-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QJURz/d/LJql8YgdTIjF6GVSSHdl32ht+0cQ4GSMgdSTbABhKGasSoFQuSz3/5Cx fo2yPCEHdLZM74K3hjwYKQ== 0000895755-99-000086.txt : 19991101 0000895755-99-000086.hdr.sgml : 19991101 ACCESSION NUMBER: 0000895755-99-000086 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAVION TECHNOLOGIES INC CENTRAL INDEX KEY: 0001081938 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 841472763 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-80421 FILM NUMBER: 99736666 BUSINESS ADDRESS: STREET 1: 7475 DAKIN STREET STREET 2: SUITE 607 CITY: DENVER STATE: CO ZIP: 80221 BUSINESS PHONE: 3036578212 MAIL ADDRESS: STREET 1: CAVION TECHNOLOGIES INC STREET 2: 7475 DAKIN ST STE 607 CITY: DENVER STATE: CO ZIP: 80221 SB-2/A 1 As filed with the Securities and Exchange Commission on October 29, 1999 Registration No. 333-80421 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 4 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- CAVION TECHNOLOGIES, INC. (Name of Small Business Issuer in its Charter) Colorado 514191 84-1472763 (State or other (Primary North American (I.R.S. Employer jurisdiction Industry Classification Identification No.) of incorporation) System Number) 7475 Dakin Street, Suite 607 Denver, Colorado 80221 (303) 657-8212 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) DAVID J. SELINA President and Chief Executive Officer Cavion Technologies, Inc. 7475 Dakin Street, Suite 607 Denver, Colorado 80221 (303) 657-8212 (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service) ---------------- Copies to: S. LEE TERRY, JR., ESQ. JOHN G. HERBERT, ESQ. CYNTHIA R. CAIN, ESQ. John G. Herbert P.C. Gorsuch Kirgis LLP 1675 Larimer Street, Suite 310 Tower I, Suite 1000 Denver, Colorado 80202 1515 Arapahoe Street (303) 534-0522 Denver, Colorado 80202 (303)376-5000 ---------------- Approximate date of commencement of proposed sale to the public: as soon as practicable after this registration statement becomes effective. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. CALCULATION OF REGISTRATION FEE
Proposed Proposed Maximum Maximum Amount Title of Each Class Amount to Offering Aggregate of of Securities to be be Price Per Offering Registration Registered Registered Share(1) Price(1) Fee ---------- --------- ----------- ------------ Class A common stock, $.0001 par value per share (2) 1,380,000 $6.50 $8,970,000 $2,493.66 Representative's Warrants(3) 120,000 $0.0008 $100 $0.03 Common stock issuable upon exercise of Representative's Warrant(4) 120,000 $7.80 $936,000 $260.21 Total -- -- $9,906,100 $2,753.90
(1) Estimated solely for the purpose of calculating the amount of the registration fee. (2) Includes 180,000 shares of common stock which the underwriters have the option to purchase to cover over- allotments, if any. (3) Representative's warrants to be sold to the representative. (4) Underlying shares of common stock issuable upon exercise of representative's warrants. This registration statement also covers the number of additional warrants which may become issuable upon exercise of the representative's option by reason of anti-dilution provisions according to Rule 416. Subject to completion, dated October 29, 1999 PROSPECTUS 1,200,000 Shares [Logo - cavion.com secure connectivity from a single-minded company] Common Stock - ------------------------------------------------------------------------- We are offering 1,200,000 shares. No public market currently exists for our common stock. The offering price is $6.50 per share. INVESTING IN SHARES OF OUR STOCK INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 5.
Per Share Total ----------- -------- Public offering price $6.50 $7,800,000 Underwriting discount $0.65 $ 780,000 Proceeds to cavion.com $5.85 $7,020,000
We have granted the underwriters a 45-day option to purchase up to 180,000 additional shares of common stock on the same terms and conditions to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CALIFORNIA RESIDENTS. INVESTORS IN THIS OFFERING RESIDING IN THE STATE OF CALIFORNIA MUST HAVE A MINIMUM ANNUAL GROSS INCOME OF $65,000 AND A MINIMUM NET WORTH OF $250,000, EXCLUSIVE OF AUTOMOBILES, HOME AND HOME FURNISHINGS; OR A MINIMUM NET WORTH OF $500,000, EXCLUSIVE OF AUTOMOBILES, HOME AND HOME FURNISHINGS. These securities are being offered on a "firm commitment" basis by Neidiger, Tucker, Bruner, Inc., as representative of the underwriters. Neidiger, Tucker, Bruner, Inc. expects to deliver the shares against payment on or about , 1999. - ------------------------------------------------------------------------- Neidiger, Tucker, Bruner, Inc. , 1999 The information in this prospectus is not complete and may change. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. [INSIDE COVER OF PROSPECTUS] Picture of Public Service Credit Union Website page PUBLIC SERVICE CREDIT UNION HOMEPAGE [Back] [Forward] [Home] [Stop] Location: http://www.pscu.org/ Welcome to your Credit Union. Options to select: o Credit Union Information with picture o Kids Safari Club with picture o Home Banking with picture o Lifetime Rewards with picture Providing Directions for your Financial Future. Instant Loan Approval Logo for Public Service Credit Union PUBLIC SERVICE [running down the left side of the page] Prospectus Summary cavion.com cavion.com offers products and services for business to business communications, secure Internet financial products, such as on-line banking and bill paying services, and secure Internet access and services for our customers. We are also building and managing a secure private communications network exclusively for the credit union industry. Our network acts as communications platform for the delivery of services and information to and from credit unions and related businesses. Our principal executive offices are located at 7475 Dakin Street, Suite 607, Denver, Colorado 80221. Our telephone number is 303-657-8212. The offering ------------ Common stock offered by cavion.com 1,200,000 shares Common stock outstanding after this offering 4,606,326 shares Use of proceeds of approximately $6.3 million or $7.3 million, expected to be used as follows: o to purchase equipment and infrastructure o to establish new points of presence o for sales and marketing activities o for general working capital o to pay debts and accounts payable o to repay the August 1999 promissory notes o possibly to purchase our outstanding shares of Class B common stock Proposed Nasdaq Small Cap Market Symbol CAVN The calculation of common stock to be outstanding after this offering is based on shares outstanding as of the date of this prospectus and includes the automatic conversion of 700,000 shares of our Series A preferred stock upon the closing of this offering. It excludes approximately 1.11 million shares of Class A common stock that may be issued as a result of stock option grants and exercises, conversion of the Class B common stock, exercise of warrants in our August 1999 private placement of notes and warrants, exercise of the underwriter's over- allotment option and exercise of the representative's warrant. Summary financial information ----------------------------- The following tables contain our summary financial data. In addition to this summary financial data, you should refer to the more complete financial information included elsewhere in this prospectus.
cavion.com Period from Combined LanXtra August 18,1998 Year Ended Year Ended (Inception) to Pro Forma December 31, December 31, December 31, Adjustments 1998 1998 1998 (unaudited) (unaudited) ------------ -------------- ----------- ------------ STATEMENT OF - ------------ OPERATIONS DATA: - --------------- Revenue $ 215,022 $ -- $ -- $ 215,022 Cost of Revenue 222,419 -- -- 222,419 Operating Expenses 1,117,892 6,877 914,146 2,038,915 ----------- -------- --------- ----------- Operating Loss (1,125,289) (6,877) (914,146) (2,046,312) Interest expense, and other 845,213 29,067 (584,480) 289,800 ----------- -------- --------- ----------- Loss from continuing operations $(1,970,502) $(35,944) $(329,666) $(2,336,112) =========== ======== ========= =========== Basic and diluted net loss from continuing operations per share $ (.77) ========== Weighted average common shares outstanding - basic and diluted 3,029,218 ===========
Pro Forma cavion.com Combined Six Six LanXtra Months Months One Month Ended Ended Ended June 30, Pro Forma June 30, January 31, 1999 Adjustments 1999 1999 (unaudited) (unaudited) (unaudited) ------------ -------------- ----------- ------------ STATEMENT OF - ------------ OPERATIONS DATA - ---------------: Revenue $ 37,850 $ 205,333 $ -- $ 243,183 Cost of Revenue 31,898 133,617 -- 165,515 Operating Expenses 213,311 1,619,677 79,388 1,912,376 --------- ---------- -------- ---------- Operating Loss (207,359) (1,547,961) (79,388) (1,834,708) Interest expense, and other 64,069 252,586 (52,932) 263,723 --------- ---------- -------- ---------- Net Loss $(271,428) $(1,800,547) $(26,456) $(2,098,431) ======== ========== ======= ========== Basic and diluted net loss per share $ (.75) ========== Weighted average common shares outstanding - basic and diluted 2,788,574 ==========
The following table is a summary of our balance sheet data. The pro forma column reflects our receipt of: o the August 1999 promissory notes payable private offering proceeds, and the estimated value of warrants for common stock issued in that offering; and o the estimated net proceeds of the shares of common stock we are selling in this offering at an assumed initial public offering price of $6.50 per share, after deducting underwriting discounts and commissions and estimated expenses of the offering. The pro forma as adjusted column reflects the required repayment upon the successful completion of this offering of our line of credit, notes payable to former LanXtra shareholders, back pay to former employees and equipment purchases.
Pro Forma cavion.com Pro Forma As Adjusted June 30, Pro Forma June 30, June 30, 1999 Adjustments 1999 1999 (unaudited)(unaudited) (unaudited) (unaudited) ---------------------- ----------- ----------- BALANCE SHEET DATA: - ------------------- Current Assets $ 926,262 $6,604,000 $ 7,530,262 $ 6,090,262 Total Assets $5,793,826 $6,604,000 $12,397,826 $10,957,826 ========== ========== =========== =========== Current Liabilities $1,952,344 $ 266,863 $ 2,219,207 $ 779,207 Long-term Borrowings 456,240 -- 456,240 456,240 Putable Stock 184,697 -- 184,697 184,697 Stockholders' Equity 3,200,545 6,337,137 9,537,682 9,537,682 ---------- ---------- ----------- ----------- Total Liabilities and Stockholders' Equity $5,793,826 $6,604,000 $12,397,826 $10,957,826 ========== ========== =========== ===========
Risk Factors Because we have a short operating history, you will have limited historical information about us on which to base your investment decision - ------------------------------------------------------------------------- Our business plan was developed in January 1998 and we began acquiring credit union customers, other than our original pilot customers, in April 1998. Accordingly, we have a limited operating history upon which you may evaluate us. We face the risks and uncertainties faced by early-stage companies. Our short operating history makes it difficult to predict our future financial results. Because we have not yet been profitable, we may not have sufficient resources to execute our business plan - ------------------------------------------------------------------- As of the date of this prospectus, we have not been a profitable business. We may never achieve profitable operations. Even if we do become profitable, we may not be able to continue to be profitable. Combined with LanXtra, we reported a total loss of $2,006,446 for the year ended December 31, 1998, comprised of a $35,944 net loss for cavion.com and a net loss of $1,970,502 for LanXtra. We reported additional combined losses of $2,071,975 for the six months ended June 30, 1999. We expect to continue to report losses through most of the year 2000. Today, we receive our revenue from the license and sale of products and services to our credit union customers. Our revenue has grown since the start of our business but it may not continue to grow or even continue at its current level. Because some of our expenses are fixed, including equipment and real estate leases, if our revenue does not increase, we may not be able to compensate by reducing our expenses as much or as quickly as we need to do. It is possible that our operating losses will continue at present levels or even increase in the future. Our business, our financial condition and the results of our operations will be materially and adversely affected if we can't quickly adjust our operating expense levels to at least match our revenue levels. The opinion of our independent public accountants with respect to our audited financial statements expresses substantial doubt regarding our ability to continue as a going concern and the effects, if any, on the financial statements of the outcome of such uncertainty. We plan to seek additional bank financing after the closing of this offering. If we are successful in obtaining such financing, we hope that the proceeds of the offering, along with improved cash flow and results of operations, will permit our independent accounting firm to delete the going concern qualification from its report on our 1999 year end audited financial statements. Because there are a number of factors that go into an auditor's decision whether to include a going concern paragraph, many of which are outside our control, we are not sure that it will be deleted from the report on our 1999 financial statements. If we are unable to attract more credit union customers, we may not be able to execute our business plan - ------------------------------------------------------------------ As of the date of this prospectus, substantially all our revenue has been derived from network access and connectivity fees and installation service fees from our credit union customers. We expect that reliance to continue for at least the next 18 months, after which we expect our affinity program to generate increasing revenue. Our revenue depends on information-technology spending by credit unions and we can't be sure that this type of spending will increase as we expect or even continue at today's levels. We do expect the credit union industry to grow over the next several years, partially because credit unions have recently been allowed to expand their membership beyond a single employee group. We think that, as the credit union industry grows, its demand for information technology products will also grow. Still, the demand for our products and services is unpredictable. Our network currently hosts 60 credit unions, two credit union leagues, one of which provides check clearing services to credit unions, one corporate credit union, which provides liquidity services to credit unions, and one credit union vendor that is a provider of website design, development and hosting services to credit unions. Our future growth depends on our ability to provide more services and different kinds of services to our existing and new customers. We cannot be certain that we will be able to do that. There are approximately 12,600 credit unions in the United States with combined assets of more than $375 billion and approximately 73 million members. Our success in the near term will depend on our ability to capture a significant percentage of the credit union services market and to expand the services we provide to our existing credit union customers. We cannot assure you we will be able to do so. Because we have not established a backup system, there may be temporary interruptions in our service - ----------------------------------------------------------------------- Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Any system interruptions that cause our services to be unavailable to our credit union customers would greatly reduce the attractiveness of our services and would materially damage our business, financial condition, and operating results. Substantially all of our computer and communications hardware is located at a single leased facility in Denver, Colorado, which has finite backup protection. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. We presently do not have redundant, or backup, systems in separate geographic locations for our network, nor do we have a formal disaster recovery plan. We do store copies of critical data from our internal systems and customers' systems, including the source code of our proprietary software, at a second location. We carry business interruption insurance which will compensate us for up to twelve months of actual losses of business income due to physical loss of or damage to property at our principal facility in Denver. This insurance is limited and may not compensate us for all of our losses. The design of our network architecture includes some redundancy and disaster recovery capabilities, but these capabilities will not be available until we have installed and connected at least one other network server farm with capacity similar to our Denver facility. We can't predict today when that second installation will be completed. Because of the importance to us of David Selina's experience and contacts in the credit union industry, and Jeff Marshall's technical expertise, our success may be dependent on our ability to retain these individuals - --------------------------------------------------------------------- We believe that the credit union and related management experience of David J. Selina, our president, chief executive officer and chief operating officer, is important to our success. We also believe that the software development ability of Jeff Marshall, vice president of Software Development, is important to our success. While we recently lost the services of our former chief executive officer, Craig Lassen, who resigned in March of 1999 to pursue other interests, we believe that the current management team is highly qualified to carry out our business expansion plans. We recently entered into an agreement with Mr. Lassen under which he will provide up to 360 hours of consulting services relating to our business generally, including telecommunications matters. As of the date of this prospectus, we have not utilized a significant amount of the hours available to us. We have employment contracts with David Selina, Jeff Marshall and another key executive, Marshall Aster, our chief financial officer. We have purchased $1,000,000 of key man insurance on each of David Selina and Jeff Marshall. We have relied on our direct sales force for sales of our products and services. Our success may be dependent on our ability to attract and retain personnel qualified in Internet and network services - ----------------------------------------------------------------- We will need to hire more people in sales, customer service and other areas in 1999 and beyond if we grow as we expect to. Competition for qualified people in the Internet services and software industry, particularly in the network services field, is intense. We compete with bigger and better financed software and Internet services companies for these employees. Our future success may depend on whether we can attract, retain and motivate highly qualified personnel. We can't assure you that we will be able to do so. Because our business involves the transmission of confidential financial information over the Internet, we could be liable if our electronic security measures should fail - ------------------------------------------------------------------------ We represent to our credit union customers that our Internet-based network and transactional banking software are secured and protected by multiple security measures, seven days a week, 24 hours a day, with electronic monitoring and activity tracking, and industry-standard software encryption. We believe that these features are an important factor in convincing credit unions to buy our products and services, and encouraging their members to use our Internet network systems for their personal and sometimes sensitive financial transactions. Although we believe our systems will prevent unauthorized access to credit union and personal information, it is impossible to eliminate all risk of unauthorized access. Despite all the measures we have taken, our products may be vulnerable to physical or electronic break-ins, viruses, unknown software defects and similar problems. If someone does circumvent our security measures, that person could copy or review our trade secrets and/or the private information of our credit union customers and their members. Intruders, or "hackers", could also disrupt our systems and cause interruptions to our operations. Breaches of our network could cause us to lose customers, and could make us liable for substantial damages to our credit union customers or their members. Because we have only recently begun to use service contracts that limit our liability to our customers and their members, our earlier customers who did not enter into service contracts with us will not be contractually limited in any damages they may seek from us - ----------------------------------------------------------------------- Historically, we have not used comprehensive service contracts with our credit union customers, but have relied on our customers' written acceptance of our written proposal. As a result, many of the terms of our agreements with early customers are implied from generally accepted business practices and customs rather than being spelled out in a formal document. We are currently using a standard service contract with our customers, including provisions limiting our liability to our customers and their members. However, we can't be sure that these contractual limitations of liability would actually protect us from liability for damages. After this offering existing shareholders will hold a majority of our stock, which will limit the ability of new investors to influence our corporate affairs - --------------------------------------------------------------------- Upon completion of the offering, on a fully-diluted basis, our directors, executive officers and holders of 5% or more of our outstanding Class A common stock will beneficially own approximately 54.4% of the outstanding Class A common stock. If some or all of these shareholders act together, they might be able to elect our directors or even determine the outcome of corporate actions requiring shareholder approval, no matter how other shareholders vote. This concentration of ownership may have the effect of delaying or preventing a change in control of cavion.com. Third parties we deal with may not be Y2K compliant - --------------------------------------------------- While we believe that our products and services comply with Year 2000 requirements, there is a risk that Y2K issues will adversely affect third- party network or application software that is integrated with our products. There are, however, other third-party network or application software programs available to us if the ones we currently use are not Y2K compliant. There are also similar risks of failure from the telecommunications networks, the electric power grid, and the other systems on which the operation of our products and the delivery of our services depend. The disruption of these broader services would have an adverse effect on our ability to provide our products and services to our credit union customers, and could then have a material adverse effect on our business, our financial condition and our results of operations. Shares that can be sold in the future by our current shareholders could lower our stock price - ------------------------------------------------------------------------ If our shareholders sell large amounts of our common stock in the public market following the offering, then the market price of our common stock could fall. Restrictions under the securities laws and lock-up agreements limit the number of shares of common stock which can be sold in the public market. Affiliates of cavion.com have agreed not to sell their shares for a period of twelve months after this offering without the prior written consent of Neidiger, Tucker, Bruner, Inc. In addition, all of the other shareholders who own shares, including the holders of the 700,000 shares of Series A preferred stock that will automatically convert into the same number of shares of common stock when this offering closes, have agreed not to sell their shares for nine months after the effective date of this offering. NTB may, in its sole discretion, release some or all of the shares subject to the lock-up agreements before their scheduled expiration. Such an early release could adversely affect the market price of our common stock. NTB has no present intention to release any shares early. We also plan to file a registration statement to register all shares of common stock under our Equity Incentive Plan. After that registration statement is effective, shares issued upon exercise of stock options will be eligible for resale in the public market without restriction. In addition, we have also agreed to register, as soon as possible after this offering closes, the 700,000 shares of common stock into which the preferred stock will have been automatically converted, but the holders of those shares will still be subject to the nine month lock- up agreement period. Forward-Looking Statements This prospectus contains forward-looking statements. We use words such as "anticipate", "believe", "expect", "future", "may", "will", "should", "plan", "projected", "intend" and similar expressions to identify forward-looking statements. These statements are based on our beliefs and the assumptions we made using information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Our actual results could differ materially from the results discussed in the forward-looking statements. Some, but not all, of the factors that may cause these differences include those discussed in the risk factors in this prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Use of Proceeds We estimate the net proceeds from the offering to be approximately $6.3 million, or $7.3 million if the underwriters exercise their over- allotment option in full, assuming an initial public offering price of $6.50 per share and after deducting estimated underwriting discounts and commissions and expenses of the offering. We expect to use the net proceeds from the offering as follows:
CATEGORY AMOUNT OF PERCENTAGE NET PROCEEDS Purchase the equipment required for $1,500,000 23.8% expansion of our telecommunications and secure network infrastructure and establish new points of presence, physical locations housing a switch that permits access by local credit unions to our national network Sales and marketing activities $2,100,000 33.3% General working capital such as salaries, rent, utilities, supplies, office equipment, telecommunications expenses $1,064,000 16.9% Payment of liabilities assumed in $1,140,000 18.0% connection with the purchase of LanXtra's assets, including our revolving line of credit, notes payable to shareholders, back pay to former employees and equipment purchases. Repayment of promissory notes issued $300,000 4.8% in our August 1999 private offering Possible purchase of our outstanding shares of Class B common stock $ 200,000 3.2% ---------- ------ $6,304,000 100.0% ========== ======
We raised $300,000 through a private offering of notes and warrants to purchase common stock which ended on August 31, 1999. We plan to seek additional bank financing after the closing of this offering. If we are successful in obtaining such financing, we currently expect that our cash needs will be satisfied for at least the next two years. If these funds are not sufficient to satisfy our needs we might need to slow our expansion and reduce our sales and marketing budget. Except for the payment of the liabilities we assumed in connection with the purchase of LanXtra's assets, we have complete discretion over how to use a significant portion of the net proceeds of this offering. You should recognize that, as a result, you will not have the opportunity to evaluate the financial or other information on which our management bases its decision to use the proceeds of this offering. We cannot assure investors that our use of the net proceeds will not otherwise vary substantially due to unforeseen factors. Also, we cannot state with certainty the particular uses for the additional net proceeds should the over-allotment option be exercised. Net proceeds not immediately required for the purposes described above will be principally invested in United States government securities, A-1 rated commercial paper with maturities of 30 days or less, short-term certificates of deposit, money market funds or other short-term interest- bearing investments with qualifying banks or institutions. Dividends We have never declared or paid any dividends on our common stock. We do not intend to pay cash dividends on our common stock. Holders of shares of Series A preferred stock are entitled to receive 5% per year cumulative preferred dividends payable quarterly in cash or in shares of Class A common stock at the discretion of our board of directors. Dividends for the first quarter ended March 31, 1999 of $3,858 and the second quarter ended June 30, 1999 of $24,597 were paid in cash. Dividends due for the third quarter ended September 30, 1999 will be paid in cash. All preferred stock will be converted into common stock upon the closing of this offering. Holders of the preferred stock will be entitled to receive their dividends until the date of conversion. Should our board of directors decide to pay dividends on the preferred stock in shares of common stock, the number of shares of our common stock to be issued upon the closing of this offering will increase accordingly. We plan to retain our future earnings, if any, to finance our operations and the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant. Capitalization The following table sets forth our capitalization as of June 30, 1999. You should also refer to the more complete financial information included elsewhere in this prospectus. Our capitalization is presented: o on an unaudited actual basis o on an unaudited pro forma basis to reflect: o our receipt of the estimated net proceeds from the sale of 1,200,000 shares of common stock offered in the offering at an assumed initial public offering price of $6.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses, o the automatic conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering, o our receipt of the August 1999 promissory notes payable private offering proceeds and the estimated value of the warrants for common stock issued in that offering, and o the subsequent termination of the warrants for preferred stock issued to the placement agent o on an unaudited, pro forma as adjusted basis to reflect the payment of debt that must be repaid from the proceeds of the offering
Pro Forma Actual Pro Forma As Adjusted (unaudited) (Unaudited) (unaudited) ----------- ----------- ----------- Notes and capital leases payable $1,388,034 $ 1,654,897 $ 214,897 Putable Class B common stock, $.0001 par value; 30,000 shares authorized; 28,648 and 28,648 shares issued and outstanding actual, pro forma and pro forma as adjusted, respectively 184,697 184,697 184,697 Stockholders' equity Series A convertible preferred stock, $.0001 par value; 10,000,000 shares authorized; 700,000, 0 and 0 shares issued and outstanding actual, pro forma and pro forma, as adjusted, respectively 1,682,800 -- -- Class A common stock, $.0001 par value; 19,970,000 shares authorized; 2,706,326, 4,606,326 and 4,606,326 shares issued and outstanding actual, pro forma and pro forma as adjusted, respectively 271 461 461 Warrants for common stock -- 33,137 33,137 Warrants for preferred stock 165,200 -- -- Additional paid-in capital 3,188,765 11,340,575 11,340,575 Accumulated (deficit) (1,836,491) (1,836,491) (1,836,491 ---------- ---------- ---------- Total stockholders' equity $3,200,545 $ 9,537,682 $ 9,537,682 ========== =========== =========== Total capitalization $4,773,276 $11,377,276 $ 9,937,276 ========== =========== ===========
We expect there to be 4,606,326 shares of common stock outstanding after the offering which includes shares issuable upon the conversion of all outstanding shares of preferred stock. In addition to the shares of common stock to be outstanding after the offering, we may issue additional shares of common stock under the following: o 477,500 shares of common stock issuable upon exercise of options outstanding under our Equity Incentive Plan o An additional 272,500 shares available for issuance under our Equity Incentive Plan. o 28,648 shares of Class B common stock which are convertible into the same number of shares of common stock. o 30,000 shares of Class A common stock issuable on exercise of warrants issued in our August 1999 private placement of notes and warrants o 180,000 shares of Class A common stock issuable upon exercise of the underwriter's over-allotment option o 120,000 shares of Class A common stock issuable upon exercise of the representative's warrant. Options available for issuance under the 1999 Equity Incentive Plan may be granted with exercise prices as low as 50% of market value of the common stock on the grant date. If we grant options below fair market value it would be dilutive to investors who purchase shares at the initial public offering price. Dilution As of June 30, 1999, our net tangible book value (deficit) on a pro forma basis based upon an assumed public offering price of $6.50 per share and giving effect to the assumed conversion of all of the outstanding shares of preferred stock into shares of common stock upon the closing of this offering was approximately ($1,170,165) or ($.34) per share of common stock. "Net tangible book value (deficit)" per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by pro forma the number of shares of common stock outstanding. As of June 30, 1999, our net tangible book value, on a pro forma basis adjusted for the sale of 1,200,000 shares offered in the offering and the application of the net proceeds from such sale of approximately $6.3 million, based on an assumed initial public offering price of $6.50 per share and after deducting the underwriting discounts and commissions and other estimated offering expenses, would have been approximately $1.11 per share. This represents an immediate increase of $1.45 per share to existing shareholders and an immediate dilution of $5.39 or 83% per share to you. The following tables do not include the exercise of warrants or the stock issuable on exercise of the warrants issued in connection with our August 1999 private placement of notes and warrants. None of the warrants have been exercised as of the date of this prospectus. The following table illustrates the per share dilution:
Assumed initial public offering price per share $6.50 ----- Pro forma net tangible book value per share as of June 30, 1999 $(0.34) Increase per share attributable to you $1.45 ----- Net tangible book value per share after the offering $1.11 ----- Dilution per share to you $5.39 =====
The following table summarizes on a pro forma basis as of the date of this prospectus by the differences between the total consideration paid and the average price per share paid by the existing shareholders, including the shares of preferred stock convertible into common stock upon the closing of this offering, and the new investors with respect to the number of shares of common stock purchased from us on an assumed initial offering price of $6.50 per share:
Total ----- Shares Purchased Consideration Average ----------------- ----------------- Price Number Percent Amount Percent Per Share -------- ------- ------- ------- --------- Existing Shareholders 3,406,326 74.0% $ 5,289,037 40.4% $1.55 New Investors 1,200,000 26.0% 7,800,000 59.6% $6.50 --------- ----- ---------- ---- ----- TOTAL 4,606,326 100.0% $13,089,037 100.0% ========= ===== ========== =====
Selected Financial Information We derived the selected historical and pro forma financial data represented below from our historical and pro forma financial statements and related notes included in other parts of this prospectus. The unaudited balance sheet reflects our June 30, 1999 assets, liabilities and stockholders' equity. The statement of operations adjustments reflect: o our actual expenses for 1998 and the six months ended June 30, 1999 o the pro forma amortization expense for goodwill in connection with the acquisition o adjustments to interest expense based on our new capital structure You should read the selected financial data along with the other financial information contained in this prospectus and the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". Following are the unaudited historical balance sheet at June 30, 1999, and the pro forma statement of operations for the year ended December 31, 1998 and the unaudited six months ended June 30, 1999 for LanXtra and cavion.com. For purposes of the statement of operations, the transaction was assumed to be consummated on January 1, 1998. Pro forma earnings per share are calculated as if the Purchase Agreement was completed on January 1, 1998.
Balance Sheet as of June 30, 1999 ================================= cavion.com ---------- (unaudited) Assets: - ------- Current assets $926,262 Property & equipment, net 436,642 Goodwill and other 4,430,922 ---------- Total Assets $5,793,826 ========== Liabilities: - ------------ Current liabilities $1,952,344 Long-term borrowings 456,240 Putable stock 184,697 Stockholders' equity Preferred stock 1,682,800 Common stock 271 Warrants 165,200 Additional paid-in capital 3,188,765 Accumulated deficit (1,836,491) ---------- Total liabilities and Stockholders' equity $5,793,826 ==========
Statement of Operations for Year Ended December 31, 1998 ======================================================== Pro Forma Pro Forma Adjustments Company LanXtra cavion.com (unaudited) (unaudited) ------------ ---------- ----------- ----------- Revenue $ 215,022 $ - $ - $ 215,022 Cost of revenue 222,419 - - 222,419 ---------- --------- -------- ---------- Gross loss (7,397) - - (7,397) ---------- --------- -------- ---------- Total operating expenses 1,117,892 6,877 914,146 2,038,915 ---------- --------- -------- ---------- Loss from operations (1,125,289) (6,877) (914,146) (2,046,312) --------- --------- ------- --------- Interest expense and (612,200) other, net 845,213 29,067 27,720 289,800 --------- --------- ------- --------- Loss from continuing operations $(1,970,502) $ (35,944) $(329,666) $(2,336,112) =========== ========== ========= =========== Net loss per share $ (.77) ======+==== Weighted average common shares outstanding 3,029,218 =========
Notes to Unaudited Combined Condensed Pro Forma Financial Statements - -------------------------------------------------------------------- Pro Forma adjustments to the unaudited condensed pro forma statement of operations for the year ended December 31, 1998 are as follows:
Income Statement Item Amount Explanation - --------------------- ------ ----------- Amortization of $(914,146) To record amortization expense for goodwill and other the developed technologies, goodwill intangible assets and other intangible assets. Accretion of putable $(612,200) To eliminate the accretion expense common stock for the terminated putable common stock. Accretion of putable $27,720 To record accretion of Cavion's common stock Class B common stock put options.
Statement of Operations for Six Months Ended June 30, 1999 ============================================================= Pro Forma LanXtra cavion.com Combined One Six Months Six Month Ended Months Ended June 30, Pro Forma Ended January 31, 1999 Adjustments June 30, 1999 (unaudited) (unaudited) (unaudited) ----------- ---------- ----------- ----------- Revenue $ 37,850 $ 205,333 $ -- $ 243,183 Cost of revenue 31,898 133,617 -- 165,515 -------- --------- ------- ---------- Gross profit 5,952 71,716 -- 77,668 -------- --------- ------- ---------- Total operating expenses 213,311 1,619,677 79,388 1,912,376 -------- --------- ------- ---------- Loss from operations (207,359) (1,547,961) (79,388) (1,834,708) -------- --------- ------- ---------- Interest expense and other, net 64,069 252,586 (52,932) 263,723 -------- ---------- ------- ---------- Net Loss $(271,428)$(1,800,547) $(26,456) $(2,098,431) ======== ========== ======= ========== Net loss per share $ (.75) ========== Weighted average common shares outstanding 2,788,574 =========
Pro forma adjustments to the unaudited condensed pro forma statement of operations for the six months ended June 30, 1999 are as follows:
Income Statement Item Amount Explanation - --------------------- ------ ----------- Amortization of goodwill $79,388 To record amortization for goodwill for January, 1999 Interest expense: $(52,932) To eliminate the accretion expense for the terminated putable stock
Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in another part of this prospectus. Those financial statements and notes should be considered to be incorporated into this section. This discussion contains forward looking statements that involve risk and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors that include, but are not limited to, the risk factors listed elsewhere in this prospectus. We completed our acquisition of the assets of LanXtra on February 1, 1999 as described in the Asset Purchase Agreement. Prior to the acquisition, we did not conduct any operations except financing activities and other preparations for the acquisition. The following discussion relates to LanXtra's historical results of operations since January 1, 1998 (the date on which LanXtra commenced the business we acquired), and to our plan of operation following this offering. Since January 1, 1998, we have been engaged in building a suite of network products and services for the credit union industry that includes: o a secure network that enables access to our credit union customers' products and services via the Internet or an intranet o secure Internet financial products, including Internet banking software o secure Internet access services for credit unions o secure Internet automated loan application and approval We are in the start-up phase of our operations and generated a net loss of $2,006,446 for the year ended December 31, 1998, comprised of a $35,944 net loss for Cavion and a net loss of $1,970,502 for LanXtra. We expect to incur substantial monthly operating losses through most of the year 2000. Since January 1, 1998, our revenue has been derived from recurring monthly connectivity fees, installation services and monthly recurring revenue associated with our secure Internet access services and secure Internet financial products. As of the date of this prospectus, 60 credit unions, two credit union leagues, one of which provides check clearing services to credit unions, one corporate credit union, which provides liquidity services to credit unions, and one credit union vendor that is a provider of website design development and hosting services to credit unions, have subscribed to our products and services. Approximately half of these customers are located in Colorado, and the other half are located in 15 other states. As of the date of this prospectus, we have financed the development of our products and services with: o capital provided by the sale of LanXtra's unrelated business o a bank loan o loans from shareholders and employees of LanXtra o two private placements of promissory notes and related warrants o a private placement of preferred stock Results of operations for the year ended December 31, 1998 - ---------------------------------------------------------- The following discussion relates to LanXtra's operations for the fiscal year ended December 31, 1998. While LanXtra generated nominal revenue and incurred general and administrative and research and development costs prior to commencement of the 1998 fiscal year, management believes that a comparison of the 1998 operations to those operations conducted in fiscal year 1997 would provide little benefit since our current business was launched in January 1998, with 1997 activity limited to general and corporate activities and research and development activities, and LanXtra's prior business was sold. During the fiscal year ended December 31, 1998, we generated $215,022 in revenue. This revenue was derived from a variety of Internet/intranet activities, including secure Internet access for credit unions utilizing dedicated lines, secure credit union network services, secure Internet financial products such as Internet banking software, sales of related equipment, and installation fees charged for these services. Cost of sales during this period were $222,419, or 103% of revenue. These costs include Internet access fees, telephone company charges for frame relay lines, equipment purchased for resale, service personnel and occupancy costs, hardware repair and maintenance expenses. Our margins will significantly improve in the future as sales discounts for installations diminish for our customers. General and administrative expenses for the period were $869,293 or 404% of revenue. Of these expenses, $566,380 was attributable to salaries and wages, 263% of gross revenue. Additionally, we incurred $248,599 in research and development costs during this period, which represented a percentage of programmers' and engineers' salaries applicable to the amount of time they devoted to development activities. We anticipate that our general and administrative expenses will increase as we hire additional employees to handle the expected growth of our business. In May 1998, LanXtra issued Class B common stock which the holders can require cavion.com to repurchase at $7.00 per share during a 60-day exercise period beginning on the date that is 30 days after the 100 Credit Union Date. For financial accounting purposes, the cost of this "putable" common stock from its issuance price to its redemption value is treated as interest expense. During 1998, such interest expense totaled $612,200. After the closing of this offering, we expect to offer the former LanXtra shareholders, who have rights to the Class B common stock, the option to redeem their Class B shares at $7.00 per share, or to convert each Class B share into one share of our Class A common stock. Results of operations for the six months ended June 30, 1999 and comparisons to six months ended June 30, 1998 - --------------------------------------------------------------- The following discussion relates to our operations for the six months ended June 30, 1999. In 1998, LanXtra operated the business since acquired by us, and LanXtra's operations during the six months ended June 30, 1998 were substantially curtailed due to an ongoing liquidity shortage. During the period ended June 30, 1999, we recognized $205,333 ($243,183 when combined with LanXtra) in revenue, as compared to $92,921 during the six months ended June 30, 1998. Our revenue was derived from a variety of Internet/intranet activities, including secure Internet access for credit unions utilizing dedicated lines, secure credit union network services, secure Internet financial products such as Internet banking software, sales of related equipment, and installation fees charged for these services. The increase in revenue was primarily due to additional credit union customers, and increases in our marketing activity made possible by the funds provided by recent offerings of equity and issuances of debt. Cost of sales during the six months ended June 30, 1999 was $133,617 ($165,511 combined), or 65%, compared to $84,397, or 91%, for the six months ended June 30, 1998. These costs include Internet access fees, telephone company charges for frame relay lines, equipment purchased for resale, service personnel and occupancy costs, hardware repair and maintenance expenses. The increase is primarily due to the increase in the number of customers, and the decrease as a percentage of sales is due to economies of scale in delivering our services to an increasing installed customer base. General and administrative expenses for the six months ended June 30, 1999 were $1,063,079 ($1,244,828 combined) or 518% of revenue, compared to $348,959 or 376% of revenue for the six months ended June 30, 1998. Of these 1999 expenses, $452,195 was attributable to salaries and wages, 220% of gross revenue. Additionally, we incurred $162,089 ($193,669 combined) in research and development costs during the six months ended June 30, 1999, which represented a percentage of programmers' and engineers' salaries applicable to the amount of time they devoted to development activities. During the six months ended June 30, 1998, we incurred $120,177 of research and development costs. We anticipate that our general and administrative expenses will continue to increase as we hire additional employees to handle the expected growth of our business. As we expand our operations nationwide, our depreciation expense will increase because we will be purchasing additional equipment and infrastructure. After this offering is funded, our revolving line of credit, notes payable to former shareholders of LanXtra, back pay to former employees and equipment purchases will be paid off and, because of that, interest expense will be reduced. As compared to the six months ended June 30, 1998, where interest expense was $433,573, our interest expense was $288,200, combined, for the six months ended June 30, 1999. We were also required to pay dividends on our Series A preferred stock, which totaled $28,455 for the six months ended June 30, 1999. These dividends were paid in cash. The board of directors has the discretion to pay future dividends in either cash or stock. We expect to invest at least an additional $300,000 in research and development during 1999. We have just completed developing software for an Internet-enabled automated loan application and approval system. We are in the early stages of designing stored value or "smart card" capabilities for our network. We expect in the near future to begin development of two or more additional interfaces for credit union host data processing systems not yet supported by our network as well as an additional Internet bill pay vendor interface. We are continuously evaluating possible enhancements to the security and functionality of our existing products and services. In addition, we expect to incur development costs in launching our affinity program, through which we plan to offer products and services to credit union members via our credit unions' websites. We expect our product development focus to evolve continuously in the future based on guidance from our customers. The transaction with LanXtra resulted in approximately $4,763,000 of intangible assets, primarily technology, customer lists and goodwill. These intangible assets will be amortized over five years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from February 1, 1999. Because the business now operated by cavion.com has never been profitable, and due to the other risks and uncertainties discussed in this prospectus, it is reasonably possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. Liquidity and capital resources - ------------------------------- As of the date of this prospectus, we have funded our cash requirements primarily through the sale of equity, debt, cash flow from operations and the proceeds from the sale of LanXtra's prior business. On June 30, 1999, cavion.com had $458,881 in cash, current assets of $926,262, and current liabilities of $1,952,344. We raised $300,000 in a private offering of 14% notes and warrants to purchase common stock which ended on August 31, 1999. The effective interest rate of the notes is 36% because of the warrants and the expense of the offering. Each $50,000 note entitles the purchaser to a warrant to purchase 5,000 shares of common stock. The notes are due on the earlier to occur of the closing of this offering or one year from the date of note issuance. The warrants are exercisable for a period of five years beginning on the earlier to occur of the closing of this offering or one year from the date of their issuance. The warrants are exercisable at the price per share of the shares of common stock offered in this offering, or, if this offering does not close within one year from the date of the issuance of the warrant, at $6.00 per share. We will receive payments under an agreement with MoneyLine America, LLC to provide on-line mortgage lending services for our credit unions and their members through our network. This agreement calls for minimum annual payments to us of $300,000 in the first year, beginning in September 1999, escalating to $1,000,000 in years six through ten, provided we have at least 1,500 credit unions, or 12% of the U.S. credit unions on our network by the end of year three. Fifty percent of MoneyLine America is owned by Boutine Capital, LLC, a principal shareholder of cavion.com. We recently entered into a five-year agreement with Convergent Communications Services, Inc. under which Convergent will establish, maintain and support network connectivity between our network and our customers, including providing equipment, maintenance and related services for the network. We will pay Convergent a monthly service fee for these services, beginning at approximately $28,000 per month and increasing as new credit unions are added to the network. The portion of this fee relating to each credit union telecommunications circuit will be passed through to the customer. Convergent purchased from us on October 22, 1999, the effective date of the agreement, our network equipment for $286,000. We expect to incur substantial costs in connection with expanding our telecommunications infrastructure, establishing a sales presence in key strategic markets, and developing new products. We also expect to incur increased marketing, costs and general and administrative expenses in connection with the growth of our secure network for the credit union industry. We plan to seek additional bank financing after the closing of this offering. If we are successful in obtaining such financing, we expect our cash needs will be satisfied for at least the next two years. We hope that the proceeds of this offering, along with improved cash flow and results from operations, will permit our independent accounting firm to delete the going concern paragraph, which expresses substantial doubt regarding our ability to continue as a going concern, from its report on our 1999 year end audited financial statements. Because there are a number of factors that go into an auditor's decision whether to include a going concern paragraph, many of which are outside our control, we are not sure that it will be deleted from the report of our 1999 financial statements. Our June 30, 1999 balance sheet shows approximately $2.6 million in liabilities and approximately $3.2 million of stockholders' equity. Approximately $1.2 million of our liabilities represent obligations to shareholders, as described in the following section. As described in Use of Proceeds, $1.1 million of our debt must be repaid upon the completion of this offering. SHAREHOLDER OBLIGATIONS. Prior to our acquisition of LanXtra's assets, we agreed to provide bridge funding to LanXtra for its business operations pending the raising of equity financing. In order to provide the bridge funding, we raised $370,000 in 1998 through the issuance of 15% secured notes due on October 19, 2000, along with warrants to purchase 2,400 shares of our Class A common stock for every $20,000 in subscriptions at an exercise price of $.01 per share. The notes are secured by substantially all of our assets, now owned or acquired after October 19, 1998, including, cash, equipment, fixtures, general intangibles, and all products and proceeds of the foregoing collateral, accounts receivable, inventory, work in process and service contracts receivables. The October 20, 1998 security agreement contains a covenant which prevents us from incurring any other liens on our assets. We raised an additional $100,000 through this offering in 1999. The warrants were originally exercisable only after payment of the notes. However, we subsequently agreed to permit early exercise, and all of the warrants had been exercised for 56,400 shares, as of February 1999. In connection with our acquisition of LanXtra's assets, we assumed approximately $1.8 million in existing liabilities of LanXtra, not including the bridge funding described in the preceding paragraph. Approximately $1.1 million of these amounts will become payable 15 days after the closing of this offering. These obligations are described below. We expect to use a portion of the proceeds of this offering to pay these obligations. In August 1996, LanXtra had obtained a $600,000 line of credit from US Bank, Denver, Colorado in connection with its previous business. LanXtra shareholders British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin Cooper, and Fairway Realty Associates, provided cash collateral for the loan. In May 1998, this line of credit was extended to January 31, 1999. At the February 1, 1999 closing of the Asset Purchase Agreement between us and LanXtra, we effectively assumed the loan by entering into a loan agreement with US Bank on the same terms as the loan from US Bank to LanXtra, with a maturity date of December 31, 1999, using the proceeds of our loan to pay off the US Bank loan to LanXtra. The LanXtra shareholders who provided cash collateral for the US Bank loan agreed, however, to keep their collateral in place until the completion of this offering. All amounts available under this line of credit have been utilized. Interest accrues on all outstanding balances at the rate of 1.5% over the reference rate, as established by US Bank, from time to time. The reference rate closely tracks the prevailing prime rate. On May 28, 1998, LanXtra borrowed $260,000 from three of its shareholders and three of our employees - David J. Selina, Jeff Marshall and Randal Burtis - for working capital purposes. This transaction is more fully described in the section of this prospectus entitled "Certain Relationships and Related Transactions." In the aggregate, we owe these shareholders, directors and managers $260,000 in principal and $59,480 in interest. However, an agreement has been reached to defer payment of these amounts, without the accrual of further interest, until the completion of this offering. We agreed to assume LanXtra's obligations with respect to the put agreements by issuing to LanXtra at the closing of the Asset Purchase Agreement 28,648 shares of our Class B common stock, which are subject to economically equivalent put provisions. By its terms, the put feature of our Class B common stock becomes exercisable 30 days after the date when we have 100 credit union industry customers on our network, the 100 Credit Union Date. We had agreed with the former LanXtra shareholders who have rights to the Class B stock that their put rights will mature upon completion of this offering. To implement that agreement, after completion of this offering we expect to offer these shareholders the option to redeem their Class B shares at $7.00 per share, or to convert each Class B share into one share of our Class A common stock. Between September 8 and October 15, 1997, Herman Axelrod, a former president and director of LanXtra, and Mr. Lassen, also a former president and director of LanXtra, made various factoring loans to LanXtra in the amounts of $50,190 and $25,000, respectively. Such loans were secured by an account receivable for computer network integration work LanXtra performed for Questar Infocomm and bear interest at the rate of 3% of the factoring loan amount for the first 30 days and 1% for each additional 10 days until the factoring loan is paid in full. Questar disputed LanXtra's invoice and the dispute was settled in September of 1998 for a payment of $61,780. This amount was paid against the factoring loans on September 21, 1998 as follows: $41,238 to Mr. Axelrod and $20,542 to Mr. Lassen. Accordingly, as of February 1, 1999, LanXtra owed Mr. Axelrod $28,331 and Mr. Lassen $13,441, and we assumed such obligations. Mr. Axelrod and Mr. Lassen have agreed that the remaining balance of these loans will be deferred until the completion of this offering and will not accrue additional interest. On July 1 and August 1, 1992, LanXtra executed promissory notes for $25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively, each bearing interest at the rate of 2% over prime. The principal amounts of these notes reflect $20,000 in cash loaned by each and $5,000 each of co-signer liability on a $10,000 credit line at the Bank of Boulder that LanXtra took out at its inception. The credit line was paid off in August 1996, leaving an aggregate principal balance of $40,000 on the notes. We assumed the obligation to pay Mr. Axelrod and Mr. Lassen the principal balance of the notes together with interest as stated above. Mr. Axelrod and Mr. Lassen have agreed that the remaining balance of these loans will be deferred until the completion of this offering. Interest will continue to be paid on a quarterly basis until the notes are paid in full. We owe Convergent Communications, Inc. $78,673 for equipment purchased in connection with a customer network upgrade performed by LanXtra in December 1997, while Convergent was completing the purchase of LanXtra's network integration business. Convergent has agreed that payment of this amount will be deferred until the completion of this offering. As to all of the obligations described above that will be deferred until the completion of this offering, there is no current understanding between the parties as to any repayment obligations in the event we do not complete the offering. In addition to the obligations described above, upon the closing of the Asset Purchase Agreement, we assumed any potential liability under a lawsuit threatened against LanXtra by a dissenting shareholder. Although we believe the claim in this lawsuit does not have a substantial basis in fact, we cannot assure you that we will not be required to make a payment to the dissenter. We have not reserved any funds to cover payment of this liability or of the potential tax liability if such a payment is necessary. INFLATION. Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on the results of our operations during the fiscal year ended December 31, 1998, nor do we expect that inflation will have a material effect on the results of our operations. In April 1999 we completed a private placement of our Series A preferred stock in which we raised net proceeds of approximately $1.8 million. These funds are being used primarily to fund expansion of our credit union industry network to key markets across the United States. We estimate the net proceeds from this offering to be approximately $6.3 million, or $7.3 million if the underwriters exercise their over allotment option in full, and we expect to use these proceeds primarily for the same purpose. Trends - ------ Management expects that we will continue to operate at a loss as additional credit unions are solicited and enter into contracts with us. We are optimistic about our ability to add to the number of credit unions under contract. We cannot give you any assurance, however, that actual operating results will be as we predict today. We plan to continue to expand our network of credit union clients. These expansion efforts are likely to cause us to incur significant increases in expenses, both in absolute terms and as a percentage of revenue, as we prepare for the future growth in our credit union customer base we anticipate today. Expenses will increase because of the need to increase staffing in all categories, acquire additional equipment, and provide for additional telephone connections. We believe our operating results may fluctuate significantly as a result of a variety of factors, some of which are outside our control. Because of that, we cannot assure you that we will achieve profitable operations even with a significant increase in our credit union customer base. Year 2000 disclosure - -------------------- Many uncertainties exist within the computer hardware and software and electronic networking industries about the changeover from the 1999 to 2000 calendar years. In 1998, we initiated a comprehensive program to assess, plan and manage our Y2K compliance effort. The risks posed to us by possible Y2K related problems could be significant. Our operations rely on continuous Internet connectivity, availability of power and communications systems, computer systems in use by our credit union customers and their members and, in some cases, computer systems in use by vendors to credit unions, as well as on our own internal computer systems. Any extended damage to any of the foregoing could have a material adverse effect on our business and operations. While we are confident in the operability of our products, services, and our own internal systems after the year 2000 date change, there is still some risk that credit unions will encounter difficulties with one or more of our products and services because of Y2K issues. Further, we cannot accurately predict the effect of the Y2K problem on our business due to our interdependence with numerous other systems. In assessing the Y2K compliance of our products, services and systems, we have identified the following seven distinct areas of focus: o Products and services: We completed testing of all products and services by May 1, 1999 and to our knowledge, these systems are Y2K compliant. o Business computer systems: This category includes computer systems and applications relating to operations such as financial reporting, human resources, marketing and sales, product engineering and design, phone systems, and purchasing. We have completed testing of these systems and believe them to be Y2K compliant. o Suppliers: We rely on approximately 12 critical suppliers, including computer hardware and software vendors and telecommunications providers. We have contacted our critical suppliers to determine whether plans are in place to achieve timely Y2K compliance. As of the date of this prospectus, none of our suppliers have informed us of any Y2K related problems which are expected to have an adverse effect on our operations. o Business affiliates: M&I Data Services, formerly Travelers Express, provides our customers' members with bill payment data. We have received documentation from M&I stating that they are Y2K compliant. o Product development test equipment: This category includes equipment and systems for testing software and hardware. All of our product development equipment has been tested and, to our knowledge, is Y2K compliant. o End-user computing: We use desktop and laptop computers throughout our operations. These computers have been tested and, to our knowledge, are Y2K compliant. o Physical properties and infrastructure: We have assessed the impact of Y2K on all building systems. Included in our assessment were fire and security systems in our facilities. To our knowledge, these systems are Y2K compliant. We have completed our compliance efforts for existing systems. Newly acquired facilities and equipment will require evaluation and possibly remediation through the end of the year, and we anticipate a need to support credit union testing and remediation efforts through the first quarter of 2000 or beyond. We estimate these future expenditures to be less than $50,000. Our most likely worst case scenario with respect to the Y2K problem is the failure of a supplier, including an energy supplier, to be Y2K compliant so that its supply of needed products or services to one of our facilities is interrupted. As a result, we could be unable to service our customers for a period of time, which could then cause us to lose customers, revenue and profits. While we are monitoring the preparedness plans of our utility suppliers and other critical vendors, in many cases we have little leverage or bargaining power to ensure their Y2K readiness. We are establishing a Y2K contingency plan to evaluate business disruption scenarios, coordinate responses to such scenarios, and identify and implement preemptive strategies. We have established detailed contingency plans for critical business processes. cavion.com's critical business processes rely on Sun Microsystems, Cisco Systems and Motorola to provide both Internet banking and ISP. Should any of these hardware manufacturers experience an inability to supply product, this may have an adverse effect on our business. Under normal situations cavion.com would order hardware from Cisco Systems, Sun Microsystems and Motorola 30 days or more after the credit union customer places their order for ISP or Internet banking. As the turn of the century approaches, cavion.com will order immediately on receipt of a customer order. This will ensure at least 30 days of critical hardware and software in the supply line. In addition, we have evaluated the impact of Y2K issues on our customers. Based on our evaluations, we do not expect our current or potential customers to reduce their capital expenditures budgets or to defer the purchase of cavion.com products and services because of concern about potential Y2K issues. The National Credit Union Association, which insures the deposits of most credit unions in the United States, has established detailed requirements with regard to Y2K compliance of its member credit unions. NCUA requires its members to roll forward the clocks on their critical systems past the year 2000 and to conduct real- time dynamic testing prior to January 1, 2000. We are prepared to participate in our clients' Y2K testing upon request. We have tested all critical third party elements used in delivering our products and services and are satisfied they are Y2K compliant. We are, of course, reliant on infrastructure-level suppliers such as utility companies and telecommunications carriers. We have not been able to test the Y2K readiness of these entities nor do we have a contingency plan in the event of a catastrophic failure of the power and/or telecommunication infrastructure. Our Business cavion.com offers products and services for business to business communications, secure Internet financial products such as on-line banking and bill paying services, and secure Internet access and services for our customers. We are also building and managing a secure private communications network exclusively for the credit union industry. Our network acts as a communication platform for the delivery of services and information to and from credit unions and related businesses. Our products and services utilize our proprietary software. As of the date of this prospectus, 60 credit unions, two credit union leagues, one of which provides check clearing services to credit unions, one corporate credit union, which provides liquidity services to credit unions, and one credit union vendor that is a provider of website design, development and hosting services to credit unions, have subscribed to our products and services. Through our affinity program, we plan to offer additional services to credit union members via our credit unions' websites, including long distance telephone services, new vehicle transactions, retail ISP services, consumer products and insurance products, among others. We market our products and services to credit unions and related entities, such as credit union leagues, that are located in key geographic areas across the United States which have been selected due to their high concentration of credit unions. We intend to focus our marketing efforts on credit unions with $5 million or more in assets, and geographic markets with an average concentration of more than 300 credit unions. Products and services --------------------- We provide numerous products and services to the credit union industry, such as: o A secure private network that enables individual credit unions to offer their services to their members via the Internet or an intranet. This network also facilitates business to business communication. o Secure Internet financial products, such as transactional banking services, that enable credit union members to view their account and loan balances and to make transfers between accounts, as well as bill paying services which allow credit union members to pay their bills on line. o Secure Internet access for credit unions, with multiple layers of security features and dedicated connections designed to satisfy credit unions' need for confidential communications and secure transactional processing with one connection. o Secure consumer loan application and approval product. Our products are priced in a way that permits our credit union customers to offer Internet banking services to their members at a flat monthly rate. Overview -------- The credit union industry. A credit union is a non-profit, cooperative financial institution, owned and controlled by the members who use its services. Credit unions are either state or federally chartered. The Credit Union Membership Access Act of 1998 allows credit unions to solicit new members outside the once restricted field of membership, and allows credit unions to offer generally the same products and services as other financial institutions such as banks and savings and loan institutions. In the United States: o there are approximately 12,600 credit unions with combined assets of over $375 billion o these 12,600 credit unions service approximately 73 million members o approximately 6,100 of these credit unions have assets of over $5 million o these larger credit unions service approximately 70 million members and have combined assets of approximately $366 billion The Internet phenomenon. The widespread adoption in recent years of public and private electronic communications networks, including the Internet, intranets and extranets, has impacted the manner in which organizations communicate and conduct business. These advanced networks provide an attractive medium for communications and commerce because of their widespread reach, accessibility, use of open standards and ability to permit interactions on a real-time basis. At the same time, they offer businesses a user-friendly, low-cost way to conduct a wide variety of commercial functions electronically. In March, 1999 Nielsen/NetRatings estimated that the number of online computer users in the United States by the end of March 1999 to have exceeded 95 million or nearly 40% of the U.S. population. In recent years, the development of the Internet, intranets and extranets has enabled users of personal computers to access and interact with a broad range of information sources. Financial institutions rapidly are adopting network communications to conduct electronic banking and provide customers with access to their account information. According to International Data Corporation estimates of February, 1999, U.S. banks will spend $326 million on Internet banking technology in 1999 alone, more than double the amount spent in 1998, to accommodate the expected sharp increases in online banking. The Internet and credit unions. We believe financial institution customers increasingly will demand more convenient and more interactive access to financial information and services. Competitive pressures are driving banks and credit unions to increase the quality and cost- effectiveness of such services. New opportunities exist to employ available and emerging technologies to automate and enhance a credit union's interactions with its members. Traditionally, credit unions have used trained service representatives to serve as the link between their customers and the information systems that stored and processed the customers' account information. Reliance on people alone to perform service functions is expensive and limits growth. Labor costs tend to grow proportionately with increased demands for service. In addition, the time required to hire and train service personnel limits the speed with which credit unions can respond to customer demand or new competitive service offerings. Our solution is to provide credit unions with network-based technologies that enable their members to serve themselves through automated, interactive access to financial information and services. As technologies continue to advance for network-based solutions, financial institutions will be able to deploy increasingly sophisticated network applications. Given its relatively late arrival, online banking is just now beginning to build momentum. A study conducted by Gomez Advisors found that as of the first quarter of 1999, nearly 40% of the top 100 banks in the United States are offering online services. Online Banking Report of January, 1998 estimates that by the end of 2000, 17.5 million households will be using online banking and/or a bill payment application. Despite this momentum, the market for Internet based network financial services is new and uncertain. As of the date of this prospectus, our products and services have been sold to credit unions located in Colorado and fifteen other states. While we are marketing our products and services across the country, we cannot be sure that they will sell as well in the new markets as they have in Colorado. Important questions remain about the use of the Internet for financial services, such as security, reliability, ease of access, cost of access, quality of service and costs of service. The answers to those questions may affect the growth of Internet use in ways we can't predict today. As a result, we also can't accurately predict the size of the market for Internet based financial services or the rate at which the market will grow. If it fails to grow, or grows more slowly than we expect, or it is becomes saturated with competitors, our business, financial condition and operating results will be materially and adversely affected. Our strategy ------------ Our goal is to become the largest Internet/intranet provider to credit unions. We plan to achieve that goal by implementing the following strategies: Focus on providing a secure industry network. As the use of the Internet grows for the delivery of timely and confidential financial information, security issues become critical. With technological advances, there is an increased opportunity for electronic intruders, or "hackers", to conduct successful attacks. The increased interconnectivity of information networks has given hackers more opportunities to invade many companies' information systems. We believe the trend of breaches in security will continue. Credit unions require a secure network environment for systems that handle their members' financial data. We believe credit unions prefer the reliability and security a private network can offer. Our network uses dedicated phone lines to our credit union customers, limiting access to the network and maintaining constant control of the information being transmitted. When the credit union provides its members with Internet access to account information and financial services, the concern with security becomes more acute. The Internet side of our network uses multiple security safeguards - firewalls, data encryption, digital certificates and the JAVA(R) programming language. Firewalls act as the gate keeper between the Internet and the private network. They are designed to allow external access to networks only from authorized sources, and can also block data packets from specified addresses from entering or exiting the network. Our network uses industry standard firewall products. Our network also uses public key encryption whenever data is exchanged with the Internet for Internet banking and bill pay services or for our share draft repository system. In public key encryption, cryptographic software is used to generate an electronic "private key" and a mathematically related "public key". The software encrypts the data using the public key, in a way that allows the data to be recovered only by someone with the proper private key. This technique provides a "session key" for each user session, assuring that the information came from a specific source and was not altered in transit. In this way, personal information can be sent across public networks without compromising its confidentiality. We use digital certificates provided by an independent certificate authority on all of our secured web servers - internet banking, secure forms server, and share draft repository server. Digital certificates verify the identity of the web server being used and that the owner of that server is authorized to allow encryption. Digital certificates are also used to create a unique session key for each connection. As an added layer of security for the user, we use the JAVA(R) programming language to control Internet banking and bill pay sessions. The JAVA(R) programs, called "applets", used in these sessions run within the user's Internet browser, and are not allowed to access the user's hard drive without specific authorization. Because the programmer of the applet can't read or write to memory locations in the user's computer, this technology minimizes the opportunity to introduce destructive coding, such as a virus, to the user's computer. Continued development of feature-rich applications. Our products have been designed using "thin client architecture" which includes complete Internet capability as well as our proprietary messaging features and industry standard security features. With thin client architecture, the applications being run are not permanently stored on the user's computer. Instead, the applications reside on our server. The user logs on to our server, and can then access and run the applications remotely to process data. After the on-line connection is terminated, the applications are erased from the user's computer memory. This enables us to maintain control over our proprietary software since we do not provide permanent copies to our users, and enables us to make upgrades of our software immediately and efficiently available without having to physically distribute individual copies. Thin client architecture also minimizes our credit union customers' need to constantly upgrade their hardware in order to keep up with the technology required to store and maintain our application software. This results in cost savings to our credit unions and minimizes the burdens associated with administering hardware and software upgrades. Because our network uses the JAVA(R) programming language, which is platform independent, it allows many kinds of systems to talk to each other and share applications. Our transactional banking products also provide scalability, distributive and centralized implementation, and access using Web-enabled cellular devices. Development of new products and services. Concurrently with expanding our Internet/intranet network, we plan to expand our product offerings for credit unions. We recently began offering our bill paying and automated virtual loan applications services. We believe credit unions connected to the Internet will want to provide their membership access to a variety of products and services to increase membership retention and build customer loyalty. To meet this need, we are establishing a co-branded affinity program through which we will be a reseller of various products and services provided by third party vendors to credit union members. Our network model allows the addition of these products as they become available. Our first affinity agreement was executed on August 18, 1999 with MoneyLine America, LLC to provide on-line mortgage lending services for our credit unions and their members through our network. MoneyLine is the exclusive cavion.com-approved on-line mortgage lender. The agreement calls for minimum annual payments to us of $300,000 in the first year, beginning in September 1999, and escalating to $1,000,000 in years six through ten, provided that we have at least 1,500 credit unions, or 12% of U.S. credit unions, on our network by the end of the third year. In addition, we entered into a contract with Cardinal Services Corporation, a credit-union owned website design firm under Cardinal Services will purchase and license for resale our Internet transactional banking, bill pay, and kiosk enabling software at a discount which they will then offer to their credit union customers. We refer our credit union clients and prospects to Cardinal Services for website design. Cardinal Services will refer its credit union clients and future prospects to us for connectivity and secure Internet products and services. Other products and services we plan to offer through our affinity program include, for example, the following: o long-distance telephone service o new vehicle transactions o retail ISP o consumer products o insurance products o real estate transactions o travel/rent-a-car services o local services, such as concert and movie tickets Each of our credit union customers will decide which products and services to make available to their respective members. Our credit union customers will be provided opportunities to co-brand and endorse these offerings to their members. We can customize a variety of options for each credit union and interactively link the credit union's website to cavion.com's affinity sponsors and affinity websites. Plan of operations ------------------ We target expansion of our network to do business with over 2,400 credit unions across the United States. Through this expansion our goal is to: o provide access to Internet/intranet services to credit unions serving 28 million members, with combined assets of over $146 billion o offer affinity products to our credit union customers to generate increased revenue o develop new products based on proprietary intellectual property To manage new customers connected to our credit union network, we plan to establish a number of local offices in key strategic locations in the United States. Each local office will be located in a key strategic market with an average concentration of more than 300 credit unions. Local offices will be opened upon the hiring of sales agents to service the territory. We recently entered into an agreement with Convergent Communications Services, Inc. to establish and maintain connectivity between our network and our customers. When our network is completed, we expect to have excess server capacity available at multiple data centers so that network traffic can be rerouted between data centers when circumstances require. We plan for all customer locations to be connected with all of our data centers, either by point-to-point connection, by private frame relay circuit, or by "virtual private network" technology now available from third party vendors. This architecture is designed for redundancy and disaster recovery, allowing us, with the cooperation of our telecommunications provider, to pick up traffic temporarily from a nonfunctional data center. Our Denver data center and our local communications switch in Colorado Springs are completed and fully operational. We have hired sales personnel for 14 of our sales territories and recruiting efforts are underway to the rest of our planned additional sales territories. In order to provide our Internet based network products and services to our customers, we must purchase a large quantity of telecommunications services from providers of those services. Because of that, our financial results depend greatly on the amount we pay for those services and our efficiency in using them. Although our contract with Convergent is nonexclusive, we expect that Convergent will provide and manage our entire network infrastructure, contracting with underlying local providers as necessary. Therefore, our business will be critically dependent on Convergent's delivery and maintenance of our network connectivity. Although the amounts we pay for telecommunications services are passed through to our customers, if one or more of our telecommunications providers are unable to provide the volume or level of service required, our ability to carry out our business plan will be impaired and our business, our financial condition and our results of operations will be materially and adversely affected. In addition, we get most of our revenue from recurring sales of our products and services. This revenue cannot be earned until the telecommunications provider installs a dedicated telecommunications circuit for our new credit union customer. This installation can take from one to three months, or longer in some cases, after we sign up a new customer. Market ------ We believe that the increased usage of the Internet and the increasing demand for networking products and services will provide an excellent opportunity for us to grow our business. Credit unions that move rapidly to implement a full-featured, well-conceived network have an opportunity to enhance the value of their individual client relationships. Nationally, approximately 12,600 credit unions serve approximately 73 million customers. We have targeted the approximately 6,100 credit unions with more than $5 million in assets each for our marketing efforts. Marketing strategy ------------------ Our sales team uses a face-to-face sales strategy that emphasizes: o the features and functions of the network, such as online bill paying, connectivity to credit union vendors, Internet access and transactional banking o the fact that the network is host independent o a bandwidth pricing model not directly driven by transaction volume We charge the credit unions connected to our network a fixed monthly rate based on the amount of bandwidth they anticipate using. As transactions over the network increase and as the number of members accessing a credit union's website increases, the credit union will need to increase the amount of bandwidth it uses. Each incremental increase in bandwidth involves a price increase. As of the date of this prospectus, only one of our credit union customers has increased its bandwidth requirement, but we anticipate other customers will do so in the future. We intend to place a direct sales force in each of our 19 planned sales territories and to hire individuals who are familiar with the credit union industry, are known by the credit unions in the sales territory and have established relationships within the industry. Sales agents will initially contact the primary decision makers, usually the president, at the credit unions in their territories. The sales agent's job will be to sell the idea of a secure, private network with Internet access, emphasizing the features offered by our network, including the security features as well as, the ability of the credit union to reduce personnel and administrative costs even while providing 24 hour service to its membership. We have implemented an automated system to measure each credit union's usage of the network. By monitoring each credit union's connect usage, sales agents can advise existing customers of their need to increase bandwidth. We also have established an informal marketing/endorsement arrangement with a credit union league in Colorado which has provided significant marketing advantages. We plan to target credit union associations and leagues in other markets, such as North Carolina, where serving a league is likely to enhance our profile with credit unions in the region. The North Carolina Credit Union League signed with us in March 1999 to provide secure ISP services to their management and employees. Competition ----------- We operate in a highly competitive environment against a number of network application developers and providers of online banking services. Additionally, there is continuous market pressure among market participants to offer new and innovative products and services. Moreover, in this field, technological and new product development proceeds rapidly and market share can be gained and lost in very short time periods. A number of public and private companies compete with one or more of the individual products and services offered by cavion.com. These competitors include Digital Insight, Symitar Systems, Inc., Database Management Services, Virtual Financial Services, Inc., CFI and Fiserv, Inc. Any of these companies, as well as other potential competitors, could in the future offer a combination of products and services to credit unions similar to the combination offered by us. Presently, we believe all these companies have greater financial, personnel and operational resources than we have. We think that, as the Internet transaction and network services we sell are purchased by more of our customers, other competitors will enter the market to compete aggressively with us, including some larger, established companies. Competition may also increase if there is a consolidation in the software and networking industries, particularly if one or more of our competitors is acquired by a larger provider of products and services to the banking industry as a means for the larger company to penetrate the credit union market. Customers/rate of growth ------------------------ We launched our credit union strategy in January 1998. In our first three months of operations, we connected seven credit unions to the network. We believe that we were the first Internet service provider in the country to provide credit unions with secure transactional banking and Internet service. By the end of August 1998, we were delivering secure Internet access to 13 credit unions, including our first credit union outside of Colorado, and one credit union league. As of the date of this prospectus, our network includes 60 credit unions, two credit union leagues, one corporate credit union and one credit union vendor. Thirty- two of these customers are located in states other than Colorado. Intellectual property and proprietary rights -------------------------------------------- We believe that our proprietary secure communications network, which we brought to market before most of our competitors, gives us a significant competitive advantage in providing Internet based network products and services to the credit union market. We rely on copyrights, trademarks, service marks, nondisclosure agreements, confidentiality provisions, trade secret laws and general technical and practical security measures to protect our intellectual property. We have applied for federal registration of the trademark and service mark "Cavion" and have registered the service mark "CUiNET". We also claim a service mark in the name "cavion.com," although we have not yet applied for a federal registration of that name. We hold no United States or foreign patents covering our technology and we have no pending patent applications. We have copyrights in software and marketing materials used or related to our business, although we have not registered any of our copyrights. While we expect to evaluate the feasibility of making patent filings, registering our copyrights and registering additional trademarks and service marks in the future, no assurance can be given that any of our intellectual property will be entitled to patent, copyright or trademark protection. We treat much of our technology as trade secrets and take what we consider to be appropriate measures to maintain the secrecy of our technology. Our strategy in protecting our trade secrets includes limiting access only to key employees who have a need to know our trade secrets in order to perform their services, and who have signed confidentiality and nondisclosure agreements. We further prevent unauthorized access to or disclosure of our trade secrets by way of technical blocks built into our technology. Despite our efforts to protect our proprietary software, in which we claim both copyrights and trade secret protection, third parties may still attempt to copy or use it, and others may develop similar technology independently. There can be no assurance that the measures we take to protect our intellectual property rights, or the formal applications and registrations we may undertake in the future, will deter unauthorized use, copying, reverse engineering or destruction of our proprietary technology and other intellectual property, or that we will have adequate legal redress in such cases. We currently use security technology under license from third parties. We believe that our products and services, including our trademarks and other intellectual property rights, do not infringe on the proprietary rights of third parties. It is possible, however, that third parties will assert infringement claims against us in the future with respect to products or services we currently offer or may offer in the future, or with respect to technology we utilize under license from others. Any litigation resulting from assertions of infringement, even if the claims are false, could be time consuming and expensive to defend. Given the limited number of our key employees, any litigation could materially disrupt our on going efforts to develop and expand our business and technology. Property -------- Our corporate headquarters are located at 7475 Dakin Street, Suite 607, Denver, Colorado 80221 in an office facility where we lease approximately 4,600 square feet under a lease that expires on December 31, 1999. We have entered into a letter of intent to lease a 14,400 square foot facility in Denver and plan to relocate our corporate headquarters there in January 2000. We maintain our local communication switch in an office facility in Colorado Springs, Colorado which we lease on a month-to- month basis. We plan to establish sales and engineering office space in leased facilities across the United States. As of the date of this prospectus, we have leased nine such facilities. We have entered into a lease in Raleigh, North Carolina for 879 square feet expiring February 28, 2002; a lease in Bloomington, Minnesota for 1,098 square feet expiring March 14, 2002; a lease in San Diego, California for 1,162 square feet expiring February 28, 2002; a lease in Sacramento, California for 1,459 square feet expiring 2004, a lease in Newark, Delaware for 1,047 square feet, expiring May 1, 2004; a lease in Portland, Oregon for 982 square feet expiring July 31, 2003; a lease in Livonia, Michigan for 3,387 square feet, expiring July 31, 2004; a lease in Bradenton, Florida for 1,100 square feet expiring December 31, 2002; and a lease in Memphis, Tennessee for 2,956 square feet expiring in October, 2004. We are currently considering leasing facilities in Chicago, Illinois, St. Louis, Missouri, Dallas, Texas and Boston, Massachusetts. We maintain our computer system in our Denver, Colorado facility. We currently maintain an insurance policy covering this equipment for full replacement value. We also carry general liability insurance, errors and omissions insurance and Internet security insurance policies. This insurance may not cover all future claims. If a large claim is successfully asserted against us, we might not be covered by insurance, or the claim might be covered but cause us to pay much higher insurance premiums or a large deductible or copayment. Furthermore, regardless of the outcome, litigation involving customers, credit union members or even insurance companies disputing coverage could divert management's attention and energies away from operations. Employees --------- We currently employ 34 full-time employees, including 6 in development, 7 in engineering, 16 in sales, and 5 in general and administrative, three of whom are in accounting. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We consider our relationships with our employees to be good. Government regulations ---------------------- We are not required to obtain a Federal Communications Commission license as a telecommunications carrier, but may be required to comply with FCC regulations applicable to non-dominant telecommunications carriers, including payment of "universal service" fees on end user revenues not derived from Internet access services. Several telecommunications carriers are advocating that the FCC regulate the Internet in the same manner as other telecommunications services by imposing access fees on Internet service providers. Any such regulation could substantially increase the cost of communicating on the Internet thus slowing the growth of Internet use and the demand for our products and services. Any regulation of the Internet under new interpretation of existing laws could materially and adversely affect our business operations results and financial conditions. While we are not subject to the Glass-Steagall Act of 1933, the Bank Holding Company Act of 1956, the Competitive Equality Banking Act of 1987, the Federal Credit Union Act of 1934, nor are we regulated by the National Credit Union Administration or the Federal Reserve Board, we are concerned with regulations governing financial institutions, especially credit unions, and how those regulations will affect the market and our ability to provide services as presently planned. A credit union is a cooperative financial institution, owned and controlled by the members who use its services. Credit unions are non- profit organizations that are state or federally chartered. Credit unions are regulated closely by the NCUA. On August 7, 1998, the Credit Union Membership Access Act of 1998 was signed into law. Title I of the Act permits federally chartered credit unions to solicit credit union members from more than one occupational group so long as each group has fewer than 3,000 members. The Act also allows credit unions to make business loans to its members as long as the total amount of such loans does not exceed 1.75 times the credit union's actual net worth. This limitation does not apply to credit unions chartered primarily to make business loans, to serve low-income members, or as community development financial institutions. Full implementation of the Act requires issuance of regulations by the NCUA. The Act will potentially increase the activity of federal credit unions in the financial marketplace as it presents new opportunities for the federal credit unions to expand their customer base. Legal proceedings ----------------- At LanXtra's shareholders meeting on January 15, 1999, to consider the sale of LanXtra's assets to us, Kirk W. Dennis, a LanXtra shareholder holding 50,000 shares, or 17.45% of its outstanding shares at the time, voted against the transaction. Under Colorado law, a shareholder voting against a sale-of-assets transaction has the right to dissent from the sale and obtain payment of the fair value of the shareholder's shares. Fair value, in general, means the value of the shares immediately before the effective date of the corporate action to which the dissenter objects. We have assumed the liability, if any, of LanXtra to the dissenting shareholder. On or about March 12, 1999, Mr. Dennis demanded payment for the value of his 50,000 shares immediately before the effective date of the asset sale which he asserted to be $250,000. Because we could not reach an agreement with Mr. Dennis as to the fair value of his shares, we filed a lawsuit against him, as we were required to do under Colorado law, on June 1, 1999 to resolve the matter. The case is titled LANXTRA, INC. V. KIRK W. DENNIS, Case No. 99 CV 3583 in the District Court, City and County of Denver, Colorado. While we could be required to pay him the fair value of his shares as determined in that proceeding, we believe that the value paid on account of these shares under the asset purchase agreement is greater than the amount which he could recover under Colorado law and substantially less than the value of the shares upon closing of this offering. Because of that, we have not reserved any funds to cover payment of the liability. If Mr. Dennis nevertheless obtains an award of a substantial amount as fair value, it could have a materially adverse effect on our financial condition. Further, a payment to this dissenting shareholder could result in the transaction in which we purchased the business of LanXtra becoming a taxable transaction, which could expose us to significant tax liability. Two former employees have filed claims against us with the Denver office of the Equal Employment Opportunity Commission alleging gender discrimination. We believe there is no factual basis for the claims and we intend to vigorously defend them. Company history --------------- We were originally incorporated under the name Network Acquisitions, Inc. in August 1998 for the purpose of acquiring the assets and business operations of LanXtra, Inc. LanXtra was incorporated in June 1992 under the name Sigmacom Corporation and was originally engaged in the business of integrating computer networks and communications technologies for large business and government clients. In 1997, LanXtra created a software development division to develop network-based financial services software for credit unions. In December 1997, LanXtra sold its network integration business. Using funds received in the sale, the software development group continued as a start-up, and began building the business we eventually acquired in 1999. On January 27, 1998, LanXtra changed its name from Sigmacom Corporation to Cavion Technologies, Inc., and, on February 1, 1999, to LanXtra, Inc. The assets of LanXtra were transferred to a newly-formed company called Zutano, LLC on July 1, 1999 and LanXtra was dissolved on July 2, 1999. Prior to our acquisition of substantially all of the assets and business operations of LanXtra, including the assumption of LanXtra's liabilities, we did not conduct any business operations except preparation for the acquisition, including providing bridge funding to LanXtra with funds raised through a private placement of promissory notes and related warrants. The definitive purchase agreement between us and LanXtra was signed on December 31, 1998, and closed on February 1, 1999. On February 1, 1999, we changed our name to Cavion Technologies, Inc. and began to conduct some of our business under the trade name cavion.com. Management
Executive officers and directors - -------------------------------- Name Age Position ---- --- -------- David J. Selina 49 President, Chief Operating Officer, Chief Executive Officer and Director Marshall E. Aster 45 Chief Financial Officer Jeffrey W. Marshall 34 Vice President of Software Development and Director Andrew I. Telsey 46 Director Stephen B. Friedman 58 Director John R. Evans 44 Director Key employees - ------------- Name Age Position ---- --- -------- Daniel W. Dudley 40 Vice President of Affinity Products Christopher Knauer 33 Vice President of Network Services Marvin C. Umholtz 48 Vice President of Sales & Marketing
DAVID J. SELINA. Mr. Selina has served as our president, chief operating officer and a director since February 1, 1999. He was also appointed as our chief executive officer and chairman of the board on March 19, 1999. Mr. Selina was the president and chief operating officer of LanXtra, Inc. from December 1997, and a director from January 1998, until that company's dissolution in July, 1999. Mr. Selina is a manager of Zutano LLC, a company formed in May 1999 to hold the assets of LanXtra, Inc. From June 1995 to June 1997, Mr. Selina was the president and CEO of Lasertec, Inc., a mailing and fulfillment operation in Auburn Hills, Michigan. He was the regional manager of the Credit Union Services Division for Electronic Data Systems from November 1993 to June 1995. At EDS, Mr. Selina was responsible for five separate data processing products serving credit unions. In 1993, Mr. Selina participated in the sale of World Computer Corporation, a $23 million company, to Electronic Data Systems. World Computer was a leading provider of data processing systems and services to credit unions throughout the U.S. and Canada. Mr. Selina held various management positions, including president and chief executive officer, at World Computer, from March 1986 to November 1993. Mr. Selina received his education at Henry Ford Community College and Oakland University, both located in southeastern Michigan, between 1970 and 1976. MARSHALL E. ASTER. Mr. Aster became our chief financial officer on March 8, 1999 and our secretary on March 22, 1999. Mr. Aster was the chief financial officer at Intertech Plastics, Inc., a plastics manufacturer in Denver, Colorado from May 1997 to July 1998. Prior to that time, he served in the positions of vice president of Finance and Administration and senior vice president of Finance and Administration at EDI, Inc., a technology based information service located in Los Angeles, California, from October 1989 until May 1997. Mr. Aster also served in the positions of director, vice president and senior vice president of Corporate Financial Planning at Lorimar-Telepictures Corporation, an entertainment company, from March 1984 to October 1989. He is a member of AICPA and Colorado Society of CPAs. He is also a director for the Financial Executive Institute's Rocky Mountain Chapter. He received a Bachelor of Science in accounting in 1975 from the State University of New York in Binghamton, New York. JEFFREY W. MARSHALL. Mr. Marshall has served as our vice president of Software Development since February 1, 1999. He became one of our directors on May 27, 1999. He was the vice president of Software Development at LanXtra, Inc. from December 1997 until he joined us. Prior to his promotion to vice president at LanXtra, he was a software engineer since July 1996. At LanXtra, Mr. Marshall was responsible for the design and development of Internet software interfaces including, transactional banking, bill paying, smart cards and multimedia kiosks. Mr. Marshall was a programmer for Chemical Waste Management, a waste treatment concern in Denver, Colorado from September 1994 to July 1996. At Chemical Waste Management, he developed lab database software and technical services billing software. From August 1993 to September 1994, Mr. Marshall developed relational database software for Williams Thatcher Rand/Milliman & Robertson, actuarial consultants in Denver, Colorado. He received a degree in mathematics from Colorado State University in 1991. ANDREW I. TELSEY. Mr. Telsey has served as one of our directors since January 1, 1999. He also served as our president, secretary and treasurer from January 1, 1999 to February 1, 1999. Since 1984, Mr. Telsey has been employed by Andrew I. Telsey, P.C., a private legal practice founded by Mr. Telsey that same year. Mr. Telsey's firm emphasizes business law, including transactions, securities compliance matters, and mergers and acquisitions. From January 1997 to the present, Mr. Telsey has been the president, a director and the sole shareholder of Venture Funding, Ltd., a privately held investment banking firm, whose primary activities include identifying companies exiting their development stage, providing funding for such companies and taking companies into the public market. Venture Funding, Ltd. is our largest shareholder. Mr. Telsey is an officer and director of one reporting company under the 1934 Act, Mully Corp., a Nevada company which has not commenced operations. Between 1986 and 1988, Mr. Telsey served as president and director of International Financial Consultants, Ltd., a privately held corporation which prepared feasibility studies along international standards and performed due diligence efforts on behalf of international entities interested in financing commercial and residential real estate projects and acquiring businesses in North America. Mr. Telsey received a Bachelor of Arts degree in politics and a New York teaching certificate from Ithaca College in 1975 and a Juris Doctorate degree from Syracuse University in 1979. STEPHEN B. FRIEDMAN. Mr. Friedman became one of our directors on April 1, 1999. He has been a business consultant to various companies from January 1997 to the present. Mr. Friedman was the president of the Asia/Pacific division of American Express Company, a travel related service company located in Tokyo and Hong Kong from July 1993 to December 1996. Prior to that time he served in various executive positions at American Express from October 1978 to June 1993. Mr. Friedman was the vice president and general counsel at Carte Blanche Corporation, a credit card company located in Los Angeles, California, from 1969 to 1978 and corporate counsel for the Securities Division of the California Department of Corporations from 1967 to 1969. He received A.B. in political science from the University of California at Los Angeles in 1963 and L.L.B. degree from the same University in 1966. JOHN R. EVANS. Mr. Evans became one of our directors on October 25, 1999. He is one of the founders of Convergent Communications, Inc. in Englewood, Colorado, where he has served as it chief executive officer and chairman of the board since 1995. Prior to that time, he served as the chief financial officer and executive vice president of ICG Communications, Inc. in Englewood from 1991 until December 1995. Before joining ICG, Mr. Evans was the controller of Shaw Industries for three years. He held various senior accounting and treasury management positions for five years with Northern Telecom Canada Ltd. in Lakewood, Colorado, including strategic financial planning, analysis and budgeting, and held various audit and management information systems positions during six years with Coopers & Lybrand in Toronto, Canada. He received a Bachelor of Commerce Degree from McMaster University in Hamilton, Ontario in 1978 and became a Canadian chartered accountant in 1982. DANIEL W. DUDLEY. Mr. Dudley became our vice president of Affinity Products on June 1, 1999. From April 1997 to May, 1999, Mr. Dudley was the senior vice president and general manager at SkyTeller, L.L.C. in Denver, Colorado, where he was responsible for the development and implementation of that company's Global Distribution System and Internet foreign currency businesses. From December 1991, he was director of Performance Consulting at The Polk Company in Denver, providing advanced technologies consulting to direct marketing companies. In January 1995, The Polk Company promoted him to vice president of List and Data Products, with strategic responsibility for leading database products, and he served in that capacity until April 1997. Mr. Dudley received his B.B.A. in finance in 1982 and his M.S. in operations research in 1990, both from The George Washington University in Washington, D.C. CHRISTOPHER KNAUER. Mr. Knauer became our vice president of Network Services on August 2, 1999. From January 1999 to July 1999, Mr. Knauer was a senior manager of Internet Customer Implementation Management at Level 3 Communications in Broomfield, Colorado, where he helped streamline processes for faster flow-through provisioning and project management of implementing Internet provider products. From November 1997 to December 1998, Mr. Knauer worked for Qwest Communications in Denver, Colorado, where he served as a senior manager of Technical Services until he was promoted to director of Data Center Engineering in May 1998. At Qwest he was involved with the design of LAN and infrastructure requirements for nationwide Internet provider center rollout. Prior to that time, from April 1996 to November 1997, Mr. Knauer was the systems administrator at SuperNet which was acquired by Qwest. His earlier career was involved with broadcasting companies, the last of which was Secret Communications in Denver, Colorado, where he was the manager of Information Services from March 1994 until April 1996. At Secret he worked with the design and rollout of internal network systems, implementation of one of the first media websites in the country and managed the NT/Linux/Novell network. Mr. Knauer received his education in communications at DePauw University in Greencastle, Indiana. MARVIN C. UMHOLTZ. Mr. Umholtz became our vice president of Sales & Marketing on September 1, 1999. From April 1999 until his promotion to vice president he served as our eastern region sales manager. From October 1997 to April 1999, Mr. Umholtz was an independent consultant and strategic planner serving credit unions, credit union service organizations and credit union vendors. From April 1990 to September 1997, he worked for the Michigan Credit Union League and its subsidiary, CUcorp, in Lansing and Plymouth, Michigan. While there he served as senior vice president of the Government and Public Affairs Group until he was promoted to executive vice president and chief operating officer of Association Services in June 1992. Mr. Umholtz also served in the same positions at CUcorp between November 1994 until September 1997. In these positions he administered a correspondent credit and debit card program, marketed insurance and financial products to credit unions to serve their members and customers, launched the Michigan credit union electronic funds transfer think tank, and represented the association and its member credit unions with state and federal regulators, lawmakers and the media. Mr. Umholtz received his education in communications and political science from the University of Kansas in Lawrence, Kansas. Committees of board of directors - -------------------------------- The board of directors is currently acting as our compensation committee. The members of the compensation committee, when appointed by the board, will be persons who qualify to serve on the committee under the provisions of Rule 16b-3 of the Securities Exchange Act of 1934 and Treasury Regulation Section 1.162-27(e)(3). The compensation committee evaluates our compensation policies and administers our Equity Incentive Plan. The audit committee will review the scope of our audit, the engagement of our independent auditors and their audit reports. The audit committee will also meet with the financial staff to review accounting procedures and reports. The audit committee currently consists of Messrs. Telsey, Friedman and Evans. Director compensation - --------------------- While we do not pay directors cash compensation, they are reimbursed for the expenses they incur in attending meetings of the board or board committees. Directors may receive options to purchase common stock awarded under our Equity Incentive Plan at the discretion of the compensation committee. Mr. Telsey was granted a ten year option to purchase 27,500 shares on March 19, 1999, subject to vesting of 6,875 shares at the end of each calendar quarter beginning June 30, 1999. Mr. Friedman was granted a ten year option to purchase 27,500 shares on April 1, 1999 subject to the same vesting schedule as Mr. Telsey. All of their options were granted at the private placement price of $3.00 per share. Mr. Evans was granted a ten year option, at the price per share of the shares sold in this offering, to purchase 27,500 shares on October 25, 1999, subject to vesting of 6,875 shares at the end of each calendar quarter beginning December 31, 1999. Executive Compensation The following table sets forth information for the last three fiscal years ended December 31, concerning compensation we paid to the chief executive officer and the other two most highly compensated executive officers we employed during such fiscal years. Summary compensation table --------------------------
Annual Compensation ------------------------------------ Fiscal Other Annual Name and Principal Position Year Salary Bonus Compensation - --------------------------- ------ -------- ----- ------------ David J. Selina 1998 $105,402 -0- -0- President, Chief Executive 1997 $ 8,333 -0- -0- Officer and Chief 1996 $ 0 -0- -0- Operating Officer Jeffrey W. Marshall 1998 $ 76,333 -0- -0- Vice President of 1997 $ 56,426 -0- -0- Software Development 1996 $ 20,484 -0- -0- Craig E. Lassen 1998 $ 75,481 -0- -0- Former Chairman of the Board 1997 $ 68,747 -0- -0- and Chief Executive Officer 1996 $ 48,000 -0- -0-
o The compensation paid to Mr. Selina in 1997 and 1998 was paid by LanXtra, Inc. He became employed by LanXtra in December 1997 and payment of the amount reported for 1997 was deferred until January 1998. Mr. Selina did not become an officer of cavion.com until February 1, 1999. o The compensation paid to Mr. Marshall in 1996, 1997 and 1998 was paid by LanXtra. Mr. Marshall did not become an officer of cavion.com until February 1, 1999. o The compensation paid to Mr. Lassen in 1996, 1997 and 1998 was paid by LanXtra. Mr. Lassen did not become an officer of cavion.com until February 1, 1999. His resignation as an officer and as a director of cavion.com was effective March 18, 1999. The named executive officers did not receive perquisites or other personal benefits the aggregate annual amount of which was the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for such executive officer. None of our executive officers received options to purchase our common stock in 1998. After we adopted the Equity Incentive Plan in March of 1999, Mr. Selina was granted 150,000 options, Mr. Aster was granted 40,000 options, and Mr. Marshall was granted 50,000 options, all of which they may exercise for a period of ten years at $3.00 per share. Mr. Aster's options vest over a fifteen month period from his start date of March 8, 1999, one quarter after 6 months, and another quarter every three months until they are fully vested. Mr. Selina's and Mr. Marshall's options vest over an eighteen month period, with one third vesting every six months. In August 1998, Mr. Selina was granted a five-year option to purchase 42,970 shares of LanXtra common stock at $2.75 per share, and a five year option to purchase 74,761 shares of LanXtra common stock at $7.50 per share. At the same time, Mr. Marshall was granted a five-year option to purchase 28,646 shares of LanXtra common stock at $2.75 per share, and a five year option to purchase 49,840 shares of LanXtra common stock at $7.50 per share. In November 1997, Mr. Lassen was granted a five-year option to purchase 270,000 shares of LanXtra common stock at $7.50 per share. All of the LanXtra options were cancelled as of December 31, 1998 as provided in an agreement between LanXtra and each of the optionees. Employment agreements - --------------------- Under an employment agreement dated February 1, 1999, David J. Selina agreed to serve as our president and a director. Under the agreement, Mr. Selina receives a base salary of $125,000 per year, participation in a cash bonus pool based upon our business goals and profitability as determined by disinterested members of our board of directors, as well as other employee benefits. Marshall E. Aster agreed to serve as our chief financial officer under an employment agreement effective March 8, 1999. Under the agreement, Mr. Aster receives a base salary of $105,000, participation in the bonus pool described above, and other employee benefits. Under an employment agreement dated February 1, 1999, Jeffrey W. Marshall agreed to be our vice president of Software Development at a base salary of $100,000 per year. Mr. Marshall is entitled to participate in the bonus pool described above, as well as other employee benefits. Effective May 1, 1999, our board increased Mr. Marshall's salary to $125,000 per year. Under all of these employment contracts, if any executive is terminated other than for dissolution of cavion.com, death, disability or cause, or the executive is terminated or resigns for good reason within three months after a change of control of cavion.com, the executive will be entitled to severance compensation. Severance pay is equal to twelve months of base salary as in effect at the time of termination, except for Mr. Aster, whose severance pay is equal to six months of base salary, increasing to twelve months on the first anniversary of employment if cavion.com is profitable on an after-tax basis at that time or, if it is not, on the second anniversary of employment. Craig E. Lassen agreed to serve as our chairman of the board and chief executive officer under an employment agreement dated February 1, 1999. Under the agreement, Mr. Lassen was to receive a base salary of $125,000, participation in the bonus pool described above, and other employee benefits. Mr. Lassen's resignation as chairman of the board, chief executive officer and a director was effective March 18, 1999. His resignation as an employee was effective April 16, 1999. In June 199 we entered into an agreement with Mr. Lassen under which he will provide up to 360 hours of consulting services relating to our business generally, including telecommunications matters, until April 15, 2000. He will receive a total of $75,000 as payment for his services. In addition, Mr. Selina, Mr. Aster, Mr. Marshall and Mr. Lassen each agreed under their employment contracts to protect our confidential information, to refrain from soliciting our customers or employees for a competing business, and to assign to us all rights in intellectual property developed during the term of employment that relates to our business. These obligations survive termination of employment for periods of one to three years, and in some cases longer. Equity Incentive Plan Our board of directors adopted the Equity Incentive Plan as of March 19, 1999. The Plan provides for grants of incentive stock options, nonqualified stock options, restricted stock and stock appreciation rights to our designated employees, officers, directors, advisors and independent contractors. By encouraging stock ownership, we seek to motivate such individuals to participate in the increased value of cavion.com which their effort, initiative, and skill have helped produce. General. The Plan authorizes up to 750,000 shares of common stock for issuance under the terms of the Plan. No more than 250,000 shares in the aggregate may be granted to any individual in any three year period. If options granted under the Plan expire or are terminated for any reason without being exercised, or shares of restricted stock are forfeited, the shares of common stock underlying such grant will again be available for purposes of the Plan. Administration of the plan. After we become a public company, the compensation committee of the board of directors will administer and interpret the Plan. Currently, the board of directors is acting as our compensation committee. The compensation committee, when appointed by the board, will consist of two or more directors, each of whom must be a "non- employee director" as defined by Rule 16b-3 under the Securities Exchange Act of 1934, and an "outside director" as defined by Section 162(m) of the Internal Revenue Code of 1986 and related Treasury regulations. The compensation committee has the sole authority to: o determine the individuals to whom grants shall be made under the Plan o determine the type, size and terms of the grants to be made to each such individual o determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for vesting and the acceleration of vesting o determine the total number of shares of common stock available for grants o deal with any other matters arising under the Plan The board of directors, with members of the compensation committee abstaining, has the authority to make grants under the Plan to members of the committee and may also establish a formula by which grants will automatically be made to members of the compensation committee. The compensation committee has the authority to make grants to members of the board of directors other than committee members and may also establish a formula by which grants will automatically be made to board members. Grants. Grants under the Plan may consist of: o options intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code o nonqualified stock options that are not intended to so qualify o restricted stock o stock appreciation rights Eligibility for participation. Grants may be made to employees, officers, directors, advisors and independent contractors of cavion.com and its subsidiaries, including any non-employee member of the board of directors. As of the date of this prospectus, 477,500 options were outstanding under the Plan. Options. Incentive stock options may be granted only to officers and directors who are employees. Nonqualified stock options may be granted to employees, officers, directors, advisors and independent contractors. The exercise price of common stock underlying an option will be determined by the compensation committee and may be equal to, greater than, or less than the fair market value but in no event less than 50% of fair market value; provided that: o the exercise price of an incentive stock option shall be equal to or greater than the fair market value of a share of common stock on the date such incentive stock option is granted o the exercise price of an incentive stock option granted to an employee who owns more than 10% of the common stock must not be less than 110% of the fair market value of the underlying shares of common stock on the date of grant The participant may pay the exercise price: o in cash o by delivering shares of common stock owned by the participant and having a fair market value on the date of exercise equal to the exercise price of the grant o by such other method as the compensation committee shall approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board Options vest according to the terms and conditions determined by the compensation committee. The compensation committee will determine the term of each option up to a maximum of ten years from the date of grant except that the term of an incentive stock option granted to an employee who owns more than 10% of the common stock may not exceed five years from the date of grant. The compensation committee may accelerate the exercisability of any or all outstanding options at any time for any reason. Restricted stock. The compensation committee will determine the number of shares of restricted stock granted to a participant, but may not exceed the maximum plan limit described above. Grants of restricted stock will be conditioned on such performance requirements, vesting provisions, transfer restrictions or other restrictions and conditions as the compensation committee may determine in its sole discretion. The restrictions shall remain in force during a restricted period set by the compensation committee. Stock appreciation rights. The compensation committee may grant a participant the right to receive, in cash, the amount of any appreciation in the value of our stock over the exercise price of the stock appreciation right, which is set by the committee at the time of grant. The compensation committee has the same discretion to determine the terms of stock appreciation rights, including exercise price and vesting schedule, that it has in the case of nonqualified stock options. Termination of employment. If a participant leaves our employment, other than because of retirement, death or disability, the participant will forfeit any stock options or stock appreciation rights that are not yet vested, and any restricted stock for which the restrictions are still applicable, unless the participant remains as a non-employee director, advisor or independent contractor. Amendment and termination of the plan. The compensation committee may amend or terminate the plan at any time, except that it may not make any amendment that requires shareholder approval as provided in Rule 16b-3 or Section 162(m) without shareholder approval. The Plan will terminate on the day immediately preceding the tenth anniversary of its effective date, unless terminated earlier by the compensation committee. Acceleration of rights and options. If our board of directors or shareholders agree to dispose of all or substantially all of our assets or stock, any right or option granted will become immediately and fully exercisable during the period from the date of the agreement to the date the agreement is consummated or, if earlier, the date the right or option is terminated in accordance with the Plan. No option or right will be accelerated if the shareholders immediately before the contemplated transaction will own 50% or more of the total combined voting power of all classes of voting stock of the surviving entity (whether it is us or some other entity) immediately after the transaction. Section 162(m). Under Section 162(m), we may be precluded from claiming a federal income tax deduction for total remuneration in excess of $1.0 million paid to the chief executive officer or to any of the other four most highly compensated officers in any one year. Total remuneration would include the value of stock options, restricted stock and stock appreciation rights granted under the Plan. An exception does exist, however, for "performance-based compensation," including amounts received upon the exercise of stock options as provided in a plan approved by shareholders that meets the requirements of Section 162(m). We will ask the shareholders to approve the Plan at the next annual or special meeting of shareholders so that grants of options under the Plan meet the requirements of "performance-based compensation." Awards of restricted stock generally will not qualify as "performance-based compensation." Principal Shareholders The following shareholder information about the beneficial ownership of our common stock, as of the date of this prospectus, assumes: o the conversion of 700,000 shares of preferred stock into the same number of shares of common stock; and o the sale of 1,200,000 shares of common stock in this offering. The information in the table below provides the information for: o each person known by cavion.com to beneficially own more than 5% of the common stock; o each of our directors; o each of our executive officers; and o our current directors and executive officers as a group.
Number of shares of Percent of ownership common stock --------------------- Name of beneficially Before After beneficial owner owned offering offering - ---------------- ------------ ----------- -------- Venture Funding, Ltd. 898,602 33.2% 19.5% 2581 S. Parker Road #720 Aurora, CO 80014 Boutine Capital, LLC 738,370 27.3% 16.0% 5460 S. Quebec St. #220 Englewood, CO 80111 David J. Selina 259,055 9.4% 5.6% 7475 Dakin Street #607 Denver, CO 80221 Marshall E. Aster 20,000 <1% <1% 7475 Dakin Street #607 Denver, CO 80221 Jeffrey W. Marshall 225,722 8.3% 4.9% 7475 Dakin Street #607 Denver, CO 80221 Andrew I. Telsey 933,627 34.2% 20.2% 2851 S. Parker Road, #720 Aurora, CO 80014 Stephen B. Friedman 20,625 <1% <1% P.O. Box 8279 Beaver Creek, CO 81620 John R. Evans 6,875 <1% <1% 400 Inverness Drive South #400 Englewood, CO 80112 Zutano LLC 376,299 13.9% 8.2% 7475 Dakin Street #607 Denver, Colorado 80221 Craig E. Lassen 209,055 7.7% 4.5% 245 Poplar Street Denver, CO 80220 All directors and executive officers as a group (6 persons) 1,465,904 51.6% 30.9%
*Less than one percent In the preceding table: o The sole shareholder of Venture Funding, Ltd. is Andrew I. Telsey, one of our directors. o The sole member of Boutine Capital, LLC is Julie Graham who is the spouse of Gary Graham, the president of First Capital Investments, Inc., the agent for our 1998 private placement of promissory notes and warrants, and an agent for our August 1999 private placement of promissory notes and warrants. Julie Graham is also the sole shareholder of First Capital Investments, Inc. o Mr. Telsey's shares include 898,602 shares owned by Venture Funding, Ltd. of which Mr. Telsey is the sole shareholder. They also include 14,400 shares owned by trusts for which Mr. Telsey is the trustee, but for which he disclaims any beneficial ownership to the shares owned by each of them. o Mr. Evans' ownership does not include 67,603 shares of common stock that Convergent Communications, Inc., of which is the chief executive officer, chairman of the board and a principal shareholder, will receive when a distribution is made by Zutano of the shares of common stock LanXtra received for the sale of its assets to cavion.com. Mr. Evans disclaims beneficial ownership of the shares. o Zutano's shares were the shares of common stock distributed to LanXtra, Inc. for the assets of that company, which were subsequently transferred to its successor company, Zutano LLC. These shares will continue to be voted by the management of Zutano until they are distributed to the members of Zutano after the completion of this offering. The managers of Zutano are David J. Selina and Craig E. Lassen, and its principal owners are Herman D. Axelrod, Craig E. Lassen and Convergent Communications Services, Inc. o Mr. Lassen's shares do not include 98,520 shares of common stock that he will receive when a distribution is made by Zutano of the shares of common stock LanXtra received for the sale of its assets to cavion.com. o The shares owned by the executive officers and directors include or consist of the following shares acquirable upon exercise of stock options which are exercisable within 60 days of this prospectus: Mr. Selina 50,000, Mr. Aster 20,000, Mr. Marshall 16,667, Mr. Telsey 20,625, Mr. Friedman 20,625 and Mr. Evans 6,875. Unless otherwise noted, we believe all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. Change in control - ----------------- As far as is known to our board of directors or management, there are no arrangements, including any pledge by any person of securities of cavion.com, the operation of which might, at a subsequent date, result in a change in control of cavion.com. Description of Capital Stock Our authorized capital stock consists of 19,970,000 shares of Class A common stock, $.0001 par value per share; 30,000 shares of Class B common stock, $.0001 par value per share; and 10,000,000 shares of preferred stock, par value $.0001 per share. Common stock The Class A and Class B common stock are identical in all respects except that the Class B common stock is subject to an option, referred to as a put, for the holder to sell the shares to us at $7.00 per share, or in the alternative, a parallel option, referred to as a call, for us to buy the shares from the holder at $7.00 per share. The put is exercisable only during a 60-day exercise period beginning on the date that is 30 days after the 100 Credit Union Date. The call is exercisable at any time after issuance of the Class B common stock and prior to the end of the exercise period. If at the end of the puts' exercise period neither the put nor the call has been exercised for any shares of Class B common stock, then each share of Class B common stock will automatically convert into one share of Class A common stock, effective on the day after the last day of the exercise period. The authorization for issuance of the Class B common stock will automatically terminate on the earlier of the date on which the exercise notices for either the put or call have been issued for the Class B common stock, or the date of automatic conversion of all outstanding shares of Class B common stock described above. After the closing of this offering, we expect to offer the Class B shareholders the option to redeem their Class B shares at $7.00 per share or to convert each Class B share into one share of our Class A common stock. Holders of the common stock are entitled to receive, as, when and if declared by the board of directors from time to time, such dividends and other distributions in cash, stock or property from our assets or funds legally available for such purposes, subject to any dividend preferences that may be attributable to preferred stock that is outstanding. Holders of the common stock are entitled to one vote for each share held of record on all matters on which shareholders may vote. There are no preemptive, conversion, redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution. Preferred stock Our board of directors, without further action by the shareholders, is authorized to issue an aggregate of 10,000,000 shares of preferred stock in one or more series. Our board of directors may, without shareholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights and any other preferences. No such preferred stock may have voting rights except as provided by Section 7-110-104 of Colorado law which permits voting by the holders of any class of shares on amendments to articles of incorporation that would affect the rights of holders of such class. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action of the shareholders. The board of directors authorized the issuance of 770,000 shares of nonvoting Series A preferred stock in February 1999 of which 700,000 were issued to accredited investors in March and April 1999 in a private offering. The other 70,000 shares were subject to preferred stock purchase warrants issued to NTB as the placement agent for the private placement. The preferred stock purchase warrants have been terminated at NTB's request. Each share of preferred stock is convertible at any time at the holder's option into one share of Class A common stock. Automatic conversion of the preferred stock will occur upon the earlier to occur of the closing of the public offering of Class A common stock offered by this prospectus or the date specified in a notice delivered by us any time after January 1, 2004. Commencing on the date of issuance of the preferred stock through the date of conversion, each holder will receive, when, as and if declared by the board of directors, cumulative preferential dividends at the rate of 5% per year. Dividends are payable quarterly either in cash or in shares of Class A common stock at our option. All accrued and unpaid dividends will be paid upon conversion of the preferred stock. Upon any liquidation, dissolution or winding up of cavion.com, whether voluntary or involuntary, the holders of the preferred stock will be entitled to receive $6.00 per share, plus accrued and unpaid dividends on the date fixed for distribution of assets prior to and in preference to any distribution or payment of assets to holders of our common stock. Since the conversion of the preferred stock into common stock is expected to occur upon closing of this public offering, it is not expected that this right will be effected. All of the 700,000 shares of Class A common stock into which the outstanding shares of preferred stock are convertible will be registered under a separate registration statement after this offering closes. Each purchaser of our preferred stock had to agree that their registered shares of common stock could not be sold for nine months from the effective date of this prospectus without the written consent of the representative. Preferred stock warrant As of June 30, 1999, we had warrants outstanding for the purchase of 70,000 shares of our preferred stock exercisable at $3.00 per share for a period of five years. The warrants were issued to NTB in connection with the February 1999 private placement of preferred stock described in the preceding paragraph. The preferred stock warrants have been terminated at NTB's request. Common stock warrant We have warrants outstanding for the purchase of 30,000 shares of our Class A common stock. The warrants are exercisable for a five year period beginning on the earlier to occur of this closing or one year from the date of their issuance. The warrants are exercisable at the price per share of the shares offered in this offering, or, if this offering does not close within one year from the date of issuance of the warrants, at $6.00 per share. The warrants were issued in our August 1999 private placement of notes and warrants. Shareholder action by written consent Our bylaws provide that any action that may be taken at a meeting of the shareholders may be taken without a meeting if such action is authorized by the unanimous written consent of all shareholders entitled to vote at a meeting for such purposes. Since cavion.com has numerous shareholders at this time and will have a much greater number after this offering, it is not likely that action by unanimous written consent of the shareholders is feasible. Special meetings Our bylaws provide that special meetings of our shareholders may be called by the board, by our president or by one or more written demands for the meeting, stating the purposes for which it is to be held, signed and dated by the holders of shares representing at least 10 percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. This provision may make it difficult for shareholders to take action opposed by the board. Amendments to our bylaws Our bylaws provide that they may be amended or repealed by the shareholders or, except to the extent limited by Colorado law, by the board of directors. Indemnification of directors and officers The Colorado Business Corporation Act provides the power to indemnify and pay the litigation expenses of any officer, director or agent who is made a party to any proceeding. Our articles of incorporation also provide for indemnification of our officers and directors for liabilities arising out of their service to us to the maximum extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling cavion.com as provided in the foregoing provisions, we have been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and thus cannot be enforced. Our bylaws provide that we shall indemnify any person against all liability and expense incurred by any reason of the person being or having been a director or officer of cavion.com to the full extent and in any manner that directors may be indemnified under Colorado law, our bylaws, a resolution of the board of directors or shareholders, by contract or otherwise so long as such provision is legally permissible. At the discretion of the board of directors, we may also indemnify any employee, fiduciary or agent who is not a director or officer to the same extent as a director or officer. Our bylaws authorize us to take steps to ensure that all persons entitled to the indemnification are properly indemnified, including if the board of directors so determines, purchasing and maintaining insurance. We have also entered into indemnification agreements with our officers and directors to indemnify them and to advance expenses to the fullest extent permitted by law either in connection with the investigation, defense, adjudication, settlement or appeal of a proceeding or in connection with establishing or enforcing a right to indemnification or advancement of expenses. In addition, the agreement provides that no claim or cause of action may be asserted by us against such director or officer after two years from the date of the alleged act or omission, provided that if in fact the person has fraudulently concealed the facts, then no claim or cause of action may be asserted after two years from the earlier of the date we discover the facts or the date we should have discovered such facts by the exercise of reasonable diligence. The term of the agreement and our obligations apply while the person is our agent and continues so long as the person is subject to any claim by reason of the fact that he or she served as our agent. Limitation of liability Our articles of incorporation provide that none of our directors shall be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director, except for liability: o for any breach of the director's duty of loyalty o for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law o for the payment of unlawful dividends and specified other acts prohibited by Colorado corporate law o for any transaction resulting in receipt by the director of an improper personal benefit We have obtained directors and officers' liability insurance to provide directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts. At present, there is no material pending litigation or proceeding, and we are not aware of any material threatened litigation or proceeding, involving any director, officer, employee or agent where indemnification will be required or permitted under the articles of incorporation, our bylaws or the indemnification agreements. Transfer agent The transfer agent for our common stock is American Securities Transfer & Trust, Inc. in Lakewood, Colorado. Shares Eligible for Future Sale Sales of substantial amounts of common stock in the public market following the offering could adversely affect the market price of the common stock and adversely affect our ability to raise capital at a time and on terms favorable to us. Upon completion of the offering, there will be 4,606,326 shares of common stock outstanding, including the automatic conversion of 700,000 shares of Series A preferred stock into Class A common stock, assuming that the underwriters do not exercise their over-allotment option. The 1,200,000 shares sold in this offering will be freely tradable in the United States if a market for our stock develops, by persons other than our officers, directors or other affiliated parties. We have agreed to register the shares of Class A common stock that will be issued upon the automatic conversion of the Series A preferred stock upon the closing of the offering in a separate registration as soon as possible after the closing of the offering. The holders of the preferred stock have agreed not to sell their shares of preferred stock, or the shares of common stock into which the preferred shares will be converted, for a period of nine months after the date of this prospectus, without the representative's prior consent. After the nine month period has expired, and assuming the separate registration statement has become effective, these holders will be able to freely trade their shares of Class A common stock in the public market, unless such shares are held by "affiliates," as that term is defined in Rule 144(a) under the Securities Act of 1933. For purposes of Rule 144, an "affiliate" of an issuer is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, such issuer. The remaining 2,706,326 shares of common stock to be outstanding after the offering are "restricted securities" under the Securities Act. After the expiration of the lock-up arrangements that have been agreed to by the holders of these restricted shares, which are described below, the restricted shares may be sold in the public market upon the expiration of specified holding periods under Rule 144, subject to the volume, manner of sale and other limitations of Rule 144. In general, under Rule 144, a person holding restricted securities for at least one year, may, within any three-month period, sell in ordinary brokerage transactions, a number of shares equal to one percent of a company's then outstanding common stock, or the average weekly trading volume during the four calendar weeks prior to the person's sales. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. A shareholder who is not an "affiliate" of ours and who has held the shares for at least two years, may sell the shares without any quantity limitations, manner of sale provisions or public information requirements. As of the date of this prospectus there were options to purchase 477,500 shares of common stock under our Equity Incentive Plan of which 160,961 are exercisable. An additional 272,000 shares are reserved for issuance under the Plan. We intend to register the shares of common stock issued, issuable or reserved for issuance under the Plan as soon as practicable following the date of this prospectus. Also as of the date of this prospectus there were outstanding warrants to purchase 30,000 shares of common stock. The warrants were issued in connection with our August 1999 private placement of notes and warrants. Lock-up arrangements Along with our officers and directors, all of the holders of 5% or more of the common stock, or securities convertible into common stock, have agreed not to offer or sell or contract to dispose of any of their shares of common stock without the prior written consent of NTB for a period of 12 months from the effective date of this prospectus. In addition, all of the other shareholders who own shares, or securities convertible into common stock, prior to this public offering have agreed not to offer or sell or contract to dispose of any of their shares of common stock for a period of 9 months from the date of this prospectus without such written consent. Most of these shareholders have also agreed that, for a period of 18 months from the date of this prospectus, any public sale of their shares, either under Rule 144 or otherwise, will be made only in a transaction through NTB, provided that NTB's compensation is competitive with other broker-dealers. The representative has no present intention to waive or shorten the period of these lock-up arrangements. Certain Relationships and Related Transactions Our founding shareholders, Venture Funding, Ltd. and Boutine Capital, LLC acquired 1,100,000, and 900,000 shares, respectively, of our Class A common stock on August 18, 1998 for $.0001 per share. On December 21, 1998, David Selina and Jeff Marshall, members of our management, and Craig Lassen, a former member of our management, purchased 208,452 shares each of Class A common stock for $.01 per share. Their share ownership subsequently increased to 209,055 shares each as provided in the Agreement for Post-Closing Adjustments described below. On September 14, 1998, we entered into a Loan Agreement to loan our predecessor, LanXtra, Inc., a Colorado corporation, formerly known as Sigmacom Corporation and Cavion Technologies, Inc., up to $300,000. On December 29, 1998, cavion.com agreed to lend up to an additional $55,000 under the same terms, and advanced $35,000 of this amount. The loan was made to fund LanXtra's working capital, promotion and marketing, and development of proprietary technology and was secured by substantially all of the assets of LanXtra, including its technology. In connection with the loan, LanXtra executed a promissory note requiring monthly interest payments on the unpaid principal balance at an interest rate of 16% per year, with the entire remaining balance due on March 14, 1999. This loan was discharged on February 1, 1999, under the terms of the Asset Purchase Agreement, as described more fully below. In 1998, we conducted a private placement of securities which raised $370,000 through the issuance of 15% secured notes due on October 19, 2000 in the aggregate principal amount of $370,000, along with warrants to purchase 2,400 shares of our Class A common stock for every $20,000 of note principal at an exercise price of $0.01 per share. As provided in a security agreement dated October 20, 1998, the notes are secured by substantially all of our assets, now owned or acquired subsequent to that date, including cash, equipment, fixtures, general intangibles, and all products and proceeds of the foregoing collateral, accounts receivable, inventory, work in process and service contracts receivables. The October 20, 1998 security agreement contains a covenant which prohibits us from incurring any other liens on our assets. We raised an additional $100,000 through this offering in 1999. The warrants were exercisable for a period of one year after repayment of the Notes. On December 22, 1998, we accelerated the warrants' exercise period to begin on December 22, 1998. All holders exercised their warrants by February 8, 1999 and all of the shares purchased have been issued. We engaged First Capital Investments, Inc., a broker/dealer registered with the Securities and Exchange Commission, as our exclusive placement agent and financial advisor for the private placement. We agreed to pay First Capital commissions of 8% of the gross proceeds of the offering and reimburse expenses, not to exceed 3% of the gross proceeds of the offering, and we issued First Capital a warrant to purchase 5,640 shares of Class A common stock, which was exercised on February 8, 1999. We granted First Capital piggyback registration rights for these shares. First Capital has agreed not to exercise these rights for inclusion of its shares in this offering. First Capital has waived any commissions with respect to our 1999 private placement of preferred stock and this offering. Under the terms of the engagement, for a period of two years after the closing of our 1998 private placement, First Capital will provide us with financial advisory services and is entitled to receive 8% of the gross consideration and/or value attributed to any business combination between us and a third party that is introduced to us by First Capital or involves the work product of First Capital. First Capital and the representative have agreed that we will not be required to pay a double commission on future corporate financing. Julie Graham, the spouse of Gary Graham, is the sole member of Boutine Capital, LLC, one of our principal shareholders. Gary Graham is a principal of First Capital and Julie Graham is its sole shareholder. On December 31, 1998, we entered into an Asset Purchase Agreement to purchase substantially all the assets and assume the liabilities of LanXtra. The transaction closed on February 1, 1999. In exchange for the sale of its assets, LanXtra received: o 375,214 shares of our Class A common stock, subsequently increased to 376,299 shares o 28,648 shares of our Class B common stock, which were issued to replace LanXtra's nonvoting common stock. o We assumed the following liabilities of LanXtra: o The obligations reflected on LanXtra's balance sheet and all accounts payable of LanXtra o The accrued salaries and benefits of employees that accepted employment with us o All obligations and liabilities arising on or after the closing with respect to LanXtra's assets or business o The amounts due to us under the loan we made to LanXtra in 1998, resulting in a discharge of that loan o Any liability of LanXtra in connection with the threatened lawsuit described in "Our Business - Legal Proceedings" and other contingent liabilities described in the Asset Purchase Agreement LanXtra was incorporated on June 26, 1992. The founding shareholders were Craig E. Lassen, Herman Axelrod, and Kirk Dennis. On August 1, 1996, the founders entered into an Investment Agreement with four investors, British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin Cooper and Fairway Realty Associates, who we call the 1996 Investors, who, in exchange for LanXtra stock, provided cash collateral in the amount of $600,000 for LanXtra's commercial loan with US Bank, N.A. made on August 1, 1996. The loan was also secured by an additional $20,000 in cash collateral provided by LanXtra. As a condition to providing the collateral for the loan, the 1996 Investors were granted benefits under a Put Agreement with LanXtra, a Share Escrow Agreement between LanXtra, the 1996 Investors and Norwest Bank Colorado, as escrow agent, a Subordination Agreement between LanXtra and its founders, and, in the case of one 1996 Investor, an Advisor's Option Agreement, each of which was dated as of August 1, 1996. Collectively, these agreements were intended to ensure the reimbursement of the 1996 Investors if LanXtra defaulted on the US Bank loan and the 1996 Investors' collateral was foreclosed. These agreements have been terminated as provided in the Termination and Modification Agreement of September 28, 1998 between LanXtra, its founders and the 1996 Investors. However, the Termination and Modification Agreement does include an obligation for LanXtra to reimburse the 1996 Investors in the event of foreclosure on their collateral by US Bank. We borrowed $600,000 from US Bank as provided in the Loan Agreement of January 18, 1999, which was later amended on March 24, 1999. The proceeds of the new loan were used to pay off the 1996 loan to LanXtra. The new loan bears annual interest at the rate of 1.5% over the reference rate payable monthly beginning on February 28, 1999. The principal of the loan must be paid in a single payment on December 31, 1999. The loan is secured by $620,000 cash collateral consisting of certificates of deposit and letters of credit, of which $600,000 was provided by the 1996 Investors and $20,000 was provided by us. On January 15, 1999, the Termination and Modification Agreement was amended to provide that upon closing of the Asset Purchase Agreement, the shares of Class A common stock received by LanXtra as consideration will not be distributed to its shareholders until our loan with US Bank has been paid in full or the 1996 Investors have been reimbursed for their collateral. Upon closing of the Asset Purchase Agreement with LanXtra, we assumed LanXtra's obligations under the amended Termination and Modification Agreement with the 1996 Investors. The LanXtra obligations we assumed also include the transactions described below. Each of the creditors of these obligations has agreed to defer repayment until 15 days after the closing of this offering. o On July 1 and August 1, 1992, LanXtra executed promissory notes for $25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively, at an interest rate of 2% over prime. These notes were originally secured by the assets of LanXtra which are now owned by cavion.com. The original principal amounts of these notes reflects $20,000 in cash loaned by each and $5,000 each of co-signer liability on a $10,000 credit line at the Bank of Boulder that LanXtra obtained at its inception. The credit line was paid in full in August 1996, leaving an aggregate principal balance of $40,000 on the notes. We assumed the obligation to pay Mr. Axelrod and Mr. Lassen the principal balance of the notes together with interest stated above which will continue to be paid on a quarterly basis until the notes are paid in full. o Between September 8, 1997 and October 15, 1997, Herman Axelrod, the former president and director of LanXtra, and Mr. Lassen, also a former president and director of LanXtra, made factoring loans to LanXtra in the amounts of $50,190 and $25,000, respectively. These loans were secured by an account receivable for computer network integration work LanXtra performed for Questar Infocomm and bear interest at the rate of 3% of the loan amount for the first 30 days, and 1% for each additional 10 days until the loan is paid in full. Questar disputed the amount of LanXtra's invoice, and the dispute was settled in September 1998 under which Questar paid LanXtra the sum of $61,780. This amount was then paid against the factoring loans on September 21, 1998 as follows: $41,238 to Mr. Axelrod and $20,542 to Mr. Lassen leaving $28,331 due to Mr. Axelrod and $13,441 due to Mr. Lassen. We assumed these obligations, but no further interest will accrue on them. o We assumed the obligation to pay Mr. Lassen $12,500 for unpaid back salary. Between the months of October 1997 and November 1997, Mr. Lassen agreed to defer payment of salary due to a shortage of working capital during those months. No interest will accrue on this obligation. o We assumed the obligation to pay Mr. Axelrod $19,904 for unpaid back salary. Between the months of September 1997 and December 1997, Mr. Axelrod agreed to defer payment of salary due to a shortage of working capital during those months. No interest will accrue on this obligation. o We assumed the obligation to pay Convergent Communications, Inc. $78,673 for equipment purchased in connection with a customer network upgrade performed by LanXtra in December 1997, while Convergent was completing the purchase of LanXtra's network integration business. o On May 28, 1998, LanXtra borrowed an aggregate of $150,000 to be used for working capital from three of its shareholders, British Far East Holdings, Ltd., Martin Cooper and Fairway Realty Associates in equal amounts as provided in a Bridge Loan Agreement. On that same date, LanXtra entered into an Additional Bridge Loan Agreement with David Selina, Jeff Marshall and Randal Burtis, to borrow an additional $110,000 for working capital purposes. Of that amount, $30,000 was borrowed from Mr. Selina, $50,000 from Mr. Marshall and $30,000 from Mr. Burtis. LanXtra issued each of these shareholders and employees senior promissory notes bearing interest at 42% per year, the principal and interest of which was payable in three equal monthly installments beginning on November 1, 1998. They also received shares of LanXtra nonvoting common stock and put options to sell those shares back to LanXtra at $7.00 a share beginning on January 1, 1999. We assumed LanXtra's obligations under the senior promissory notes to pay these individuals an aggregate of $260,000 in principal and $59,480 in interest, which did not continue to accrue after the closing of the Asset Purchase Agreement. We assumed LanXtra's obligations under the Put Agreements by issuing to LanXtra at the closing of the Asset Purchase Agreement 28,648 shares of our Class B common stock. The terms of our Class B common stock contain put provisions which are identical to those in the Put Agreements except that the exercise period for the put begins 30 days after our 100 Credit Union Date, and we also have an option to purchase all or part of the Class B common stock at a price of $7.00. After completion of this offering we expect to offer these shareholders the option to redeem their Class B shares at $7.00 per share, or to convert each Class B share into one share of our Class A common stock. LanXtra has conveyed the shares of our Class A and Class B common stock it received through the Asset Purchase Agreement and the Agreement for Post-Closing Adjustments to a newly formed limited liability company named Zutano LLC. Zutano has the same ownership as LanXtra, and will hold the shares until they are distributed to its members after the completion of this offering. Beginning in February 1999, we conducted a private placement of our Series A preferred stock in which we sold 700,000 shares at $3.00 per share and raised gross proceeds of $2,100,000. In accordance with the terms of our Series A preferred stock, these shares will automatically convert into 700,000 shares of Class A common stock upon the closing of this offering. The holders of the converted shares of common stock are entitled to piggyback registration rights. We engaged Neidiger, Tucker, Bruner, Inc., as our exclusive placement agent for the offering as provided in a Placement Agent Agreement dated March 10, 1999. NTB received a placement fee and non-accountable expense allowance equal to 10% and 2%, respectively, of the gross proceeds in the offering, and warrants to purchase 70,000 shares of preferred stock exercisable at $3.00 per share for a term of five years. The preferred stock purchase warrants have been terminated at NTB's request. NTB has a non-contingent right of first refusal to act as our investment banker with respect to any public or private offering or sale of any of our securities, or the securities of any subsidiary, for three years ending December 22, 2001. In addition, in the event of a closing of any such offering in the first 24 months in which NTB does not choose to act as our investment banker, we must pay NTB a fee of $200,000 and issue NTB a warrant in an amount equal to 3% of the securities sold, exercisable for five years at a purchase price of 120% of the price of the securities in that offering. When we closed the Asset Purchase Agreement with LanXtra, our founding shareholders, Venture Funding, Ltd. and Boutine Capital, LLC, agreed with LanXtra and our management shareholders, Mr. Selina, Mr. Marshall and Mr. Lassen, that there would be a post-closing adjustment of the shares of our Class A common stock held by these parties. Under the Agreement for Post-Closing Adjustments, Venture Funding and Boutine agreed to bear the equity cost of bringing us the first $1 million of new equity, while LanXtra and the management shareholders agreed to share in the dilution of any additional equity. This agreement was completed as of April 16, 1999, with the transfer of an aggregate of 2,894 shares of our Class A common stock from Venture Funding and Boutine to LanXtra and the management shareholders. On August 18, 1999, we entered into an agreement with MoneyLine America, LLC to provide on-line mortgage lending services for our credit unions and their members via our network. Fifty percent of MoneyLine America is owned by Boutine Capital, LLC, a principal shareholder of cavion.com. On August 31, 1999, we completed a private placement of promissory notes and warrants to purchase common stock under we raised $300,000. The 14% notes are due on the first to occur of the closing of this offering or one year from their issuance. Each $50,000 note entitled the purchaser to warrants to purchase 5,000 shares of common stock. The warrants are exercisable for a five year period beginning on the earlier to occur of the closing of this offering or one year from the date of their issuance. The warrants are exercisable at the price per share of the shares offered in this offering, or, if this offering does not close within one year from the date of the issuance of the warrants, at $6.00 per share. First Capital and NTB acted as our placement agents and received a commission of 9%; totaling $27,000 between them. We have contracted with Convergent Communications Services, Inc. to provide connectivity between our network and our customers for a monthly fee, beginning on October 22, 1999. Under our contract, Convergent purchased our host site equipment for $286,000. One of our directors, John R. Evans, is the chief executive officer and chairman of the board of Convergent Communications, Inc., the parent company of Convergent Communications Services, Inc. As part of our purchase of LanXtra's assets in February 1999, we assumed LanXtra's obligation to pay Convergent Communications, Inc. $78,673 for equipment purchased in connection with a customer network upgrade performed by LanXtra in December 1997. Convergent Communications Services, Inc. is an owner of Zutano, LLC. LanXtra contributed to Zutano, LLC its shares of cavion.com common stock received in the asset purchase transaction in February 1999. LanXtra also contributed to Zutano its warrants to purchase 50,000 shares of common stock of Convergent Communications, Inc. at $15.00 per share, which expire on December 3, 1999. Convergent Communications Services, Inc., as an owner of Zutano, will receive a portion of the cavion.com common stock and Convergent warrants when Zutano distributes its assets after the completion of this offering. We believe that each of the related party transactions described above were on terms at least as favorable as could be obtained from nonaffiliated parties. All future transactions between cavion.com and an officer, director or a principal shareholder will be on terms at least as favorable to us as could be obtained from nonrelated parties; and, in addition, any such transactions must be approved by a majority of the disinterested members of the board of directors with access to counsel. Underwriting Subject to the terms and conditions in the underwriting agreement, the underwriters named below, for which Neidiger, Tucker, Bruner, Inc., is acting as representative, have agreed to purchase from us the respective number of shares of common stock shown opposite its name below.
Number of Shares Underwriter To Be Purchased ----------- ---------------- Neidiger, Tucker, Bruner, Inc. --------- TOTAL 1,200,000 =========
In the underwriting agreement, the underwriters have agreed, to purchase all shares offered by this prospectus, other than the shares covered by the underwriters' over-allotment option described below. In the event of a default by any underwriter, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. The representative has advised us that the underwriters propose to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus, and to selected dealers at such price less a concession not in excess of $0.325 per share and that the representative and such dealers may reallow a discount of not in excess of $0.15 per share to other dealers. The offering price and the concession and discount to dealers may be changed by the representative after the initial public distribution of the shares is completed. The representative also has advised us that the underwriters do not intend to confirm sales to any accounts over which any of them exercise discretionary authority. We have granted the underwriters an option, expiring at the close of business 45 days after the date of this prospectus, to purchase up to 180,000 additional shares at the offering price less the 10% underwriting discount and a 2% non-accountable expense allowance. The underwriters may exercise this option only to satisfy over-allotments in the sale of the shares. We will be obligated to sell these shares to the underwriters to the extent the option is exercised. If the over-allotment option is exercised in full, the total public offering price, underwriting discount and gross proceeds to us will be $8,970,000, $897,000 and $8,073,000, respectively. We have agreed to pay the representative a non-accountable expense allowance of 2% of the total proceeds of the offering of which we have already paid $45,000. We have also agreed to pay all expenses in connection with qualifying the shares for sale in the states selected by the representative. The representative's expenses in excess of the non- accountable expense allowance, including its legal expenses, will be borne by the representative. To the extent that the expenses of the representative are less than the non-accountable expense allowance, the excess may be deemed additional underwriting compensation. Until the distribution of the shares is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and selling group members to bid for and purchase our common stock. As exceptions to these rules, the underwriters are permitted to engage in transactions that stabilize the price of the common stock. Such transactions may consist of over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which create a syndicate short position. Stabilizing transactions permit bids to purchase the common stock so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by such syndicate member are purchased in a syndicate covering transaction. Such transactions, or any of them, may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. Neither cavion.com nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. If these activities are commenced, they may be discontinued by the underwriters at any time without notice. Our directors, officers and each holder of 5% or more of our common stock have agreed not to offer, sell or otherwise dispose of their shares of cavion.com common stock for a period of 12 months after the date of this prospectus without the representative's prior written consent. Each holder who owns less than 5% of our common stock, or securities convertible into common stock, prior to the public offering has agreed not to offer or sell or otherwise dispose of any of their shares for a period of 9 months from the date of this prospectus without the prior written consent of the representative. Most of these shareholders have also agreed that, for a period of 18 months from the date of this prospectus, any public sales of their shares, either under Rule 144 or otherwise, will be made through the representative on an exclusive basis, provided that the representative's compensation is competitive with other broker- dealers. We have agreed to sell the representative on completion of the offering, for $100, a warrant entitling the representative or its assigns to purchase 120,000 shares of our common stock. The representative's warrant will be exercisable for a period of four years beginning one year from the date of this prospectus. The representative's warrant will contain anti-dilution provisions and permit the cashless exercise of the warrant utilizing the value of the warrants being surrendered. The exercise price of the representative's warrant is 125% of the public offering price. The warrant is not redeemable by us. The representative's warrant and the underlying common shares will be restricted from sale, transfer, assignment or hypothecation for three years after the date of this prospectus, except to officers of the representative, co-underwriters, selling group members and their officers or partners. After such three year period, the representative's warrant and the underlying common shares will be transferable provided such transfer is in accordance with the provisions of the Securities Act of 1933. We have agreed, at the representative's request, to register the common stock underlying the representative's warrant issuable upon exercise of the warrants. We may find it more difficult to raise additional equity capital while the representative's warrant is outstanding. The representative has agreed to provide investment banking services to us upon completion of the offering for a period of two years for a fee of $48,000, payable at the closing of the offering. We have agreed to pay the representative a fee based on the consideration paid or received by us or our shareholders or any subsidiary in any transaction, including mergers, asset sales and acquisitions, accepted by us within 3 years from the completion of the offering made by this prospectus, provided the representative introduced the other party to us. Such fee is based on a sliding scale decreasing from 5% of the first $3 million of consideration to 1% of any consideration greater than $10 million. We have also agreed that for a period of two years from the date of this offering, the representative shall have the right to designate one person as an advisor to our board of directors. That person will be reimbursed for his expenses in attending meetings of the board and will receive cash compensation equal to that received by outside directors but will have no power to vote as a director. We will indemnify that person against any claim arising out of his or her participation in meetings of the board to the same extent as directors. During such two-year period, we have agreed with the representative to hold at least four meetings of our board each year. We maintain a liability insurance policy with coverage for acts of our officers and directors, and we have agreed that if possible we will include the advisor designee as an insured under the policy. Any advisor designated by the representative must be acceptable to us, which acceptance will not be unreasonably withheld. The representative has not yet designated an advisor to our board. The representative received a $210,000 commission, a non-accountable expense allowance of $42,000, and warrants to purchase up to 70,000 shares of our preferred stock at $3.00 per share in connection with our private offering of preferred stock completed in April 1999. The warrants have been terminated at NTB's request. The representative also received a $9,000 commission in connection with our August 1999 private offering of promissory notes and warrants. In connection with this offering, cavion.com and the underwriters have agreed to indemnify each other against liabilities under the Securities Act and if such indemnification is unavailable or insufficient, cavion.com and the underwriters have agreed to damage contribution arrangements based upon relative benefits received from this offering and relative fault resulting from such damage. Prior to the offering, there has been no public market for our securities. The initial public offering price of the shares of common stock has been determined by negotiation between us and the representative. Among the factors considered in determining the initial public offering price of the shares of common stock were: o our earnings and other financial and operating information in recent periods o our future prospects and our industry in general o the general condition of the securities markets at the time of this offering o the market prices of securities and the financial and operating information of companies engaged in activities similar to ours There can be no assurance, however, that the prices at which the common stock will sell in the public market after this offering will not be lower than the price at which it is sold by the underwriters. Application has been made to have the common stock approved for quotation on the NASDAQ SmallCap Market upon completion of this offering. The foregoing does not purport to be a complete statement of the terms and conditions of the underwriting agreement, copies of which are on file at the offices of cavion.com, the representative and the Securities and Exchange Commission. Additional Information We will file annual, quarterly, special reports, proxy statements, and other information with the Securities and Exchange Commission. Reports, proxy and other information can be read and copied at the SEC's Public Reference Room, 450 Fifth Street N.W., Washington, D.C. 20549. You may obtain information on the operation of Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a website at (http://www.sec.gov) that contains all information filed electronically by us. This prospectus constitutes a part of a registration statement on Form SB-2, together with amendments and exhibits, filed by us with the Commission under the Securities Act, for the securities offered in this prospectus. This prospectus does not contain all the information which is in the registration statement, as allowed by the rules and regulations of the Commission. We refer you to the registration statement and to the exhibits for further information with respect to cavion.com and the securities offered in this prospectus. Copies of the registration statement and the exhibits are on file at the offices of the Commission and may be obtained upon payment of the prescribed fee. They may be examined without charge at the Commission's Public Reference Room or through the Commission's website described above . Statements contained in this prospectus concerning the provisions of documents are necessarily summaries of the material provisions of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. This prospectus includes statistical data regarding Internet usage and the credit union industry which were obtained from industry publications, including reports generated by Callahan, International Data Corporation, Nielson/NetRatings, Gomez Advisors, and Online Banking Report. These industry publications generally indicate that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe those industry publications to be reliable, we have not independently verified such data. We also have not sought the consent of any of these organizations to refer to their reports in this prospectus. Reports to Security Holders We intend to distribute to our shareholders annual reports containing audited financial statements and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. Experts The audited financial statements of cavion.com and LanXtra included in this prospectus and registration statement to the extent and for the periods indicated in their reports have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of Arthur Andersen LLP as experts in accounting and auditing in giving said reports. Reference is made to such reports, which include explanatory paragraphs with respect to the uncertainty regarding cavion.com's and LanXtra's ability to continue as going concerns as discussed in Note 1 to each company's financial statements. Legal Matters The validity of the common stock offered by this prospectus will be passed upon for us by Gorsuch Kirgis LLP, Denver, Colorado. Legal matters in connection with the offering will be passed upon for the underwriters by John G. Herbert, P.C., Denver, Colorado. Index to Financial Statements Page ---- Audited financial statements: LanXtra, Inc. Report of Independent Public Accountants F-3 Balance Sheets at January 31, 1999, December 31, 1998 and 1997 F-4 Statements of Operations for the one month period ended January 31, 1999, for the years ended December 31, 1998 and 1997 and for the six month period ended June 30, 1998 F-6 Statements of Stockholders' Deficit for the one month ended January 31, 1999 and for the years ended December 31, 1998 and 1997 F-7 Statements of Cash Flows for the one month period ended January 31, 1999, for the years ended December 31, 1998 and 1997 and for the six month period ended June 30, 1998 F-8 Notes to Financial Statements F-9 Cavion Technologies, Inc. Report of Independent Public Accountants F-26 Balance Sheets at June 30, 1999, March 31, 1999 and December 31, 1998 F-27 Statements of Operations for the six months ended June 30, 1999, three months ended March 31, 1999 and for the period from Inception (August 18, 1998) to December 31, 1998 F-29 Statements of Stockholders' Equity for the three monthsF-30 ended June 30, 1999, three months ended March 31, 1999 and for the period from Inception (August 18, 1998) to December 31, 1998 Statements of Cash Flows for the six months ended June 30, 1999, three months ended March 31, 1999 and for the period from Inception (August 18, 1998) to December 31, 1998 F-33 Notes to Financial Statements F-34 LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) FINANCIAL STATEMENTS AS OF JANUARY 31, 1999, DECEMBER 31, 1998 AND DECEMBER 31, 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To LanXtra, Inc.: We have audited the accompanying balance sheets of LANXTRA, INC. (a Colorado corporation; formerly Cavion Technologies, Inc. and Sigmacom Corporation) as of January 31, 1999, December 31, 1998 and 1997, and the related statements of operations, stockholders' deficit and cash flows for the one-month period ended January 31, 1999 and for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LanXtra, Inc. as of January 31, 1999, December 31, 1998 and 1997, and the results of its operations and its cash flows for the one-month period ended January 31, 1999 and for the years ended December 31, 1998 and 1997 all in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Effective February 1, 1999, substantially all of the Company's assets were transferred to Cavion Technologies, Inc. in exchange for common stock and the assumption of the Company's liabilities. Subsequent to this transaction, the Company's activities will be limited to holding warrants to purchase the common stock of Convergent Communications Services, Inc. and common stock of Cavion Technologies, Inc. In April 1999, the Board of Directors resolved to form a limited liability company and contribute the Company's remaining assets into such company. The ability of the Company and its successor limited liability company to continue operations depends upon the ultimate value, if any, of the financial instruments held and the resolution of the matters discussed in Note 7. This raises substantial doubt about the Company and its successor's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ARTHUR ANDERSEN LLP Denver, Colorado, May 18, 1999 Page 1 of 2 LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) BALANCE SHEETS --------------
December 31, January 31, ----------------- ASSETS 1999 1998 1997 ------ ----------- -------- -------- CURRENT ASSETS: Cash and cash equivalents $ - $ 52,116 $350,443 Accounts receivable 16,458 17,695 114,599 Prepaids 33,120 38,295 - Inventories 5,832 5,641 - -------- -------- -------- Total current assets 55,410 113,747 465,042 -------- -------- -------- PROPERTY AND EQUIPMENT, at cost: Leasehold improvements 7,674 7,674 7,674 Furniture and fixtures 44,330 44,330 44,330 Network equipment and licensed software 391,880 354,577 233,471 -------- -------- -------- 443,884 406,581 285,475 Less - Accumulated depreciation (112,864) (104,712) (38,209) -------- -------- -------- Property and equipment, net 331,020 301,869 247,266 -------- -------- -------- DEBT ISSUANCE COSTS, net of accumulated amortization of $67,500, $67,500 and $49,091, respectively - - 18,409 DEPOSIT FOR LETTER OF CREDIT 20,000 20,000 20,000 OTHER ASSETS 21,815 20,179 17,313 -------- --------- -------- TOTAL ASSETS $428,245 $455,795 $768,030 ======== ========= ========
The accompanying notes to financial statements are an integral part of these balance sheets. Page 2 of 2 LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) BALANCE SHEETS --------------
December 31, January 31, -------------------- LIABILITIES AND STOCKHOLDERS' DEFICIT 1999 1998 1997 - ------------------------------------- ----------- -------- -------- CURRENT LIABILITIES: Accounts payable $ 256,222 $ 118,942 $ 81,032 Bank overdraft 19,397 - - Accrued liabilities 186,444 171,908 211,347 Accrued interest 114,322 105,401 9,095 Deferred revenue and deposits 214,712 198,884 8,695 Related party collateralized loans 13,410 13,410 75,190 Current portion of capital lease obligations 30,279 32,363 17,661 Notes payable to stockholders 300,000 300,000 40,000 Note payable to Cavion 335,000 335,000 - Revolving line of credit 600,000 600,000 600,000 --------- --------- --------- Total current liabilities 2,069,786 1,875,908 1,043,020 --------- --------- --------- LONG-TERM LIABILITIES: Capital lease obligations 32,832 32,832 20,475 PUTABLE COMMON STOCK; 58,648, 58,648 and 30,000 shares issued and outstanding, respectively (stated at accreted value; total redemption value of approximately $2.0 million) 1,700,236 1,650,236 837,500 COMMITMENTS AND CONTINGENCIES (Notes 1 and 7) STOCKHOLDERS' DEFICIT: Common stock; $.01 par value, 1,000,000 shares authorized; 315,112, 315,112 and 286,464 shares issued, and outstanding including 58,648, 58,648 and 30,000 shares, respectively, of putable common stock 3,151 3,151 2,865 Additional paid-in capital 410,735 410,735 410,735 Accumulated deficit (3,788,495) (3,517,067) (1,546,565) --------- --------- --------- --------- Total stockholders' deficit (3,374,609) (3,103,181) (1,132,965) --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 428,245 $ 455,795 $ 768,030 ========= ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. Page 1 of 2 LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) STATEMENTS OF OPERATIONS ------------------------
One-Month Period Ended Year Ended January 30, December 31, 1999 1998 ------------ ------------ REVENUE: Network access and connectivity fees $ 24,381 $ 147,965 Installation services 12,800 63,031 Software licensing fees 669 4,026 --------- ----------- Total revenue 37,850 215,022 --------- ----------- COST OF REVENUE: Network access and connectivity 15,645 136,903 Installation services 16,253 85,516 --------- ----------- Total cost of revenue 31,898 222,419 --------- ----------- Gross profit (loss) 5,952 (7,397) --------- ----------- OPERATING EXPENSES: General and administrative 181,731 869,293 Research and development 31,580 248,599 --------- ----------- Total operating expenses 213,311 1,117,892 --------- ----------- LOSS FROM OPERATIONS (207,359) (1,125,289) INTEREST EXPENSE (64,069) (997,503) OTHER INCOME - 152,290 --------- ----------- LOSS FROM CONTINUING OPERATIONS (271,428) (1,970,502) DISCONTINUED OPERATION: Gain from disposal of discontinued operation - - Income from operations of discontinued operation - - --------- ----------- - - --------- ----------- NET LOSS $(271,428) $(1,970,502) ========= =========== BASIC AND DILUTED NET LOSS FROM CONTINUING OPERATIONS PER SHARE $(1.06) $ (7.66) ====== ========= BASIC AND DILUTED NET LOSS PER SHARE $(1.06) $ (7.66) ====== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 256,464 257,319 ========= ===========
Six-Month Year Ended Period Ended December 31, June 30, 1997 1999 ------------ ------------ (unaudited) REVENUE: Network access and connectivity fees $ 24,430 $ 72,457 Installation services - 19,227 Software licensing fees - 1,237 ---------- ----------- Total revenue 24,430 92,921 COST OF REVENUE: Network access and connectivity 51,688 66,398 Installation services - 17,999 ---------- ----------- Total cost of revenue 51,688 84,397 ---------- ----------- Gross profit (loss) (27,258) 8,524 ---------- ----------- OPERATING EXPENSES: General and administrative 673,034 348,959 Research and development 363,741 120,177 ---------- ----------- Total operating expenses 1,036,775 469,136 ---------- ----------- LOSS FROM OPERATIONS (1,064,033) (460,612) INTEREST EXPENSE (808,822) (433,573) OTHER INCOME 37,361 20,986 ---------- ----------- LOSS FROM CONTINUING OPERATIONS (1,835,494) (873,199) DISCONTINUED OPERATION: Gain from disposal of discontinued operation 418,848 - Income from operations of discontinued operation 653,528 - ---------- ----------- 1,072,376 - ---------- ----------- NET LOSS $ (763,118) $(873,199) ========== =========== BASIC AND DILUTED NET LOSS FROM CONTINUING OPERATIONS PER SHARE $ (8.86) $ (3.40) ========== ========= BASIC AND DILUTED NET LOSS PER SHARE $ (3.68) $ (3.40) ========== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 207,205 256,464 ========== ==========
The accompanying notes to financial statements are an integral part of these statements. LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) STATEMENTS OF STOCKHOLDERS' DEFICIT ----------------------------------- FOR THE ONE MONTH ENDED JANUARY 31, 1999 AND -------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 ----------------------------------------------
Common Stock Shares (Including Shares of Putable Common Stock) Amount ---------------------- ------ BALANCES, December 31, 1996 230,000 $ 2,300 Exercise of stock options by an employee at an exercise price of $.01 in May 1997 5,000 50 Issuance of common stock for cash at $7.77 per share in connection with the sale of discontinued operation 51,464 515 Net loss - - -------- -------- BALANCES, December 31, 1997 286,464 2,865 Issuance of putable common stock 28,648 286 Net loss - - --------- --------- BALANCES, December 31, 1998 315,112 3,151 Net loss - - --------- --------- BALANCES, January 31, 1999 315,112 3,151 ========= =========
Additional Paid-In Accumulated Capital Deficit ----------- ----------- BALANCES, December 31, 1996 $ 11,250 $ (783,447) Exercise of stock options by an employee at an exercise price of $.01 in May 1997 - - Issuance of common stock for cash at $7.77 per share in connection with the sale of discontinued operation 399,485 - Net loss - (763,118) --------- ---------- BALANCES, December 31, 1997 410,735 (1,546,565) Issuance of putable common stock - - Net loss - (1,970,502) --------- ---------- BALANCES, December 31, 1998 410,735 $(3,517,067) Net loss - (271,428) --------- ---------- BALANCES, January 31, 1999 $ 410,735 $(3,788,495) ========= ==========
Total Stockholders' Deficit ------------- BALANCES, December 31, 1996 $ (769,897) Exercise of stock options by an employee at an exercise price of $.01 in May 1997 50 Issuance of common stock for cash at $7.77 per share in connection with the sale of discontinued operation 400,000 Net loss (763,118) ---------- BALANCES, December 31, 1997 (1,132,965) Issuance of putable common stock 286 Net loss (1,970,502) ---------- BALANCES, December 31, 1998 $(3,103,181) Net loss (271,428) ---------- BALANCES, January 31, 1999 $(3,374,609) ==========
The accompanying notes to financial statements are an integral part of these statements. LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) STATEMENTS OF CASH FLOWS ------------------------
One-Month Period Ended Years Ended January 31, December 31, 1999 1998 ----------- ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(271,428) $(1,970,502) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 8,152 84,912 Gain from disposal of discontinued operations - - Provision for doubtful accounts - - Accretion of putable stock 50,000 612,200 Accretion of discount on bridge loan - 200,536 Change in operating assets and liabilities- Accounts receivable 1,237 96,904 Prepaids and inventories 4,984 (43,936) Other assets (1,636) (2,866) Accounts payable 137,280 37,910 Accrued liabilities 23,457 56,867 Deferred revenue 15,828 190,189 Decrease in net assets of discontinued operations - - --------- ----------- Net cash used in operating activities (32,126) (737,786) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (37,303) (71,154) Proceeds from disposal of discontinued operations - - --------- ----------- Net cash (used in) provided by investing activities (37,303) (71,154) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash overdraft 19,397 - Proceeds from issuance of common stock - 286 Repayments of related party loans - (61,780) Cash received on related party loans - - Repayments of stockholder notes - - Cash received from stockholder notes - 260,000 Cash received from Cavion - 335,000 Payment on capital lease obligations (2,084) (22,893) --------- ----------- Net cash provided by financing activities 17,313 510,613 --------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (52,116) (298,327) CASH AND CASH EQUIVALENTS, beginning of period 52,116 350,443 --------- ----------- CASH AND CASH EQUIVALENTS, end of period - $ 52,116 ========= =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property acquired with capital leases - $ 49,952 ========= =========== Putable common stock issued in conjunction With stockholder notes - $ 200,536 ========= =========== Cash paid for interest 5,148 $ 88,461 ========= ===========
Years Ended Six-Month December 31, Period Ended 1997 June 30, 1999 ------------ ------------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(763,118) $(873,199) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 58,284 39,662 Gain from disposal of discontinued operations (418,848) - Provision for doubtful accounts 20,923 - Accretion of putable stock 577,500 306,100 Accretion of discount on bridge loan - 28,648 Change in operating assets and liabilities- Accounts receivable (135,522) 6,869 Prepaids and inventories - (9,906) Other assets (7,970) (1,164) Accounts payable 69,186 (32,860) Accrued liabilities 184,169 123,225 Deferred revenue 8,695 40,654 Decrease in net assets of discontinued operations 64,884 - --------- --------- Net cash used in operating activities (341,817) (371,971) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (181,422) (30,959) Proceeds from disposal of discontinued operations 475,000 - --------- --------- Net cash (used in) provided by investing activities 293,578 (30,959) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash overdraft - - Proceeds from issuance of common stock 400,050 286 Repayments of related party loans) (50,000) - Cash received on related party loans 75,190 - Repayments of stockholder notes (28,721) - Cash received from stockholder notes - 260,000 Cash received from Cavion - - Payment on capital lease obligations (6,625) (10,935) --------- --------- Net cash provided by financing activities 389,894 249,351 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 341,655 (153,579) CASH AND CASH EQUIVALENTS, beginning of period 8,788 350,443 --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 350,443 $ 196,864 ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property acquired with capital leases $ 44,761 $ 16,881 ========= ========= Putable common stock issued in conjunction with stockholder notes $ - $ 200,536 ========= ========= Cash paid for interest $ 66,496 $ 39,750 ========= =========
The accompanying notes to financial statements are an integral part of these statements. LANXTRA, INC. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) NOTES TO FINANCIAL STATEMENTS ----------------------------- FOR THE PERIOD ENDED JANUARY 31, 1999 AND ----------------------------------------- FOR YEARS ENDED DECEMBER 31, 1998 AND 1997 ------------------------------------------ (Information as of June 30, 1998 and for the six months then ended is unaudited) (1) DESCRIPTION OF BUSINESS ----------------------- Organization ------------ Sigmacom Corporation ("Sigmacom")was incorporated under the laws of the state of Colorado on June 26, 1992. In 1998 Sigmacom changed its name to Cavion Technologies, Inc. Effective January 1999, Cavion Technologies, Inc. changed its name to LanXtra, Inc. ("LanXtra" or the "Company"). Before 1998, the Company was engaged in integrating computer networks and communications technologies for financial institutions, Fortune 1000 companies and government agencies. On December 3, 1997, the Company entered into an asset purchase agreement with Convergent Communications Services, Inc. ("Convergent") for the sale of certain assets of the Company, including all assets related to the Company's network integrator business, including, without limitation, the name, "Sigmacom". Since January 1, 1998, the Company has been engaged in developing and marketing a suite of network products and services for the credit union industry that includes: (1) a secure network that enables access via the internet or an intranet; (2) secure internet financial products such as internet banking software; and (3) secure internet access services for credit unions. Subsequent to the transaction discussed below, the Company's activities will be limited to holding warrants for the purchase of Convergent common stock and common stock of the new Cavion Technologies, Inc. Further, in April 1999, the Board of Directors resolved to form a limited liability company and contribute the Company's remaining assets into such company. The ability of the Company and its successor limited liability company to continue operations depends upon the ultimate value, if any, of the financial instruments held and the resolution of the matters discussed in Note 7. This raises substantial doubt about the Company and its successor's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Transfer of the Company's Assets, Liabilities and Operations ------------------------------------------------------------ In August 1998, the Company signed a letter of intent to transfer its assets and operations to a company to be renamed Cavion Technologies, Inc. ("Cavion"). In December 1998, the Company signed an Asset Purchase Agreement (the "Purchase Agreement") with Cavion for the transfer of substantially all the assets of the Company in exchange for 375,214 shares and 28,648 shares of Cavion's Class A and B common stock, respectively, and the assumption of liabilities. Also in December 1998, management shareholders of LanXtra received 625,356 shares of Class A common stock directly from Cavion. These management shareholders held sufficient voting shares, directly and indirectly through irrevocable proxies, to approve the transaction with Cavion. The Class A common stock and Class B common stock of Cavion are alike in all respects, except that the Class B common shareholders have the option to put those shares to Cavion for $7 per share and a parallel call option is held by Cavion. The Class A common stock issued to the Company represents approximately 12% of the common equity of Cavion. The Purchase Agreement was consummated on February 1, 1999 and Cavion has subsequently assumed the operations of the Company. During the period from August 1998 through February 1, 1999, Cavion provided loans to the Company totaling $335,000 at January 31, 1999. Such loans were forgiven as part of the transaction. In management's opinion, the purchase of the Company's assets and assumption of its liabilities by Cavion will qualify under Internal Revenue Code regulations as a tax free reorganization. Upon consummation of the Purchase Agreement, several of the Company's contractual arrangements were significantly modified. The Company's Investment Agreement, warrant and option agreements were cancelled and certain debt maturities were rescheduled by the creditors (see Notes 3 and 5). Cavion is an entity formed by various third parties to acquire the business conducted by the Company. Through January 31, 1999, Cavion had raised $370,000 through debt offerings, $335,000 of which was advanced to the Company as of January 31, 1999. In February 1999, Cavion conducted a private placement of its Series A preferred stock, raising approximately $2 million. The business now conducted by Cavion has never been profitable, and there is substantial risk associated with the Company's investment in Cavion common stock. It is probable that the value of this common stock will be highly volatile and it is reasonably possible that the ultimate value realized from the stock could be zero. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Interim Financial Statements (unaudited) ---------------------------------------- The interim financial statements as of and for the six months ended June 30, 1998, are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. The results of operations for the interim period is not necessarily indicative of the results for the entire year. Basis of Presentation --------------------- Accounting for transactions during the one-month period ending January 31, 1999, is on the same basis of accounting as for the years ended December 31, 1998 and 1997. The Company has presented information as of and for the one-month period ended January 31, 1999, as this represents the final period in which the business transferred to Cavion was conducted by the Company. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- The Company considered all highly liquid investments with original maturities of three months or less to be cash equivalents. Fair Value of Financial Instruments ----------------------------------- The fair value of the Company's cash and cash equivalents, trade receivables and payables approximated their carrying amounts due to their short-term nature. The fair value of the Company's other financial instruments are as follows:
January 31, 1999 and December 31, 1998 ------------------------- Approximate Carrying Fair Amount Value ---------- ----------- Related party collateralized loans $ 13,410 $ 11,000 Notes payable to stockholders 300,000 260,000 Revolving line of credit 600,000 600,000 Putable stock 1,700,236/1,650,236 175,000
December 31, 1997 ------------------------- Approximate Carrying Fair Amount Value ---------- ----------- Related party collateralized notes $ 75,190 $ 6,000 Notes payable to stockholders 40,000 3,000 Revolving line of credit 600,000 600,000 Putable stock 837,500 15,000
Fair values at January 31, 1999 and December 31, 1998 have been estimated using the values placed on them by the buyer in the transaction described above. Fair values at December 31, 1997, have been estimated based upon the terms of subsequent financings. Concentration of Credit Risk ---------------------------- Financial instruments which potentially subjected the Company to concentrations of credit risk were accounts receivable, which were concentrated among credit union customers. The Company performed ongoing credit evaluations of its customers' financial condition and generally required no collateral. Additionally, the Company managed a portion of its credit risk by billing certain services in advance. The Company had no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other hedging arrangements. Property and Equipment ---------------------- Property and equipment were recorded at cost and depreciated using the straight-line method over the lesser of the lease term or their estimated lives as follows: Furniture and fixtures 7 years Computer equipment 3 - 5 years Licensed software 3 years Leasehold improvements Life of the lease Impairment of Long-Lived Assets ------------------------------- The Company reviewed its long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. During 1997 and 1998 and in January 1999, no impairment losses were recorded. Accrued Liabilities ------------------- Accrued liabilities consist of the following:
December 31, January 31, ------------------- 1999 1998 1997 ----------- -------- -------- Wages payable and accrued vacation $48,545 $ 44,661 $ 30,924 Accrued vendor payable 78,673 78,673 78,673 Accrued professional fees 41,257 27,500 9,657 Other liabilities 17,969 21,074 92,093 -------- -------- -------- Total accrued liabilities $186,444 $171,908 $211,347 ======== ======== ========
Income Taxes ------------ A current provision for income taxes was recorded for actual or estimated amounts payable or refundable on tax returns filed or to be filed for each year. Deferred income tax assets and liabilities were recorded for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities and carryforwards. The overall change in deferred tax assets and liabilities for the period measured the deferred tax expense for the period. Effects of changes in tax laws on deferred tax assets and liabilities were reflected as adjustments to tax expense in the period of enactment. Deferred tax assets were recognized for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets were then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, were not expected to be realized. Net Loss Per Share ------------------ The Company reports net loss per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires the presentation of both basic and diluted earnings (loss) per share. Basic net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during the period, excluding putable common stock as an assumed cash settlement is more dilutive than a share settlement. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The Company has excluded the weighted average effect of common stock issuable upon exercise of all warrants and options for common stock from the computation of diluted earnings per share as the effect of all such securities is anti- dilutive for all periods presented. The shares excluded (without regard to the treasury stock method) are as follows: For the year ended December 31: 1998 531,978 1997 307,113 There are no such shares excluded for the month ended January 31, 1999, due to the cancellation of options and warrants at December 31, 1998. Basic and diluted net loss per share is computed using the following average shares outstanding:
Six Years Ended Months Month Ended December 31, Ended January 31, ---------------- June 30, 1999 1998 1997 1998 ----------- ------- ------- -------- Weighted average shares outstanding 315,112 304,130 237,205 290,557 Less: Weighted average shares of putable stock (58,648) (46,811) (30,000) (34,093) ------- ------- ------- ------- Net weighted average shares outstanding 256,464 257,319 207,205 256,464 ======= ======= ======= =======
Stock Based Compensation ------------------------ The Company accounted for its employee stock option plans and other employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which allows entities to continue to apply the provisions of APB 25 for transactions with employees and provide pro forma disclosures for employee stock grants made in 1997 and future years as if the fair-value-based method of accounting in SFAS No. 123 had been applied to these transactions. The Company accounted for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123. Revenue Recognition ------------------- The Company generated revenue from three sources: (1) service revenue for the installation of internet access equipment at customer sites, (2) software license fees, and (3) recurring monthly network access and connectivity fees. Service revenue was recognized as the services were performed. Software license arrangements typically provided for enhancements over the term of the arrangement, and software license fees were generally received in advance, deferred and recognized ratably over the term of the arrangement. Network access and connectivity fees were typically billed in advance and recognized in the month that the access/connectivity was provided. Software Development Costs -------------------------- Capitalization of software development costs commenced upon the establishment of technological feasibility of the software product. The Company's software products were deemed to be technologically feasible at the point the Company commenced field testing of the software. The period from field testing to general customer release of the software was brief and the costs incurred during this period were insignificant. Accordingly, the Company did not capitalize any qualifying software development costs. Comprehensive Income -------------------- Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. From its inception through January 31, 1999, there were no differences between comprehensive loss and net loss. Segment Information ------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In accordance with the provisions of SFAS No. 131, the Company has determined that it had one reportable operating segment at December 31, 1998 and January 31, 1999. Recently Issued Accounting Pronouncement ---------------------------------------- Statement of Financial Accounting Standards No. 133 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company's derivative financial instruments include a written put on the Company's common stock and the Convergent warrants (Note 8). Reclassifications ----------------- Certain amounts in the 1997 financial statements have been reclassified to conform to the current year presentation. (3) DEBT ---- Revolving Line of Credit ------------------------ In 1996, the Company entered into a two-year revolving line of credit (the "Revolving Line of Credit") with a bank which allows for borrowings up to $600,000. Interest accrues at a rate equal to the Bank's reference rate plus 1.5% (9.25%, 9.25% and 10% at January 31, 1999, December 31, 1998 and 1997, respectively). The Revolving Line of Credit is collateralized by letters of credit issued by the Company and certain stockholders as well as by agreements among certain stockholders (see Note 5). In 1998, the Revolving Line of Credit was extended and all amounts outstanding were due on January 31, 1999. As part of the Purchase Agreement, the Revolving Line of Credit was assumed by Cavion and the maturity date of the loan was extended to December 31, 1999. As part of the 1997 asset sale agreement with Convergent, it was agreed that the Company would be reimbursed for interest expense incurred on the Revolving Line of Credit if certain revenue targets were achieved on the line of business sold. In 1998, Convergent reimbursed the Company for interest expense totaling $30,334 until June 30, 1998, when such reimbursements were discontinued because the revenue targets were not met. Notes Payable to Stockholders ----------------------------- The notes payable to stockholders consist of eight notes totaling $300,000 at January 31, 1999, and December 31, 1998. Two of the notes have an aggregate principal balance of $40,000 and accrue interest at a rate of prime plus 2% (9.75%, 9.75% and 10.5% as of January 31, 1999, December 31, 1998 and 1997, respectively). During 1999, 1998 and 1997, the Company continued to accrue interest in accordance with the terms of the notes. The notes are unsecured. Effective May 28, 1998, the Company entered into six note payable agreements (the "Bridge Loans") with certain stockholders and management (the "Lenders"), whereby the Company borrowed $260,000. Interest on the Bridge Loans was payable at the rate of 42% per year. Under the original terms of the Bridge Loans, the principal was payable in monthly installments and the balance, including accrued interest, was due on January 1, 1999. In connection with the Purchase Agreement, the maturity was extended to the date on which Cavion obtains 100 credit union customers (the "100 Credit Union Date"). In addition, interest terms were amended such that no interest will accrue after December 31, 1998. The Bridge Loans are unsecured. As additional consideration for the Bridge Loans, the Lenders were issued 28,648 shares of the Company's nonvoting common stock for $.01 per share. The Lenders had the right to sell these shares back to the Company for a purchase price of $7 per share, during a 60-day period beginning January 1, 1999. As a result of this transaction, $200,536 was recorded as a debt discount and accreted as interest expense in 1998. The common stock was accreted to its redemption value at December 31, 1998. The right to sell shares back to the Company was canceled in conjunction with the Purchase Agreement, in exchange for the stockholders being granted the same rights in 28,648 shares of Cavion's Class B common stock. Note Payable ------------ On September 14, 1998, the Company entered into a loan agreement with Cavion to borrow up to $300,000, at an interest rate of 16% and a maturity date of March 14, 1999. The note was secured by substantially all of the tangible and intangible assets of the Company (including its technology). On December 29, 1998, Cavion agreed to lend up to an additional $55,000 under the same terms, and advanced $35,000 of this amount. As part of the Purchase Agreement, this loan was forgiven. Related Party Collateralized Loans ---------------------------------- The Company entered into factoring agreements (the "Agreements") with management and a stockholder of the Company. Accrued interest as of January 31, 1999, December 31, 1998 and 1997, under the Agreements was $27,952, $27,952 and $6,905, respectively, and is included in accrued interest in the accompanying financial statements. Under the terms of the Agreements, interest accrued on the outstanding balances at a rate of 3% for the first 30 days and 1% for each additional 10 days until the outstanding balances were paid in full. In connection with the Purchase Agreement, the maturity of these loans was extended to the 100 Credit Union Date. In addition, interest terms were amended such that no interest will accrue after February 1, 1999. (4) CAPITAL LEASE OBLIGATIONS ------------------------- The Company entered into various capital lease agreements related to computers and various office equipment. The capital leases have terms ranging from 24 to 36 months with interest rates ranging between 11.4% and 20.3%. As of December 31, 1998, the present value of future minimum lease payments are as follows: Year Ending December 31, 1999 $ 39,509 2000 21,513 2001 15,578 -------- 76,600 Less: amounts representing interest (11,405) -------- 65,195 Less: current portion (32,363) -------- Long-term capital lease obligation $ 32,832 ======== The net book value of assets under capital lease obligations as of January 31, 1999 was $65,069. (5) STOCKHOLDERS' DEFICIT --------------------- Investment Agreement -------------------- In August 1996, the Company entered into an investment agreement (the "Investment Agreement") under which the Company sold 30,000 shares of common stock to an investor group at par value, subject to a put option agreement (the "Put Options"). The investor group provided letters of credit for $600,000 to secure the Company's Revolving Line of Credit. The Put Options were exercisable for a 60-day period beginning August 1, 1999. The original terms of the Put Options provided that they would be canceled if the Company completes a public stock offering and repaid the Revolving Line of Credit. The amounts to be redeemed under the Put Options were being accreted over the period to their exercise date using the straight line method, and has been included in interest expense in the accompanying statements of operations. Contingent upon consummation of the Purchase Agreement with Cavion, the investor group, under a separate agreement, has agreed to cancel the Put Options. The letters of credit provided by the investor group continue to secure the Company's Revolving Line of Credit until it is repaid by Cavion. However, LanXtra is obligated to reimburse the investor group in the event of foreclosure on their collateral. If Cavion defaults on the Revolving Line of Credit, 171,000 shares of the Company's outstanding common stock held by certain members of the Company's investor group are to be forfeited and transferred back to the Company. Warrants -------- The Investment Agreement required that if the Company repaid its Revolving Line of Credit but failed to complete a qualified initial public offering by January 31, 2000, the investor group would be issued warrants to purchase 30,000 shares of common stock. The warrants will have an exercise price equal to the book value per share on December 31, 1999, and are exercisable anytime within three years from the date of issuance. As part of the Purchase Agreement, such warrants were canceled. The Company also issued a stockholder warrants to purchase 7,113 shares of common stock in consideration for services performed in connection with the Investment Agreement. The warrants had an exercise price of $ 7.70 and are exercisable upon the expiration or the exercise of the Put Option. No value was attributed to these warrants as it was unlikely these warrants would be exercised prior to the exercise date. As part of the Purchase Agreement, such warrants were canceled. Stock Options ------------- In 1997, the Company adopted a stock option plan. Stock options to employees were granted at various exercise prices and vested between one and five years. The following table summarizes stock option activity for the plan:
1998 1997 ---------------- ----------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ -------- ------ -------- Outstanding at beginning of year 270,000 $ 7.50 5,000 $0.01 Granted 196,217 4.60 292,105 $6.94 Cancelled (466,217) (5.93) (22,105) $0.01 Exercised - - (5,000) $0.01 ------- ------ ------- ------ Outstanding at end of year - $ - 270,000 $7.50 Weighted average fair value of options granted during the year $1.79 $1.63 ===== =====
As of December 31, 1998, all outstanding options for common stock were canceled. Under the fair value approach of SFAS 123, the total fair value of options granted under the Plan during 1997 was approximately $478,000. If the Company had accounted for its stock option plan in accordance with SFAS 123, the Company's net loss and pro forma net loss would have been reported as follows:
1998 1997 ------------ ---------- Net loss: As reported $(1,970,502) $(763,118) =========== ========= Pro forma $(2,321,196) $(819,242) =========== ========= Per share data: As reported $(7.66) $(3.68) ====== ====== Pro forma $(9.02) $(3.95) ====== ======
The fair value of each option grant was estimated on the date of the grant using the minimum value method. Assumptions used to calculate the fair value were risk free interest rates of 6.22% to 6.25%, no dividend yields, an expected life of three to five years and volatility of .001%. (6) INCOME TAXES ------------ From inception, the Company has generated losses for both financial reporting and tax purposes. At January 31, 1999, December 31, 1998 and 1997, the Company had a net operating loss carryforward for income tax purposes of approximately $1,550,000, $1,328,000 and $530,000, respectively. These would expire beginning in 2011 through 2018, if not utilized. The net loss carryforwards resulted in a deferred tax asset of approximately $613,000, $530,000 and $199,000 at January 31, 1999, December 31, 1998 and 1997, respectively. Due to the uncertainty relating to the realization of the benefit of the net operating loss carryforward, a valuation allowance has been recorded for the full amount. The Company paid no federal or state income taxes in 1998 or 1997. The effective tax rate differs from the statutory tax rate applied to the loss from continuing operations for the following reasons:
January December 31, 1999 1998 1997 --------- ---------- ---------- Expected federal benefit $(92,285) $(669,971) $(624,067) Expected state benefit, net of federal (8,957) (65,027) (60,571) Non-deductible accretion 18,650 403,998 229,039 Increase in valuation allowance 82,592 331,000 455,599 -------- -------- -------- Provision/benefit for income taxes related to loss from continuing operations $ - $ - $ - ======== ======== ========
No taxes were provided against the gain and results from discontinued operations as no incremental taxes were due. (7) COMMITMENTS AND CONTINGENCIES ----------------------------- Leases ------ The Company had operating lease agreements relating to office facilities and equipment which expire through 2000. Future minimum lease payments under these agreements were as follows: Year Ended December 31, 1999 $60,049 2000 2,298 -------- $62,347 ======== Rent expense for the years ended December 31, 1998 and 1997 was approximately $60,621 and $73,000, respectively, and approximately $5,000 for January 1999. Obligations for payments under these leases were assumed by Cavion. Legal Matters ------------- In the normal course of business, the Company is subject to, and may become a party to, litigation arising out of its operations. In management's opinion, none of the matters currently in actual or threatened litigation will have a material impact on the Company's financial position or results of operations. In connection with the Purchase Agreement transaction, a shareholder of the Company exercised his rights as a dissenting shareholder. If the shareholder is permitted to pursue this claim in a legal proceeding, the Company could be required to pay the shareholder the fair value of his shares immediately before the closing date of the Purchase Agreement. Management believes that the value paid on account of these shares pursuant to the Purchase Agreement is greater than the amount which the dissenting shareholder could recover under Colorado law. The dissenting shareholder has asserted, however, that the value of his 50,000 LanXtra shares immediately before the closing date of the Purchase Agreement is approximately $250,000. The ultimate resolution of the matter, which is expected to occur within one year, could result in an obligation to the shareholder. Further, should the Company, or Cavion as successor, be required to make a payment to this shareholder, such payment could result in the Cavion purchase transaction being treated as a taxable transaction which could subject Cavion or the Company to a significant tax liability. (8) DISCONTINUED OPERATION ---------------------- On December 3, 1997, the Company sold the network integrator operations (the "Discontinued Operation") of the Company for cash of $475,000. This transaction resulted in a gain of $418,848. The Company also received $30,334 in 1998 from Convergent related to this transaction and has included this amount in other income for 1998. In conjunction with the sale, the Company also issued Convergent 51,464 shares of common stock in exchange for $400,000. The Company also received a warrant to purchase 50,000 shares of Convergent's common stock at an exercise price of $7.50 per share. The warrant was exercisable immediately and expires on December 3, 1999. As of January 31, 1999, the Company had not exercised the warrant. No value has been attributed to this warrant in the accompanying financial statements as management believes the value of this warrant is nominal. Convergent is not a publicly traded company, and based on information available to the Company, the exercise price is significantly in excess of the estimated market value of Convergent's common stock. Summarized results of operations financial position and earnings per share data of the discontinued operations were as follows:
For the Year Ended December 31,1997 ------------------ Results of operations: Revenue $3,723,130 Net income from discontinued operation 653,528 Basic and diluted per share information: Basic and diluted net income from discontinued operation $3.15 ===== Basic and diluted gain on sale of discontinued operation $2.02 =====
(9) PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------ The following presents unaudited balance sheet information of Cavion as of June 30, 1999 and pro forma statements of operations data for the year ended December 31, 1998, and the six-month period ended June 30, 1999 for the Company and Cavion. For purposes of the pro forma statements of operations, the transfer of the Company's assets and assumption of its liabilities was assumed to be consummated on January 1, 1998. Pro forma earnings per share are calculated as if the Purchase Agreement was completed on January 1, 1998.
Cavion June 30,1999 -------------- Current assets $ 926,262 Noncurrent assets 4,867,564 ---------- Total assets $5,793,826 ========== Current liabilities $1,952,344 Noncurrent liabilities 640,937 Stockholders' equity 3,200,545 ---------- $5,793,826 ==========
The pro forma statement of operations for the year ended December 31, 1998 is as follows:
Pro Forma LanXtra Cavion Adjustments Pro Forma --------------------- -------------- ------------ (unaudited) (unaudited) Revenue $ 215,022 $ - $ - $ 215,022 Cost of revenue 222,419 - - 222,419 ----------- -------- --------- ----------- Gross profit (loss) (7,397) - - (7,397) Operating expenses 1,117,892 6,877 914,146 (1) 2,038,915 Nonoperating expenses 845,213 29,067 (584,480) (2) 289,800 ----------- -------- --------- ----------- Loss from continuing operations $(1,970,502) $(35,944) $(329,666) $(2,336,112) =========== ======== ========= =========== Net loss from continuing operations per basic share $ (.77) ====== Weighted average shares outstanding 3,029,218 ========= (1) Amortization of goodwill (2) Reduction of interest expense to reflect Cavion's capital structure.
The pro forma statement of operations for the six-month period ended June 30, 1999 is as follows:
Cavion (Six Months LanXtra Ended (January June 30, Pro Forma 1999) 1999) Adjustments Pro Forma ---------- ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) Revenue $ 37,850 $ 205,333 $ - $ 243,183 Cost of revenue 31,898 133,617 - 165,515 --------- `---------- --------- ---------- Gross profit 5,952 71,716 - 77,668 Operating expenses 213,311 1,619,677 79,388 (1) 1,912,376 Nonoperating expenses 64,069 252,586 (52,932) (2) 263,723 --------- ----------- -------- ----------- Net Loss $(271,428) $(1,800,547) $(26,456) $(2,098,431) ========= =========== ======== =========== Net loss per basic share $(.75) ===== Weighted average shares outstanding 2,788,574 =========
Adjustments ----------- (1) Amortization of goodwill (2) Reduction of interest expense to reflect Cavion's capital structure (10) CONDENSED FINANCIAL STATEMENTS, AFTER CONSUMMATION -------------------------------------------------- OF PURCHASE AGREEMENT (UNAUDITED) --------------------------------- The following unaudited balance sheet reflects the Company's balance sheet following the transfer of the Company's assets to and assumption of its liabilities by Cavion which was completed February 1, 1999 (see Note 1). The investment in Cavion stock has been recorded at the net book value of the assets transferred to and liabilities assumed by Cavion. Because the liabilities assumed by Cavion exceeded the value of the assets transferred and the Company was relieved from its obligations for those transferred liabilities, the investment in Cavion was recorded at zero. As discussed in Note 8, management believes that the fair value of the Convergent warrants was zero. Investment in Cavion common stock $ - Investment in Convergent warrants - -------- $ - ======== Stockholders' equity (deficit) $ - ======== CAVION TECHNOLOGIES, INC. (Formerly Network Acquisitions, Inc.) FINANCIAL STATEMENTS AS OF JUNE 30, 1999 (UNAUDITED), MARCH 31, 1999 AND DECEMBER 31, 1998 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cavion Technologies, Inc.: We have audited the accompanying balance sheets of CAVION TECHNOLOGIES, INC. (a Colorado corporation doing business as cavion.com; formerly Network Acquisitions, Inc.; the "Company") as of March 31, 1999 and December 31, 1998, and the related statements of operations, stockholders' equity and cash flows for the three months ended March 31, 1999 and for the period from inception (August 18, 1998) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cavion Technologies, Inc. as of March 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1999 and for the period from inception (August 18, 1998) to December 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has acquired the business of an entity that has suffered recurring and substantial operating losses. The Company also assumed substantial liabilities, and its operating plans call for the expenditure of significant amounts to support its anticipated growth. A substantial portion of the equity of the Company has been derived from the issuance of stock for non-cash consideration and is based upon estimates of fair value which may or may not be substantiated by subsequent cash offerings. These issues raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ARTHUR ANDERSEN LLP Denver, Colorado, May 18, 1999. Page 1 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) BALANCE SHEETS --------------
June 30, March 31, December 31, 1999 1999 1998 ---------- ----------- ----------- (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 458,881 $ 1,055,230 $ 19,735 Accounts receivable 26,202 9,393 - Prepaid assets 63,049 50,841 - Inventories 5,832 5,832 - Deferred offering costs 372,298 119,773 - --------- ---------- --------- Total current assets 926,262 1,241,069 19,735 --------- ---------- --------- PROPERTY AND EQUIPMENT, at cost: Leasehold improvements 19,256 17,809 - Furniture and fixtures 42,970 27,157 - Network equipment and 419,613 385,668 - licensed software --------- ---------- --------- 481,839 430,634 - Less - Accumulated depreciation (45,197) (17,531) - --------- ---------- --------- Property and equipment, net 436,642 413,103 - --------- ---------- --------- DEBT ISSUANCE COSTS, net of accumulated amortization of $33,753 (unaudited), $12,103 and $4,232, respectively 28,865 50,515 49,412 DEPOSIT FOR LETTER OF CREDIT 20,000 20,000 - DEFERRED LANXTRA ACQUISITION COSTS - - 2,204,814 GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization of $392,509 (unaudited), $158,776 as of June 30, 1999 and as of March 31, 1999, respectively 4,370,759 4,604,492 - OTHER ASSETS 11,298 24,482 - --------- ---------- --------- TOTAL ASSETS $ 5,793,826 $ 6,353,661 $ 2,273,961 ========= ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. Page 2 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) BALANCE SHEETS --------------
June 30, March 31, December 31, 1999 1999 1998 ----------- ----------- ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 385,729 $ 201,928 $ - Accrued liabilities 274,408 286,657 31,185 Accrued interest 117,448 146,613 2,116 Deferred revenue and deposits 242,965 235,863 - Related party collateralized loans 12,369 11,586 - Current portion of capital lease obligations 42,948 52,378 - Notes payable to stockholders 276,477 253,393 - Revolving line of credit 600,000 600,000 - --------- --------- --------- Total current liabilities 1,952,344 1,788,418 33,301 --------- --------- --------- LONG-TERM LIABILITIES: Capital lease obligations 61,580 62,438 - Notes payable 394,660 338,155 252,833 --------- ---------- --------- Total long-term liabilities 456,240 400,593 252,833 --------- ---------- --------- PUTABLE CLASS B COMMON STOCK; 30,000 shares authorized; 28,648, 28,648 and 0 shares issued and outstanding, respectively (stated at accreted value; total redemption value of $200,536) 184,697 172,816 - COMMITMENTS AND CONTINGENCIES (Notes 1 and 7) STOCKHOLDERS' EQUITY: Series A Convertible Preferred Stock; $.0001 par value, 10,000,000 shares authorized; 700,000 (unaudited), 567,000 and 0 issued and outstanding, respectively (liquidation value of $4,200,000 (unaudited), $3,402,000, and 0 1,682,800 1,496,880 - Class A Common Stock; $.0001 par value, 19,970,000 shares authorized; 2,706,326 (unaudited), 3,006,210 and 2,625,356 issued and outstanding, respectively 271 302 263 Warrants 165,200 - 13,284 Additional paid-in capital 3,188,765 3,188,765 2,010,224 Accumulated deficit (1,836,491) (694,113) (35,944) --------- --------- --------- Total stockholders' equity 3,200,545 3,991,834 1,987,827 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,793,826 $ 6,353,661 $ 2,273,961 ========= ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc. ) STATEMENTS OF OPERATIONS ------------------------
Period from Six Three- Inception Months Months (August 18, Ended Ended 1998) to June 30, March 31, December 31, 1999 1999 1998 ----------- ----------- ----------- (unaudited) REVENUE: Network access and $ 156,207 $ 55,578 $ - connectivity fees Installation services 45,225 9,623 - Software licensing fees 3,901 1,338 - --------- ---------- --------- Total revenue 205,333 66,539 - --------- ---------- --------- COST OF REVENUE: Network access and connectivity 99,900 34,749 - Installation services 33,717 6,694 - --------- ---------- --------- Total cost of revenue 133,617 41,443 - --------- --------- --------- Gross profit 71,716 25,096 - --------- --------- --------- OPERATING EXPENSES: General and administrative 1,063,079 404,249 6,877 Research and development 162,089 46,584 - Amortization of goodwill 394,509 158,776 - --------- ---------- --------- Total operating expenses 1,619,677 609,609 6,877 --------- ---------- --------- LOSS FROM OPERATIONS (1,547,961) (584,513) (6,877) INTEREST EXPENSE (224,131) (73,656) (29,067) --------- ---------- --------- NET LOSS $(1,772,092) $ (658,169) $ (35,944) ========= ========== ========= NET LOSS APPLICABLE TO COMMON SHAREHOLDERS Net loss $(1,772,092) (658,169) $ (35,944) Dividends on redeemable, convertible preferred stock (28,455) - - ---------- ---------- --------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(1,800,547) $ (658,169) $ (35,944) ========== ========== ========= BASIC AND DILUTED NET LOSS PER SHARE $ (0.65) $ (0.23) $ (0.02) ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 2,757,306 2,875,879 2,078,170 ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. CAVION TECHNOLOGIES, INC. ------------------------- (formerly Network Acquisitions, Inc.) STATEMENTS OF STOCKHOLDERS' EQUITY ---------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED), ----------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1999 --------------------------------- AND FOR THE PERIOD FROM INCEPTION (AUGUST 18,1998) -------------------------------------------------- TO DECEMBER 31, 1998 --------------------
Series A Convertible Preferred Stock Common Stock ------------------- ---------------- Shares Amount Shares Amount ------- ------------------- ------ BALANCES, August 18, 1998 - $ - - $ - Issuance of common stock for $.0001 per share - - 2,000,000 200 Issuance of common stock for $.01 per share, recorded at December 21, 1998 estimated fair value of $3.00 per share - - 625,356 63 Issuance of warrants to note holders - - - - Repurchase of common stock - - (44,400) (4) Issuance of warrants to Selling Agent - - - - Exercise of warrants by note holders - - 44,400 4 Net loss - - - - --------- --------- --------- ---- BALANCES, December 31, 1998 - - 2,625,356 263 Issuance of common stock for LanXtra business, recorded at February 1, 1999, estimated fair value of $3.00 per share - - 375,214 38 Issuance of warrants to note holders - - - - Repurchase of common stock - - (12,000) (1) Issuance of warrants to Selling Agent - - - - Exercise of warrants by note holders and Selling Agent - - 17,640 2 Issuance of Series A Preferred Stock for $3.00 per share, net of offering costs of $204,120 567,000 1,496,880 - - Net loss - - - - ------- --------- --------- ---- BALANCES, March 31, 1999 567,000 1,496,880 3,006,210 302
Addi- Warrants Total tional for Accumu- Stock- Paid-In Common lated holders' Capital Stock Deficit Equity ---------- -------- -------- -------- BALANCES, August 18, 1998 $ - $ - $ - $ - Issuance of common stock for $.0001 per share - - - 200 Issuance of common stock for $.01 per share, recorded at December 21, 1998 estimated fair value of $3.00 per share 1,876,005 - - 1,876,068 Issuance of warrants to note holders - 133,775 - 133,775 Repurchase of common stock - - - (4) Issuance of warrants to Selling Agent - 13,284 - 13,284 Exercise of warrants by note holders 134,219 (133,775) - 448 Net loss - - (35,944) (35,944) --------- -------- --------- --------- BALANCES, December 31, 1998 2,010,224 13,284 (35,944) 1,987,827 Issuance of common stock for LanXtra business, recorded at February 1, 1999, estimated fair value of $3.00 per share 1,125,604 - - 1,125,642 Issuance of warrants to note holders - 35,885 - 35,885 Repurchase of common stock - - - (1) Issuance of warrants to Selling Agent - 3,590 - 3,590 Exercise of warrants by note holders and Selling Agent 52,937 (52,759) - 180 Issuance of Series A Preferred Stock for $3.00 per share, net of offering costs of $204,120 - - - 1,496,880 Net loss - - (658,169) (658,169) --------- ------- -------- --------- BALANCES, March 31, 1999 3,188,765 - (694,113) 3,991,834
The accompanying notes to financial statements are an integral part of these statements. CAVION TECHNOLOGIES, INC. ------------------------- (formerly Network Acquisitions, Inc.) STATEMENTS OF STOCKHOLDERS' EQUITY ---------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED), ----------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1999 --------------------------------- AND FOR THE PERIOD FROM INCEPTION (AUGUST 18,1998) -------------------------------------------------- TO DECEMBER 31, 1998 --------------------
Series A Convertible Preferred Stock Common Stock ------------------- ---------------- Shares Amount Shares Amount ------- ------------------- ------ Issuance of Series A Preferred Stock for $3.00 per share, net of offering costs of $213,080, including warrant valued at $165,200 133,000 185,920 - - Repurchase of common stock - - (299,884) (31) Dividends on Series A Preferred Stock - - - - Net loss - - - - ------- --------- --------- ---- BALANCES, June 30, 1999 (unaudited) 700,000 $1,682,800 2,706,326 $271 ======= ========= ========= ====
Addi- Total tional Accumu- Stock- Paid-In lated holders' Capital Warrants Deficit Equity ---------- -------- ------------ ---------- Issuance of Series A Preferred Stock for $3.00 per share, net of offering costs of $213,080, including warrant valued at $165,200 - 165,200 - 351,120 Repurchase of common stock - - - (31) Dividends on Series A Preferred Stock - - (28,455) (28,455) Net loss - - (1,113,923) (1,113,923) ---------- -------- ----------- ---------- BALANCES, June 30, 1999 $3,188,765 $165,200$(1,836,491) $3,200,545 (unaudited) ========== ======== =========== ==========
The accompanying notes to financial statements are an integral part of these statements. Page 1 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (formerly Network Acquisitions, Inc.) STATEMENTS OF CASH FLOWS ------------------------
Period from Six Three Inception Months Months (August 18, Ended Ended 1998) to June 30, March 31, December 31, 1999 1999 1998 ------------ ----------- ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,772,092) $ (658,169) $ (35,944) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 445,577 184,178 - Accretion of debt discount 126,902 24,880 16,608 Accretion of putable stock 17,500 5,619 4,232 Change in operating assets and liabilities- Accounts receivable (9,744) 7,065 - Prepaids and inventories (29,929) (17,721) - Other assets 10,517 (2,667) - Accounts payable 100,120 (83,681) - Accrued liabilities 92,162 162,031 2,116 Deferred revenue 28,253 21,151 - ----------- ---------- ---------- Net cash used in operating activities (990,734) (357,314) (12,988) ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (87,015) (35,810) - Acquisition of LanXtra - - (335,000) ----------- ---------- ---------- Net cash used in investing activities (87,015) (35,810) (335,000) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 100,000 100,000 370,000 Repurchases of common stock (31) - - Proceeds from issuance of Common Stock 178 178 6,898 Proceeds from issuance of Series A Preferred Stock 2,100,000 1,701,000 - Series A Preferred Stock offering costs (252,000) (204,120) - Payment of debt issuance costs (36,567) (36,567) (9,175) Principal payments on capital leases (22,387) (12,099) - Deferred offering costs (372,298) (119,773) - ----------- ---------- ---------- Net cash provided by financing activities 1,516,895 1,428,619 367,723 ----------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 439,146 1,035,495 19,735 CASH AND CASH EQUIVALENTS, beginning of period 19,735 19,735 - ---------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 458,881 $1,055,230 $ 19,735 ========== ========= =========
The accompanying notes to financial statements are an integral part of these statements. Page 2 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (formerly Network Acquisitions, Inc.) STATEMENTS OF CASH FLOWS ------------------------
Period from Six Three Inception Months Months (August 18, Ended Ended 1998) to June 30, March 31, December 31, 1999 1999 1998 ------------ ----------- ------------ (Unaudited) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 35,771 $ 16,679 $ 6,111 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Value of warrants to purchase preferred stock issued to Placement Agent $ 165,200 $ - $ - =========== ========== ========== Property acquired with capital leases $ 63,804 $ 63,804 $ - =========== ========== ========== Value of warrants to purchase common stock issued to note holders $ 35,885 $ 35,885 $ 133,775 =========== ========== ========== Value of warrants to purchase common stock issued to Selling Agent $ 35,590 $ 3,590 $ 13,284 =========== ========== ========== Debt issuance costs included in accrued liabilities $ - $ - $ 31,185 =========== ========== ========== Estimated value of shares issued to LanXtra management shareholders $ - $ - $1,876,068 =========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. CAVION TECHNOLOGIES, INC. ------------------------- (formerly Network Acquisitions, Inc.) NOTES TO FINANCIAL STATEMENTS ----------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND --------------------------------------------- FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998) ----------------------------------------------- TO DECEMBER 31, 1998 -------------------- (Information as of June 30, 1999 and for the six months then ended is unaudited) (1) DESCRIPTION OF BUSINESS ----------------------- Organization ------------ The Company was incorporated in Colorado on August 18, 1998 as Network Acquisitions, Inc. to acquire the assets of Cavion Technologies, Inc., now known as LanXtra, Inc. ("LanXtra"), which was engaged in providing internet, intranet, and extranet services to the credit union industry. On February 1, 1999, the Company acquired the business of LanXtra, and the Company changed its name to Cavion Technologies, Inc., doing business as cavion.com. The Company has devoted substantially all of its efforts since inception to the acquisition of LanXtra's assets and to raising capital and other organizational activities. The Company financed its operations through a private placement of its 15% notes, which were offered commencing on October 20, 1998 (the "Offering") and the sale of Series A Preferred Stock. The Company advanced a portion of the proceeds from the Offering to LanXtra in anticipation of the acquisition of LanXtra. Through December 31, 1998, the Company had raised $370,000 in the private placement and had advanced LanXtra a total of $335,000 under an agreement dated September 14, 1998. As of March 31, 1999, an additional $100,000 was raised from the Offering (see Note 3). Purchase of LanXtra's Assets, Liabilities and Operations -------------------------------------------------------- In August 1998, the Company signed a letter of intent to purchase LanXtra's business. In December 1998, the Company signed an Asset Purchase Agreement (the "Purchase Agreement") with LanXtra to purchase substantially all the assets of LanXtra in exchange for approximately 375,214 shares and 28,648 shares of the Company's Class A and B common stock, respectively, and the assumption by the Company of certain liabilities of LanXtra. The number of Class A common stock shares issued to LanXtra represents approximately 12% of the Company's equity interest. The Purchase Agreement was consummated on February 1, 1999 and the Company assumed the operations of LanXtra on that date. Upon consummation, significant modifications were made to LanXtra's capital structure. On December 21, 1998, the Company issued 625,356 shares to certain shareholders of LanXtra who could continue as management of the Company. One of these shareholders held directly and through irrevocable proxies sufficient voting shares to approve the transaction. The shares are non- forfeitable and not contingent upon the management's continued employment with the Company. As a result, the shares have been considered additional purchase consideration and are recorded at their estimated fair value of $3 per share. The estimated fair value of assets acquired, liabilities assumed, and consideration issued in the transaction with LanXtra are as follows:
Consideration: Class A common stock $3,001,710 Class B common stock 167,197 Cash 338,735 --------- 3,507,642 Add: Net liabilities (assets) assumed: Working capital deficit assumed 704,044 Property and equipment (331,020) Borrowings assumed 924,417 Other assets (41,815) --------- Goodwill and other intangible assets $4,763,268 =========
The Company has recorded the fair value of its stock issued to LanXtra at $3 per share based principally upon its private placement of Series A Preferred Stock completed in February 1999. The transaction with LanXtra resulted in approximately $4,760,000 of intangible assets (primarily technology, customer lists and goodwill). These intangible assets will be amortized over five years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from February 1, 1999. Because the business now operated by the Company has never been profitable, and due to the other risks and uncertainties discussed herein, it is reasonably possible that an analysis of these long- lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. The Company's operations, as assumed from LanXtra, are subject to various risks and uncertainties frequently encountered by companies in the early stages of development, particularly companies in the new and rapidly evolving market of internet-based products and services. Such risks and uncertainties include, but are not limited to, its limited operating history, evolving technology, and the management of rapid growth. To address these risks, the Company must, among other things, maintain and increase its customer base, implement and successfully execute its business and marketing strategy, continue to develop and upgrade its technology, provide superior customer service and attract, retain and motivate qualified personnel. There can be no guarantee that the Company will be successful in addressing such risks. The business purchased from LanXtra has never achieved profitability and the Company expects to incur net losses for the foreseeable future. This business has never generated sufficient revenue to cover the substantial amounts spent to create, launch and enhance its services. Even if the Company's operations do achieve profitability in the future, it may not sustain or increase its profitability. LanXtra historically funded its operations through borrowings and sales of equity. The Company has expended, and will continue to expend, significant resources marketing its products and establishing a customer base. Management believes, but cannot guarantee, that such products will be accepted by the marketplace in sufficient quantities to provide for profitable operations at some future date. The Company's ability to achieve and attain profitable operations and positive cash flow from operations depends upon various factors including, among others, the costs of and resources for developing and marketing its products, the extent and timing of market acceptance of the Company's products, competitive factors and other factors, certain of which may be beyond the Company's control. In order to execute its business plan, the Company will require additional public or private debt or equity financing. There can be no guarantees that such financing will be available in the future. As a result of these factors, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Management intends to seek additional equity financing, and to continue to aggressively market the Company's products to its identified market, in response to these factors. Subsequent to March 31, 1999, the Company sold an additional 133,000 shares of Series A Preferred Stock for gross proceeds of $399,000. The Company believes that the proceeds of this offering and the cash on hand at March 31, 1999 will be sufficient to fund the Company's operations through September 1999 (see Note 9). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Interim Financial Statements (Unaudited) ---------------------------------------- The interim financial statements as of and for the six months ended June 30, 1999, are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. The results of operations for the interim period is not necessarily indicative of the results of the entire year. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. As of March 31, 1999, the Company has recorded capital contributions of $4,890,066, of which only $1,708,076 was issued for cash consideration. The Company based the estimated fair value of its stock issued to LanXtra management shareholders in December 1998, and the stock issued to LanXtra in February 1999, upon its private placement of preferred shares in February 1999. The Company believes its estimate of fair value is reasonable, however, there can be no assurance that future cash offerings will substantiate the estimated per share value of the Company's stock. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Concentration of Credit Risk ---------------------------- Financial instruments which subject the Company to concentrations of credit risk are accounts receivable and cash equivalents. The Company's receivables are concentrated among credit unions. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Additionally, the Company manages a portion of its credit risk by billing certain services in advance. The Company has no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other hedging arrangements. Fair Value of Financial Instruments ----------------------------------- The Company's financial instruments consist of cash, accounts receivable, short-term trade payables, putable common stock and borrowings. The carrying values of the instruments acquired from LanXtra approximate the fair value placed upon them on February 1, 1999, in connection with their assumption. Fair values were principally determined by discounting expected future cash flows at a market cost of debt. The fair value of the Company's other borrowings approximate their carrying values based upon current market rates of interest. Property and Equipment ---------------------- Property and equipment acquired from LanXtra was recorded at its estimated fair value. Additions are recorded at cost. Property and equipment are depreciated using the straight-line method over the lesser of the lease term or their estimated lives as follows.
Furniture and fixtures 7 years Computer equipment 3 - 5 years Licensed software 3 years Leasehold improvements Life of the lease
Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the difference between the carrying value and fair value of the long-lived assets. The acquisition of LanXtra generated approximately $4,760,000 of intangible assets. Because the Company is the successor to a business which has not demonstrated the ability to achieve profitable operations, it is reasonably possible that these intangibles will be written down in the near future. Deferred Offering Costs ----------------------- The Company has recorded deferred offering costs totaling $119,773 at March 31, 1999. Such costs represent legal and other professional fees incurred related to the Company's proposed initial public offering. Such costs will be offset against the initial public offering proceeds upon the consummation of such offering. There can be no guarantee that the offering will be consummated, and if the offering is unsuccessful, such deferred offering costs would be expensed. Accrued Liabilities ------------------- Accrued liabilities consist of the following:
March 31, December 31, 1999 1998 --------- ------------ Accrued payroll and vacation $ 52,882 $ - Accrued vendor payable 78,673 - Accrued professional fees 133,657 - Other liabilities 21,445 31,185 ------- ------ Total accrued liabilities $286,657 $31,185 ======= ======
Income Taxes ------------ A current provision for income taxes is recorded for actual or estimated amounts payable or refundable on tax returns filed or to be filed for each year. Deferred income tax assets and liabilities are recorded for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities and carryforwards. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense for the period. Effects of changes in tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets are recognized for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Net Loss Per Share ------------------ The Company reports net loss per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires the presentation of both basic and diluted earnings (loss) per share. Basic net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during the period. Weighted average common shares excludes 28,648 shares of putable Class B common stock as an assumed cash settlement is more dilutive. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The Company has excluded the weighted average effect of common stock issuable upon exercise of all warrants and options from the computation of diluted earnings per share as the effect of all such securities is anti-dilutive for the periods presented. The shares excluded related to outstanding options and warrants (without regard to the treasury stock method) at March 31, 1999 and December 31, 1998 were 345,000 and 4,440, respectively. The Company has also excluded the effect of the convertible preferred stock as such effect would be antidilutive. Stock Based Compensation ------------------------ The Company accounts for its employee stock option plan and other employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations. The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants as if the fair-value-based method of accounting in SFAS No. 123 had been applied to these transactions. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123. Revenue Recognition ------------------- The Company generates revenue from three sources: (1) service revenue for the installation of internet access equipment at customer sites, (2) software license fees, and (3) recurring monthly network access and connectivity fees. Service revenue is recognized as the services are performed. Software license arrangements typically provide for enhancements over the term of the arrangement, and software license fees are generally received in advance, deferred and recognized ratably over the term of the arrangement. Network access and connectivity fees are typically billed in advance and recognized in the month that the access/connectivity is provided. Software Development Costs -------------------------- Capitalization of software development costs commences upon the establishment of technological feasibility of the software product. The Company's software products are deemed to be technologically feasible at the point the Company commences field testing of the software. The period from field testing to general customer release of the software has been brief and the costs incurred during this period were insignificant. Accordingly, the Company has not capitalized any qualifying software development costs. In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1")". In general, SOP 98-1 requires that certain costs to develop software for internal use be capitalized effective for fiscal years beginning after December 15, 1998. The adoption of this Statement of Position has no impact on the Company's financial statements. Comprehensive Income -------------------- The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. From inception through June 30, 1999, there have been no differences between the Company's comprehensive loss and its net loss. Segment Information ------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company believes it has one reportable segment. Recently Issued Accounting Pronouncements ----------------------------------------- Statement of Financial Accounting Standards No. 133 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. To date, the Company has not entered into any derivative financial instruments or hedging activities. Statement of Position 98-5 In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities ("SOP 98-5")". SOP 98-5 provides guidance on the financial reporting of start-up and organization costs and requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and was adopted by the Company on January 1, 1999. The adoption of SOP 98-5 had no impact on the Company's financial statements as the Company had not capitalized any such costs. (3) BORROWINGS ---------- The Company's borrowings at March 31, 1999 and December 31, 1998, consisted of the following:
March 31, 1999 December 31, 1998 ------------------------ ---------------------- Unamortized Unamortized Face Value Discount Face Value Discount ---------- ----------- --------------------- Notes payable $ 470,000 $(131,845) $370,000 $(117,167) Revolving line of credit 600,000 - - - Notes payable to stockholders 300,000 (46,607) - - Related party collateralized loans 13,410 (1,824) - - --------- -------- ------- -------- $1,383,410 $(180,276) $370,000 $(117,167) ========= ======== ======= ========
Note Payable ------------ Beginning on October 20, 1998, the Company offered through its officers, directors and First Capital Investments, Inc. (the "Selling Agent"), up to $2,000,000 of 15% secured notes due October 19, 2000 (the "Notes") along with warrants to purchase Class A common stock (the "Warrants"). At December 31, 1998, the Company had raised $370,000 through the Offering. The Company raised a total of $470,000 as of March 31, 1999 and the Offering closed on February 8, 1999. The Notes are secured by substantially all of the assets now owned and hereafter acquired by the Company, including the assets acquired from LanXtra in February 1999. There is no pre-payment penalty. In connection with the Offering, the Company granted note holders warrants to purchase 1,200 shares of the Company's Class A common stock for every $10,000 of Notes Payable purchased. Accordingly, at December 31, 1998, the Company had issued warrants for 44,400 shares, and in February 1999, issued warrants for an additional 12,000 shares. Such warrants had an exercise price of $0.01 per share. These detachable warrants were valued at a total of $169,660 utilizing the Black-Scholes option pricing model, assuming a volatility factor of 70%, a risk free interest rate of 4.31% and a fair market value of the underlying common stock of $3 per share. All warrants were exercised prior to March 31, 1999. Revolving Line of Credit ------------------------ As part of the Purchase Agreement, a $600,000 Revolving Line of Credit was assumed by the Company. The maturity date of the line of credit was extended to December 31, 1999 and interest accrues at a rate equal to the Bank's reference rate plus 1.5% (9.25% at March 31, 1999 and December 31, 1998). The Revolving Line of Credit is collateralized by letters of credit issued by the Company and certain LanXtra stockholders as well as by agreements among certain LanXtra stockholders. No additional amounts may be drawn upon the line of credit. Notes Payable to Stockholders ----------------------------- The Company assumed notes payable to certain LanXtra stockholders as part of the Purchase Agreement. The maturity date on these notes was extended to the date on which Cavion obtains 100 credit union customers (the "100 Credit Union Date"). Management believes the 100 Credit Union Date will be reached on or before December 31, 1999. In addition, interest terms were amended such that no interest will accrue for the remaining term of the notes payable. At the acquisition date, the notes were discounted to reflect their fair value. The discount is being amortized as interest expense over the remaining estimated term of the notes. As additional consideration for shareholder notes with a face value of $240,000, LanXtra issued 28,648 shares of its putable common stock. These putable shares were exchanged for 28,648 shares of the Company's Class B putable common stock. The Lenders have the right to sell these shares back to the Company for a purchase price of $7 per share, 30 days after the 100 Credit Union Date is reached, or can convert these shares into equivalent shares of Class A common stock. As a result of this transaction, the Class B shares have been recorded at their estimated fair value of $167,197. The difference between this amount and the put value is being accreted as interest expense over the estimated term of the notes. Related Party Collateralized Loans ---------------------------------- The Company also assumed certain factoring agreements (the "Agreements") with management and a stockholder of the Company as part of the Purchase Agreement. The interest terms were amended such that no interest will be accrued for the remaining term of the loans and the maturity of these loans was extended to the 100 Credit Union Date. Maturities of Borrowings ------------------------ The maturities of the Company's borrowings are as follows:
1999 $ 913,410 2000 470,000 --------- 1,383,410 Less-debt discounts (180,276) --------- $1,203,134 =========
(4) CAPITAL LEASE OBLIGATIONS ------------------------- The Company assumed several capital lease agreements related to computers and various office equipment in conjunction with the Purchase Agreement. The Company has also entered into additional capital lease agreements during the period ending March 31, 1999. The capital leases have terms ranging from 24 to 36 months with interest rates ranging between 11.4% and 20.3%. As of March 31, 1999, the present value of future minimum lease payments are as follows:
Period ending March 31, 2000 $ 56,889 2001 43,339 2002 31,920 ------- 132,148 Less: amounts representing interest (17,332) ------- 114,816 Less: current portion (52,378) ------- Long-term capital lease obligation $ 62,438 =======
The net book value of assets under capital lease obligations as of March 31,1999 was approximately $120,000. (5) STOCKHOLDERS' EQUITY -------------------- The Company is authorized to issue 20,000,000 shares of common stock, par value $.0001 per share. The common stock is segregated into two classes; Class A and Class B. Of the 20,000,000 shares of common stock, 19,970,000 are designated as Class A and 30,000 are designated as Class B. Class A Common Stock -------------------- At March 31, 1999, 3,006,210 shares of Class A common stock were issued and outstanding. Two million shares were issued for consideration of $.0001 per share (par value). Certain LanXtra shareholders and management were issued 625,356 shares for cash consideration of $.01 per share. The estimated fair value assigned to these shares was $3 per share which is consistent with the value assigned to the 375,214 shares issued to LanXtra in February 1999. The holders of Class A common stock are entitled to one vote for each share held on record on each matter submitted to a vote of shareholders. Cumulative voting for election of directors is not permitted. Holders of Class A common stock have no preemptive rights or rights to convert their Class A common stock into any other securities. Class B Common Stock -------------------- As of March 31, 1999, there were 28,648 shares of the Class B voting common stock issued and outstanding. These shares were issued in exchange for similar securities of LanXtra as partial consideration for the purchase of LanXtra's business, and are callable by the Company at $7 per share. The holders of Class B common stock have the right to sell the Class B common stock to the Company at $7 per share or convert their shares to equivalent units of Class A common stock at the 100 Credit Union Date. The Class B common stock was authorized so that the Company could exchange its Class B common stock for LanXtra's existing nonvoting putable common stock with similar terms. Preferred Stock --------------- In February 1999, the Board of Directors authorized the Company, without further action by the shareholders, to issue 10,000,000 shares of one or more series of preferred stock at a par value of $.0001, all of which is nonvoting. The Board of Directors may, without shareholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights and any other preferences. In addition, the Company authorized the sale of 770,000 shares of Series A convertible preferred stock in conjunction with a private placement offering of the stock. Each share of the Series A preferred stock is convertible at any time at the holder's option into an equal number of shares of Class A common stock of the Company at a conversion price initially equal to the offering price, which was established at $3 per share. Each share of the Series A preferred stock is automatically convertible into an equal number of Class A shares, if the Company completes a qualified initial public offering, which Management believes will occur in 1999 (see Note 9). In addition, each share of the Series A preferred stock is convertible into Class A shares at the option of the Company beginning on January 1, 2004. The Series A preferred stock will entitle each holder to receive cumulative preferential dividends at the rate of 5% per year, payable in cash or in shares of the Company's Class A common stock quarterly. The Series A preferred stock also entitles the holder to a liquidation preference at a liquidation value which is initially equal to two times the offering price. As of March 31, 1999, the Company sold 567,000 shares of Series A preferred stock at $3 per share, raising proceeds of $1,701,000 before offering costs. Subsequent to March 31, 1999, an additional 133,000 shares were sold, also at $3 per share. Warrants -------- In conjunction with the Series A preferred stock offering, the Placement Agent received warrants to purchase shares of the Company's Series A preferred stock as compensation. As of June 30, 1999, 70,000 warrants were issued to the Placement Agent. The warrants can be exercised over a five year period at an exercise price of $3. The Company issued warrants with the private placement of notes payable which allow the purchase of 1,200 shares of the Company's Class A common stock for every $10,000 of notes payable. The exercise price was $0.01 per share. Originally, the warrant exercise period was for a period of one year beginning on the maturity date of the notes payable. On December 22, 1998, the Company accelerated the exercise period to begin immediately and end one year after each note's issuance date. All holders of warrants at that date elected to immediately exercise their warrants. Warrants for 44,400 shares of Class A common stock were issued and exercised at December 31, 1998. In the three months ended March 31, 1999, warrants for an additional 12,000 shares of Class A common stock were issued and immediately exercised. The Company redeemed 17,640 and 44,400 shares of Class A common stock from its existing shareholders for a redemption price of $.0001 per share during the periods ended March 31, 1999 and December 31, 1998, respectively. The redeemed shares were reissued in connection with the exercise of the warrants issued to note holders and the Selling Agent (discussed below). As part of the Selling Agent's compensation, the Company agreed to issue additional warrants for the Company's Class A common stock. The warrants are exercisable at any time during a five-year term at 110% of the price paid by the holders of the Notes for the Class A common stock. At December 31, 1998, the Selling Agent earned the right to purchase 4,440 shares of the Company's Class A common stock at an exercise price of $.011 per share. At March 31, 1999, the Selling Agent earned the right to purchase an additional 1,200 shares under the same terms. The 4,440 warrants outstanding at December 31, 1998, were valued at a total of $13,284 and the additional 1,200 warrants were valued at $3,590, utilizing the Black-Scholes option pricing model assuming a volatility factor of 70%, a risk free interest rate of 4.31% and a fair market value of the underlying shares of $3 per share. The warrants were recorded as debt issuance costs and are being amortized into interest expense over the life of the debt. All such warrants were exercised prior to March 31, 1999. Stock Options ------------- Effective March 19, 1999, the Company adopted a stock option plan (the "Plan"). The Plan provides for grants of incentive stock options, nonqualified stock options and restricted stock to designated employees, officers, directors, advisors and independent contractors. The Plan authorizes the issuance of up to 750,000 shares of Class A common stock. Under the Plan, the exercise price per share of a non-qualified stock option must be equal to at least 50% of the fair market value of the common stock at the grant date, and the exercise price per share of an incentive stock option must equal the fair market value of the common stock at the grant date. Through March 31, 1999, options for 345,000 shares of Class A common stock have been issued under the Plan. The outstanding stock options have an exercise price of $3.00 per share and vest over various terms with a maximum vesting period of 18 months and expire after a maximum of 10 years. The following table summarizes stock option activity under the Plan:
Granted to Granted to Employees Non-Employees ---------------- ---------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------- -------- ------- -------- Outstanding at December 31, 1998 - $ - - $ - Granted 280,000 $3.00 65,000 $3.00 ------- ---- ------ ---- Outstanding at March 31, 1999 280,000 $3.00 65,000 $3.00 ======= ==== ====== ==== Exercisable at March 31, 1999 - $ - - $ - ======= ==== ====== ==== Weighted average fair value of options granted during the year $ .41 $ .72 ==== ====
Under the fair value approach of SFAS 123, the total fair value of options granted to employees under the Plan during 1999 was approximately $113,646. If the Company had accounted for its stock option plan in accordance with SFAS 123, the Company's net loss and pro forma net loss would have been reported as follows:
Three-Months Ending March 31, 1999 -------------- Net loss: As reported $(658,169) ======== Pro forma $(664,035) ======== Per share data: As reported $ (.23) ======== Pro forma $ (.23) ========
The fair value of each employee option grant was estimated on the date of the grant using the Black-Scholes option pricing model. Assumptions used to calculate the fair value were risk free interest rates of 4.48% to 4.99%, no dividend yields, volatility of 0.001% and an expected life of five years. In March 1999, the Company granted options for 65,000 shares of Class A common stock to non-employees in exchange for services. The fair value of these options on the date of grant was approximately $47,000. Expense related to such options will be recorded over the term the services are provided. The fair value of each non-employee option grant was estimated on the date of the grant using the Black-Scholes option pricing model. Assumptions used to calculate the fair value were risk free interest rates of 4.48% to 4.99%, no dividend yields, an expected life of five years and volatility of 100%. (6) INCOME TAXES ------------ From its inception, the Company has generated losses for both financial reporting and tax purposes. In conjunction with the Purchase Agreement, the Company obtained the right to LanXtra's net operating loss ("NOL") carryforward, which was fully offset by a valuation allowance. At March 31, 1999 and December 31, 1998, the Company had a NOL carryforward for income tax purposes of $2,001,000 and $12,459, respectively. The NOL is subject to examination by the tax authorities and expire in various years through 2019. A portion of the NOL is subject to limitations on use as determined by the Internal Revenue Code. The NOL, as well as expenses not yet deductible for tax purposes, resulted in a deferred tax asset of approximately $770,000 and $7,000 at March 31, 1999 and December 31, 1998, respectively. Due to the uncertainty relating to the realization of the benefit of the deferred tax asset, a valuation allowance has been recorded for the full amount. The difference between the statutory tax rate and the effective tax rate is due to the following:
Three Months Inception Ended Through March 31, December 31, 1999 1998 ---------- ------------ Provision (benefit) at statutory rate $(225,953) $(12,221) State tax benefit, net (21,931) (1,258) Valuation allowance 247,884 13,479 --------- -------- Provision (benefit) $ - $ - ======== =======
The Company has acquired a NOL carryforward of approximately $1.4 million from LanXtra. If the Company generates sufficient taxable income to allow it to utilize this NOL, such utilization will reduce cash tax payments due by the Company as well as the amount of goodwill carried by the Company. (7) COMMITMENTS AND CONTINGENCIES ----------------------------- Legal Matters ------------- In connection with the Purchase Agreement transaction, a shareholder of LanXtra exercised his rights as a dissenting shareholder. The Company assumed LanXtra's obligation (if any) to this dissenting shareholder. If the shareholder is permitted to pursue his claim in a legal proceeding, LanXtra could be required to pay the shareholder the fair value of his shares immediately before the closing date of the Purchase Agreement. The Company's and LanXtra's management believes that the value paid on account of these shares pursuant to the Purchase Agreement is greater than the amount which the dissenting shareholder could recover under Colorado law. The dissenting shareholder has asserted that the value of his 50,000 LanXtra shares immediately before the closing date of the Purchase Agreement would be approximately $250,000. The ultimate resolution of the matter, which is expected to occur within one year, could result in an obligation to such shareholder. Further, should LanXtra, or Cavion as successor, be required to make a payment to this shareholder, such payment could result in the purchase transaction being treated as a taxable transaction which could subject Cavion to a significant tax liability. In accordance with the Purchase Agreement, the Company may become legally obligated to satisfy additional liabilities of LanXtra, including liabilities arising on or after the closing date with respect to LanXtra's assets or business. To date, no liabilities other than those identified in the Purchase Agreement have arisen, however, other liabilities could arise in the future. Any such liabilities would be evaluated in the Company's determination of the fair value of liabilities assumed from LanXtra. (8) ACQUISITION OF LANXTRA BUSINESS ------------------------------- As discussed above, the Company acquired the business of LanXtra on February 1, 1999. The following is pro forma operating information. For purposes of the pro forma statement of operations, the transaction was assumed to be consummated on January 1, 1998. Pro forma earnings per share are calculated as if the Purchase Agreement was completed on January 1, 1998 and the related 1,029,218 shares of common stock were issued on that date. The pro forma statement of operations for the year ended December 31, 1998 is as follows:
Pro Forma LanXtra Cavion Adjustments Pro Forma ----------- --------- ------------------------- (unaudited) (unaudited) Revenue $ 215,022 $ - $ - $ 215,022 Cost of revenue 222,419 - - 222,419 ---------- ------- -------- ---------- Gross loss (7,397) - - (7,397) Operating expenses 1,117,892 6,877914,146 (1) 2,038,915 Nonoperating expenses 845,213 29,067(584,480) (2) 289,800 ---------- ------- -------- ---------- Loss from continuing operations $(1,970,502) $(35,944) $(329,666) $(2,336,112) ========== ======= ======== ========== Unaudited pro forma net loss from continuing operations per basic and diluted share $(.77) ===== Weighted average shares outstanding 3,029,218 =========
The pro forma statement of operations for the six month period ended June 30, 1999 is as follows:
Pro Forma LanXtra Cavion Adjustments Pro Forma --------- ------------ -------------- ------------ (unaudited) (unaudited) (unaudited) Revenue $ 37,850 $ 205,333 $ - $ 243,183 Cost of revenue 31,898 133,617 - 165,515 --------- ---------- -------- ----------- Gross profit 5,952 71,716 - 77,668 Operating expenses 213,311 1,619,677 79,388 (1) 1,912,376 Interest expense and other 64,069 252,586(52,932) (2) 263,723 --------- ----------- -------- ----------- Net Loss $(271,428) $(1,800,547) $(26,456) $(2,098,431) ========= =========== ======== =========== Net loss per basic share $(.75) ===== Weighted average shares outstanding $2,788,574 ==========
Adjustments ----------- (1) Amortization of goodwill (2) Reduction of interest expense to reflect Cavion's capital structure (9) SUBSEQUENT EVENTS ----------------- The Company intends to file an initial public offering with the Securities and Exchange Commission to sell 1,200,000 shares of it's common stock in the second quarter of 1999. There can be no guarantee that such offering will be completed. In April 1999, the Company repurchased 299,884 shares of Class A common stock issued to its majority shareholders for a price of $.0001 per share in satisfaction of an agreement to adjust share ownership following the closing of the Purchase Agreement and the final determination of certain factors in April 1999. Change in Repayment Date (Unaudited) - ------------------------------------ The Company has obligations (see Note 3) which had repayment terms based upon the Company's achievement of the 100 Credit Union Date. On May 28, 1999, such repayment terms were modified such that these obligations must be repaid on the date that the initial public offering discussed above is completed. The June 30, 1999 unaudited financial statements have been prepared to reflect the changes in the repayment terms of these obligations. [Outside Back Cover] TABLE OF CONTENTS Prospectus Summary 3 Risk Factors 6 Use of Proceeds 14 Dividends 15 Capitalization 15 Dilution 17 Selected Financial Information 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Our Business 31 Management 41 Executive Compensation 46 Equity Incentive Plan 48 Principal Shareholders 51 Description of Capital Stock 53 Shares Eligible for Future Sale 57 Certain Relationships and Related Transactions 58 Underwriting 64 Additional Information 68 Reports to Security Holders 68 Experts 68 Legal Matters 69 Index to Financial Statements F-1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Until , 1999, all dealers selling shares of the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II Information not Required in Prospectus ITEM 24. Indemnification of directors and officers. The only statute, bylaw, contract or arrangement under which any controlling person, director or officer of cavion.com is insured or indemnified in any matter against liability which he may incur in his capacity as such, are as follows: Article VIII of the Amended and Restated Articles of Incorporation of cavion.com include the following provisions: Indemnification (a) The Corporation shall indemnify, to the fullest extent permitted by applicable law in effect from time to time, any person, and the estate and personal representative of any such person, against all liability and expense (including attorneys' fees) incurred by reason of the fact that such person is or was a director or officer of the Corporation or, while serving as a director or officer of the Corporation, such person is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary or agent of, or in any similar managerial or fiduciary position of, another domestic or foreign corporation or other individual or entity or of an employee benefit plan. The Corporation shall also indemnify any person who is serving or has served the Corporation as director, officer, employee, fiduciary, or agent, and that person's estate and personal representative, to the extent and in the manner provided in any bylaw, resolution of the shareholders or directors, contract, or otherwise, so long as such provision is legally permissible. (b) The Corporation shall pay for or reimburse the reasonable expenses incurred by a director or officer who is a party to a proceeding in advance of final disposition of the preceding if: (i) the director or officer furnishes to the Corporation a written affirmation of his or her good faith belief that he or she has met the standard of conduct described in Section 7-109-102 of the Colorado Business Corporation Act; (ii) the director or officer furnishes to the Corporation a written undertaking, executed personally or on the director's or officer's behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct; and (iii) a determination is made that the facts known to those making the determination would not preclude indemnification under Article 109 of the Colorado Business Corporation Act. Article V of the Bylaws of cavion.com includes the following provisions: 1. Indemnification. The Corporation shall indemnify any person against all liability and expense incurred by reason of the person being or having been a director or officer of the Corporation to the full extent and in any manner that directors may be indemnified under the Colorado Business Corporation Act, as in effect at any time. The Corporation shall also indemnify any person who is serving or has served the Corporation as director or officer to the extent and in any manner provided in any bylaw, resolution of the directors or shareholders, contract or otherwise, so long as such provision is legally permissible. In the discretion of the board of directors, the Corporation may indemnify an employee, fiduciary or agent who is not a director or officer to the same extent as a director or officer. 2. Insurance. The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, fiduciary, or agent of this Corporation or who, while a director, officer, employee, fiduciary, or agent of this Corporation, is or was serving at the request of this Corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of any other entity (including without limitation an employee benefit plan), against any liability asserted against or incurred by the person in that capacity or arising from his or her status as a director, officer, employee, fiduciary, or agent, whether or not the Corporation would have power to indemnify the person against the same liability under this Article. Any such insurance may be procured from any insurance company designated by the board of directors, whether such insurance company is formed under this state or any other jurisdiction of the United States or elsewhere, including any insurance company in which the Corporation has equity or any other interest through stock ownership or otherwise. 3. Notice to shareholders of indemnification of director. If the Corporation indemnifies or advances expenses to a director in connection with a proceeding by or in the right of the Corporation, the Corporation shall give written notice of the indemnification or advance to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. 4. Indemnification nonexclusive; inurement. The indemnification provided by this Article shall not be deemed exclusive of any other rights and procedures to which the indemnified party may be entitled under the articles of incorporation, any bylaw, agreement, vote of the shareholders or directors, contract or otherwise. Such indemnification shall continue as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of such person's heirs, personal representatives and administrators. The provisions of Article 109 of the Colorado Revised Statutes on indemnification are as follows: Section 7-109-101. Definitions. As used in this article: (1) "Corporation" includes any domestic or foreign entity that is a predecessor of a corporation by reason of a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (2) "Director" means an individual who is or was a director of a corporation or an individual who, while a director of a corporation, is or was serving at the corporation's request as a director, an officer, an agent, an associate, an employee, a fiduciary, a manager, a member, a partner, a promoter, or a trustee of, or to hold any similar position with, another domestic or foreign corporation or other person or of an employee benefit plan. A director is considered to be serving an employee benefit plan at the corporation's request if the director's duties to the corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a director. (3) "Expenses" includes counsel fees. (4) "Liability" means the obligation incurred with respect to a proceeding to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses. (5) "Official capacity," means, when used with respect to a director, the office of director in a corporation and, when used with respect to a person other than a director as contemplated by Section 7-109- 107, the office in a corporation held by the officer or the employment, fiduciary, or agency relationship undertaken by the employee, fiduciary, or agent on behalf of the corporation. "Official capacity" does not include service for any other domestic or foreign corporation or other person or employee benefit plan. (6) "Party" includes a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding. (7) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. Section 7-109-102 . Authority to indemnify directors. (1) Except as provided in subsection (4) of this section, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if: (a) The person conducted himself or herself in good faith; and (b) He reasonably believed: (I) In the case of conduct in an official capacity with the corporation, that his or her conduct was in the corporation's best interests; and (II) In all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and (c) In the case of any criminal proceeding, the person had no reasonable cause to believe his or her conduct was unlawful. (2) A director's conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in or beneficiaries of the plan is conduct that satisfies the requirements of subparagraph (II) of paragraph (b) of section (1) of this section. A director's conduct with respect to an employee benefit plan for a purpose that the director did not reasonably believe to be in the interests of the participants in or beneficiaries of the plan shall not be deemed not to satisfy the requirements of paragraph (a) of subsection (1) of this section. (3) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section. (4) A corporation may not indemnify a director under this section: (a) In connection with any proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (b) In connection with any proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that he or she derived an improper personal benefit. (5) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. Section 7-109-103. Mandatory indemnification of directors. Unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in defense of any proceeding to which the person was a party because the person is or was a director, against reasonable expenses incurred by him or her in connection with the proceeding. Section 7-107-104. Advance of expenses to directors. (1) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of the final disposition of the proceeding if: (a) The director furnishes to the corporation a written affirmation of the director's good faith belief that he or she has met the standard of conduct described in section 7-109-102; (b) The director furnishes to the corporation a written undertaking, executed personally or on the director's behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct; and (c) A determination is made that the facts then known to those making the determination would not preclude indemnification under this article. (2) The undertaking required by paragraph (b) of subsection (1) of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. (3) Determinations and authorizations of payments under this section shall be made in the manner specified in section 7-109-106. Section 7-109-105. Court ordered indemnification of directors. (1) Unless otherwise provided in the articles of incorporation, a director who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: (a) If it determines that the director is entitled to mandatory indemnification under section 7-109-103, the court shall order indemnification, in which case the court shall also order the corporation to pay the director's reasonable expenses incurred to obtain court-ordered indemnification. (b) If it determines that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director met the standard of conduct set forth in section 7-109-102(1) or was adjudged liable in the circumstances described in section 7-109-102(4), the court may order such indemnification as the court deems proper; except that the indemnification with respect to any proceeding in which liability shall have been adjudged in the circumstances described in section 7-109-102(4) is limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Section 7-109-106. Determination and authorization of indemnification of directors. (1) A corporation may not indemnify a director under section 7-109- 102 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because the director has met the standard of conduct set forth in section 7-109-102. A corporation shall not advance expenses to a director under section 7-109-104 unless authorized in the specific case after the written affirmation and undertaking required by section 7-109- 104(1)(a) and (1)(b) are received and the determination required by section 7-109-104(1)(c) has been made. (2) The determinations required by subsection (1) of this section shall be made: (a) By the board of directors by a majority vote of those present at a meeting at which a quorum is present, and only those directors not parties to the proceeding shall be counted in satisfying the quorum; or (b) If a quorum cannot be obtained, by a majority vote of a committee of the board of directors designated by the board or directors, which committee shall consist of two or more directors not parties to the proceeding; except that directors who are parties to the proceeding may participate in the designation of directors for the committee. (3) If a quorum cannot be obtained as contemplated in paragraph (a) of subsection (2) of this section, and a committee cannot be established under paragraph (b) of subsection (2) of this section, or, even if a quorum is obtained or a committee is designated, if a majority of the directors constituting such quorum or such committee so directs, the determination required to be made by subsection (1) of this section shall be made: (a) By independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in paragraph (a) or (b) of subsection (2) of this section or, if a quorum of the full board cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board of directors; or (b) By the shareholders. (4) Authorization of indemnification and advance of expenses shall be made in the same manner as the determination that indemnification or advance of expenses is permissible; except that, if the determination that indemnification or advance of expenses is permissible is made by independent legal counsel, authorization of indemnification and advance of expenses shall be made by the body that selected said counsel. Section 7-109-107. Indemnification of officers, employees, fiduciaries, and agents. (1) Unless otherwise provided in the articles of incorporation: (a) An officer is entitled to mandatory indemnification under section 7-109-103, and is entitled to apply for court-ordered indemnification under section 7-109-105, in each case to the same extent as a director; (b) A corporation may indemnify and advance expenses to an officer, fiduciary, employee, or agent of the corporation to the same extent as a director; and (c) A corporation may also indemnify and advance expenses to an officer, employee, fiduciaries, or agent who is not a director to a greater extent, if not inconsistent with public policy, and if provided for by its bylaws, general or specific action of its board of directors or shareholders, or a contract. Section 7-109-108. Insurance. A corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the corporation, or who, while a director, officer, employee, fiduciary, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of any other domestic or foreign corporation or other person, or of an employee benefit plan, against liability asserted against or incurred by the person in that capacity or arising from his or her status as a director, officer, employee, fiduciary, or agent, whether or not the corporation would have the power to indemnify the person against the same liability under section 7-109-102, 7-109-103, or 7-109-107. Any such insurance may be procured from any insurance company designated by the board of directors, whether such insurance company is formed under the laws of this state or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has equity or any other interest through stock ownership or otherwise. Section 7-109-109. Limitation of indemnification of directors. (1) A provision treating a corporation's indemnification of, or advance of expenses to, directors that is contained in its articles of incorporation or bylaws, in a resolution of its shareholders or board of directors, or in a contract, except an insurance policy, or otherwise, is valid only to the extent the provision is not consistent with sections 7-109-101 to 7- 109-108. If the articles of incorporation limit indemnification or advances of expenses, indemnification and advance of expenses are valid only to the extent not inconsistent with the articles of incorporation. (a) Sections 7-109-101 to 7-109-108 do not limit a corporation's power to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he or she has not been made a named defendant or respondent in the proceeding. Section 7-109-110. Notice to shareholders of indemnification of director. If a corporation indemnifies or advances expenses to a director under this article in connection with a proceeding by or in the right of the corporation, the corporation shall give written notice of the indemnification or advance to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. Section 7-108-402(2) of the Colorado Revised Statutes states as follows: No director or officer shall be personally liable for any injury to person or property arising out of a tort committed by an employee unless such director or officer was personally involved in the situation giving rise to the litigation or unless such director or director committed a criminal offense in connection with such situation. The protection afforded in this subsection (2) shall not restrict other common-law protections and rights that an director or officer may have. This subsection (2) shall not restrict the corporation's right to eliminate or limit the personal liability of a director to the corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director as provided in subsection (1) of this section. Article VII of the Amended and Restated Articles of Incorporation of cavion.com includes the following provision: A director of the Corporation shall not be personally liable to the Corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director; except that this provision shall not eliminate or limit the liability of the director to the Corporation or to its shareholders for monetary damages otherwise existing for (i) any breach of the director's duty of loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts specified in Section 7-108-403 of the Colorado Business Corporation Act; or (iv) any transaction from which the director derived an improper personal benefit. If the Colorado Business Corporation Act is later amended to eliminate or limit further the liability of a director, then, in addition to the elimination and limitation of liability provided by the preceding sentence, the liability of each director shall be eliminated or limited to the fullest extent permitted by the Colorado Business Corporation Act as so amended. Any repeal or modification of this Article VII shall not adversely affect any right or protection of a director of the Corporation under this Article VII, as in effect immediately prior to such repeal or modification, with respect to any liability that would have accrued, but for this Article VII, prior to such repeal or modification. Also, cavion.com has entered into indemnification agreements with the officers and directors to indemnify them and to advance expenses to the fullest extent permitted by law either in connection with the investigation, defense, adjudication, settlement or appeal of a proceeding or in connection with establishing or enforcing a right to indemnification or advancement of expenses. In addition, the agreements provide that no claim or cause of action may be asserted by cavion.com against any director or officer after two years from the date of the alleged act or omission, provided that if in fact the person has fraudulently concealed the facts, then no claim or cause of action may be asserted after two years from the earlier of the date cavion.com discovers the facts or the date cavion.com should have discovered such facts by the exercise of reasonable diligence. The term of the agreement and cavion.com's obligations apply while the person is an agent of cavion.com and continues so long as the person is subject to any claim by reason of the fact that he or she served as an agent of cavion.com. In addition, the Underwriting Agreement for our initial public offering provides for indemnification by the Representative of cavion.com, its directors and officers against certain liabilities, including liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, or persons controlling cavion.com as provided in the foregoing provisions, cavion.com has been informed that, in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and thus cannot be enforced. ITEM 25. Other expenses of issuance and distribution. Estimates of fees and expenses incurred or to be incurred in connection with the issuance and distribution of securities being registered, other than underwriting discounts and commissions are as follows: SEC Registration Fees $ 2,754* Printing and Mailing Fees and Costs 80,000* Transfer Agent Fees and Costs 2,150* Legal Fees and Costs 240,000* Accounting Fees and Costs 92,000* Nasdaq Listing Fees 13,635* Director & Officers Insurance Premium 50,000* Miscellaneous Expenses 79,461* --------- TOTAL $560,000* * Estimated. ITEM 26. Recent sales of unregistered securities. Founders shares. In August 1998, we issued 2,000,000 shares of $.0001 common stock to our two founding shareholders at $.0001 per share. These issuances to the two accredited investors were effected without registration under the Securities Act of 1933 in reliance upon the exemption from registration contained in Section 4(2) of the Act. As founding shareholders, they had access to complete information regarding our business at the time of issuance. 1998-1999 private placement of notes and warrants. On October 20, 1998, we began conducting a private placement and between October 27, 1998 and February 8, 1999, we issued $470,000 in 15% secured promissory notes due October 19, 2000 and a total of 56,400 warrants to purchase shares of Class A common stock at an exercise price of $.01 per share. We relied on the exemption from registration provided by Section 4(2) of the Securities Act and Rule 505 of Regulation D adopted under the Act, as well as exemptions under various state securities laws. The securities were sold to 13 private investors. One was an accredited investor and 12 were sophisticated investors. Investors received private placement memorandum documents relating to the sale of the assets of LanXtra to cavion.com which closed in February 1999 and the loan from cavion.com to LanXtra which has since been extinguished. Between December 28, 1998 and February 8, 1999, all of the warrants were exercised. In connection with the offering, the agent for the offering, First Capital Investments, Inc. was issued an agent warrant to purchase 5,640 shares of Class A common stock at $.01 per share which was exercised on February 8, 1999. In addition, First Capital received a total offering commission of $37,600. Management shares. In December 1998, we issued 625,356 shares of Class A common stock to our management shareholders at $.01 per share. These issuances to the three sophisticated investors were effected without registration under the Securities Act of 1933 in reliance upon the exemption from registration contained in Section 4(2) of the Act. As these individuals were part of management at the time the shares were issued, they had access to complete information regarding our business at the time of issuance. LanXtra asset purchase. In February 1999, we issued 375,214 shares of Class A common stock and 28,648 shares of Class B common stock to LanXtra, Inc. in exchange for the assets and liabilities of LanXtra. This issuance was effected without registration under the Securities Act of 1933 in reliance upon the exemption from registration contained in Section 4(2) of the Act, relating to the sale of securities by an issuer not involving a public offering. Since cavion.com was formed to purchase the assets and liabilities of LanXtra, the management and shareholders of LanXtra had access to complete information regarding our business at the time of issuance. On July 1, 1999, LanXtra transferred its 376,299 shares of cavion.com class A common stock and 28,648 shares of class B common stock to Zutano, LLC, a limited liability company formed to hold the assets of LanXtra and which has the same ownership as that of LanXtra before its dissolution. This transfer was made without registration under the Securities Act of 1933 (the "Act") in reliance on the exemption from registration contained in Section 4(1) of the Act. LanXtra was not an issuer, underwriter or dealer of the cavion.com common stock. After the completion of this offering Zutano intends to transfer the assets of Zutano to its owners, including its 376,299 shares of cavion.com class A common stock. The shares to be transferred to the owners of Zutano include but are not limited to, Herman D. Axelrod (98,520 shares), Craig E. Lassen (98,520 shares) and Convergent Communications Services, Inc. (67,603 shares). This transfer will be made without registration under the Act in reliance on the exemption from registration contained in Section 4(1) of the Act and, in particular, the "Section 4(1-1/2)" exemptive doctrine. Zutano is not an issuer, underwriter, or dealer of cavion.com common stock. Certain owners of Zutano have rights to the shares of class B common stock held by Zutano. cavion.com agreed with these owners that their put rights will mature upon completion of this offering. To implement that agreement, after completion of this offering we expect to offer these owners the option to redeem their class B shares at $7.00 per share, or to convert each class B share into one share of our class A common stock. This transfer will be made without registration under the Act in reliance on the exemption from registration contained in Section 4(2) of the Act. The class B common stock is fully described in "Description of Capital Stock" in Part I of this Registration Statement. 1999 private placement of preferred stock. In March and April 1999, we issued 700,000 shares of convertible preferred stock, Series A, convertible into Class A common stock, for an aggregate of $2,100,000, prior to expenses and commissions. The initial conversion price was $3.00 per share of Class A common stock, but the conversion price was subject to adjustment upon certain events affecting cavion.com's capitalization. The shares of preferred stock will automatically convert into Class A common stock upon the earlier to occur of (i) consummation of a public offering of common stock registered under the Securities Act of 1933 or (ii) the date specified in a notice thereof delivered by cavion.com on any date after January 1, 2000. The securities were sold in reliance on the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D adopted thereunder, as well as exemptions under various state securities laws. The offering was sold to accredited investors only. Investors received a private placement memorandum including financial statements. In connection with the offering, the agent for the offering, NTB was issued a five year agent warrant to purchase 70,000 shares of preferred stock at an exercise price of $3.00 per share. In addition, NTB received a commission of $210,000 and a non- accountable expense allowance of $42,000. August 1999 private placement of notes and warrants. In August 1999 we raised $300,000 through the issuance of 14% promissory notes along with warrants to purchase 30,000 shares of common stock. Each $50,000 note entitled the subscriber to warrants to purchase 5,000 shares of Class A common stock. The notes are due on the first to occur of the closing of this offering or one year from the date of their issuance. The warrants are exercisable for period of five years, beginning on the first to occur of the closing of this offering or one year from the date of their issuance. The warrant exercise price is the price at which common stock is offered in this offering, or, if this offering does not close within one year of the date of the issuance of the warrants, then at $6.00 per share. The notes and warrants were sold to 4 accredited investors. We relied on the exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D adopted under the Act, as well as exemptions under various state securities laws. With respect to all of the foregoing offerings, the securities were offered for investment only and not for the purposes of resale or distribution, and the transfer thereof was appropriately restricted by us. Each certificate representing the above shares contains a legend indicating that such shares are restricted and may not be sold without registration under the Securities Act of 1933 or pursuant to an available exemption from such registration. The notes and the warrants, before the exercise of warrants for shares of Class A common stock, contain a similar legend. In addition, all of the shares of common and preferred stock are subject to lock-up arrangements with the underwriter except for 5,000 shares issuable on exercise of the warrants issued to one new shareholder in our August 1999 private placement of notes and warrants. As provided in agreements with our founding shareholders, Venture Funding, Ltd. and Boutine Capital, LLC, out of their initial purchases of Class A common stock in August 1998, we redeemed 56,400 of their shares for the exercise of the warrants in the October 1998 private placement, 603 shares were transferred by them to each of our management shareholders, Craig Lassen, David J. Selina, and Jeffrey W. Marshall, 1,085 shares were transferred by them to LanXtra, Inc. and we redeemed an additional 299,884 shares which were returned to authorized, but unissued shares of our Class A common stock. The following sets forth the owner, amount of notes, warrants, shares of Class A common stock, Class B common stock, preferred stock, as well as the price paid by the purchasers in our private placements of notes, warrants, Class A common stock, Class B common stock and preferred stock:
Nature and Title and Name of person aggregate amount of or class to amount Date of securities whom securities of sale sold were sold consideration -------- ---------- --------------- ------------- FOUNDERS SHARES: 8-14-98 1,100,000 Venture Funding, Ltd. $110.00 Class A Common Cash 8-14-98 900,000 Boutine, LLC $90.00 Class A Common Cash 1998-1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS: 12-2-98 $50,000 Lorene Allison Trust $50,000.00 Note Cash 12-2-98 6,000 Lorene Allison Trust $60.00 Class A Common Cash 12-2-98 $50,000 Newpax Venture Corp.$50,000.00 Note Cash 12-2-98 6,000 Newpax Venture Corp. $60.00 Class A Common Cash 12-2-98 $10,000 MN Trust $10,000.00 Note Cash 12-2-98 1,200 MN Trust $12.00 Class A Common Cash 12-2-98 $10,000 MLN Trust $10,000.00 Note Cash 12-2-98 1,200 MLN Trust $12.00 Class A Common Cash 12-2-98 $50,000 Arthur Harrison $50,000.00 Note TRUST Cash 12-2-98 6,000 Arthur Harrison $60.00 Class A Common TRUST Cash 12-2-98 $50,000 Ilse Diamant $50,000.00 Note Cash 12-2-98 6,000 Ilse Diamant $60.00 Class A Common Cash 12-2-98 $20,000 Matt Eccles $20,000.00 Note Cash 12-2-98 2,400 Matt Eccles $24.00 Class A Common Cash 12-2-98 $30,000 J. Kipp Monroe $30,000.00 Note Cash 12-2-98 3,600 J. Kipp Monroe $36.00 Class A Common Cash 12-2-98 $20,000 Peter Prato $20,000.00 Note Cash 12-2-98 2,400 Peter Prato $24.00 Class A Common Cash 12-2-98 $10,000 Wesley Zepelin & $10,000.00 Note Susan Elliott JT Cash 12-2-98 1,200 Wesley Zepelin & $12.00 Class A Common Susan Elliott JT Cash 12-2-98 $20,000 Go East, LLC $20,000.00 Note Cash 12-2-98 2,400 Go East, LLC $24.00 Class A Common Cash 12-2-98 $25,000 Gale Daniel $25,000.00 Note Cash 12-2-98 3,000 Gale Daniel $30.00 Class A Common Cash 12-2-98 $25,000 Rike Wootten $25,000.00 Note Cash 12-2-98 3,000 Rike Wootten $30.00 Class A Common Cash 2-1-99 $50,000 Gail Daniel $50,000.00 Note Cash 2-1-99 6,000 Gail Daniel $60.00 Class A Common Cash 2-1-99 $50,000 Arthur Harrison $50,000.00 Note Trust Cash 2-1-99 6,000 Arthur Harrison $60.00 Class A Common Trust Cash 2-8-99 5,640 First Capital $62.04 Class A Common Investment, Inc. Cash MANAGEMENT SHARES: 12-21-98 208,452 Craig Lassen $2,084.52 Class A Common Cash 12-21-98 208,452 David J. Selina $2,084.52 Class A Common Cash 12-21-98 208,452 Jeffrey W. Marshall $2,084.52 Class A Common Cash LANXTRA ASSET PURCHASE: 2-1-99 375,214 LanXtra, Inc. $1,125,642.00 Class A Common Assets 2-1-99 28,648 LanXtra, Inc. $172,816.00 Class B Common Assets 1999 PRIVATE PLACEMENT OF PREFERRED STOCK: 3-10-99 10,000 Anne D. Dyde Trustee $30,000.00 Preferred Anne D. Dyde Trust Cash 3-10-99 10,000 James F. Dyde Trustee$30,000.00 Preferred James F. Dyde Insurance Cash Trust 3-10-99 10,000 Jon D. Kostival $30,000.00 Preferred Cash 3-10-99 10,000 James F. Seifert & $30,000.00 Preferred Nancy L. Seifert Cash As Trustees or Successor Trustees of James F. Seifert Management Trust 3-10-99 10,000 Dianne M. Giambusso $30,000.00 Preferred Cash 3-10-99 20,000 Carol Nixon $60,000.00 Preferred Cash 3-10-99 10,000 Adam Glickman $30,000.00 Preferred Cash 3-10-99 10,000 Leland E. Tate $30,000.00 Preferred Cash 3-10-99 16,000 William Ettenger $48,000.00 Preferred Cash 3-10-99 10,000 Jeffrey Telsey $30,000.00 Preferred Trustee Special Needs Cash Trust 3-10-99 10,000 Lincoln Trust $30,000.00 Preferred Company Custodian for Cash Jerry Schnepp 3-10-99 20,000 MBM Young $60,000.00 Preferred Cash 3-10-99 80,000 Jeff Kavy $240,000.00 Preferred Cash 3-10-99 10,000 William J. Nooney $30,000.00 Preferred Cash 3-10-99 10,000 Robert C. Tucker Jr.$30,000.00 Preferred & Karen D. Tucker JT Cash 3-10-99 20,000 William Oyen & $60,000.00 Preferred Carolyn S. Oyen JT Cash 3-10-99 10,000 Michael Mara $30,000.00 Preferred Cash 3-10-99 20,000 John E. Tarrillion $60,000.00 Preferred Cash 3-10-99 10,000 Daniel A. Dupre $30,000.00 Preferred Cash 3-10-99 10,000 Carla G. Stewart $30,000.00 Preferred Cash 3-10-99 14,000 Martin J. Sherlock $42,000.00 Preferred Trustee Marion A. Cash Sherlock Trust 3-10-99 10,000 Jerry Schempp & $30,000.00 Preferred Bruce E. Kobey TEN COM Cash 3-10-99 10,000 Janet M. Searl & $30,000.00 Preferred Kent E. Searl JT TEN Cash 3-10-99 10,000 Gregory Werts $30,000.00 Preferred Cash 3-10-99 10,000 Julie A. Hackett $30,000.00 Preferred Cash 3-10-99 10,000 Tyrone M. Clark $30,000.00 Preferred Cash 3-10-99 10,000 Lisa H. Robb & $30,000.00 Preferred Michael B. Robb JT TEN Cash 3-10-99 10,000 Jack C. Moore $30,000.00 Preferred Cash 3-10-99 10,000 Robert C. Werts & $30,000.00 Preferred Patricia Cash Schulte-Werts JT TEN 3-10-99 17,000 Michael K. Carney $51,000.00 Preferred Cash 3-10-99 10,000 Joseph Reinke $30,000.00 Preferred Cash 3-10-99 10,000 Alan L. Talesnick & $30,000.00 Preferred Robert M. Bearman Cash TEN COM 3-31-99 10,000 Roswell S. Monroe & $30,000.00 Preferred Wanda V. Monroe Trustees Cash of the Roswell & Wanda Monroe Family Trust U/D/T DTD 1-31-90 3-31-99 10,000 Walter J. $30,000.00 Preferred Schoefberger Cash 3-31-99 10,000 William Kilzer $30,000.00 Preferred Cash 3-31-99 10,000 Robert L. Young & $30,000.00 Preferred Anna M. Young JT Cash 3-31-99 10,000 Karl D. Smith $30,000.00 Preferred Cash 3-31-99 10,000 Schield Management $30,000.00 Preferred Company Cash 3-31-99 10,000 John R. McKowen $30,000.00 Preferred Cash 3-31-99 10,000 John Metzger $30,000.00 Preferred Cash 3-31-99 10,000 Trans-L A $30,000.00 Preferred Partnership Cash 3-31-99 10,000 Lucas Liakos $30,000.00 Preferred Cash 3-31-99 10,000 Carl Brad Linder & $30,000.00 Preferred Cathy Linder JT Cash 3-31-99 10,000 Thomas J. Obradovich$30,000.00 Preferred Cash 4-30-99 10,000 Thomas R. Ashford $30,000.00 Preferred Cash 4-30-99 10,000 Stanley Ranch $30,000.00 Preferred Cash 4-30-99 10,000 Denora Corporation $30,000.00 Preferred Cash 4-30-99 10,000 Ronald D. Devoe $30,000.00 Preferred Cash 4-30-99 10,000 William Daniel $30,000.00 Preferred Carter TTEE of Cash the William Daniel Carter Trust 4-30-99 10,000 Third Millenium $30,000.00 Preferred Trading LLP Cash 4-30-99 10,000 Advent Fund LLC $30,000.00 Preferred Cash 4-30-99 10,000 Mariusz Witek $30,000.00 Preferred Cash 4-30-99 10,000 Randal A. Alford $30,000.00 Preferred Cash 4-30-99 10,000 Farhad Ghaffarour $30,000.00 Preferred Cash 4-30-99 10,000 Erven J. Nelson $30,000.00 Preferred TTEE for the Erven J. Cash nelson ltd psp 4-30-99 10,000 Leonard B. Zelin $30,000.00 Preferred Cash 4-30-99 13,000 Fiscal Dynamics $39,000.00 Preferred corporation Cash AUGUST 1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS: 8-20-99 $50,000 Arthur D. Harrison $50,000.00 Note Cash 8-20-99 5,000 Arthur D. Harrison 0 Warrants Cash 8-24-99 $50,000 R. Gale Daniel $50,000.00 Note Cash 8-24-99 5,000 R. Gale Daniel 0 Warrants Cash 8-30-99 $50,000 Jackson IV, LLC $50,000.00 Note Cash 8-30-99 5,000 Jackson IV, LLC 0 Warrants Cash 8-31-99 $100,000 Jeff Kavy $50,000.00 Note Cash 8-31-99 10,000 Jeff Kavy 0 Warrants Cash 8-31-99 $50,000 Arthur D. Harrison $50,000.00 Note Cash 8-31-99 5,000 Arthur D. Harrison 0 Warrants Cash
ITEM 27. EXHIBITS. Exhibit No. Description - ---------- ----------- *1.1 Form of Underwriting Agreement 1.2 Form of Agreement Among Underwriters 1.3 Representative's Warrant Agreement 2 Asset Purchase Agreement with Cavion Technologies, Inc. dated December 31, 1998 3.1a Amended and Restated Articles of Incorporation as filed with the Colorado Secretary of State on February 1, 1999 3.1b Articles of Amendment to the Amended and Restated Articles of Incorporation setting forth Statement of Designation of Series and Determination of Rights and Preferences of convertible preferred stock, Series A, as filed with the Colorado Secretary of State on February 26, 1999 3.2 Amended and Restated Bylaws of the Company as adopted by its Board of Directors on March 22, 1999 4.1 Specimen Certificate for $.0001 par value Class A common stock of the Company 4.2 Specimen Certificate for $.0001 par value Class B common stock of the Company 4.3 Specimen Certificate for $.0001 par value Series A preferred stock of the Company 4.4 Form of Subscription Agreement in the Offering of Convertible preferred stock of the Company 4.5 Form of Preferred Stock Warrant issued to Neidiger, Tucker, Bruner, Inc. 4.6 Form of Subscription Agreement in the 1999 offering of Promissory Notes and Warrants 4.7 Form of Warrant in 1999 offering 5 Opinion of Gorsuch Kirgis LLP 10.1 Promissory Note to Herman D. Axelrod dated July 1, 1992 10.2 Promissory Note to Craig E. Lassen dated August 1, 1992 10.3 Factoring Agreements to Herman D. Axelrod dated September 8, 1997 and September 15, 1997 10.4 Factoring Agreement to Craig E. Lassen dated October 15, 1997 10.5 Bridge Loan Agreement, Promissory Notes and Put Agreement with Far East Holdings, Ltd., Martin Cooper and Fairway Realty Associates with Sigmacom Corporation dated May 28, 1998 10.6 Additional Bridge Loan Agreement, Promissory Notes and Put Agreement with Jeff Marshall, David Selina and Randal Burtis dated May 28, 1998 10.7 Termination and Modification Agreement dated September 28, 1998, and Amendment to Termination and Modification Agreement dated January 15, 1999, with British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin Cooper, Fairway Realty Associates, Craig Lassen, Herman Axelrod and David Selina 10.8 Engagement Letter with First Capital Investments, Inc. dated September 20, 1998 10.9 Form of 15% Secured Promissory Notes due October 19, 2000 10.10 Agreement for Post-Closing Adjustments by and among Venture Funding, Ltd., Boutine Capital, LLC, Network Acquisitions, Inc., Cavion Technologies, Inc., Craig E. Lassen, David J. Selina and Jeff Marshall dated February 1, 1999 10.11 Share Allocation Agreement by and among Venture Funding Ltd., Boutine Capital, LLC, Cavion Technologies, Inc., LanXtra, Inc., Craig E. Lassen, David J. Selina and Jeff Marshall, dated April 16, 1999 10.12 Office Lease Agreement with TTD Associates dated December 4, 1996 for the corporate offices located at 7475 Dakin Street, Denver, Colorado 10.13 Business Loan Agreement and Promissory Note with US Bank dated January 18, 1999, and First Amendment to Business Loan Agreement with US Bank dated March 24, 1999 10.14 Executive Employment Agreement with David J. Selina effective February 1. 1999 10.15 Executive Employment Agreement with Marshall E. Aster effective March 8, 1999 10.16 Executive Employment Agreement with Jeff Marshall effective February 1, 1999 10.17 Executive Employment Agreement with Craig E. Lassen effective February 1, 1999 10.18 Equity Incentive Plan dated March 19, 1999 10.19 Form of Indemnification Agreement with officers and directors 10.20 Agreement to Modify Deferred Obligations dated May 28, 1999 with British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin Cooper, Fairway Realty Associates, David J. Selina, Jeff Marshall, Randal W. Burtis, Convergent Communications, Inc., Craig E. Lassen and Herman D. Axelrod 10.21 Form of Secure Network Services Agreement 10.22 Forms of Lock-Up Agreements among the officers and directors of the Company, 5% or more shareholders and the other shareholders and the Representative 10.23 Settlement Agreement and Mutual General Release with Craig E. Lassen dated June 8, 1999 10.24 Form of Promissory Note in the 1999 offering 10.25 License Agreement with MoneyLine America, LLC dated August 18, 1999 10.26 Network Service Master Agreement with Convergent Communications Services, Inc. dated October 22, 1999 10.27 License and Referral Agreement with Cardinal Services Corporation dated September 27, 1999 *23.1 Consent of Arthur Andersen LLP 23.2 Consent of Gorsuch Kirgis LLP contained in its opinion filed as Exhibit 5 27 Financial Data Schedule * Filed herewith. All other exhibits have been previously filed. ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of cavion.com according to the foregoing provisions, or otherwise, cavion.com has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and so it cannot be enforced. In the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person of cavion.com in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered, cavion.com will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (1) To treat the information omitted from this form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us under Rule 424(b)(1), or (4) or 497(h) under the Act as part of this registration statement as of the time the Securities and Exchange Commission declared it effective. (2) To treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. We undertake with respect to the securities being offered and sold in this offering: (1) To file, during any period in which offers or sales are being made, a post- effective amendment to this registration statement: (a) to include any prospectus required by Section 10(a)(3) of the Act; (b) to reflect in the prospectus any facts or events arising after the effective date of the registration statement, or the most recent post-effective amendment thereof, which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (c) to include any additional or changed material information on the plan of distribution. (2) That, for the purpose of determining liability under the Act, each such post- effective amendment shall be deemed to be a new registration statement of the securities offered in the registration statement, and the offering of such securities at that time shall be deemed to be the initial bona fide offering. (3) To remove from registration by means of a post-effective amendment any of the securities which remain unsold at the end of the offering. SIGNATURES In accordance with the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorizes this Registration Statement to be signed on its behalf by the undersigned, in the City and County of Denver, State of Colorado, on October 28, 1999. CAVION TECHNOLOGIES, INC. By:/s/David J. Selina David J. Selina, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: /s/ David J. Selina Date: October 28, 1999 David J. Selina, Director, President, Chief Executive Officer, Principal Executive Officer and Chief Operating Officer /s/ Marshall E. Aster Date: October 28, 1999 Marshall E. Aster, Chief Financial Officer and Principal Financial and Accounting Officer /s/ Andrew I. Telsey Date: October 28, 1999 Andrew I. Telsey, Director /s/ Stephen B. Friedman Date: October 28, 1999 Stephen B. Friedman, Director /s/ Jeffrey W. Marshall Date: October 28, 1999 Jeffrey W. Marshall, Director /s/John R. Evans Date: October 28, 1999 John R. Evans, Director EXHIBIT INDEX All of the following exhibits were filed herewith electronically: Exhibit No. Description - ---------- ----------- 1.1 Form of Underwriting Agreement 23.1 Consent of Arthur Andersen LLP EX-1.1 2 1,200,000 Shares CAVION TECHNOLOGIES, INC. COMMON STOCK UNDERWRITING AGREEMENT NEIDIGER, TUCKER, BRUNER, INC. 300 Plaza Level 1675 Larimer Street Denver, Colorado 80202 (as Representative of the Several Underwriters named in Schedule I hereto) ------------------, 1999 Gentlemen: Cavion Technologies, Inc., a Colorado corporation d/b/a cavion.com (the "Company"), proposes, on the terms and subject to the conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (collectively the "Underwriters"), on whose behalf Neidiger, Tucker, Bruner, Inc. ("NTB") is acting as representative (the "Representative"), a total of 1,200,000 shares (the "Firm Shares"), of the Company's Common Stock, par value $.0001 per share (the "Common Stock"). The Underwriters will have the option to purchase from the Company up to 180,000 additional shares of Common Stock (the "Option Shares") solely to cover over-allotments in the sale of the Firm Shares. The Firm Shares and any Option Shares are referred to collectively herein as the "Securities." The Company also proposes to issue and sell to you individually, and not in your capacity as Representative, five-year warrants (the "Representative's Warrants") to purchase, for 125% of the public offering price of the Firm Shares, an aggregate of 120,000 shares of the Common Stock as provided in Section 2 hereof. The Representative's Warrants and the shares of Common Stock issuable upon exercise of the Representative's Warrants are referred to collectively herein as the "Representative's Securities." As the Representative, you have advised the Company that you are authorized to enter into this Agreement on behalf of the several Underwriters and that the several Underwriters are willing, severally and not jointly, to purchase the number of Firm Shares set forth opposite their respective names on Schedule I. The term "Underwriters" refers to any individual member of the underwriting syndicate and includes any party or parties substituted for an Underwriter pursuant to Section 9 hereof. In consideration of the mutual agreements contained herein, the parties hereby agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with, the Underwriters that: 1.1 A registration statement, and amendments thereto, on Form SB-2 (Reg. No. 333-80421) with respect to the Securities, the Representative's Securities and other shares of Common Stock for the benefit of the holders thereof, including a preliminary form of prospectus, has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act") and has been filed with the Securities and Exchange Commission (the "Commission"). The conditions for use of Form SB-2, set forth in the General Instructions thereto, have been satisfied. Such registration statement, as finally amended and revised at the time such registration statement was or is declared effective by the Commission (including the information contained in the form of final prospectus, if any, filed with the Commission pursuant to Rule 424(b) and Rule 430A under the Act and deemed to be part of the registration statement if the registration statement has been declared effective pursuant to Rule 430A(b)) and as thereafter amended by post-effective amendment, if any, is herein referred to as the "Registration Statement." The related final prospectus in the form first filed with the Commission pursuant to Rule 424(b) or, if no such filing is required, as included in the Registration Statement, or any supplement thereto, is herein referred to as the "Prospectus." The prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and each such prospectus as amended from time to time until the date of the Prospectus, is referred to herein as the "Preliminary Prospectus." Reference made herein to each Preliminary Prospectus or the Prospectus, as amended or supplemented, shall include all documents and information incorporated by reference therein under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Each Preliminary Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act. The Company has prepared and filed such amendments to the Registration Statement since its initial filing with the Commission, if any, as may have been required to the date hereof, and will file such additional amendments thereto as may hereafter be required. There have been delivered to the Representative two signed copies of the Registration Statement and each amendment thereto, if any, including one copy of any document filed under the Exchange Act and deemed to be incorporated by reference into the Registration Statement, together with one copy of each exhibit filed therewith or incorporated by reference therein, and such number of conformed copies for each of the Underwriters of the Registration Statement and each amendment thereto, if any (but without exhibits), and of each Preliminary Prospectus and of the Prospectus as the Representatives have requested. For purposes of this Agreement, "Rules and Regulations" means the rules and regulations adopted by the Commission under either the Act or the Exchange Act, as the context requires. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to EDGAR. 1.2 No stop order preventing or suspending the use of or requiring the recirculation of any Preliminary Prospectus has been issued by the Commission nor have any proceedings been instituted for the purpose. Each Preliminary Prospectus, at the time of first delivery to the Underwriters for distribution, conformed in all material respects to the requirements of the Act and the Rules and Regulations, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to the information contained in or omitted from any Preliminary Prospectus in its reliance upon and in conformity with written information furnished to the Company as stated in Section 7.1 hereof by or on behalf of any Underwriter through the Representative expressly for use with reference to the Underwriters in connection with the preparation of the Registration Statement. 1.3 As of the time the Registration Statement (or any post- effective amendment thereto) is or was declared effective by the Commission, upon the filing or first delivery to the Underwriters of the Prospectus (or any supplement to the Prospectus), and at the Firm Closing Date and the Option Closing Date (as defined in Section 2), the Registration Statement and the Prospectus contain and will contain all statements which are required to be made therein and conform and will conform in all material respects to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to the information contained in or omitted from the Registration Statement or the Prospectus in its reliance upon and in conformity with written information furnished to the Company as stated in Section 12 hereof by or on behalf of any Underwriter through the Representative expressly for use with reference to the Underwriters in connection with the preparation of the Registration Statement. The Company meets all requirements for the use of a Form SB-2 registration statement in connection with the offer and sale of the Securities. 1.4 The Company does not own or control any corporation, partnership, joint venture, unincorporated association or other entity. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state or country of its organization, with full corporate power and authority and all consents, authorizations, approvals, orders, licenses, certificates and permits of and from all third parties, including without limitation, federal, state, local and other governmental authorities and all courts and other tribunals, as are necessary and material to enable the Company to own, lease, license and use its properties and assets and conduct its business as described in the Prospectus. The Company has not received notice of or have knowledge of any basis for any proceeding or action for the revocation or suspension of any such consent, authorization, approval, order, license, certificate or permit or any other action or proposed action by any regulatory authority having jurisdiction over the Company that would have a material adverse effect on the Company. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it makes such qualification necessary, except where the failure to do so would not result in a material adverse effect upon the Company. 1.5 The capitalization of the Company is, and upon consummation of the transactions contemplated hereby will be, in all material respects as set forth in the Prospectus. The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and the holders thereof are not subject to personal liability by reason of being such holders and have no rights of rescission with respect thereto which, if exercised, would have a material adverse effect on the Company. None of such shares have been issued by the Company in violation of any preemptive or similar rights or, to the Company's knowledge, in violation of federal or state securities laws. Except as described in the Prospectus, there is no commitment, plan or arrangement to issue, and no outstanding option, warrant, convertible security or other instrument or right calling for the issuance of, any shares of capital stock of the Company or any security or other instrument which is convertible into or exercisable or exchangeable for capital stock of the Company. The capital stock of the Company, all stock option, stock bonus and other stock plans or arrangements relating to any capital stock of the Company, including the Securities and the Representative's Securities, conform in all respects to the descriptions thereof contained in the Prospectus. 1.6 The Securities have been duly authorized and, when issued and paid for as provided herein, will be validly issued, fully paid and nonassessable. No person has any preemptive or other similar rights with respect to any of the Securities or the issue and sale thereof. 1.7 Except as described in the Prospectus, no holder of any securities of the Company or of any options, warrants, or other convertible or exchangeable securities of the Company (i) has the right to include any securities of the Company in the Registration Statement or (ii) has the right to include any securities issued by the Company in any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act other than those which have been waived or satisfied; and no person or entity holds any anti-dilution rights with respect to any securities of the Company. 1.8 Arthur Anderson LLP, which has audited the financial statements and related notes of the Company filed with the Commission as part of the Registration Statement, are, and during the periods covered by their reports were, independent certified public accountants with respect to the Company as required by the Act and the Rules and Regulations. 1.9 The financial statements of the Company, together with related notes, and schedules, as set forth in the Registration Statement, comply in all material respects with the requirements of the Act and the Rules and Regulations and present fairly the financial position and the results of operations of the Company, at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted accounting principals consistently applied throughout the periods involved and with the Rules and Regulations, and all adjustments necessary for a fair presentation of results for such periods have been made. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management's general or specific authorization and (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and the rules of regulatory authorities having jurisdiction over the Company. No other financial statements or schedules are required to be included or incorporated by reference in the Registration Statement or the Prospectus. The selected financial data and summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with the financial statements in the Registration Statement. 1.10 The minute books and stock record books of the Company are complete and correct and accurately reflect all material actions taken at meetings of the shareholders and directors of the Company, and all committees thereof, including, without limitation, the audit committee and compensation committee, and all issuances and transfers of any shares of the capital stock of the Company. 1.11 The Company has filed with the appropriate federal, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns, including franchise tax returns, which are required to be filed (or has duly obtained extensions of time for the filing thereof) and has paid all taxes shown on such returns and all assessments received by them to the extent that the same have become due. The provisions for income taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such financial statements. The Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company. 1.12 Since the respective dates as of which information is given in the Registration Statement and except as contemplated by the Prospectus, there has not been (i) any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, condition (financial or other), earnings, results of operations or properties of the Company, whether or not occurring the ordinary course of business; (ii) any transaction entered into or any liability or obligation, absolute or contingent, incurred by the Company which is material to the Company or is otherwise required to be disclosed in the Registration Statement; (iii) except as disclosed in the Registration Statement, any change in the capital stock of the Company, any increase in the short-term or long-term debt (including capitalized lease obligations) of the Company, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company; or (iv) any dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock or any acquisition by the Company of any capital stock of the Company. The Company has no material contingent obligations or commitments which are not disclosed in the Registration Statement. 1.13 The Company maintains insurance of the type and in the amounts as are prudent and generally deemed adequate for their respective businesses and consistent with insurance maintained by similar companies in similar businesses, including general liability insurance, performance guaranty bonds, and insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, including computer failure, all of which insurance is in full force and effect. The Company has not been refused any insurance or bonding coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage and any performance guaranty bonds as and when such coverage expires or to obtain similar coverage from insurers and bonding firms of recognized financial responsibility. 1.14 Except as disclosed in the Prospectus, there is no litigation or governmental proceeding to which the Company is a party or to which any property of the Company is subject or which is pending in which either the Company has been served or, to the best knowledge of the Company, is otherwise pending or threatened against the Company which, if adversely determined, will result in any material adverse change in the financial condition, results of operations, business or prospects of the Company or which is required to be disclosed in the Prospectus which has not been so disclosed. To the best knowledge of the Company, no labor dispute by the employees of the Company exists or is imminent and which, if it now exists or comes to exist, is expected materially to affect adversely the financial condition, results of operations, business or prospects of the Company or which is required to be disclosed in the Prospectus. 1.15 Each of this Agreement, the Representative's Warrants and NTB's Financial Consulting Agreement (as provided in Section 4.18 hereof) constitutes the valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except insofar as rights to indemnity and/or contribution may be limited by federal or state securities laws or the public policy underlying such laws and except as enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, and be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Securities have been duly and validly authorized by the Company and upon their delivery in accordance herewith will be duly issued and will be validly issued, fully paid and nonassessable. The shares of Common Stock issuable upon exercise of the Representative's Warrants have been duly authorized and reserved for issuance upon the exercise of such Warrants and when issued upon payment of the exercise price therefor will be validly issued, fully paid and nonassessable shares of Common Stock. 1.16 The Company is not in violation of or in default under, and the consummation of the transactions contemplated herein and the fulfillment of the terms hereof will not conflict with or result in a violation of or default under, the Certificate or Articles of Incorporation, Bylaws of the Company, or under foreign or domestic judgment, decree, order, statute, rule or regulation applicable to the Company or any of their respective properties, or under any permit, lease, license, contract, indenture, mortgage, deed of trust, loan agreement or other agreement, instrument or obligation to which the Company is a party or by which any of them or of their respective properties is bound. Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or court necessary in connection with the execution and delivery of the Company of this Agreement, the Representative's Warrants and the Financial Consulting Agreement and the consummation of the transactions contemplated hereby and thereby (except additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), or which may be necessary to qualify the Securities for public offering by the Underwriters under state securities or "Blue Sky" Laws) has been obtained or made and is in full force and effect. 1.17 Except as disclosed in the Prospectus, the business and operations conducted by the Company are being conducted in compliance in all material respects with all applicable federal, state and local laws. 1.18 The descriptions in the Registration Statement and the Prospectus of material contracts, including the Company's licenses, leases and other agreements, are accurate in all material respects and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Rules and Regulations which have not been so described or filed as required. 1.19 Each material contract or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and to which reference is made in the Prospectus has been duly and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally; and none of such contracts or instruments has been assigned by the Company and neither the Company nor, to the best knowledge of the Company, any other party is in default thereunder, which default would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company, and, to the best knowledge of the Company, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder and would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. 1.20 Each employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Employee Benefit Plan"), and each bonus, retirement, pension, profit sharing, stock bonus, thrift, stock option, stock purchase, incentive, severance, deferred or other compensation or welfare benefit plan, program, agreement or arrangement of, or applicable to employees of the Company ("Benefit Plans"), which is presently in existence, or was in existence at any time during the prior five calendar years, was or has been established, maintained, and operated in all material respects in compliance with all applicable federal, state and local statutes, orders, governmental rules and regulations, including, but not limited to, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). The Company does not, either directly or indirectly as a member of a controlled group within the meaning of Sections 414(b), (c), (m) and (o) of the Code ("Controlled Group"), have any material liability that remains unsatisfied for (A) the termination of any single employer plan under Section 4062 or 4064 of ERISA, (B) any interest payments under Section 302(e) of ERISA or Section 412(m) of the Code, (C) any excise tax imposed by Section 4971, Section 4972, Section 4975 or Section 4979 of the Code, (D) any minimum funding contributions under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code, (E) any accumulated funding deficiency within the meaning of Section 412(a) of the Code, whether or not waived, or (F) to the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation, or any Benefit Plan or any multiemployer plan (as defined in Section 3(37) of ERISA) ("Multiemployer Plan") under Subtitle D or Subtitle E of Title IV of ERISA, under Subchapter D of Chapter 1 of Subtitle A of the Code or under Chapter 43 of Subtitle D of the Code. No action, suit, grievance, arbitration or other matter of litigation or claim with respect to any Benefit Plan (other than routine claims for benefits made in the ordinary course of plan administration for which plan administrative procedures have not been exhausted) is pending or, to the Company's knowledge, threatened or imminent against or with respect to any Benefit Plan, any member of a Controlled Group that includes the Company, or any fiduciary within the meaning of Section 3(21) of ERISA with respect to a Benefit Plan which, if determined adversely to the Company, would have a material adverse effect on the Company. Neither the Company, nor any member of a Controlled Group that includes the Company has any knowledge of any facts that would give rise to any action, suit, grievance, arbitration or any other manner of litigation or claim with respect to any Benefit Plan. 1.21 The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers or stockholders or by others) designed to or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. 1.22 All transactions during the Company's current or last three fiscal years between the Company and any person who is or was during such time period an officer or director or the owner of 5% or more of the outstanding voting stock of the Company have been disclosed in the Prospectus to the extent required by the Act and the Rules and Regulations; and the terms of each such transaction are and were in all material respects fair to the Company and no less favorable to the Company than the terms that could have been obtained from unrelated parties. 1.23 To the best knowledge of the Company after due inquiry, the Company owns or has the irrevocable right to use all patents, trademarks, service marks, assumed names, trade names, copyrights, and other intellectual property rights (collectively referred to herein as "Intellectual Property Rights") necessary to conduct their respective businesses as now conducted or proposed to be conducted as described in the Prospectus. The Company has no knowledge of (i) any infringement or claimed infringement by it or the Subsidiary of any Intellectual Property Rights of any third party or (ii) any infringement by any third party of any such intellectual property right of the Company. Except as set forth in the Prospectus, the Company is not obligated or any liability to make any payment by way of royalty, fee or otherwise to any owner or licensee of, or other claimant to, any Intellectual Property Rights with respect to the Company's use thereof or in connection with the conduct of the business of the Company. 1.24 The Company has taken reasonable measures to protect the secrecy, confidentiality and value of all of its Intellectual Property Rights in all material respects. 1.25 The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property described or referred to in the Prospectus to be owned or leased by it free and clear of all liens of any kind whatsoever, other than (i) those referred to in the Prospectus and (ii) liens for taxes not yet due and payable. 1.26 Except as disclosed in the Registration Statement and the Prospectus, the Company has not issued, sold or offered for sale within the last three years any shares of its Common Stock, any right to acquire any shares of its Common Stock or any securities or instrument exercisable for or convertible into any shares of its Common Stock. 1.27 There are no agreements, claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's, consulting or origination fee with respect to the sale of the Securities payments, issuances, arrangements or understandings with respect to the Company or any of its officers, directors, stockholders, partners, employees, or affiliates that may affect the Underwriters' compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD") or for which the Company or any Underwriter may be responsible. 1.28 As of the effective date of the Registration Statement, (i) the Common Stock has been duly registered under Section 12(g) of the Exchange Act, and (ii) the Common Stock has been approved for inclusion in the Automated Quotation System of the National Association of Securities Dealers, Inc. ("NASDAQ"). 1.29 Neither the Company nor to best of the Company's knowledge any officer, director or employee of or agent acting on behalf of the Company has at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance requiring such disclosure, (ii) made any payment to any governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law, (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which the Company sells or from which the Company buys products for the purpose of influencing such agent or person to buy products from or sell products to the Company, or (iv) engaged in any transaction on behalf of the Company, maintained any bank account for the Company, or used any corporate funds of the Company, except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company. 1.30 Except as set forth in the Prospectus, no officer, director or principal stockholder of the Company, nor any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities, has or has had, either directly or indirectly, (i) an interest in any person or entity that (A) furnishes or sells services or products that are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions," there are no existing or proposed agreements, arrangements, understandings, or transactions between or among the Company and any officer, director, or principal stockholder of the Company, or any partner, affiliate or associate of any of the foregoing persons or entities. 1.31 Any certificate signed by any officer of the Company on behalf of the Company and delivered to the Representative or to Representative's counsel shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. 1.32 The Company is not, and upon completion of the transactions contemplated hereby will not be, required to register as an investment company under the Investment Company Act of 1940, as amended. 1.33 The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than such Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by the Company, subject to the Representative's prior written approval thereof or consent thereto. 1.34 The Company has obtained from each shareholder of the Company an enforceable written agreement that for the agreed upon terms, such shareholder will not, without the Representative's prior written consent, offer, pledge, sell, contract to sell, grant any option for the sale of, or other dispose of, directly or indirectly, any shares of Common Stock or any security or other instrument which by its terms is convertible into, exercisable for or exchangeable for shares of Common Stock. 1.35 The Company has (i) entered into an employment agreement with each of David J. Selina, Marshall E. Aster, and Jeffrey W. Marshall in the forms filed as Exhibits 10.14, 10.15 and 10.16, respectively, to the Registration Statement, and (ii) purchased term key-person insurance on the lives of ---------- and ------------- each in the amount of $1,000,000, which policies name the Company as the beneficiary thereof. 1.36 No action has been taken suspending the registration or qualification of the Securities in any jurisdiction designated by the Representative pursuant to Section 4.2 hereof, nor have any proceedings been initiated or threatened for any such purpose. 1.37 The computer systems, technology, products and software owned or licensed by each of the Company and the Subsidiaries, and which each of the Company and the Subsidiaries proposes to acquire or license, in order to conduct its business can accurately (i)process, record, store, calculate and present calendrical data including, but not limited to, calculating, comparing and sequencing from, into and between dates in the twentieth century (through the year 1999), the year 20000 and the twenty- first century, including leap year calculations, (ii) create, calculate, recognize, accept display, store, retrieve, access, compare, sort, manipulate, or process any information dependent on or relating to dates on or after December 31, 1999 or otherwise provide use of dates or date dependent or date related data, including, but not limited to, century recognition, day-of-the-week recognition, leap years, date values and interfaces of date functionalities, without loss of accuracy, functionality, data integrity and performance and (iii) respond to two- digit input in a way that resolves ambiguity as to century in a disclosed, defined and pre-determined manner (collectively, "Year 2000 Compliant"). Each of the Company and the Subsidiaries has taken all reasonable steps to ensure that its products and services will lose no functionality with respect to the introduction of records containing dates falling on or after January 1, 2000. Neither the Company nor the Subsidiaries has specific information that would cause it to believe that any of its material vendors, suppliers, licensors or collaborators is not similarly situated. 2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. The Company agrees to sell the Firm Shares to the several Underwriters, and each Underwriter agrees, severally and not jointly, to purchase, at the price set forth below, the number of Firm Shares set forth opposite its name on Schedule I hereto, subject to adjustments in accordance with Section 9 hereof. The purchase price for the Firm Shares shall be $6.50 per Share. 2.1 Payment for the Firm Shares shall be made to the Company by wire transfer or certified or bank cashier's check in same-day funds against delivery of certificates for the Firm Shares to the Representative for the several accounts of the Underwriters. Such payment and delivery shall be conducted at the offices of NTB, 300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202 (or such other place as mutually may be agreed upon by the Representative and the Company), at -------- a.m. Denver, time, on the fourth full Business Day after the date of this Agreement or at such other time and date thereafter as the Representative and the Company shall agree upon, such time and date being herein referred to as the "Firm Closing Date." 2.2 In addition, the Company hereby grants to the several Underwriters an option to purchase, on the terms and subject to the conditions set forth herein, up to 120,000 Option Shares at the price per Share set forth above, solely to cover over-allotments in the sale of the Firm Shares. Nothing contained herein shall obligate the Underwriters to make any over-allotments in the sale of the Firm Shares. No Option Shares shall be sold and delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered. 2.3 The over-allotment option may be exercised, in whole or in part, at any time upon written notice given within 45 days after the date of this Agreement, by NTB, as Representative of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the over-allotment option, the names and denominations in which the certificates representing the Option Shares are to be registered and the time and date at which such certificates are to be delivered (such time and date being referred to herein as the "Option Closing Date"). The Option Closing Date shall be determined by the Representative but shall not be earlier than 3 nor later than 10 full Business Days after the exercise of the over-allotment option, nor in any event prior to the Firm Closing Date. If the date of exercise of the over- allotment option is 3 or more days before the Firm Closing Date, the notice of exercise shall set the Firm Closing Date as the Option Closing Date. As Representative of the several Underwriters, NTB may cancel the over-allotment option at any time prior to its expiration by giving written notice of such cancellation to the Company. If the over-allotment option is exercised, payment for the Option Shares shall be made to the Company on the Option Closing Date by wire transfer or certified or bank cashier's check in same-day funds against delivery of certificates for the Option Shares at the above stated offices of NTB in Denver, Colorado. Delivery of certificates for the Firm Shares and any Option Shares shall be made by or on behalf of the Company through the facilities of the Depository Trust Company ("DTC") to the Representative for the respective accounts of the several Underwriters, against payment of the purchase price therefore by wire transfer or certified or bank cashier's check in same-day funds to the order of the Company. Certificates for the Firm Shares and any Option Shares shall be registered in such names and denominations as the Representative shall have requested at least 2 full Business Days prior to the applicable Closing Date, and shall be made available for checking and packaging at a location as may be designated by the Representative at least 1 full Business Day prior to such Closing Date. Time shall be of the essence, and delivery at the time and place specified is a further condition to the obligations of each Underwriter. 2.4 At the closing of the sale of the Firm Shares, the Company will sell and deliver to the Representative, at an aggregate purchase price of $100, Representative's Warrants, dated the Firm Closing Date, substantially in the form filed as an exhibit to the Registration Statement, evidencing the right of the Representative, and/or Representative's permitted designees, to purchase up to 120,000 shares (equal to 10% of the Firm Shares) of Common Stock (subject to adjustment as provided in the Representative's Warrants) at the price of $----- per share and on the terms and conditions provided in the Warrants. The Company shall not be obligated to sell and deliver the Representative's Warrants, and the Representative shall not be obligated to purchase and pay for the Warrants, except upon payment for the Firm Shares. 3. OFFERING BY UNDERWRITERS. It is understood that the several Underwriters intend to make a public offering of the Firm Shares as soon as the Representative deems it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that Option Shares are purchased pursuant to the over-allotment option, the Underwriters will offer them to the public on the foregoing terms. It is further understood that the Representative will act as the representative for the Underwriters in the offering and sale of the Securities pursuant to an Agreement Among Underwriters entered into by the Representative and the several other Underwriters. 4. Covenants of the Company. The Company covenants and agrees with each Underwriter as follows: 4.1 If the Registration Statement has not yet been declared effective, the Company shall use its best efforts to cause the Registration Statement and any amendment thereto to become effective under the Act and, upon notification from the Commission that the Registration Statement or any amendment thereto has become effective, shall so advise you immediately, in writing. The Company shall comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424(b) under the Act and notify you in writing of all such filings. The Company shall notify you promptly of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information; the Company shall carefully prepare and file with the Commission promptly upon your request, any amendment of or supplement to the Registration Statement or Prospectus which, in your reasonable opinion, may be necessary or advisable in connection with the distribution of the Securities; and the Company shall not file or make any amendment of or supplement to the Registration Statement or the Prospectus which is not approved by you after reasonable notice from the Company to you, which approval shall not be unreasonably withheld or delayed. The Company shall advise you immediately of the issuance by the Commission, any state securities commission or any other regulatory body of any stop order or other order suspending the effectiveness of the Registration Statement, suspending or preventing the use of any Preliminary Prospectus or the Prospectus or suspending the qualification of the Securities for offering or sale in any jurisdiction, or of the institution of any proceedings for any such purpose; and the Company shall use its best efforts to prevent the issuance of any stop order or other such order and, should a stop order or other such order be issued, to obtain as soon as possible the lifting thereof. 4.2 The Company shall cooperate with you and your counsel in connection with the registration or qualification of the Securities for sale under the securities or "Blue Sky" laws of such jurisdictions as the Representative shall designate and the continuance of such qualification in effect for so long a period as the Representative may reasonably request, except the Company shall not be required to qualify as a foreign corporation in any jurisdiction where it is not already so qualified or to execute a general consent to service of process in actions other then those arising out of the offer and sale of the Securities or take any action which would subject it to taxation in any jurisdiction where it is not now so subject. 4.3 Within the time during which a prospectus relating to the Securities is required to be delivered under the Act, the Company shall comply with all requirements imposed upon it by the Act and the Exchange Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as is necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or would omit to state a material fact necessary to make the statements therein, in light of the circumstances then existing, not misleading, or if during such period it is otherwise necessary, in the opinion of the Company or in your opinion, to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company or you, as the case may be, shall promptly notify the other party and the Company shall amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. 4.4 The Company shall make generally available to its security holders (and shall deliver to you), in the manner contemplated by Rule 158(b) under the Act, as soon as practicable but in any event not later then 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of Registration Statement occurs, an earnings statement satisfying the requirements of Section 11(a) of the Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement; and will advise you in writing when such statement has been made available. 4.5 For a period of five years from the Firm Closing Date, the Company will deliver to you on a timely basis (i) a copy of each report, including, without limitation, reports on Form 8-K, 10-C, 10-K (or 10-KSB) and 10-Q (or 10-QSB) or any successor form and exhibits thereto filed with or furnished by the Company to the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD") on the date each such report or document is so filed or furnished; (ii) as soon as practicable, copies of any reports or communications (financial or other) of the Company mailed to its security holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4 (or any successor form) received or prepared by the Company from time to time; and (iv) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request and which can be prepared or obtained by the Company without unreasonable effort or expense. 4.6 The Company shall furnish or cause to be furnished to the Representative or on the Representative's order, without charge, at such place as the Representative may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post- effective amendments thereto, the Prospectus, and all amendments and supplements thereto, including any Prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Representative may request. The Company will deliver to the Representative, at or before the Firm Closing Date, two signed copies of the Registration Statement and all pre-effective or post- effective amendments thereto including all exhibits filed therewith. 4.7 The Company shall not, during the 180 day period following the Firm Closing Date, except with the Representative's prior written consent, offer for sale, contract to sell, issue, distribute, grant any option, right or warrant to purchase any shares of Common Stock or other equity securities of the Company or any securities convertible into shares of Common Stock or such other equity securities, except the Securities, the Representative's Securities, those options to purchase shares of Common Stock issued under the Company's Equity Incentive Plan and those other options to purchase shares of Common Stock (collectively the "Options") and shares of Common Stock issued upon exercise of the Options, as those Options are described in the Prospectus. 4.8 The Company shall cause (i) each officer and director of the Company and each holder of 5% or more of the Company's Common Stock (or securities convertible into shares Common Stock) to furnish to the Representative, prior to the date of this Agreement, in form and substance satisfactory to Representative's counsel, whereby each such person shall agree not to offer for sale, contract to sell, sell, distribute, grant any option or other right to purchase or otherwise dispose of or contract to dispose of any of their shares of the Company's Common Stock (or any security convertible into shares of the Company's Common Stock) without the Representative's prior written consent during the 12 month period following the effective date of the Registration Statement; and (ii) each other holder of the Company's Common Stock (or other security convertible into Common Stock) to furnish to the Representative, prior to the date of this Agreement, a written agreement, in form and substance satisfactory to Representative's counsel whereby each such person shall agree not to offer for sale, contract to sell, sell, distribute, grant any option or other right to purchase or otherwise dispose of or contract to dispose of any of their shares of the Company's Common Stock (or any security convertible into shares of the Company's Common Stock) for a period of 9 months from the effective date of the Registration Statement without the Representative's prior written consent. Except as the Representative may consent, in it sole discretion, the foregoing agreements shall also provide that any sale of shares of the Company's Common Stock by any such person during the 18 month period from the effective date of the Registration Statement, and which sale is made pursuant to Rule 144 under the Act (or comparable provision under the Act) shall be made only in a transaction or transactions by or directly with the Representative, providing the compensation charged by the Representative is competitive with other broker-dealers. 4.9 The Company shall not take, or permit any of its officers of directors or shareholders or any affiliate (within the meaning of the term "affiliate" in the Rules and Regulations) to take, directly or indirectly, any action designed to or which has constituted or might reasonably be expected to cause or result, under the Exchange Act or otherwise, in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities; and has not effected any sales of shares of Common Stock or other securities that are required to be disclosed in response to Item 26 of Part II of the Registration Statement. 4.10 The Company shall apply the net proceeds from the sale of the Securities in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. 4.11 The Company shall timely file all such reports, forms and other documents as may be required (including, without limitation, a Form SR as may be required pursuant to Rule 463 under the Act) from time to time under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed shall comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. 4.12 The Company shall use its best efforts to maintain the inclusion of the Common Stock for quotation on the SmallCap Market of NASDAQ. 4.13 For a period of three years from the Firm Closing Date, the Company shall (i) retain American Securities Transfer & Trust, Inc., Denver, Colorado as the transfer agent for the Common Stock and shall instruct the transfer agent to furnish to the Representative, as and to the extent reasonably requested by the Representative, at the Company's sole expense, with copies of the Company's stock transfer sheets relating to the Company's securities, including a current list of the holders of all of the Company's securities and a list of the beneficial owners of securities held by Depository Trust Company; (ii) retain such accounting firm as the Company's independent public accountants as shall be reasonably acceptable to the Representative; and (iii) retain such financial public relations firm as shall be reasonably acceptable to the Representative for consecutive 6 month terms; provided, however, that any renewal of such firm's engagement shall be subject to NTB's approval. 4.14 The Company shall take all necessary action, on an expedited basis, to be included effective with the First Closing Date in Standard and Poor's Corporate Records, Stock Quotes and Stock Guide published by Standard and Poor's Corporation and to continue such inclusion for a period of not less than seven years from the Firm Closing Date. 4.15 Until that date which is 90 days after the Firm Closing Date, the Company shall not, without the prior written approval of the Representative, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations or such releases as counsel for the Representative and the Company have advised are necessary to comply with applicable law. 4.16 For a period of two years from the Firm Closing Date, the Company agrees that NTB shall have the right to designate one person as an advisor to the Company's Board of Directors. Such advisor will be reimbursed for his or her expenses in attending meetings of the Board of Directors and will receive cash compensation equal to that received by any other outside director but will have no power to vote as a director. Such person shall be indemnified by the Company against any claim arising out of his or her participation in meetings of the Board of Directors to the same extent as directors. During the stated two year period, NTB's advisor to the Company's Board of Directors will be (i) invited to attend all meetings of the Company's Board of Directors; (ii) provided with a copy of all Actions by Unanimous Written Consent of the Board of Directors in Lieu of an Actual Meeting; (iii) furnished with a copy of all public filings by the Company and Company press releases as released; (iv) updated by the Company's management, on at least a quarterly basis, regarding the Company's activities, prospects and financial condition; and (v) advised immediately of material events to the extent consistent with applicable law. During the subject two year period, the Company shall hold meetings of its Board of Directors at intervals of not less than once each calendar quarter. Any advisor to the Company's Board of Directors designated by NTB shall be acceptable to the Company, which acceptance shall not be unreasonably withheld. 4.17 For a period of 12 months from the Firm Closing Date, the Company shall not authorize or otherwise effect any change in the compensation to any officer and/or director of the Company without 30 days' prior written notice to the Representative. 4.18 On the Firm Closing Date, the Company shall enter into a consulting agreement, retaining NTB, individually, and not as Representative of the Underwriters, as financial consultant to the Company for a period of 24 months at a fee of $48,000 payable in full on the Firm Closing Date. As financial consultant, the Representative will advise the Company as to market conditions, financial alternatives, resource allocation and similar investment banking services. Such consulting agreement shall also provide for compensation to the Representative as follows: 5% of the first $3 million, 2.5% of any consideration between $3 million and $5 million; 2% of any consideration between $5 million and $10 million; and 1% of any consideration greater than $10 million paid or received by the Company (or its shareholders) in any transaction (including mergers, assets sales and acquisitions) accepted by the Company (or its shareholders) within 36 months from the Firm Closing Date, provided the Representative introduced the other party to the Company. 5. COSTS AND EXPENSES. Whether or not the transactions contemplated by this Agreement are consummated, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: (i) all expenses (including stock transfer taxes, if any) incurred in connection with the delivery of the Firm Shares and Option Shares to the Underwriters, (ii) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Underwriters, except as provided in (iii) below) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), each Preliminary Prospectus and the Prospectus as amended or supplemented, and the printing, delivery and shipping of this Agreement and other underwriting documents, including Underwriters' Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements Among Underwriters and Selected Dealer Agreements and any letters transmitting the offering material to selling group members (including costs of shipment and delivery), (iii) all filing fees and fees and disbursements of Representative's counsel incurred in connection with the qualification of the Securities under state securities laws as provided in Section 4.2 hereof, (iv) the filing fees of the Commission and NASD, (v) the fees and expenses of inclusion of the Common Stock on NASDAQ NMS as well as and any other securities exchange, (vi) the cost of printing certificates representing the Common Stock, (vii) the cost and charges of the transfer agent or registrar, (viii) the costs of "tombstone" advertisements in such publications as you shall reasonably request, as well as the costs of any other advertising undertaken at the Company's request, (ix) the costs of preparing, printing and distributing bound volumes for the Representative and its counsel, (x) all fees and costs for due diligence information, examinations, (xi) the costs and expenses associated with the production of materials related to and travel expenses incurred by the Company's management and you in connection with, the various meetings to be held between the Company's management and prospective investors; and (xii) all other costs and expenses incident to the performance of the obligations of the Company hereunder which are not otherwise provided for in this section. In addition, the Company shall also pay you, individually and not in your capacity as Representative, at the applicable Closing Date, a non-accountable expense allowance equal to 2% of the initial public offering price of the Securities purchased on such Closing Date (including Option Shares purchased pursuant to the option granted pursuant to Section 2 hereof). If the sale of the Securities provided for herein is not consummated by reason of any termination of this Agreement pursuant to Section 10.2 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or because any condition of the Underwriters' obligations set forth in Section 6 herein is not fulfilled, the Company shall reimburse the Representative for all of Representative's accountable out-of-pocket expenses (including fees and disbursements of its counsel) actually incurred by the Representative in connection with the investigation, preparing to market and marketing of the Securities or in contemplation of performing its obligations hereunder, such reimbursement not to exceed in the aggregate $65,000. You acknowledge that $45,000 has been paid to you pursuant to the Company's prior agreement to be applied against the expense allowance (and which shall be applied toward such reimbursement of the Representative). You agree that any portion of such $45,000 that is not necessary to reimburse you for your out-of-pocket expenses actually incurred if the sale of the Securities, as contemplated by this Agreement, is not consummated for any reason shall be repaid to the Company. 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase and pay for the Firm Shares on the Firm Closing Date and the Option Shares, if any, on the Option Closing Date shall be subject, as of the date hereof, the Firm Closing Date and the relevant Option Closing Date, if any, respectively, of each of the representations and warranties on the part of the Company contained herein, to the performance by the Company of all of its agreements herein contained, to the fulfillment of or compliance by the Company with all covenants and conditions hereunder, and to the following additional conditions: 6.1 The Registration Statement thereto shall have become effective not later than 5:30 p.m., Washington, D.C. time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative; all post-effective amendments thereto shall have become effective and all filings required by Rule 424(b) and Rule 430A under the Act have been completed within the time period required by the Rules and Regulations prior to the Firm Closing Date; no stop order suspending the effectiveness of the Registration Statement, or any amendment or supplement thereto shall have been issued and no proceedings for the issuance of such an order shall have been indicated or threatened; and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to Representative's satisfaction. 6.2 The Representative shall not have advised the Company that (i) the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's reasonable opinion, is material, or omits to state a fact which, in the Representative's reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made not misleading, or (ii) that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representative's reasonable opinion, is material, or omits to state a fact which, in the Representative's reasonable opinion is material and is required to be stated therein or is necessary to make the statements therein not misleading. 6.3 On or prior to the Firm Closing Date and the Option Closing Date, if any, the Representative shall have received from John G. Herbert, P.C., counsel for the Representative, such opinion or opinions with respect to the sufficiency of all corporate proceedings and other legal matters relating to this Underwriting Agreement and the transactions contemplated hereby as the Representative reasonably may require, and such counsel shall have received from the Company or counsel to the Company such documents and information as they reasonably request to enable them to pass upon such matters. 6.4 The Representative shall have received at or prior to the date of this Agreement, the Firm Closing Date from John G. Herbert, P.C., a memorandum or written summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Securities under the state securities or Blue Sky laws of such jurisdictions as the Representative may reasonably have designated to the Company. 6.5 The Representative shall have received on the Firm Closing Date the opinion of Gorsuch Kirgis LLP, counsel for the Company, dated such Closing Date, addressed to the Representative covering the matters set forth on Annex A attached hereto. 6.6 The Representative shall have received on the Firm Closing Date the opinion of ---------------------, special counsel to the Company with respect to intellectual property matters, dated such Closing Date, addressed to the Representative covering the matters set forth on Annex B attached hereto. 6.7 The Representative shall have received at the Option Closing Date, if any, the favorable opinions of the Company's counsel and special counsel, respectively, addressed to the Representative, confirming as of such Option Closing Date the statements made by such counsel in its opinion delivered on the Firm Closing Date. 6.8 As of the Firm Closing Date and Option Closing Date, if any, (i) there shall have been no transaction, not in the ordinary course of business, entered into by the Company after the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus that is materially adverse to the Company; (ii) the Company shall not be in material breach or material default under any provision of any instrument relating to any outstanding indebtedness; (iii) the Company shall not have issued any securities (other than as described in the Registration Statement and other than the Securities and the Representative's Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there shall not have been any change in the capital stock or any material change in the debt (long or short term) or liabilities or obligations of the Company (contingent or otherwise); (iv) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (v) no action, suit or proceeding, at law or in equity, shall have been pending or threatened (or circumstances giving rise to same) against the Company, or involving or affecting its business or properties, before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding could have a material adverse effect on the Company, except as set forth in the Registration Statement and Prospectus; and (vi) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission or any state securities regulatory agency. 6.9 The Representative shall have received on the Firm Closing Date and the Option Closing Date, if any, a certificate or certificates of the Company, signed by the Chief Executive Officer and by the Chief Financial Officer to the effect that each of such persons has carefully reviewed the Registration Statement, the Prospectus and this Agreement, and that, as of such Closing Date: 6.9.1 The Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or are, to the best of each of such person's knowledge after due inquiry, contemplated by the Commission; and 6.9.2 The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Firm Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and satisfied all conditions set forth in this Agreement on its part to be performed or satisfied at or prior to the Firm Closing Date or the Option Closing Date, as the case may be; and 6.9.3 they have carefully examined the Registration Statement, the Prospectus and any amendments or supplements thereto, and (a) neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (b) since the effective date of the Registration Statement there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth, (c) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not in the ordinary course of business, or declared or paid any dividend on any capital stock of the Company, and there has not been any change in the capital stock, or any material increase, in the short-term debt or long-term debt (including any capitalized lease obligation), or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company, or any material adverse change, or any development involving a prospective material change, in the business, key personnel, condition (financial or other), properties, assets, net worth or results of operations of the Company, and the Company has not sustained any material loss or damage to its property or interference with its business, whether or not any of the foregoing is insured, which is material to the Company, and (d) except as disclosed in the Prospectus, there is not pending, threatened or, to their knowledge, contemplated any action, suit, proceeding or investigation before or by any court or governmental agency or body, or any arbitrator which would result in any material adverse change in the general affairs, business, condition (financial or other) properties, assets, net worth or results of operations of the Company. 6.10 The Representative shall have received on or prior to the date of this Agreement, the approval of the NASD of the terms of the Underwriters' participation in the distribution of the Securities and the amount and type of compensation allowable or payable to the Representative and the Underwriters therefor. 6.11 The Representative shall have received a signed letter from Arthur Anderson LLP, addressed to the Representative, on the date of this Agreement, the Firm Closing Date and, if applicable, the Option Closing Date, respectively, and a draft of such letter not less than five days prior to each said date, from Arthur Anderson LLP dated as of the date hereof, the Firm Closing Date and, if applicable, the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter to the Representative delivered by Arthur Anderson LLP on the date hereof, which letter shall be to the effect set forth in Annex C hereto, that nothing has come to their attention during the period from the date not more than 5 days prior to date hereof, to a date not more than 5 days prior to the Firm Closing Date and the Option Closing Date, as the case may be, which would require any change in their letter dated the date hereof if it were required to be dated and delivered on the Firm Closing Date or the Option Closing Date, as the case may be. All such letters shall be in form and substance satisfactory to the Representative. 6.12 On each of the Firm Closing Date and relevant Option Closing Date, if any, there shall have been duly tendered to the Representative for its account and the accounts of the several Underwriters, certificates representing the Securities in the names and denominations instructed by the Representative against payment therefor as provided herein. 6.13 No order suspending the sale of the Securities in any jurisdiction designated by the Representative pursuant to Section 4.2 hereof shall have been issued and no proceedings for that purpose shall have been instituted or shall be threatened. 6.14 On or before the Firm Closing Date, the Company shall have executed and delivered to the Representative the Representative's Warrants in such denominations and in the names of such designees as shall have been instructed by the Representative in writing. 6.15 On or before the date of this Agreement, the Common Stock shall have been duly approved for inclusion on NASDAQ SmallCap Market subject to official notice of issuance. 6.16 Since the effective date of the Registration Statement, the Company shall not have sustained any loss by fire, flood, accident or other calamity, nor shall it have become a party to or the subject of any litigation, individually or in the aggregate, which is materially adverse to the Company, nor shall there have been a material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company, whether or not arising in the ordinary course of business, which loss, litigation or change, in your reasonable judgment, shall render it inadvisable to proceed with the delivery of the Securities. 6.17 Subsequent to the date of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in Section 6.11 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). 6.18 At or prior to the Firm Closing Date, the Representative shall have received the written agreements and performance of the matters specified in Sections 4.8 and 4.18 hereof. 6.19 Prior to the Firm Closing Date, the Company shall have furnished to the Representative such further information, certificates and documents confirming the representations and warranties of the Company and compliance with the conditions contained herein as the Representative may reasonably have requested. The options and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all respects reasonably satisfactory to the Representative and its counsel. If any of the conditions established in this Section 6 shall not have been fulfilled when and as required, the obligations of the Underwriters hereunder may be terminated at the election of the Representative upon written notification to the Company on or prior to the Firm Closing Date or the Option Closing Date, if any, as the case may be without liability on the part of any Underwriter, including the Representative, or the Company except to the extent provided in Sections 5, 7 and 10 hereof. 7. INDEMNIFICATION. 7.1 The Company will indemnify and hold harmless each Underwriter, its officers, directors and counsel and each person, if any, who controls any Underwriter (including each person who may be substituted for an Underwriter as provided in Section 9 hereof) within the meaning of the Act or the Exchange Act, from and against any losses, claims, damages, expenses, liabilities or actions in respect thereof ("Claims"), joint or several, to which such Underwriter, its officers, directors or counsel or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such Claims arise out of or are based upon any breach of any representation, warranty or covenant made by the Company in this Agreement, or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or in any application or other document executed by the Company or based upon written information furnished by the Company and filed in any state or other jurisdiction to qualify any of the Shares for offer/sale under the securities laws thereof or filed with the SEC or any securities association or exchange (any such document, application or information being hereinafter called an "Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (with respect to the Prospectus, in light of the circumstances under which they were made). The Company agrees to reimburse each such indemnified party for any legal fees or other expense as incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third-party witness in connection with such Claims; provided, however, the Company will not be liable in any such case to the extent that any such Claims arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or in any Application in reliance upon and in conformity with written information furnished by the Representative to the Company pursuant to Section 12 of this Agreement. The indemnification obligations of the Company as provided herein are in addition to and in no way limit any liability the Company may otherwise have. 7.2 Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and officers and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act against any Claim to which the Company, or any such director, officer or controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter and the Representative), insofar as such Claim arises out of or is based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application, or arises out of or is based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein (with respect to the Prospectus, in light of the circumstances under which they were made), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or in any Application in reliance solely upon and in conformity with written information furnished by the Representative to the Company pursuant to Section 12 of this Agreement. The indemnification obligations of each Underwriter as provided above are in addition to any liabilities any such Underwriter may otherwise have. Notwithstanding the provisions of this section, no Underwriter shall be required to indemnify or reimburse the Company, or any officer, director, controlling person in an aggregate amount in excess of the total price at which the Shares purchased by any such Underwriter hereunder were offered to the public, less the amount of any damages such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 7.3 Promptly after receipt by an indemnified party under this section of notice of the commencement of any action in respect of a Claim, such indemnified party will, if a Claim in respect thereof is to be made against an indemnifying party under this section, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve an indemnifying party from any liability it may have to any indemnified party under this section or otherwise, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. In case any such action is brought against any indemnified party, and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that he, she or it may wish, jointly with all other indemnifying parties, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and any indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to the indemnified party and/or other indemnified parties which are different from or additional to those available to any indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. 7.4 Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense of such action and upon approval by the indemnified party of counsel selected by the indemnifying party, the indemnifying party will not be liable to such indemnified party under this section for any legal fees or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (a) the indemnified party shall have employed separate counsel in connection with the assumption of legal defenses in accordance with the last sentence of Section 7.3 (it being understood, however, that the indemnifying party shall not be liable for the legal fees and expenses of more than one separate counsel approved by the Representative, if one or more of the Underwriters or their officers, directors, counsel or controlling persons are the indemnified parties); (b) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the indemnified party's notice to the indemnifying party of commencement of the action; or (c) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. 7.5 If the indemnification provided for in this Section 7 is unavailable to an indemnified party under subsection 7.1 or 7.2 hereof in respect of any Claim referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall, subject to the limitations hereinafter set forth, contribute to the amount paid or payable by such indemnified party as a result of such Claim (a) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares; or (b) if the allocation provided by clause (a) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (a), but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such Claim, as well as any other relevant equitable considerations. The relative benefits received by each of the Company and the Underwriters shall be deemed to be in such proportion so that the Underwriters are responsible for that portion represented by the percentage that the amount of the underwriting discounts and commissions per Share appearing on the cover page of the Prospectus bears to the public offering price per Share appearing thereon, and the Company is responsible for the remaining portion. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in subsections 7.3 and 7.4 of this section, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. 7.6 The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this section were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method or allocation which does not take into account the equitable considerations referred to in subsection 7.5 of this section. Notwithstanding the other provisions of this section, no Underwriter shall be required to contribute any amount that is greater than the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this section are several in proportion to their respective underwriting commitments and not joint. 7.7 If any proceeding is brought in a court of competent jurisdiction against any person in respect of which indemnification or contribution may be sought under this Section 7, the other parties hereto hereby (a) consent to the jurisdiction of the court in which such proceeding is brought for purposes of enforcing this Section 7, (b) agree that process issuing from such court may be served upon them by any other person seeking indemnification or contribution; and (c) agree that they may be joined as additional defendants in any such proceeding. 8. SURVIVAL OF INDEMNITIES, CONTRIBUTION, WARRANTIES AND REPRESENTATIONS. The indemnity and contribution agreements contained in Section 7 and the representations, warranties and agreements of the Company in Sections 1 and 4 hereof shall survive the delivery of the Securities to the Underwriters hereunder and shall remain in full force and effect, regardless of any termination or cancellation of this Underwriting Agreement or any investigation made by or on behalf of any indemnified party. 9. DEFAULT BY UNDERWRITERS; SUBSTITUTION. If on the Firm Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the securities which such Underwriter has agreed to purchase and pay for on such data (otherwise than by reason of the nonfulfillment of any condition to its obligation to do so hereunder), you, as Representative of the Underwriters, shall use your best efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase such amounts as may be agreed upon, and upon the terms set forth herein, of the Firm Securities or Option Securities, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as Representative, shall not have procured such other Underwriters, or any others, to purchase the Firm Securities or Option Securities, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of securities with respect to which such default shall occur does not exceed 9.09% of the Firm Securities or Option Securities as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Securities or Option Securities, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Securities or Option Securities, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase (provided that any non-defaulting Underwriter shall not be obligated to purchase any Securities which the defaulting Underwriter(s) agreed to purchase if such additional purchase would cause the non-defaulting Underwriter to be in violation of the net capital rules of the Commission), or (b) if the aggregate number of Securities with respect to which such default shall occur exceeds 9.09% of the Firm Securities or Option Securities, as the case may be, covered hereby, you as the Representative of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters, or of the Company except for expenses to be borne by the Company as provided in Section 5 hereof and the indemnity and contribution agreements in Section 7 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Firm Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representative, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. EFFECTIVE DATE AND TERMINATION. 10.1 Subject to its execution and delivery by the parties this Agreement shall become effective at 10:00 a.m., Denver time, on the later of (i) the first full Business Day following the date the Registration Statement becomes effective or (ii) at such time after the Registration Statement becomes effective as you, in your discretion, shall release the Firm Shares for the sale to the public. You shall notify the Company and its counsel immediately after you have taken any action that causes this Agreement to become effective. Until this Agreement is effective, it may be terminated by the Company by giving written notice as hereinafter provided to you or by you giving notice as hereinafter provided to the Company, except that the provisions of Sections 5, 7 and 10 hereof shall at all times be effective. For purposes of this Agreement, the release of the Firm Shares for sale to the public shall be deemed to have been made when you release, by telegram or otherwise, firm offers of the Firm Shares to securities dealers or release for publication a newspaper advertisement relating to the Securities, whichever occurs first. 10.2 Without limiting the right to terminate this Agreement pursuant to any other provision hereof, the Representative shall have the right to terminated this Agreement at any time on or before the Firm Closing Date or terminate any obligation of the Underwriters to purchase the Option Shares at any time on or before the Option Closing Date, as the case may be, if any of the following has occurred since the effective date hereof: (A) the Company shall have failed, refused or been unable to perform any agreement or condition on its part to be performed hereunder unless compliance therewith or performance or satisfaction thereof shall have been expressly waived in writing by the Representative; (B) any other condition of the obligations of the Underwriters is not fulfilled; (C) any event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement which is not reflected in the Registration Statement but should be reflected therein (exclusive of any amendment or supplement thereto) to make the statements or information contained therein not misleading in any material respect; (D) any outbreak or escalation of major hostilities in which the United States is involved, a declaration of war by the United States or any other substantial national calamity or emergency; (E) any suspension or limitation of trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the NASDAQ or any suspension of trading in the common stock of the Company on the NASDAQ; or (F) declaration of a banking moratorium by either federal or state authorities or a moratorium in foreign exchange trading by major international banks or persons has been declared. 10.3 In the event the NASD determines that any person has rendered services of any nature whatsoever to the Company for which such person has received compensation required to be aggregated with the compensation to be received by the Representative, the Representative may terminate this Agreement and its obligations with respect to the public offering, without liability on its part of any kind to the Company; and in any such event the Company shall reimburse NTB for all of its accountable expenses in the maximum amount of $65,000, inclusive of the $45,000 previously paid by the Company. 10.4 Any termination of this Agreement pursuant to this Section 10 shall be without liability on the part of the Company or the Underwriters, except as otherwise provided in Sections 5 and 7 hereof and this Section 10. 10.5 Any notice referred to above may be given at the address specified in Section 10 hereof in writing or by telegraph, facsimile or telephone, and if by telephone, shall be immediately confirmed in writing. 11. NOTICES. Except as otherwise provided in this Agreement, (a) whenever notice is required by the provisions hereof to be given to the Company, such notice shall be in writing and hand delivered or sent by mail or facsimile transmission to Cavion Technologies, Inc., at 7475 Dakin Street, Suite 607, Denver, Colorado 80221, facsimile number: (303) 657- 8212, Attn: President, and (b) whenever notice is required by the provisions hereof to be given to the Representative, such notice shall be in writing and hand delivered or sent by mail or facsimile transmission to Neidiger, Tucker, Bruner, Inc., 300 Plaza Level, 1675 Larimer Street, Denver, Colorado, 80202, facsimile number: (303) 623-9310, Attn: Corporate Finance Department. 12. INFORMATION FURNISHED BY UNDERWRITERS. [to be completed] 13. PARTIES. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 7 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 14. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without giving any effect to any choice of law or conflict of law provision or rule whether of the State of Colorado or any other jurisdiction that would cause the application of the laws of any jurisdiction other than the State of Colorado. The parties agree to the exclusive jurisdiction of the courts of the State of Colorado or of the United States of America for the District of Colorado, and irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive, in connection with any action brought by any party hereto relating to this Agreement or the transactions which are the subject matter hereof. 15. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Representative's Warrant Agreement and the Financial Consultant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings, and negotiations with respect to the subject matter hereof, including without limitation a letter of intent dated December 22, 1998 and accepted December 23, 1998 between the Company and NTB. This Agreement may not be amended except in a writing signed by the Representative and the Company. 16. SEVERABILITY. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. The parties agree, however, that in the event any provision of this Agreement shall be declared invalid or unenforceable, the parties shall negotiate a new provision achieving to the extent possible the purpose of the invalid provision. 17. DEFINITION OF BUSINESS DAY. For purposes of this Agreement, "Business Day" means any day on which the New York Stock Exchange, Inc. is open for trading. If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and each of the several Underwriters. Very truly yours, CAVION TECHNOLOGIES, INC. By ------------------------------------- David J. Selina President and Chief Executive Officer Confirmed and accepted as of the date first above written: NEIDIGER, TUCKER, BRUNER, INC. As Representative of the several Underwriters named in the attached Schedule I hereto By: NEIDIGER, TUCKER, BRUNER, INC. By ----------------------------------------- Anthony B. Petrelli Senior Vice President SCHEDULE I Number of Firm Name of Underwriter Shares to be Purchased - ------------------ Neidiger, Tucker, Bruner, Inc............... --------- TOTAL 1,200,000 ========= ANNEX A Matters to be Covered in the Opinion of Gorsuch Kirgis LLP, Counsel for the Company (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority necessary to own or hold its properties and conduct the business in which it is presently engaged as described in the Prospectus and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the character of the business conducted by it or the properties owned or held by it make such qualification necessary. (ii) The authorized, issued and outstanding share capital of the company as of the effective date of the Registration Statement is as set forth under the caption "Capitalization" in the Prospectus, the Common Stock and the Representative's Warrants conform to the descriptions thereof contained under the captions "Description of Securities" and "Underwriting" in the Prospectus. The outstanding shares of Common Stock have been, and the Shares upon issuance and delivery and payment therefor in the manner herein described and in the Representative's Warrants, will be, duly authorized, validly issued, fully paid and nonassessable. There are no preemptive or, except as described in the Registration Statement, other rights to subscribe for or to purchase from the Company, or any restriction upon the voting or transfer of, any Common Stock pursuant to the Company's Articles of Incorporation or Bylaws, as amended, or other governing documents or, to the best knowledge of such counsel, any agreement or other instrument to which the Company is a party or by which it is bound, except restrictions under applicable securities laws. (iii) To the best of such counsel's knowledge, the Company is not, or with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery hereof or of the Representative's Warrants or consummation of the transactions contemplated hereby or thereby result in a violation of, or constitute a default under, the Company's Articles of Incorporation or Bylaws, as amended, or other governing documents of the Company, or any agreement, indenture or other instrument to which the Company is a party or by which it is bound nor will the performance by the Company of its obligations hereunder or under the Representative's Warrants violate any law, rule, administrative regulation or decree of any court or any governmental agency or body having jurisdiction over the Company or any of its properties which would have a material and adverse effect, or result in the creation or imposition of any lien, charge, claim or encumbrance, upon any property or asset of the Company. (iv) Each of this Underwriting Agreement, the Representative's Warrants and the Financial Consultant Agreement has been duly authorized, executed and delivered by the Company, constitutes the valid and binding agreement of the Company, and is enforceable against the Company in accordance with its terms except insofar as rights to indemnity and/or contribution may be limited by applicable securities laws or the public policy underlying such laws and except as enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, and be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (v) The shares of Common Stock issuable upon exercise of the Representative's Warrants have been duly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of the Representative's Warrants, respectively, will be duly and validly issued, fully paid and nonassessable. (vi) The certificates representing the Shares and the Representative's Warrants are in due and proper form. (vii) The information, if any, required to be set forth in the Registration Statement in answer to Item ----- of Form SB-2 (insofar as its relates to such counsel) is to the best of such counsel's knowledge accurately and adequately set forth therein in all material respects, and the description of the Company's Equity Incentive Plan and other option arrangements, and the shares and options which may be issued and granted thereunder, set forth in the Prospectus is accurate in all material respects. (viii) All descriptions in the Prospectus of statutes, regulations, legal or governmental proceedings, contracts and other documents and the description of the consequences to the Company of such laws, proceedings or documents are accurate and fairly present the information required to be shown; and to the best knowledge of such counsel, there are no contracts or documents of a character required to be summarized or described in the Prospectus or to be filed as exhibits to the Registration Statement which are not so summarized, described or filed, nor to the best knowledge of such counsel, is there any pending or threatened litigation or any governmental proceeding, statute or regulation required to be described in the Prospectus which is not so described. (ix) To the best of such counsel's knowledge, no holder of any securities of the Company has any right to require registration of shares of Common Stock or other securities of the Company under the Act, except as any such right may arise under the Representative's Warrant Agreement. (x) The presently outstanding shares of Common Stock of the Company were issued in transactions which were not subject to the registration provisions of the Act and applicable state securities laws. To the best knowledge of such counsel, there is a reasonable basis to conclude that neither the offering nor sale of any presently outstanding shares of Common Stock will be integrated with the offering of the Shares for purposes of registration under the Act or qualification under any state securities laws. (xi) Except for the order of the Commission declaring the Registration Statement effective under the Act, and except for permits and similar authorizations required under the securities or "Blue Sky" laws of certain jurisdictions and for such permits and authorizations which have been obtained, no consent, approval, authorization or order of any federal or state court, governmental agency or body is required in connection with the consummation by the Company of the transactions contemplated by this Underwriting Agreement, the Representative's Warrants or the Financial Consulting Agreement. (xii) The Registration Statement and all post-effective amendments thereto have become effective under the Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending before or threatened by the Commission or any state of the United States or other regulatory body and all filings required by Rule 424 under the Act in connection with the public offering of the Shares have been made within the time periods required; and the Registration Statement and the Prospectus and any amendment or supplement thereto, as of their respective effective dates, comply as to form in all material respects with the requirements of the Act (except that counsel need express no opinion with respect to the financial statements, management's discussion and analysis or other financial data included therein). (xiii) The Company meets all the requirements for filing on Form SB-2. (xiv) The Company is not, and following completion of the offering of the Shares and receipt and intended investment of proceeds therefrom as described in the Final Prospectus, will not be, an "investment company" as defined in the Investment Company Act of 1940, as amended. In rendering the foregoing opinion, counsel may state that such opinion is limited to federal and applicable state law, and rely, as to matters of fact, upon certificates of responsible officers of the Company and on certificates of public officials, and may base its opinion upon such reasonable investigations and assumptions as shall be set forth in such opinion. In rendering such opinion such counsel may rely, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to counsel to the Underwriters) of other counsel familiar with the applicable laws and admitted to practice in the applicable jurisdiction. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that in their opinion you and they are justified in relying thereon. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, representatives of the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement and related matters were discussed and; although such counsel has not independently verified, is not passing upon and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement, no facts have come to the attention of such counsel that lead them to believe that the Registration Statement, as of the date it is declared effective by the Commission, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as of the Closing Date includes an untrue statement of a material tact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need not comment as to the financial statements, management's discussion and analysis, and other financial data included in the Registration Statement, the Prospectus or the exhibits to the Registration Statement). ANNEX B Matters to be Covered in the Opinion of Special Counsel 1. such counsel represents the Company in certain matters relating to intellectual property, including patents and proprietary rights; 2. such counsel is familiar with the technology and processes used by the Company in its business and the manner of its use and has read the portions of the Registration Statement and the Prospectus entitled "Risk Factors-- --------------," and "Business-- -----------------," "Business-- - ---------------," "Proprietary Rights, Trade Names and Trademarks"; 3. to the extent that the Intellectual Property Portion contains descriptions of the Company's patent applications and patent applications licensed to the Company (collectively the "Applications") and patents issued to or otherwise owned or licensed by it (collectively the "Patents"), such descriptions are accurate and do not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 4. such counsel has reviewed the Patents and Applications which Patents and Applications are described in the Intellectual Property Portion, and based upon such review, a review of the prior art references made known to counsel and discussions with Company personnel, such counsel is aware of no valid United States or foreign issued patent that is or would be infringed by the activities of the Company in the manufacture, use or sale of any product or proposed product or other material as described in the Prospectus and made or used according to the Patents or the Applications; 5. The Applications have been properly prepared and filed on behalf of the Company or its strategic partners, as the case may be, and are being diligently pursued by the Company or its strategic partners, as the case may be; each of the Applications is assigned or licensed to the Company or its strategic partners, as the case may be; to such counsel's knowledge, no other entity or individual has any right in or to any of the inventions claimed in any of the Applications or patents sought to be issued therefrom; and each of the Applications discloses patentable subject matter; and 6. such counsel is aware of no pending or threatened judicial, administrative or other proceedings by governmental authorities or others relating to the Patents or Applications challenging the validity or scope of the Patents or Applications (other than customary prosecution proceedings relating to the Applications). Such counsel shall also state that it has no reason to believe that the information contained in the Intellectual Property Portion of the Registration Statement or the Prospectus, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the information contained in the Intellectual Property Portion of the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering any such opinion, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and public officials, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. References to the Registration Statement and the Prospectus in this Annex shall include any amendment or supplement thereto at the date of such opinion. ANNEX C Matters to be Covered in the Comfort Letter of Arthur Anderson LLP 1. confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; 2. stating their opinion that, (i) the financial statements examined by them of the Company at all dates and for all periods referred to in their opinion and included in the Registration Statement and Prospectus, comply in all material respects with the applicable accounting requirements of the Act and the published Rules and Regulations thereunder with respect to registration statements on Form SB-2, (ii) on the basis of certain indicated procedures (but not an examination in accordance with generally accepted accounting principles), including examinations of the instruments of the Company set forth under "Capitalization" in the Prospectus, a reading of the latest available interim unaudited financial statements of the Company, whether or not appearing in the Prospectus, inquiries of the officers of the Company or other persons responsible for its financial and accounting matters regarding the specific items for which representations are requested below and a reading of the minute books of the Company, nothing has come to their attention which would cause them to believe that during the period from the last audited balance sheet included in the Registration Statement to a specified date not more than five days prior to the date of such letter (a) there has been any change in the capital stock or other securities of the Company or any payment or declaration of any dividend or other distribution in respect thereof or exchange therefor from that shown on its audited balance sheets or in the debt of the Company from that shown or contemplated under "Capitalization" in the Registration Statement or Prospectus other than as set forth in or contemplated by the Registration Statement or Prospectus; (b) there have been any material decreases in net current assets or net assets as compared with amounts shown in the last audited balance sheet included in the Prospectus so as to make said financial statements misleading; and (c) on the basis of the indicated procedures and discussions referred to in clause (ii) above, nothing has come to their attention which, in their judgment, would cause them to believe or indicate that (1) the unaudited financial statements and schedules set forth in the Registration Statement and Prospectus do not present fairly the financial position and results of the Company, for the periods indicated, in conformity with the generally accepted accounting principles applied on a consistent basis with the audited financial statements, and (2) the comparison of specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards), are not in agreement; 3. stating that they have not during the immediately preceding five year period (or such shorter period as the Company shall have been in existence) brought to the attention of any of the Company's management any "material weakness," as defined in Statement of Auditing Standard No.60 "Communication of Internal Control Structure Related Matters Noted in an Audit," in any of the Company's internal controls; 4. stating that they have in addition carried out certain specified procedures, not constituting an audit, with respect to certain pro forma financial information which is included in the Registration Statement and the Prospectus and that nothing has come to their attention as a result of such procedures that caused them to believe such unaudited pro forma financial information does not comply in form in all respects with the applicable accounting requirements of Item 301 Regulation S-B or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of that information; and 5. statements as to such other matters incident to the transaction contemplated hereby as the Representative may request. EX-23.1 3 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) in this Registration Statement on Form SB-2 dated October 29, 1999. /s/ Arthur Andersen LLP Denver, Colorado, October 29, 1999. -----END PRIVACY-ENHANCED MESSAGE-----