Offer to Exchange One Share of Common Stock and One Warrant to Purchase
Common Stock at $.85 per Share
by
Market Central, Inc.
dba Scientigo, Inc.
for
All Outstanding Shares of Its Series A Preferred Stock
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 4, 2005,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
Market Central, Inc. dba Scientigo, Inc., a Delaware corporation
("Scientigo") is offering to all of its current record holders of Scientigo's
Series A Preferred Stock (the "Series A Preferred Stock") to exchange one (1)
Warrant to purchase one (1) share of Common Stock at $.85 cash per share (the
"Warrants") and one (1) share of Common Stock for each share of Series A
Preferred Stock surrendered to Scientigo by such holder for cancellation, upon
the terms set forth in this Exchange Offer and in the related Letter of
Transmittal (which together, as they may be amended or supplemented from time to
time, constitute the "exchange offer").
Our intent is to exchange all outstanding Series A Preferred Stock for
Common Stock and Warrants. In such event, the 5,557,005 shares of Series A
Preferred Stock currently outstanding would be exchanged for 5,557,005 shares of
Common Stock and 5,557,005 Warrants.
The exchange offer is not conditioned on any minimum number of shares of
Series A Preferred Stock being tendered for cancellation. All such shares
properly tendered for cancellation in accordance with the procedures set forth
in this exchange offer will be accepted by Scientigo. See Section 1.
The Series A Preferred Stock is not listed on any exchange and there is no
established trading market for such Stock. The Common Stock trades on the OTC
Bulletin Board, under the symbol "MKTE.OB." On July 27, 2005, the closing bid
price of one share of Common Stock on the OTC Bulletin Board was $1.50. You are
urged to obtain current market quotations for the Common Stock before deciding
whether to tender your shares of Series A Preferred Stock. See Section 8.
OUR BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE OFFER. HOWEVER, NEITHER WE NOR
OUR BOARD OF DIRECTORS MAKE ANY RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD
TENDER OR REFRAIN FROM TENDERING YOUR SERIES A PREFERRED STOCK. YOU MUST MAKE
YOUR OWN DECISION AS TO WHETHER TO TENDER YOUR SERIES A PREFERRED STOCK AND, IF
SO, HOW MANY SHARES OF SUCH STOCK TO TENDER. YOU SHOULD READ CAREFULLY THE
INFORMATION IN THIS EXCHANGE OFFER AND IN THE RELATED LETTER OF TRANSMITTAL,
INCLUDING OUR REASONS FOR MAKING THE EXCHANGE OFFER. SEE SECTION 2. OUR ONE
DIRECTOR WHO IS A HOLDER OF THE SERIES A PREFERRED STOCK HAS ADVISED US THAT HE
INTENDS TO TENDER HIS SERIES A PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER.
SEE SECTION 10.
YOU HAVE PREVIOUSLY BEEN PROVIDED WITH INFORMATION REGARDING THE EXCHANGE OFFER.
THE INFORMATION CONTAINED IN THIS DOCUMENT IS INTENDED TO COMPLETELY REPLACE THE
INFORMATION PREVIOUSLY PROVIDED TO YOU. YOU SHOULD RELY UPON THE INFORMATION
CONTAINED IN THIS DOCUMENT AND DISREGARD THE INFORMATION PREVIOUSLY PROVIDED TO
YOU.
THE DISCLOSURES CONTAINED HEREIN ARE UPDATED AS OF JULY 28, 2005, FROM THE
DISCLOSURES PREVIOUSLY PROVIDED TO YOU IN THE EXCHANGE OFFER DATED JULY 7, 2005.
THE TERMS OF THE EXCHANGE OFFER HAVE NOT CHANGED, BUT CERTAIN FACTUAL
INFORMATION REGARDING THE COMPANY HAS BEEN UPDATED.
IMPORTANT
If you want to tender all or part of your shares of Series A Preferred
Stock, you must do one of the following before the exchange offer expires:
o if your shares are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, contact the nominee
and have the nominee tender your shares and any other documents
required by the Letter of Transmittal for you to Greenberg Traurig,
LLP, the Exchange Agent for the exchange offer; or
o if you hold certificates in your own name, complete and sign a
Letter of Transmittal according to its instructions and deliver it,
together with any required signature guarantees, the certificates
for your shares and any other documents required by the Letter of
Transmittal, to the Exchange Agent.
TO TENDER SHARES OF SERIES A PREFERRED STOCK PROPERLY, YOU MUST PROPERLY
COMPLETE AND DULY EXECUTE THE LETTER OF TRANSMITTAL.
Questions and requests for assistance may be directed to Greenberg
Traurig, LLP, the Exchange Agent for the exchange offer, at the address and
telephone number set forth in the Letter of Transmittal.
We are not making this exchange offer to, and will not accept any tendered
shares from, stockholders in any jurisdiction where it would be illegal to do
so. However, we may, at our discretion, take any actions necessary for us to
make this exchange offer to stockholders in any such jurisdiction.
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF
AS TO WHETHER YOU SHOULD TENDER OR REFRAIN FROM TENDERING YOUR SHARES IN THE
TENDER OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT
OR DOCUMENTS INCORPORATED BY REFERENCE OR IN THE RELATED LETTER OF TRANSMITTAL.
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE TENDER OFFER OTHER THAN THOSE CONTAINED
IN THIS DOCUMENT OR DOCUMENTS INCORPORATED BY REFERENCE OR IN THE RELATED LETTER
OF TRANSMITTAL. IF ANYONE MAKES ANY RECOMMENDATION OR REPRESENTATION TO YOU OR
GIVES YOU ANY INFORMATION, YOU MUST NOT RELY ON THAT RECOMMENDATION,
REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US.
TABLE OF CONTENTS
Page
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Important
Summary Term Sheet
Forward-Looking Statements
Introduction
The Exchange Offer
1. General
2. Securities Offered in Exchange for Series A Preferred Stock; Differences
in Rights of Securities Offered
3. Purpose of the Exchange Offer; Certain Effects of the Exchange Offer
4. Registration of the Resale of Common Stock
5. Procedures for Tendering Shares of Series A Preferred Stock
6. Withdrawal Rights
7. Acceptance of Tendered Shares and Issuance of Common Stock and Warrants
8. Price Range of Series A Preferred Stock
9. Certain Information Concerning Us
10. Interest of Directors and Executive Officers
11. Legal Matters; Regulatory Approvals
12. Material United States Federal Income Tax Consequences
13. Extension of the Exchange Offer; Termination; Amendment
14. Fees and Expenses
15. Miscellaneous
- --------------------------------------------------------------------------------
SUMMARY TERM SHEET
We are providing this summary term sheet for your convenience. It
highlights certain material information in this Exchange Offer, but you should
realize that it does not describe all of the details of the exchange offer to
the same extent described elsewhere in this Exchange Offer. We urge you to read
the entire Exchange Offer and the related Letter of Transmittal because they
contain the full details of the exchange offer. We have included references to
the sections of this Exchange Offer where you will find a more complete
discussion.
Who is offering to exchange my shares of Series A Preferred Stock for Common
Stock and Warrants?
The issuer of such Series A Preferred Stock, Market Central, Inc. dba
Scientigo, Inc. See Section 9.
What will be issued to me in exchange for my Series A Preferred Stock?
For each share of Series A Preferred Stock tendered to Scientigo
(including additional shares of Series A Preferred Stock issued to you in
payment of accrued dividends), you will receive one (1) share of Common Stock
and one (1) Warrant to purchase one share of Common Stock at an exercise price
of $.85 cash per share exercisable for a term ending June 30, 2007. See Section
2.
What are the differences between the terms of the Series A Preferred Stock and
the Common Stock and the Warrants?
Each share of the Series A Preferred Stock accrues dividends, has a
liquidation preference senior to the Common Stock, is convertible into one share
of Common Stock, has no voting rights other than limited class voting rights
under Delaware law and has limited registration rights. The Common Stock does
not accrue dividends, has no liquidation preference, has full voting rights on
all matters submitted to the stockholders for approval and no registration
rights. Each Warrant provides the holder with the contractual right to purchase
one share of Common Stock for $.85 cash during the term ending June 30, 2007,
and has no other rights. See Section 2.
Will the Common Stock issued to me and the Common Stock issued to me if I
exercise the Warrants be freely tradable?
No. The Common Stock and Warrants are being issued pursuant to applicable
exemptions from registration under the Securities Act of 1933, as amended (the
"Securities Act") and will be not be freely tradable. However, Scientigo intends
to register all of such shares of Common Stock for resale following the
completion of the Exchange Offer. See Section 4.
How many shares of Series A Preferred Stock will Scientigo accept for exchange?
We will accept all outstanding shares of Series A Preferred Stock properly
tendered for exchange. The exchange offer is not conditioned on any minimum
number of shares of Series A Preferred stock being tendered or any other
condition other than the proper tender of your shares of Series A Preferred
Stock. See Introduction and Sections 1 and 13.
What is the purpose of the exchange offer?
In determining to proceed with the exchange offer, the Board of Directors
has reviewed, with the assistance of management, its strategic plan and its
capital requirements in order to continue its on-going efforts to monetize its
intellectual property portfolio. In such regard, the Board of Directors has
reviewed, with the assistance of management, the desirability of providing
incentives to its existing holders of Series A Preferred Stock to exchange their
shares, which accrue dividends and are senior in liquidation preference to the
Common Stock, for shares of Common Stock, which do not accrue dividends and are
junior to the Series A Preferred Stock in liquidation preference, and Warrants,
which if exercised in the future, will provide additional capital to Scientigo.
An additional purpose of the exchange offer is to increase the number of shares
of Common Stock outstanding, and therefore increase the potential for more
significant trading volume in Scientigo's Common Stock. See Section 3.
How long do I have to tender my shares of Series A Preferred Stock?
You may tender your shares of Series A Preferred Stock until the exchange
offer expires. The exchange offer will expire on August 4, 2005, at 12:00
Midnight, New York City time, unless we extend the exchange offer. We may choose
to extend the exchange offer for any reason. We cannot assure you that the
exchange offer will be extended or, if extended, for how long. See Section 1 and
Section 13.
Can the exchange offer be extended, amended or terminated, and under what
circumstances?
We can extend or amend the exchange offer in our sole discretion. If we
extend the exchange offer, we will delay the acceptance of any shares that have
been tendered. We can terminate the exchange offer under certain circumstances.
See Sections 6 and 13.
How will I be notified if Scientigo extends the offer or amends the terms of the
exchange offer?
We will issue a press release no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date if we decide
to extend the exchange offer. We will announce any amendment to the exchange
offer by making a public announcement of the amendment. See Section 13.
Are there any conditions to the exchange offer?
No, other than the proper tender of your shares of Series A Preferred
Stock in accordance with the instructions in this Exchange Offer and the related
Letter of Transmittal. See Section 5.
Following the exchange offer, will Scientigo continue as a public company?
Yes. The completion of the exchange offer in accordance with its
conditions will not cause Scientigo to stop being subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). See Section 3.
How do I tender my shares of Series A Preferred Stock?
To tender your shares, prior to 12:00 Midnight, New York City time, on
August 4, 2005, unless the exchange offer is extended:
o you or your nominee must deliver your share certificate(s) and a
properly completed and duly executed Letter of Transmittal to
Greenberg Traurig, LLP, the Exchange Agent, at the address appearing
in the Letter of Transmittal See Section 5.
Can I change my mind after I have tendered shares of Series A Preferred Stock in
the exchange offer?
Yes. You may withdraw any shares you have tendered at any time before the
expiration of the exchange offer, which will occur at 12:00 Midnight, New York
City time, on August 4, 2005, unless we extend it. See Section 6.
How do I withdraw shares of Series A Preferred Stock I previously tendered?
You must deliver on a timely basis a written or facsimile notice of your
withdrawal to the Exchange Agent at the address appearing in the Letter of
Transmittal. Your notice of withdrawal must specify your name, the number of
shares to be withdrawn and the name of the registered holder of such shares. See
Section 6.
Has Scientigo or its Board of Directors adopted a position on the exchange
offer?
Our Board of Directors has approved the exchange offer. However, neither
we nor our Board of Directors make any recommendation to you as to whether you
should tender or refrain from tendering your shares of Series A Preferred Stock.
You must make your own decision as to whether to tender your shares and, if so,
how many shares to tender. In doing so, you should read carefully the
information in this Exchange Offer and in the related Letter of Transmittal.
Will Scientigo's directors and officers tender shares of Series A Preferred
Stock in the exchange offer?
One director owns 225,144 shares of Series A Preferred Stock (4% of the
total number of shares outstanding). He has advised us he intends to tender all
of such shares pursuant to the exchange offer. See Section 10.
What will happen if I do not tender my shares?
Stockholders who choose not to tender will own a greater percentage
ownership in our outstanding Series A Preferred Stock following the consummation
of the exchange offer. Scientigo does not anticipate that there will be an
established trading market for such Series A Preferred Stock and does not intend
to register the resale of such Series Preferred Stock. See Section 3.
When and how will Scientigo issue the Common Stock and Warrants for the shares
of Series A Preferred Stock I tender?
We will issue the Common Stock and Warrants promptly after the expiration
of the exchange offer by delivering such securities to the address set forth in
the completed Letter of Transmittal. See Section 7
What is the recent market price for the Series A Preferred Stock and the Common
Stock?
The Series A Preferred Stock is not listed on any exchange and there is no
established trading market for such Stock. The Common Stock trades on the OTC
Bulletin Board, under the symbol "MKTE.OB." On July 27, 2005, the closing bid
price of one share of Common Stock on the OTC Bulletin Board was $1.50. You are
urged to obtain current market quotations for the Common Stock before deciding
whether to tender your shares of Series A Preferred Stock. See Section 8.
Will I have to pay brokerage fees and commissions if I tender my shares of
Series A Preferred Stock?
If you are a holder of record of your shares and you tender your shares
directly to the Exchange Agent, you will not incur any brokerage fees or
commissions. If you hold your shares through a broker, bank or other nominee and
your broker tenders shares on your behalf, your broker may charge you a fee for
doing so. We urge you to consult your broker or nominee to determine whether any
charges will apply. See Section 5.
What are the United States federal income tax consequences if I tender my shares
of Series A Preferred Stock?
Generally, Scientigo believes that the exchange of your shares of Series A
Preferred Stock for Common Stock and Warrants will not be a taxable event,
except to the extent that you are issued additional shares of Series A Preferred
Stock in payment of accrued dividends, which additional shares are exchanged for
Common Stock and Warrants. However, such belief is not free from significant
uncertianty and is not binding on the Internal Revenue Service. See Section 12.
Will I have to pay stock transfer tax if I tender my shares?
No.
Who can I talk to if I have questions?
The Exchange Agent, which is also counsel to Scientigo, can help answer
your questions. Their contact information is set forth in the Letter of
Transmittal and at the end of this document.
FORWARD-LOOKING STATEMENTS
This Exchange Offer, the documents incorporated by reference and the
documents to which we refer you contain statements that are subject to risks and
uncertainties. These statements regarding Scientigo or management's intentions,
beliefs or expectations, or that otherwise speak to future events, are based on
the information currently available to management. These forward-looking
statements include those statements preceded by, followed by or that otherwise
include the words "believes," "expects," "anticipates," "intends," "estimates,"
"projects," "target," "budget," "goal," "plans," "objective," "outlook,"
"should," or similar words. In addition, any statements regarding possible
monetization of the Scientigo's intellectual property portfolio are
forward-looking statements. Future results and developments discussed in these
statements may be affected by numerous factors and risks, such as:
o Our ability to successfully execute the monetization of our
intelligent Business Process Automation technologies including the
licensing of intellectual property to partners whose products and
services complement our technologies for the benefit of clients.
o Our ability to raise sufficient capital to carry out our strategic
business plan;
o The greater financial resources of competitors.
o Changes in laws and regulations.
o General economic conditions.
o Other factors and risks discussed herein and in Scientigo's other
filings with the Commission.
In addition, please refer to our Annual Report on Form 10-KSB for the year
ended August 31, 2004, as well as our other filings with the Commission, for a
more detailed discussion of these risks and uncertainties and other factors. You
are entitled to be provided copies of such filings upon written request to
Scientigo at:
Scientigo, Inc.
6701 Carmel Road
Suite 205
Charlotte, NC 28226
Forward-looking statements are not guarantees of performance. Accordingly,
our future performance and results may differ materially from those expressed or
implied in any such forward-looking statements. Readers are cautioned not to
place any undue reliance on any forward-looking statements.
INTRODUCTION
To the Holders of our Series A Preferred Stock:
We invite our stockholders who hold shares of our Series A Preferred
Stock, par value $.001 per share, to tender such shares in exchange for Common
Stock and Warrants. Upon the terms and subject to the conditions set forth in
this Exchange Offer and in the related Letter of Transmittal, we are offering to
exchange one (1) share of Common Stock and one (1) Warrant for each of the
5,557,005 outstanding shares of Series A Preferred Stock .
The exchange offer will expire at 12:00 Midnight, New York City time, on
August 4, 2005, unless extended (such date and time, as the same may be
extended, the "Expiration Date"). We may, in our sole discretion, extend the
period of time in which the exchange offer will remain open.
Our intent is to exchange Common Stock and Warrants for all outstanding
shares of Series A Preferred Stock.
Holders of Series A Preferred Stock must properly complete the Letter of
Transmittal in order to properly tender shares.
The exchange offer is not conditioned on any minimum number of shares of
Series A Preferred Stock being tendered or any other condition other than the
proper tender of your shares of Series A Preferred Stock.
OUR BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE OFFER. HOWEVER, NEITHER WE NOR
OUR BOARD OF DIRECTORS MAKE ANY RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD
TENDER OR REFRAIN FROM TENDERING YOUR SERIES A PREFERRED STOCK. YOU MUST MAKE
YOUR OWN DECISION AS TO WHETHER TO TENDER YOUR SERIES A PREFERRED STOCK AND, IF
SO, HOW MANY SHARES OF SUCH STOCK TO TENDER. YOU SHOULD READ CAREFULLY THE
INFORMATION IN THIS EXCHANGE OFFER AND IN THE RELATED LETTER OF TRANSMITTAL,
INCLUDING OUR REASONS FOR MAKING THE EXCHANGE OFFER. SEE SECTION 3. OUR ONE
DIRECTOR WHO IS A HOLDER OF THE SERIES A PREFERRED STOCK HAS ADVISED US THAT HE
INTENDS TO TENDER HIS SERIES A PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER.
SEE SECTION 10.
We will issue Common Stock and Warrants for all shares of Series A
Preferred Stock tendered for exchange. Tendering stockholders who hold shares
registered in their own name and who tender their shares directly to the
Exchange Agent will not be obligated to pay brokerage commissions, solicitation
fees or, stock transfer taxes on our purchase of shares pursuant to the exchange
offer. We will pay all charges and expenses of the Exchange Agent incurred in
connection with the exchange offer. Stockholders holding shares through brokers,
dealers, commercial banks, trust companies or other nominees are urged to
consult such nominees to determine whether transaction costs apply. Also, any
tendering stockholder or other payee who fails to complete, sign and return to
the Exchange Agent the Substitute Form W-9 included with the Letter of
Transmittal (or such other Internal Revenue Service form as may be applicable)
may be subject to United States federal income tax backup withholding of 28%,
unless such holder establishes that such holder is within the class of persons
that is exempt from backup withholding, such as all corporations. See Section 5.
Also see Section 12 regarding certain federal income tax consequences of the
exchange offer.
As of May 31, 2005, we had issued and outstanding 5,557,005 shares of
Series A Preferred Stock, all of which we are offering to exchange Common Stock
and Warrants for pursuant to this exchange offer. The Series A Preferred Stock
is not listed on any exchange and there is no established trading market for
such Stock. The Common Stock trades on the OTC Bulletin Board, under the symbol
"MKTE.OB." On July 27, 2005, the closing bid price of one share of Common Stock
on the OTC Bulletin Board was $1.50. You are urged to obtain current market
quotations for the Common Stock before deciding whether to tender your shares of
Series A Preferred Stock. See Section 8.
THE EXCHANGE OFFER
1. General.
We will exchange one (1) share of Common Stock and one (1) Warrant for
each share of Series A Preferred Stock properly tendered (including additional
shares of Series A Preferred Stock issued to you in payment of accrued
dividends) (and not properly withdrawn in accordance with Section 6) to
Scientigo for cancellation before the expiration of the exchange offer. See
Section 13 for a description of our right to extend, delay, terminate or amend
the exchange offer. The exchange offer and withdrawal rights will expire at
12:00 Midnight, New York City time, on August 4, 2005, unless the exchange offer
is extended.
The exchange offer is not conditioned on any minimum number of shares of
Series A Preferred Stock being tendered. Any shares of Series A Preferred Stock
properly tendered to the Exchange Agent will be accepted and Common Stock and
Warrants issued in exchange.
Promptly following the Expiration Date, we will issue to you one (1) share
of Common Stock and one (1) Warrant for each share of Series A Preferred Stock
properly tendered for cancellation .
This Exchange Offer and the related Letter of Transmittal will be mailed
to record holders of shares and will be furnished to brokers, dealers,
commercial banks and trust companies whose names, or the names of whose
nominees, appear on our stockholder list.
2. Securities Offered in Exchange for Series A Preferred Stock; Differences
in Rights of Securities Offered.
Common Stock
Shares Outstanding; Record Holders. At May 31, 2005, Scientigo had
6,916,383 shares of Common Stock outstanding. As of May 31, 2005, Scientigo had
157 record holders of Common Stock.
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock, including the Series A Preferred Stock, outstanding at the
time, the holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available at the times and in the amounts as
Scientigo's board of directors may from time to time determine. Currently,
Scientigo's board of directors does not intend to pay any dividends to holders
of shares of Common Stock.
Voting Rights. Each Common Stockholder is entitled to one vote for each
share of Common Stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in
Scientigo's Certificate of Incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election.
No Preemptive or Similar Rights. The Common Stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon Scientigo's liquidation,
dissolution or winding-up, the assets legally available for distribution to
Scientigo's stockholders are distributable ratably among the holders of our
Common Stock and any participating Preferred Stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding Preferred
Stock and payment of other claims of creditors. Scientigo's Series A Preferred
Stock and Series B Preferred Stock have liquidation preferences that are senior
to the liquidation preference of the Common Stock.
Warrants
The Warrants will be exercisable at $.85 cash per share of Common Stock
and will have a term ending June 30, 2007.
Differences in Rights of Securities Offered
The securities offered by Scientigo in exchange for the Series A Preferred
Stock have certain differences in their terms including the following:
o The Series A Preferred Stock accrue dividends payable in additional
shares of Series A Preferred Stock at the annual rate of four
percent (4%). Neither the Common Stock nor the Warrants accrue
dividends and currently, Scientigo's board of directors does not
intend to pay any dividends to holders of shares of Common Stock.
o The Series A Preferred Stock has a liquidation preference of $1.3325
per share over the Common Stock. Neither the Common Stock nor the
Warrants have any liquidation preference.
o The holders of the Series A Preferred Stock have no voting rights
except for limited class voting rights required by Delaware law. The
holders of Common Stock have full voting rights on all matters
submitted to the stockholders for a vote. The holders of Warrants
have no voting rights unless they exercise their Warrants, in which
case they have the voting rights of the holders of Common Stock.
o Each share of Series A Preferred Stock is convertible into one share
of Common Stock. Neither the Common Stock nor the Warrants have
conversion rights.
o The Series A Preferred Stock is redeemable by Scientigo at any time
after December 14, 2005, at the liquidation value (currently $1.3325
per share) of such Preferred Stock. Neither the Common Stock nor the
Warrants are redeemable.
o The Series A Preferred Stock has "piggy-back" registration rights
with respect to certain "qualified public offerings." See Section 9
- Description of Capital Stock. Neither the Common Stock nor the
Warrants have registration rights, although Scientigo intends to
register the resale of such Common Stock following the completion of
the exchange offer. See Section 4.
3. Purpose of the Tender Offer; Certain Effects of the Tender Offer.
Purpose of the Tender Offer. In determining to proceed with the exchange
offer, the Board of Directors has reviewed, with the assistance of management,
its strategic plan and its capital requirements in order to continue its
on-going efforts to monetize its intellectual property portfolio. In such
regard, the Board of Directors has reviewed, with the assistance of management,
the desirability of providing incentives to its existing holders of Series A
Preferred Stock to exchange their shares, which accrue dividends and are senior
in liquidation preference to the Common Stock, for shares of Common Stock, which
do not accrue dividends and are junior to the Series A Preferred Stock in
liquidation preference, and Warrants, which if exercised in the future, will
provide additional capital to Scientigo. An additional purpose of the exchange
offer is to increase the number of shares of Common Stock outstanding, and
therefore increase the potential for more significant trading volume in
Scientigo's Common Stock.
OUR BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE OFFER. HOWEVER, NEITHER
WE NOR OUR BOARD OF DIRECTORS MAKE ANY RECOMMENDATION TO YOU AS TO WHETHER YOU
SHOULD TENDER OR REFRAIN FROM TENDERING YOUR SERIES A PREFERRED STOCK. YOU MUST
MAKE YOUR OWN DECISION AS TO WHETHER TO TENDER YOUR SERIES A PREFERRED STOCK
AND, IF SO, HOW MANY SHARES OF SUCH STOCK TO TENDER. YOU SHOULD READ CAREFULLY
THE INFORMATION IN THIS EXCHANGE OFFER AND IN THE RELATED LETTER OF TRANSMITTAL,
INCLUDING OUR REASONS FOR MAKING THE EXCHANGE OFFER. OUR ONE DIRECTOR WHO IS A
HOLDER OF THE SERIES A PREFERRED STOCK HAS ADVISED US THAT HE INTENDS TO TENDER
HIS SERIES A PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER. SEE SECTION 10.
Potential Benefits of the Exchange Offer. Scientigo believes the exchange
offer will provide benefits to Scientigo and its stockholders, including the
following:
o The successful completion of the exchange offer will decrease the
senior preferred stock outstanding, reduce the dividends that accrue
on such senior preferred stock and increase the number of shares of
Common Stock outstanding. Such an improved capital structure may
improve the ability of Scientigo to raise additional capital in the
future.
o The holders of Series A Preferred Stock are presently able to
convert each share of their Stock into one share of Common Stock.
The exchange offer, if accepted, will provide them with one share of
Common Stock and a Warrant to purchase an additional share of Common
Stock at $.85 per share.
o The future exercise of Warrants, if any, will provide Scientigo with
additional capital.
o The increase in the number of shares of Common Stock outstanding
upon the successful completion of the exchange offer and upon the
exercise of Warrants could increase the "public float," which is the
number of shares owned by non-affiliate stockholders and available
for trading in the securities markets.
Potential Disadvantages of the Exchange Offer. The exchange offer
also presents some potential disadvantages to Scientigo and its continuing
stockholders, including the following:
o The increase in the number of outstanding shares of the Common Stock
as a result of the completion of the exchange offer and the future
exercise of Warrants will dilute the ownership of the Common Stock
by other holders of Common Stock. While the exercise of Warrants
will provide additional capital for Scientigo, the exercise price of
$.85 per share is below the recent trading range of Scientigo's
Common Stock.
Certain Effects of the Exchange Offer. Assuming all outstanding
shares of Series A Preferred Stock are tendered for exchange and all Warrants
are exercised by the holders, the number of outstanding shares of Common Stock
will increase from 6,916,383 to 18,030,393.
Shares of Series A Preferred Stock that are properly tendered and not
withdrawn will be cancelled. If all outstanding shares of Series A Preferred
Stock are so tendered and not withdrawn, the Series A Preferred Stock
designation of terms will be eliminated. Such shares will return to the status
of authorized shares of preferred stock and will be available for us to issue
without further stockholder action for all purposes except as required by
applicable law.
Holders of Series A Preferred Stock who choose not to tender all of their
shares will continue to have the benefits of holding Series A Preferred Stock
including the accrual of dividends. See Section 9 - Description of Captial
Stock.
We may, in the future, decide to purchase shares. Any such purchases may
be on the same terms as, or on terms which are more or less favorable to
stockholders than, the terms of the exchange offer. Rule 13e-4 under the
Exchange Act, however, prohibits us and our affiliates from purchasing any
shares, other than pursuant to the exchange offer, until at least ten business
days after the Expiration Date.
The completion of the exchange offer will not cause Scientigo to no longer
be a reporting company under the Exchange Act.
4. Registration of the Resale of Common Stock.
It is Scientigo's intention to register the resale of the shares of
restricted Common Stock which are issued in the exchange offer as well as the
shares of restricted Common Stock that will be issued upon (a) the exercise of
the Warrants issued in the exchange offer and other warrants that have been
issued to various parties, (b) the conversion of Notes issued by Scientigo (see
Section 9), and (c) the conversion of Scientigo's outstanding Series B Preferred
Stock. Such registration rights will offered to such holders following the
completion of the exchange offer and the Note offering (see Section 9). See
Section 9 for a Pro Forma Condensed Capitalization Summary which details the
issuance of Common Stock to all of such holders.
Scientigo intends to file its registration statement late in its fourth
quarter ending August 31, 2005, although there can be no assurance as to the
actual date of filing or the date of its effectiveness.
5. Procedures for Tendering Shares of Series A Preferred Stock.
Proper Tender of Shares of Series A Preferred Stock. For shares to be
tendered properly pursuant to the exchange offer:
o the certificates for the shares, together with a properly completed
and duly executed Letter of Transmittal, including any required
signature guarantees, and any other documents required by the Letter
of Transmittal, must be received before 12:00 Midnight, New York
City time, in each case by the Expiration Date by the Exchange Agent
at its address set forth in the Letter of Transmittal.
Notwithstanding any other provisions hereof, issuance of Common Stock and
Warrants for shares tendered and accepted pursuant to the exchange offer will be
made only after timely receipt by the Exchange Agent of certificates for such
shares, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, and any other
documents required by the Letter of Transmittal.
Method of Delivery. The method of delivery of all documents, including
share certificates, is at the election and risk of the tendering stockholder. If
delivery is by mail, registered mail with return receipt requested, properly
insured, is recommended. Shares will be deemed delivered only when actually
received by the Exchange Agent. In all cases, sufficient time should be allowed
to ensure timely delivery.
Signature Guarantees. Signatures on the Letter of Transmittal need not be
guaranteed: (a) if the Letter of Transmittal is signed by the registered
holder(s) of the certificate(s) transmitted herewith and such holder(s) has
(have) not completed the instruction entitled "Special Instructions" and/or
"Special Delivery Instructions" on the Letter of Transmittal; or (b) if such
certificates are transmitted for the account of an Eligible Institution. In all
other cases, all signatures on the Letter of Transmittal must be guaranteed by a
financial institution (including most banks, savings and loan associations and
brokerage houses) that is a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (each of the foregoing constituting an
"Eligible Institution"). See Instruction 4 of the Letter of Transmittal. If a
share certificate is registered in the name of a person other than the person
executing the Letter of Transmittal, or if issuance of Common Stock and Warrants
are to be made to a person other than the registered holder, then the share
certificate must be endorsed or accompanied by an appropriate stock power, in
either case signed exactly as the name of the registered holder appears on the
certificate, with the signature guaranteed by an Eligible Institution.
Federal Income Tax Backup Withholding. Under the federal income tax backup
withholding rules, 28% of the value of the Common Stock and Warrants issued to a
stockholder or other payee pursuant to the exchange offer must be withheld and
remitted to the United States Treasury, unless the stockholder or other payee
provides his or her taxpayer identification number (employer identification
number or social security number) to the Exchange Agent and certifies that such
number is correct or an exemption otherwise applies under applicable
regulations. Therefore, unless such an exemption exists and is proven in a
manner satisfactory to the Exchange Agent, each tendering stockholder should
complete and sign the Substitute Form W-9 included as part of the Letter of
Transmittal so as to provide the information and certification necessary to
avoid backup withholding. Certain stockholders (including, among others, all
corporations) are not subject to these backup withholding and reporting
requirements.
Any tendering stockholder or other payee who fails to complete fully and
sign the Substitute Form W-9 included in the Letter of Transmittal may be
subject to required federal income tax withholding of 28% of the value of the
Common Stock and Warrants issued to such stockholder or other payee pursuant to
the exchange offer.
Tender Constitutes An Agreement. The tender of shares pursuant to any one
of the procedures described above will constitute the tendering stockholder's
acceptance of the terms and conditions of the exchange offer and an agreement
between the tendering stockholder and us upon the terms of the exchange offer.
Determination of Validity; Rejection of Shares; Waiver of Defects; No
Obligation to Give Notice of Defects. All questions as to the form of documents
and the validity, eligibility (including time of receipt) and acceptance for
issuance of Common Stock and Warrants of any tender of shares will be determined
by us, in our sole discretion, which determination shall be final and binding on
all parties. We reserve the absolute right to reject any or all tenders of
shares determined by us not to be in proper form, or the acceptance of which or
issuance of Common Stock and Warrants for which may, in the opinion of our
counsel, be unlawful. We also reserve the absolute right to waive any defect or
irregularity in any tender of particular shares, and our interpretation of the
terms of the exchange offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. No tender of shares will
be deemed to be properly made until all defects and irregularities have been
cured or waived. Unless waived, any defects or irregularities in connection with
tenders must be cured within such time as we shall determine. None of us, the
Exchange Agent or any other person will be under any duty to give notification
of any defect or irregularity in tenders or incur any liability for failure to
give any such notification.
Return of Withdrawn or Partially Tendered Shares. If any tendered shares
are properly withdrawn before the Expiration Date, or if less than all shares
evidenced by a stockholder's certificates are tendered, certificates for such
shares will be returned promptly after the expiration or termination of the
exchange offer or the proper withdrawal of the shares, as applicable, in each
case without expense to the stockholder.
Lost or Destroyed Certificates. In the event that your certificates have
been lost, stolen or destroyed, please indicate this on the face of the Letter
of Transmittal. The Exchange Agent will forward you additional documentation
that you must complete in order to effectively surrender lost, stolen or
destroyed certificates, including an affidavit of the fact that such
certificates have been lost, stolen or destroyed. A surety bond may be required.
Fees and Commissions. You will not be required to pay any brokerage fees
or commissions if your tender your shares of Series A Preferred Stock. If you
hold your shares through a broker, bank or other nominee and your broker tenders
shares on your behalf, your broker may charge you a fee for doing so. We urge
you to consult your broker or nominee to determine whether any charges will
apply.
6. Withdrawal Rights.
Tenders of shares of Series A Preferred Stock made pursuant to the
exchange offer may be withdrawn at any time prior to the Expiration Date, which
is 12:00 Midnight, New York City time, on August 4, 2005, unless we extend such
Expiration Date in which event shares tendered may be withdrawn until 12:00
Midnight, New York City time, on such extended Expiration Date. For a withdrawal
to be effective, a written, or facsimile transmission, notice of withdrawal must
both:
o be timely received by the Exchange Agent at its address set forth in
the Letter of Transmittal; and
o specify the name of the person who tendered the shares to be
withdrawn and the number of shares to be withdrawn and the name of
the registered holder of the shares, if different from that of the
person who tendered such shares.
Withdrawals may not be rescinded, and shares withdrawn will thereafter be
deemed not validly tendered for purposes of the exchange offer. However,
withdrawn shares may be retendered by again following one of the procedures
described in Section 5 at any time prior to the Expiration Date.
We will determine all questions as to the form and validity (including
time of receipt) of any notice of withdrawal, in our sole discretion, which
determination shall be final and binding. We also reserve the absolute right to
waive any defect or irregularity in the withdrawal of shares by any stockholder,
and such determination will be binding on all stockholders. None of us, the
Exchange Agent or any other person will be under any duty to give notification
of any defect or irregularity in any notice of withdrawal or incur any liability
for failure to give any such notification.
7. Acceptance of Tendered Shares and Issuance of Common Stock and Warrants.
Upon the terms and subject to the conditions of the exchange offer,
promptly following the Expiration Date, we will give the Exchange Agent oral or
written notice of acceptance of all shares of Series A Preferred Stock properly
tendered and not properly withdrawn before the Expiration Date. Thereafter, we
will cause Scientigo's transfer agent to issue the Common Stock which will be
delivered in accordance with the instructions set forth in the Letter of
Transmittal. We will also issue the Warrants which will also be delivered in
accordance with the instructions set forth in the Letter of Transmittal.
Any tendering stockholder or other payee who fails to complete fully, sign
and return to the Exchange Agent the Substitute Form W-9 included with the
Letter of Transmittal may be subject to federal income tax backup withholding on
the value of the Common Stock and Warrants issued to the stockholder or other
payee pursuant to the exchange offer. See Section 5.
8. Price Range of Series A Preferred Stock.
The Series A Preferred Stock is not listed on any exchange and there is no
established trading market for such Stock. The Common Stock trades on the OTC
Bulletin Board, under the symbol "MKTE.OB."
On July 27, 2005, the last trading day before the date of announcement of
the exchange offer, the last reported sale price of the shares on the OTC
Bulletin Board was $1.50 per share. We urge stockholders to obtain current
market quotations for the shares before deciding whether to tender their shares
of Series A Preferred Stock.
9. Certain Information Concerning Us.
General
Scientigo is primarily focused in intelligent Business Process Automation
technologies, specializing in developing and licensing intellectual property to
partners whose products and services complement our technologies for the benefit
of clients. These customizable solutions enable organizations to convert data
from a processing and storage burden into a competitive advantage, whether
structured, semi-structured, or unstructured, whether it is in paper or digital
form, and regardless of volume. Scientigo's believes its technology provides
next generation artificial intelligence and collaboration capabilities today. In
addition, Scientigo provides customer support and professional services to
support its products. Scientigo's product strategy is to focus on developing and
licensing technologies from its valuable intellectual property portfolio.
Development of the technology that is the foundation of Scientigo's unique
capabilities was begun in the mid 1990s and has resulted in four issued patents
with numerous patents pending or under development both within the United States
and internationally.
Initial testing and demonstration of the product has been on-going and in
March 2005, Scientigo announced it first license agreement with a customer.
Sales activities are on-going.
Sale of Call Center
On May 23, 2005, ECOM Support Centers, Inc., a wholly-owned subsidiary of
Scientigo ("ECOM") completed the sale of substantially all of its assets
pursuant to an Asset Purchase Agreement entered into on that date (the "Asset
Purchase Agreement") with Customerlinx of North Carolina, Inc. ("Customerlinx
NC") and wholly-owned subsidiary of Customerlinx Corp. ("Customerlinx. The
purchase price for the assets was $1,100,000, and the assumption of $85,234 of
net liabilities of ECOM (the "Liabilities"). As of the Closing, ECOM owed
Customerlinx the sum of $129,000 in management fess pursuant to a management
agreement. Therefore, Customerlinx NC delivered a promissory note (the "Note")
to ECOM in the amount of $971,000, and Customerlinx shall credit the sum of
$129,000 to the unpaid management fees. The Note has a maturity date of 39
months, pays simple interest at five percent (5%), and is secured by certain
assets of Customerlinx NC. In the event that Customerlinx NC has not pre-paid
the Note in full by May 31, 2006, then Customerlinx NC shall also pay to ECOM on
or before July 31, 2006 an amount equal to (I) 0.75 multiplied by (II) the
amount by which (A) the net income (which calculation shall only include
expenses directly attributable to Customerlinx NC's operation of the business in
North Carolina and allocable corporate expenses) that Customerlinx NC generates
from its operation of the business in North Carolina during the 12 months ending
May 31, 2006 (i.e., the period commencing June 1, 2005 and ending May 31, 2006)
exceeds (B) the greater of (i) zero or (ii) the net income or loss generated
from the operation of the business in North Carolina by ECOM and Customerlinx NC
in the calendar year ending December 31, 2005. In addition, pursuant to the
Asset Purchase Agreement, Customerlinx agreed to guaranty the obligations of
Customerlinx NC thereunder.
ECOM contained Scientigo's call center assets and operations and as of
February 28, 2005, this has been treated as a discontinued operation in
Scientigo's financial statements.
TAG/Convey Transaction
Scientigo has entered into a non-binding letter of intent to purchase
substantially all of the assets of The Tag Group, Inc. ("TAG"). These assets
consist of cash, accounts receivable and certain proprietary products in the
areas of web conferencing and collaboration and web-based PC support tools.
Subject to the execution of definitive agreements, this transaction is now
expected to be completed late in Scientigo's fourth quarter ending August 31,
2005. Audit issues relating to TAG caused the delays. TAG and its wholly-owned
subsidiary, Convey Systems, Inc. ("Convey"), and Scientigo have executed an
agreement whereby Scientigo is providing day-to-day management for Convey.
Scientigo has received the net proceeds from sales of Convey products since
April 15, 2004, and will continue to do so through the closing. The purchase
price of these assets plus related expenses is expected to be up to
approximately 2,000,000 shares of Scientigo's Common Stock. Doyal Bryant,
President and Chief Executive Officer of Scientigo, is the beneficial owner of
approximately 49% of the outstanding common stock of TAG. In such capacity, Mr.
Bryant would receive a significant number of shares of Scientigo's common stock
in the event that the TAG/Convey transaction is consummated. Mr. Bryant has
agreed to forego the receipt of any such shares and has no financial interest in
the consummation of the TAG/Convey transaction. In the event that the TAG/Convey
transaction is consummated, Mr. Gordy will receive 300,000 warrants to purchase
shares of Common Stock of the Company at $1.60 per share.
Note Offering
On April 21, 2005, Scientigo began the private placement of up to
$6,250,000 Principal Amount of Scientigo 2005 6.4% Senior Convertible Notes (the
"Notes") and Note Warrants (the "Note Warrants"). The Notes are convertible into
Common Stock at the rate of one share per $1.3325 of Principal Amount of the
Notes. The Note Price is be eight percent (80%) of Principal Amount. Interest at
the rate of 6.4% per annum are payable quarterly in cash beginning May 31, 2005,
on the Principal Amount of the Notes. The Notes mature and are payable in full
on May 31, 2007. The Notes may be prepaid at any time by Scientigo without
penalty. The repayment of the Notes is secured by a first priority security
interest in the Company's intellectual property granted pursuant to a security
agreement to be entered into by Scientigo. Upon the payment or conversion of
$5,000,000 of the total Principal Amount of the Notes, the XML patents owned by
Scientigo will be released from such security interest. Prior to a payment of
any Principal Amount of the Notes, Noteholders will be provided with thirty (30)
days written notice in the event that they wish to convert their Notes into
Common Stock prior to such payment. For each $2.00 Principal Amount of Notes
purchased, the Noteholder will receive one (1) Note Warrant to purchase one (1)
share of the Company's Common Stock at $1.00 per share. The Note Warrants will
be exercisable through June 30, 2010. As of May 31, 2005, Scientigo has issued
$4,160,525 Principal Amount of Notes and 2,080,263 Note Warrants.
Series A Preferred Stock Offering
Scientigo completed its private placement of Series A Preferred Stock on
April 26, 2005. Scientigo issued a total of 5,557,005 shares of Series A
Preferred Stock and raised $6,859,361 (net of commissions) .
Recapitalization Transactions
In November 2004, after discussions with management regarding the capital
structure of Scientigo, Scientigo's two largest beneficial shareholders (William
A. Goldstein and Glen Hammer) notified Scientigo that they would return
5,880,740 shares of Common Stock to Scientigo's treasury, cancel warrants that
they owned which provided them with the right to purchase approximately
2,300,000 shares of Common Stock in Scientigo, resign from Scientigo's Board of
Directors and seek to convert approximately $1,000,000 in demand notes due from
Scientigo into shares of Scientigo's Series A Preferred Stock. The purpose of
the proposed transactions was to restructure the capitalization of Scientigo so
that it could more readily raise additional capital needed to continue
management's efforts to monetize the value of Scientigo's intellectual property
portfolio. Mr. Goldstein returned 2,940,370 shares of Common Stock, cancelled
warrants to purchase 2,300,000 shares of Common Stock (held jointly by Messrs.
Goldstein and Hammer) and converted $701,786 of indebtedness into shares of
Scientigo's Series A Preferred Stock effective April 22, 2005. Mr. Hammer was
unable to return his shares of Common Stock to Scientigo because they were
pledged as collateral for the repayment of his indebtedness. Therefore,
Scientigo's bank debt of approximately $1,250,000 was assumed by Mr. Hammer in
exchange for a note payable from Scientigo effective December 2004. At that
time, Scientigo was released from such bank debt. This new note provided for
interest only, at LIBOR plus 2.75%, through the earlier of when Mr. Hammer
returned 2,940,370 shares of Common Stock to Scientigo, but no later than April
30, 2005. Effective April 20, 2005, Scientigo and Mr. Hammer entered into an
agreement which terminated earlier agreements and provided for the contribution
of 3,100,000 shares of Common Stock to Scientigo by Mr. Hammer. In return,
Scientigo agreed to lend Mr. Hammer $400,000 of the proceeds of the Note
Offering for the purpose of discharging indebtedness of Mr. Hammer, enter into a
loan agreement with Mr. Hammer as previously agreed to including the payment of
approximately $150,000 of the $1,250,000 principal of such indebtedness and
issue Mr. Hammer 262,238 shares of the Series A Preferred Stock in payment of
all other outstanding indebtedness of Scientigo to such shareholder. The
$400,000 loan is to be repaid out of the proceeds of the sale of a portion of
the remaining shares of the Common Stock owned by Mr. Hammer and in any event
not later than one (1) year from the date of such loan. All of such transactions
were completed on May 31, 2005.
Neither Mr. Goldstein nor Mr. Hammer have any continuing interest in
Scientigo other than as holders of Common Stock and Series A Preferred Stock.
Management believes, although there can be no assurance, that Messrs. Goldstein
and Hammer intend to tender their shares of Series A Preferred Stock in the
exchange offer.
Currently, Scientigo's executive offices are at 6701 Carmel Road, Suite
205, Charlotte, NC 28226, and its telephone number is (704) 837-0500.
Description of Capital Stock
Scientigo's authorized capital stock consists of 85,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock.
The following is a summary of the rights of Scientigo's Common Stock and
Preferred Stock. This summary is not complete. For more detailed information,
refer to Scientigo's Certificate of Incorporation which is filed as an exhibit
to Scientigo's Annual Report on Form 10-KSB.
Common Stock. See Section 2 above for a description of Scientigo's Common
Stock.
Preferred Stock. Scientigo's board of directors is authorized, subject to
the limits imposed by the Delaware General Corporation Law, to issue 10,000,000
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
of its qualifications, limitations and restrictions. The board of directors can
also increase or decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any further vote or
action by Scientigo's stockholders.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that adversely affect the voting power or other
rights of Scientigo's Common Stockholders. The issuance of additional preferred
stock, while providing flexibility in connection with possible acquisitions,
financings and other corporate purposes, could have the effect of delaying,
deferring or preventing Scientigo's change in control and may cause the market
price of the Common Stock to decline or impair the voting and other rights of
the holders of the Common Stock.
Series A Preferred Stock. At May 31, 2005, Scientigo had 5,557,005 shares
of Series A Preferred Stock outstanding. As of May 31, 2005, Scientigo had 150
record holders of the Series A Preferred Stock.
Scientigo's board of directors adopted the original Certificate of
Designations containing the terms of the Series A Preferred Stock effective
December 4, 2003, as subsequently amended. These terms include the following:
Price. $1.3325 per share of Series A Preferred Stock.
Dividends. Four percent (4%) cumulative annually payable when, as and if
declared by the board of directors of Scientigo, in additional shares of Series
A Preferred Stock determined by dividing the amount of such dividend by the
Series A Liquidation Value. Such dividends begin to accrue on December 15, 2003,
except to the extent that dividends accrue on the portion of a holder's
Liquidation Value resulting from the issuance of additional shares of Series A
Preferred Stock as dividends, in which event such dividends shall accrue from
the date of issuance of such additional shares of Series A Preferred Stock. No
dividends may be paid on shares of Common Stock unless the dividends due on the
shares of Series A Preferred Stock have been paid currently.
Series A Liquidation Value. $1.3325 per share of Series A Preferred Stock,
as adjusted for certain reorganizations and reclassifications.
Conversion Rights. At any time after the first anniversary of the date of
issuance of the Series A Preferred Stock, the holder may elect to convert his
shares of Series A Preferred Stock into shares of Common Stock on a one-for-one
basis, as adjusted for certain reorganizations and reclassifications.
Registration Rights. Holders of Series A Preferred Stock have the right to
request the registration of the Common Stock issued to them upon conversion of
their shares of Series A Preferred Stock in the event that Scientigo proposes to
conduct a "Qualified Offering." A "Qualified Offering" means the closing of a
public offering of shares of Scientigo's Common Stock in an amount of not less
than $5,000,000 prior to commissions and offering expenses pursuant to an
effective registration statement on a form prescribed by the SEC (other than
Form S-4 or Form S-8 or any successor or replacement form for any such form).
Such rights are also subject to restrictions based on market conditions.
Company Redemption Rights. At any time after December 14, 2005, but before
a Qualified Offering, Scientigo has the right to redeem all but not less than
all of the shares of Series A Preferred Stock at their Series A Liquidation
Value upon notice to such shareholders. Upon the receipt of such notice, the
holders of the Series A Preferred Stock will have the right to convert their
shares of Series A Preferred Stock into shares of Common Stock and not be
subject to such redemption.
Liquidation. Upon a liquidation or dissolution of Scientigo, the holders
of Series A Preferred Stock will be entitled to a liquidation preference in the
amount of the Series A Liquidation Value before any distribution to the holders
of Common Stock. In the event the amount available for distribution is less than
the aggregate Series A Liquidation Value, such amounts will be distributed pro
rata to the holders of the Series A Preferred Stock.
Voting Rights. Except as provided by Delaware law, the holders of Series A
Preferred Stock will have no voting rights in Scientigo.
Additional Series A Preferred Stock. On September 13, 2004, Scientigo's
Board of Directors increased the number of designated shares of Series A
Preferred Stock from 2,251,407 shares to 3,001,877 shares. On November 17, 2004,
Scientigo's Board of Directors increased the number of designated shares of
Series A Preferred Stock from 3,001,877 shares to 5,253,287 shares. On April 21,
2005, Scientigo's Board of Directors increased the number of designated shares
of Series A Preferred Stock from 5,253,287 shares to 5,628,518 shares.
Series B Preferred Stock. On March 25, 2004, Scientigo entered into an
agreement to issue to an investment group 350,000 shares of its newly designated
Series B Convertible Preferred Stock, $.001 par value per share, with a stated
value of $10.00 per share and an aggregate stated value of $3.5 million (the
"Series B Preferred Stock").
Scientigo's board of directors adopted the original Certificate of
Designations containing the terms of the Series B Preferred Stock effective
March 24, 2004. These terms include the following:
Price. $5.00 per share of Series B Preferred Stock.
Dividends. None.
Series B Liquidation Value. $10.00 per share of Series B Preferred Stock,
as adjusted for certain reorganizations and reclassifications.
Conversion Rights. At any time, the holder of the Series B Preferred Stock
may elect to convert its shares of Series B Preferred Stock into shares of
Common Stock at a conversion price, as applied against the stated value of the
Series B Preferred Stock, that is 80% of the lowest closing bid price of
Scientigo's Common Stock during the ten (10) days prior to the conversion
notice. Such conversion price has a floor of $.875 and a ceiling of $1.75. Such
conversion price is adjusted for certain reorganizations and reclassifications.
Option Rights. The holder of the Series B Preferred Stock received an
option to acquire additional shares of Company Common Stock to the extent that
the full exercise of its conversion rights described above results in the
receipt of less than 4,000,000 shares of Common Stock. Such option will have an
exercise price of $1.92, $.10 above the closing bid price on the effective date
of the agreement between the parties, and will be exercisable for a 30-day
period following the completion of the conversion of all shares of Series B
Preferred Stock. The option is exercisable only upon the payment of the cash
exercise price.
Registration Rights. Holders of Series B Preferred Stock have the right to
request the registration of the Common Stock issued to them upon conversion of
their shares of Series B Preferred Stock. Such rights are subject to
restrictions based on market conditions, the size of the public offering and the
type of offering.
Company Redemption Rights. At any time prior to the conversion of all
shares of Series B Preferred Stock by the holders, in the event of certain
defined transactions which constitute a change of control of Scientigo,
Scientigo has the right to require the conversion of all remaining outstanding
shares of Series B Preferred Stock. of Series B Preferred Stock into shares of
Common Stock and not be subject to such redemption.
Liquidation Preference. Upon a liquidation or dissolution of Scientigo,
the holders of Series B Preferred Stock will be entitled to a liquidation
preference in the amount of the Series B Liquidation Value before any
distribution to the holders of Common Stock. With respect to the Series A
Preferred Stock, the Series B Liquidation Value shall be $5.00 per share of
Series B Preferred Stock until such time that the holders of the Series A
Preferred Stock have received their full Series A Liquidation Value. At such
time, the holders of the Series B Preferred Stock will be entitled to receive an
additional $5.00 per share Liquidation Value prior to any further distributions
to other holders of Company stock. In the event the amount available for
distribution is less than the aggregate Series A Liquidation Value and Series B
Liquidation Value, such amounts will be distributed pro rata to the holders of
the Series A Preferred Stock and the Series B Preferred Stock.
Voting Rights. Except as provided by Delaware law, the holders of Series B
Preferred Stock will have no voting rights in Scientigo.
Options and Warrants. As of May 31, 2005, there were (i) options
outstanding to purchase 5,767,425 shares of Scientigo's Common Stock, at a
weighted average exercise price of $2.04 per share, and (ii) warrants
outstanding to purchase 5,580,434 shares of Scientigo's Common Stock, at a
weighted average exercise price of $1.69 per share. Generally, each warrant
contains provisions for the adjustment of its exercise price and the number of
shares issuable upon its exercise upon the occurrence of any stock dividend or
stock split. Certain of the warrants have net exercise provisions under which
the holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares based on the fair market value of our
Common Stock at the time of exercise of the warrant after deduction of the
aggregate exercise price. The option totals do not include those options which
may be available to the holder of the Series B Preferred Stock upon its
conversion to Common Stock.
Pro Forma Condensed Capitalization Summary
The following table summarizes, as of May 31, 2005, the pro forma effect
on the Common Stock of Scientigo and the proceeds to Scientigo of the Note
offering, the exchange of all outstanding shares of Series A Preferred Stock
pursuant to the Exchange Offer, the conversion of all Notes into Common Stock,
the conversion of all outstanding shares of Series B Preferred Stock into Common
Stock, the exercise of all Note Warrants and Warrants issued pursuant to the
Note offering and the Exchange Offer, respectively, the issuance of Common Stock
to acquire all of the assets of TAG and the issuance of warrants to the
placement agent in the Series A Preferred Stock offerings and the Note Offering,
and the exercise of such warrants:
Pro Forma Condensed Capitalization Summary
May 31, 2005
Future
Proceeds to
No. of Shares Company
-------------- --------------
Common shares outstanding: 6,916,383 --
Conversions from Preferred Stock to Common Stock:
Series A outstanding 5,557,005 --
Series B (minimum conversion ratio) 2,000,000 --
Conversion 6.4% Senior Convertible Notes
To Common Stock 3,122,421
Conversion of warrants granted as commissions on sale
Of 6.4% Senior Convertible Notes(1) 332,850 --
Exercise of all Note
Warrants issued as of
May 31, 2005(1) 2,080,313 $ 2,080,313
-------------- --------------
Subtotal 20,008,972 $ 2,080,313
Sale of Scientigo 2005 6.4% Senior Convertible
Notes and subsequent conversion into
Common Stock 1,568,011 $ 1,671,490
Conversion of warrants granted as commissions on sale
Of 6.4% Senior Convertible Notes 167,150
Exercise of Exchange Offer Warrants 5,557,005 $ 4,784,240
Exercise of Note Warrants accompanying the
6.4% Senior Convertible Notes 1,044,687 $ 1,044,687
Issuance of Common Stock in conjunction the
Purchase of assets of The Tag Group, Inc. 2,000,000 --
-------------- --------------
Total 30,345,815 $ 9,580,730
============== ==============
- ----------
(1) Each of these line items are included in option and warrant information
set forth above at "Options and Warrants."
Risk Factors
Scientigo has incurred significant losses recently. Scientigo has incurred
significant losses. There is no assurance that such losses will not continue to
occur.
Scientigo is not currently generating positive cash flow and its cash
resources on hand are insufficient for its long term needs. In the absence of
the obtaining of additional capital, Scientigo would be unable to continue
operations at its current level for any significant period of time.
The Common Stock and Warrants are not currently liquid investments. The
Common Stock and Warrants will not be freely tradable. Upon exercise of the
Warrants, the shares of Common Stock issued by Scientigo will be restricted
securities until they are registered for resale in a resale public offering.
Scientigo's industry is very competitive. Scientigo's long-term success
will depend on our ability to compete successfully with other companies which
develop intellectual property similar to ours. Some of our competitors will have
a broader geographic reach and customer base and a longer history of combined
operations than we have. As a result, some competitors may be able to provide a
broader range of technology to their customers more efficiently than we can.
General economic or business conditions could be worse than management
expects. Any factors that adversely affect the economy of our market areas could
adversely affect Scientigo's performance.
Summary Financial Information
The summary historical consolidated financial information presented below is
derived from Scientigo's audited consolidated financial statements included in
our Annual Report on Form 10-KSB for the year ended August 31, 2004 (the "Annual
Report") and Scientigo's unaudited consolidated financial statements included in
our Quarterly Report on Form 10-QSB for the quarter ended May 31, 2005,
which are incorporated herein by reference. More comprehensive financial
information is included in our Annual Report and the financial information
presented below is qualified in its entirety by reference to such report and all
of the consolidated financial statements and related notes contained therein,
copies of which may be obtained as set forth below under "Additional Information
About Us".
SCIENTIGO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, August 31,
2005 2004
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,716,813 $ 344,099
Accounts receivable, net of allowance for doubtful
accounts of $0.00 at May 31, 2005 and August 31, 2004 518,594 719,262
Related parties, net of allowance for doubtful accounts
of $0.00 at May 31, 2005 and August 31, 2004 -- 277,119
Notes receivable 657,293 --
Prepaid expenses and other assets 64,179 149,282
------------ ------------
Total Current Assets: 2,956,878 1,489,762
------------ ------------
Property and equipment: 189,614 143,484
Less: accumulated depreciation (121,109) (103,861)
Property and equipment, net: 68,505 39,623
Net assets from discontinued operations -- 851,826
Other Assets:
Notes receivable 713,707 --
Restricted cash -- 109,617
Goodwill 745,050 745,050
Deposits and other -- 50,308
Capitalized financing costs, net of amortization of
$7,420 and $0 at May 31, 2005 and August 31, 2004,
respectively 240,154 --
Patents and trademarks, net of accumulated amortization
of $56,771 and $32,440 at May 31, 2005 and August
31, 2004, respectively 40,548 64,879
------------ ------------
Total other assets 1,739,459 969,854
------------ ------------
Total assets $ 4,764,842 $ 3,351,065
============ ============
Liabilities and Deficiency in Stockholder's Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 3,226,847 $ 4,242,462
Note payable to related parties 365,148 1,210,474
Notes payable, current portion 3,241 1,830,422
Due to Factor 115,884 483,590
Accrued preferred stock dividend 444,282 61,067
Current portion of capital lease obligation 593,012 648,484
Deferred interest income 239,445 --
------------ ------------
Total Current Liabilities 4,987,859 8,476,499
------------ ------------
6.4% Convertible notes 526,221 --
Notes payable - related party 854,852 --
Capital lease obligaion - long-term portion 18,885 64,716
Commitments and Contingencies -- --
Liabilities from discontinued operations -- 85,234
Deficiency in Stockholders' Equity:
Preferred stock, par value $.001 per share; 10,000,000
shares auhtorized; Series A - 5,557,005 shares and
2,241,407 shares issued and outstanding at May 31, 2005
and August 31, 2004, respectively 5,557 2,251
Series B - 350,000 shares issued and outstanding at
May 31, 2005 and August 31, 2004 350 350
Common stock, par value, $.001 per share; 75,000,000
shares authorized; 6,916,385 shares and 13,391,693
shares issued and outstanding at May 31, 2005 and
August 31, 2004, respectively 6,916 13,392
Common stock receivable -- (800)
Additional paid-in-capital 35,666,786 27,672,231
Preferred stock dividend (875,000) (875,000)
Accumulated deficit (36,427,584) (32,087,808)
------------ ------------
Total shareholders' deficit (1,622,975) (5,275,384)
------------ ------------
Total liabilities and shareholders' deficit $ 4,764,842 $ 3,351,065
============ ============
SCIENTIGO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended May 31,
2005 2004
------------ ------------
Revenues, Net $ 4,893 $ 9,686
Cost of Sales -- 1,312
------------ ------------
Gross Profit 4,893 8,374
------------ ------------
Operating Expenses:
Selling, General & Administrative 1,028,964 1,052,102
Depreciation and Amortization 18,615 12,212
------------ ------------
Total Operating Expenses 1,047,579 1,064,314
Loss From Operations (1,042,686) (1,055,940)
Other income (expense): (9,983) --
Interest income (expense) (1,091,054) (158,852)
Total other (income) expense (1,101,037) (158,852)
------------ ------------
Loss from continuing operations, (Before income taxes
and discontinued operations) (2,143,723) (1,214,792)
Provision for Income Taxes -- --
Loss from Continuing Operations, before Discontinued
Operations (2,143,723) (1,214,792)
Loss from Discontinued Operations (543,329) (982,766)
Gain from disposal of discontinued operations 552,491 2,749,370
------------ ------------
Net Income (Loss) $ (2,134,561) $ 551,812
============ ============
Preferred stock dividend - beneficial conversion feature -- (875,000)
Cumulative convertible preferred stock dividend
requirements (304,523) (25,877)
------------ ------------
Net loss attributable to Common Shareholders $ (2,439,084) $ (349,065)
============ ============
Net (loss) per common share $ (0.20) $ (0.03)
Continuing operations: $ (0.20) $ (0.16)
Discontinued operations: $ 0.00 $ 0.13
Weighted Average Shares Outstanding:
Basic and assumed diluted 12,456,895 13,299,676
SCIENTIGO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Nine Months Ended May 31,
2005 2004
------------ ------------
Revenues, Net $ 11,677 $ 21,268
Cost of Sales -- --
------------ ------------
Gross Profit 11,677 21,268
------------ ------------
Operating Expenses:
Selling, General & Administrative 2,424,898 2,056,163
Impairment of Good will 0 4,062,003
Depreciation and Amortization 41,579 36,636
------------ ------------
Total Operating Expenses 2,466,477 6,154,802
Loss From Operations (2,454,800) (6,133,534)
------------ ------------
Other Income (expenses): 223,822 --
Interest Income (Expenses) (1,193,145) (288,604)
Total Other (Income) expenses (969,323) (288,604)
------------ ------------
Loss from continuing operations, (Before income taxes
and discontinued operations) (3,424,123) (6,422,138)
Provision for Income Taxes -- --
Loss from Continuing Operations, before Discontinued
Operations (3,424,123) (6,422,138)
Loss from Discontinued Operations (1,085,432) (2,468,820)
Gain from disposal of discontinued operations 552,491 2,749,370
------------ ------------
Net Loss (3,957,064) (6,141,588)
------------ ------------
Preferred stock dividend - beneficial conversion feature
-- (875,000)
Cumulative convertible preferred stock dividend
requirements (382,712) (25,877)
------------ ------------
Net loss attributable to Common Shareholders $ (4,339,776) $ (7,042,465)
============ ============
Net loss per common share $ (0.35) $ (0.53)
Continuing operations: $ (0.31) $ (0.55)
Discontinued operations: $ (0.04) $ 0.02
Weighted Average Shares Outstanding:
Basic and assumed diluted 12,456,895 13,279,279
SCIENTIGO, INC.
CONSOLIDATED STATEMENTS OF LOSSES
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
2004 2003
------------ ------------
Revenues, net $ 7,732,021 $ 8,872,052
Cost of sales 5,519,077 5,651,220
------------ ------------
Gross profit 2,212,944 3,220,832
Operating expenses:
Selling, general and administrative 6,288,606 3,870,319
Impairment of goodwill 4,062,003 --
Depreciation and amortization 576,115 1,001,467
------------ ------------
Total operating expenses 10,926,724 4,871,786
Loss from operations (8,713,780) (1,650,954)
Other income (expenses):
Interest income (expenses) (513,343) (396,260)
------------ ------------
Total other expenses (513,343) (396,260)
Loss from continuing operations, before income taxes and
discontinued operations (9,227,123) (2,047,214)
Provision for income taxes -- --
------------ ------------
Loss from continuing operations, before discontinued operations (9,227,123) (2,047,214)
Loss from discontinued operations (1,141,530) (1,632,076)
Gain from disposal of discontinued operations 2,784,370 --
------------ ------------
Net (loss) $ (7,584,283) $ (3,679,290)
============ ============
Preferred stock dividend - beneficial conversion feature (875,000) --
Cumulative convertible preferred stock dividend requirements (61,067) --
------------ ------------
Net loss attributable to common shareholders $ (8,520,350) $ (3,679,290)
============ ============
Net (loss) per common share (basic and assumed diluted) $ (0.64) $ (0.45)
============ ============
Continuing operations: (0.76) (0.25)
============ ============
Discontinued operations: 0.12 (0.20)
============ ============
Weighted Average Shares Outstanding
Basic and assumed diluted 13,293,655 8,090,736
============ ============
Additional Information About Us. We are subject to the information requirements
of the Exchange Act, and in accordance therewith file periodic reports, proxy
statements and other information relating to our business, financial condition
and other matters. We are required to disclose in such proxy statements certain
information, as of particular dates, concerning our directors and executive
officers, their compensation, stock options granted to them, the principal
holders of our securities and any material interest of such persons in
transactions with us. Pursuant to Rule 13e-4(c)(2) under the Exchange Act, we
have filed with the Commission an Issuer Tender Offer Statement on Schedule TO,
which includes additional information with respect to the exchange offer. Such
material and other information may be inspected at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained by mail,
upon payment of the Commission's customary charges, by writing to the Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a website on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
Commission.
Incorporation by Reference. The rules of the Commission allow us to incorporate
by reference information into this document, which means that we can disclose
important information to you by referring you to another document filed
separately with the Commission. These documents contain important information
about us.
SEC Filings Period or Date Filed
- ------------------------------ ----------------------
Annual Report on Year ended
Form 10-KSB August 31, 2004
Quarterly Report on Quarter ended
Form 10-QSB February 28, 2005
Current Report on Filed April 22, 2005
Form 8-K
Current Report on Filed April 28, 2005
Form 8-K
Current Report on Filed July 6, 2005
Form 8-K
Quarterly Report on Quarter ended
Form 10-QSB May 31, 2005
We incorporate by reference into this Exchange Offer the documents listed above.
You may request a copy of these filings, at no cost, by writing or telephoning
us at our principal executive offices at the following address: Scientigo, Inc.,
6701 Carmel Road, Suite 205, Charlotte, NC 28226, (704) 837-0500. Please be sure
to include your complete name and address in the request.
10. Interest of Directors and Executive Officers; Transactions and
Arrangements Concerning the Shares.
One director of Scientigo, Hoyt Lowder, is the record holder of 225,144
shares of Series A Preferred Stock (4% of the total number of shares
outstanding). He has advised us that he intends to tender all of such shares
pursuant to the exchange offer. No other officers or directors own Series A
Preferred Stock.
11. Legal Matters; Regulatory Approvals.
We are not aware of any license or regulatory permit that appears material
to our business that might be adversely affected by our acquisition of the
shares of Series A Preferred Stock as contemplated by the exchange offer or of
any approval or other action by any government or governmental, administrative
or regulatory authority or agency, domestic, foreign or supranational, that
would be required for our acquisition or ownership of the shares as contemplated
by the exchange offer. Should any such approval or other action be required, we
presently contemplate that we will seek that approval or other action. We are
unable to predict whether we will be required to delay the acceptance for
payment of or payment for shares tendered pursuant to the exchange offer pending
the outcome of any such matter.
We are not aware of any pending or threatened legal proceedings that would
affect the exchange offer.
12. Material United States Federal Income Tax Consequences.
This discussion of material U.S. federal income considerations with
respect to the exchange of a share of Series A Preferred Stock for Common Stock
and a Warrant, the acquisition of Common Stock on the exercise of a Warrant and
the ownership and disposition of a share of Common Stock and a Warrant applies
to you if you are a U.S. Holder who holds the Series A Preferred Stock, the
Common Stock and the Warrant as capital assets within the meaning of Section
1221 of the Code. You are a U.S. Holder if you are the beneficial owner of a
share of Series A Preferred Stock, a share of Common Stock or a Warrant and you
are:
o a citizen or resident alien individual of the United States,
o a corporation, or an entity treated as a corporation, organized
under the law of the United States, any State thereof or the
District of Columbia,
o an estate the income of which is subject to U.S. federal income tax
without regard to its source, or
o a trust if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or
more United States persons have the authority to control all
substantial decisions of the trust, or (2) the trust was in
existence on August 20, 1996 and properly elected to continue to be
treated as a United States person.
If a partnership, including for this purpose any entity treated as a
partnership for U.S. federal tax purposes, is a beneficial owner of a share of
Series A Preferred Stock, a share of Common Stock or a Warrant, the U.S. tax
treatment of a partner in the partnership generally will depend on the status of
the partner and the activities of the partnership. A holder that is a
partnership and partners in that partnership should consult their own tax
advisers regarding their U.S. federal income tax consequences.
This discussion is based upon the Code, Treasury regulations, Internal
Revenue Service rulings and pronouncements and judicial decisions now in effect,
each of which is subject to change at any time by legislative, administrative,
or judicial action, possibly with retroactive effect. The discussion does not
discuss every aspect of U.S. federal income and estate taxation that may be
relevant to a particular taxpayer in light of its individual circumstances or to
persons who are otherwise subject to special tax treatment. For example, special
rules not discussed here may apply to you if you are:
o a bank or other financial institution;
o a broker-dealer;
o an insurance company;
o a regulated investment company, real estate investment trust or real
estate mortgage investment conduit;
o a pension or other employee benefit plan;
o a tax-exempt organization or entity;
o a U.S. expatriate;
o a person holding Series A Preferred Stock, Common Stock or Warrants
as a part of a straddle, "hedge" or "conversion transaction" with
other investments;
o a person who has elected mark-to-market accounting;
o a hybrid entity or an owner of interests therein; or
o a holder whose functional currency is not the U.S. dollar.
In addition, this discussion does not address the effect of any applicable
foreign, state, local or other tax laws. We have not sought and will not seek
any rulings from the Internal Revenue Service concerning the tax consequences of
the exchange of a share of Series A Preferred Stock for Common Stock and a
Warrant, the acquisition of Common Stock on the exercise of a Warrant or the
ownership or disposition of a share of Common Stock or a Warrant. Moreover, the
tax consequences are subject to uncertainties that are not insignificant.
Accordingly, we cannot assure you that the Internal Revenue Service will not
successfully challenge the tax consequences described below. We urge you to
consult your tax adviser with respect to the U.S. federal income and estate tax
considerations relevant to you as well as any tax considerations applicable
under the laws of any foreign, state, local or other taxing jurisdiction.
The Exchange. The exchange of a share of Series A Preferred Stock for
Common Stock and a Warrant should be treated as a recapitalization and thus as a
reorganization within the meaning of Section 368 of the Code. As a result, you
should not recognize any gain or loss on that exchange, although you may be
treated as receiving a deemed distribution as a result of that exchange by
reason of the existence of the accumulated but unpaid dividends on the Series A
Preferred Stock. The amount that may be treated as a deemed distribution is
equal to, with respect to each exchange of a share of Series A Preferred Stock,
the lesser of (i) the amount by which the fair market value of the share of
Common Stock and the Warrant you receive in the exchange (determined immediately
after the exchange) exceeds the issue price of the share of Series A Preferred
Stock and (ii) the amount of the dividends in arrears on the share of Series A
Preferred Stock. The issue price of a share of Series A Preferred Stock should
be the price initially paid by a holder of that share upon the original issuance
of the share. Such a deemed distribution would be treated as a dividend to the
extent it is paid out of our current or accumulated earnings and profits
attributable to the distribution as determined under U.S. federal income tax
principles, and if received by a noncorporate shareholder, would be subject to a
maximum tax rate of 15%, subject to certain exceptions for short-term and hedged
positions. Conversely, if we have no accumulated or current earnings and profits
at the end of our taxable year in which the exchange occurs, no part of any
amount treated as a deemed distribution to you would be treated as a dividend.
It appears that your combined basis in the Common Stock and Warrant you receive
should be equal to the basis of the share of Series A Preferred Stock you
exchange therefor, increased by any amount treated as a dividend as described
above and that that basis should be allocated between the Common Stock and
Warrant based on their relative fair market values on the date of the exchange.
In general, your holding period in the Common Stock and Warrant you receive
should include your holding period for the share of Series A Preferred Stock you
exchange therefor. However, if any amount is treated as a dividend as described
above, you could be treated as having a split holding period for the Common
Stock and the Warrant in which a new holding period would begin in respect of a
portion of each share of Common Stock and each Warrant corresponding to the
portion of the total value of the Common Stock and Warrant you receive that is
treated as a dividend. The manner in which your basis in a share of Series A
Preferred Stock, increased by any amount treated as a dividend, will be
allocated between the Common Stock and Warrant you receive, and the
determination of any Common Stock and/or Warrant in which a new holding period
would begin, are subject to uncertainty.
The exchange of a share of Series A Preferred Stock for Common Stock and a
Warrant is subject to possible alternative tax treatment. For example, your
receipt of the Warrant might be treated as ordinary income consisting of a fee
paid to you to induce you to convert your Series A Preferred Stock into Common
Stock. In that event, however, you nevertheless should not recognize any gain or
loss on the exchange of a share of Series A Preferred Stock for Common Stock,
although you may be treated as receiving a deemed distribution as a result of
that exchange by reason of the existence of the accumulated but unpaid dividends
on the Series A Preferred Stock. The amount that may be treated as a deemed
distribution is equal to, with respect to each exchange of a share of Series A
Preferred Stock, the lesser of (i) the amount by which the fair market value of
the Common Stock you receive in the exchange (determined immediately after the
exchange) exceeds the issue price of the share of Series A Preferred Stock and
(ii) the amount of the dividends in arrears on the share of Series A Preferred
Stock. The tax consequences of such a deemed distribution would be the same as
those described in the preceding paragraph. Under this alternative
characterization, your tax basis in the Common Stock you receive should be equal
to the basis of the share of Series A Preferred Stock you exchange therefor,
increased by any amount treated as a dividend as described above, and your
holding period in the Common Stock you receive should include your holding
period for the share of Series A Preferred Stock you exchange therefor. However,
if any amount is treated as a dividend as described above, you could be treated
as having a split holding period for the Common Stock in which a new holding
period would begin in respect of a portion of each share of Common Stock
corresponding to the portion of the total value of the Common Stock received
that is treated as a dividend. The manner in which your basis in a share of
Series A Preferred Stock, increased by any amount treated as a dividend, will be
allocated to the Common Stock you receive, and the determination of any Common
Stock in which a new holding period would begin, are subject to uncertainty.
Under this alternative characterization, your basis in the Warrant should be
equal to its fair market value on the date of the exchange, and your holding
period in the Warrant should begin on the day after the date of the exchange.
The tax treatment of an exchange of a share of Series A Preferred Stock
for Common Stock and a Warrant is subject to uncertainty because the Common
Stock that a holder will receive pursuant to the exchange is the same as the
Common Stock the holder would receive if he simply converted his Series A
Preferred Stock to Common Stock. Therefore, it is possible that our payment of a
Warrant as consideration in addition to the Common Stock pursuant to the
exchange could be characterized as, in substance, a fee paid to induce holders
to convert their Series A Preferred Stock. However, in form the transaction is
structured as an exchange of Series A Preferred Stock for Common Stock and a
Warrant and not as a conversion. The degree of uncertainty which
characterization will govern the federal income tax consequences of the
transaction is significant.
Tax Treatment of Warrants. A U.S. Holder will recognize gain or loss upon
a sale, redemption, lapse or other taxable disposition of a Warrant in an amount
equal to the difference between the sum of the amount of cash and the fair
market value of any property received for the Warrant and the U.S. Holder's tax
basis in the Warrant. A U.S. Holder's tax basis in a Warrant should be
determined under one of the alternative methods described in "--The Exchange"
above. That gain or loss will be capital gain or loss if the Common Stock to
which the Warrant relates would be a capital asset in the hands of the Warrant
holder and will be long-term capital gain or loss if the holding period for the
Warrant exceeds one year.
The exercise of a Warrant will not be a taxable event for the exercising
U.S. Holder, except with respect to cash, if any, received in lieu of a
fractional share. A U.S. Holder will have a tax basis in the Common Stock
received upon exercise of a Warrant equal to the sum of the U.S. Holder's tax
basis in the Warrant surrendered and the exercise price of the Warrant, as
adjusted for any fractional share for which cash is received. A U.S. Holder
generally will have a holding period in Common Stock acquired upon exercise of a
Warrant that commences on the date of exercise of the Warrant.
An adjustment to the exercise price of the Warrants, or the failure to
make an adjustment, in certain circumstances, may result in a constructive
distribution to the holders of the Warrants that could be taxable as a dividend
under Section 305 of the Code. In that event, a holder's tax basis in the
Warrant would increase by the amount of the dividend.
Tax Treatment of Common Stock Acquired on Exercise of a Warrant. Cash
distributed on Common Stock will be treated as a dividend to the extent of our
current and accumulated earnings and profits attributable to the distribution as
determined under U.S. federal income tax principles. Subject to certain
exceptions for short-term and hedged positions, a dividend a noncorporate
shareholder receives on a share before January 1, 2009 will be subject to a
maximum tax rate of 15%. If the amount of a distribution exceeds our current and
accumulated earnings and profits attributable to the distribution, the
distribution next will be treated as a nontaxable return of capital and will be
applied against and reduce your adjusted tax basis in the Common Stock, but not
below zero. If the distribution exceeds both our current and accumulated
earnings and profits attributable to the distribution and your adjusted tax
basis in your Common Stock, the excess will be treated as capital gain and will
be either long-term or short-term capital gain depending on whether your holding
period for that Common Stock is or is not more than one year.
Corporate holders of Common Stock generally should be eligible for the 70%
dividends-received deduction with respect to the portion of any distribution
taxable as a dividend. However, corporate investors should consider certain
provisions that may limit the availability of a dividends-received deduction,
including but not limited to the holding period rules of Section 246(c) of the
Code, the rules of Section 246A of the Code that reduce the dividends-received
deduction for dividends on certain debt-financed stock, and the rules in Section
1059 of the Code that reduce the basis of stock and may require recognition of
taxable gain in respect of certain extraordinary dividends. Corporate investors
should also consider the effect of the dividends-received deduction on the
determination of alternative minimum tax liability.
If you sell or dispose of your Common Stock in a taxable transaction, you
will recognize capital gain or loss equal to the difference between the sum of
the cash and the fair market value of any property received and your tax basis
in the Common Stock. A U.S. Holder's tax basis in shares of Common Stock
acquired on exercise of a Warrant will be determined in the manner set forth in
"--Tax Treatment of Warrants" above. The gain or loss will be long-term capital
gain or loss if your holding period for your Common Stock exceeds one year. For
corporate taxpayers, long-term capital gains are taxed at the same rate as
ordinary income. For noncorporate taxpayers, net capital gains--the excess of
the taxpayer's net long-term capital gains over short-term capital losses--are
subject to a maximum tax rate of 15%. The deductibility of capital losses is
restricted and generally may be used only to reduce capital gains to the extent
thereof.
Information Reporting; Backup Withholding. We are required to furnish to
record holders of Common Stock, other than corporations and other exempt
holders, and to the Internal Revenue Service, information with respect to
dividends paid on the Common Stock.
Certain U.S. Holders may be subject to backup withholding at the rate of
28% with respect to dividends paid on Common Stock or with respect to proceeds
received from a disposition of a share of Common Stock or a Warrant. Generally,
backup withholding applies only if:
o the payee fails to furnish a correct taxpayer identification number
to the payer in the manner required or fails to demonstrate that it
otherwise qualifies for an exemption;
o the Internal Revenue Service notifies the payer that the taxpayer
identification number furnished by the payee is incorrect;
o the payee has failed to report properly the receipt of a "reportable
payment" on one or more occasions, and the Internal Revenue Service
has notified the payer that withholding is required; or
o the payee fails, in certain circumstances, to provide a certified
statement, signed under penalties of perjury, that the taxpayer
identification number furnished is the correct number and that the
holder is not subject to backup withholding.
Backup withholding is not an additional tax but, rather, is a method of
tax collection. A U.S. Holder will he entitled to credit any amount withheld
under the backup withholding rules against its actual tax liability, provided
the required information is furnished to the Internal Revenue Service.
13. Extension of the Exchange Offer; Termination; Amendment.
We expressly reserve the right, in our sole discretion, at any time and
from time to time, to extend the period of time during which the exchange offer
is open and thereby delay acceptance for exchange of, and issuance of Common
Stock and Warrants for shares, by making a public announcement of such
extension.
Subject to compliance with applicable law, we further reserve the right,
in our sole discretion, to amend the exchange offer in any respect, including,
without limitation, by decreasing or increasing the consideration offered in the
exchange offer to holders of shares or by decreasing the number of shares being
sought in the exchange offer. Amendments to the exchange offer may be made at
any time and from time to time effected by public announcement, such
announcement, in the case of an extension, to be issued no later than 9:00 a.m.,
New York City time, on the next business day after the last previously scheduled
or announced Expiration Date. Any public announcement made pursuant to the
exchange offer will be disseminated promptly to stockholders in a manner
reasonably designed to inform stockholders of such change. Without limiting the
manner in which we may choose to make a public announcement, except as required
by applicable law, we shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release through PRnewswire or another comparable service.
The exchange offer is not conditioned on any minimum number of shares of
Series A Preferred Stock being tendered or any other condition other than the
proper tender of your shares of Series A Preferred Stock.
In the event that there is a material change in the information set forth
in the Exchange Offer, we will be required to extend the exchange offer so that
at least five (5) business days remain in the exchange offer period after the
information is provided to you.
14. Fees and Expenses.
Scientigo is responsible for all fees and expenses of the Exchange Agent.
We will not pay any fees or commissions to brokers or dealers for
soliciting tenders of shares pursuant to the exchange offer. Stockholders
holding shares through brokers or banks are urged to consult the brokers or
banks to determine whether transaction costs are applicable if stockholders
tender shares through such brokers or banks and not directly to the Exchange
Agent. We will, however, upon request, reimburse brokers, dealers, commercial
banks and trust companies for customary mailing and handling expenses incurred
by them in forwarding the exchange offer and related materials to the beneficial
owners of shares held by them as a nominee or in a fiduciary capacity. No
broker, dealer, commercial bank or trust company has been authorized to act as
the agent of us or the Exchange Agent for purposes of the exchange offer. We
will pay or cause to be paid all domestic stock transfer taxes applicable to the
exchange offer.
15. Miscellaneous.
We are not aware of any jurisdiction where the making of the exchange
offer is not in compliance with applicable law. If we become aware of any
jurisdiction where the making of the exchange offer or the acceptance of shares
pursuant thereto is not in compliance with applicable law, we will make a good
faith effort to comply with the applicable law. If, after such good faith
effort, we cannot comply with the applicable law, the exchange offer will not be
made to (nor will tenders be accepted from or on behalf of) the holders of
shares in such jurisdiction.
Pursuant to Rule 13e-4(c)(2) under the Exchange Act, we have filed with
the Commission an Issuer Tender Offer Statement on Schedule TO, which contains
additional information with respect to the exchange offer. The Schedule TO,
including the exhibits and any amendments and supplements thereto, may be
examined, and copies may be obtained, at the same places and in the same manner
as is set forth in Section 9 with respect to information concerning us.
We have not authorized any person to make any recommendation on our behalf
as to whether you should tender or refrain from tendering your shares in the
exchange offer. You should rely only on the information contained in this
document or documents incorporated by reference or in the related Letter of
Transmittal. We have not authorized any person to give any information or to
make any representations in connection with the exchange offer other than those
contained in this document or documents incorporated by reference or in the
related Letter of Transmittal. If anyone makes any recommendation or
representation to you or gives you any information, you must not rely on that
recommendation, representation or information as having been authorized by us.
July 7, 2005, as amended July 28, 2005
Questions or requests for assistance may be directed to the Exchange Agent
at its telephone numbers and address set forth below. Stockholders may also
contact their broker, dealer, commercial bank or trust company for assistance
concerning the exchange offer.
The Exchange Agent for the Exchange Offer is:
Greenberg Traurig, LLP
Suite 400
3290 Northside Parkway
Atlanta, GA 30327
678-553-2430
678-553-2431 (fax)