-----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, QCi5zPY6jyfgdvfuF6alnW761DK52b5m3Sh6HeM8AzOzqKeL+BTXLAQg5GOhsyRh r7bG3zPqn4DpqBjTtDrgbw== 0001015402-05-002911.txt : 20050611 0001015402-05-002911.hdr.sgml : 20050611 20050603112213 ACCESSION NUMBER: 0001015402-05-002911 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20050603 DATE AS OF CHANGE: 20050603 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUEGATE CORP CENTRAL INDEX KEY: 0000768216 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870565948 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-125465 FILM NUMBER: 05876226 BUSINESS ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7136827400 MAIL ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: CRESCENT COMMUNICATIONS INC DATE OF NAME CHANGE: 20010921 FORMER COMPANY: FORMER CONFORMED NAME: BERENS INDUSTRIES INC DATE OF NAME CHANGE: 19990823 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL AIR CORP DATE OF NAME CHANGE: 19970521 SB-2 1 body.txt BLUEGATE CORPORATION SB-2 06-02-2005 As filed with the Securities and Exchange Commission on June 3, 2005 Registration No. ___ United States Securities and Exchange Commission Washington, D.C. 20549 FORM SB-2 Registration Statement Under The Securities Act of 1933 BLUEGATE CORPORATION (Exact name of small business issuer in its charter) Nevada 8090 76-0640970 (State or other jurisdiction of (Primary standard (I.R.S. Employer incorporation or organization) industrial code) Identification Number) BLUEGATE CORPORATION 701 North Post Oak Road, Suite 630 Houston, Texas 77024 voice: (713) 686-1100 fax: (713) 682-7402 (Address and telephone number of principal executive offices and principal place of business) Manfred Sternberg, CEO and President 701 North Post Oak Road, Suite 630 Houston, Texas 77024 voice: (713) 686-1100 fax: (713) 682-7402 (Name, address, including zip code, and telephone number, including area code, of agent for service) With a Copy to: Joel Seidner, Esq. 1240 Blalock, Suite 250 Houston, Texas 77055 voice: (713) 461-2627 ext. 210 fax: (713) 461-2633 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_]
CALCULATION OF REGISTRATION FEE Proposed Maximum Title of Securities Amount Offering Proposed to be to be Price Per Maximum Amount of Registered Registered Share Aggregate Registration (1) Offering Price Fee - ------------------------------------------------------------------------------------- Common Stock 980,000 shares $ 1.50 $ 1,470,000.00 $ 174.00 par value $0.001 Common Stock 1,688,630 shares $ 1.50 $ 2,532,945.00 $ 299.00 par value $0.001 underlying options and warrants Common Stock 200,000 shares $ 1.50 $ 300,000.00 $ 36.00 par value $0.001 underlying convertible debenture ------------- TOTAL REGISTRATION FEE $ 509.00 ============= - -------------------------------------------------------------------------------------
- ----------------------------- (1) The Proposed Maximum Offering Price Per Share was computed pursuant to Rule 457 under the Securities Act of 1933, as amended (the "Securities Act") solely for the purpose of calculating the registration fee. This fee computation is based on the closing price of the common stock on the OTCBB under the stock symbol "BGAT' on June 2, 2005. 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. FORM SB-2 PART I INFORMATION REQUIRED IN A PROSPECTUS WE HAVE FILED A REGISTRATION STATEMENT RELATING TO THESE SECURITIES WITH THE SECURITIES AND EXCHANGE COMMISSION. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject To Completion June 3, 2005 PROSPECTUS BLUEGATE CORPORATION 701 North Post Oak Road, Suite 630 Houston, Texas 77024 voice: (713) 686-1100 fax: (713) 682-7402 2,868,630 Shares of Common Stock This prospectus relates to the sale of up to 2,868,630 shares of our common stock by Selling Stockholders. We will not receive proceeds from the sale of our shares by the Selling Stockholders. However, we may receive proceeds from the exercise of the options and warrants overlying the common stock. If the all the options and warrants are exercised, we may receive $1,708,630. Our common stock is traded on the OTCBB under the trading symbol BGAT." INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS BEFORE MAKING A DECISION TO PURCHASE OUR STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is ___ , 2005
TABLE OF CONTENTS Page Available Information 5 Prospectus Summary 5 Risk Factors 6 Information Regarding Forward-Looking Statements 9 Use of Proceeds 9 Description of Business 9 Description of Property 16 Financial Statements 16 and F-1 Management's Discussion and Analysis 17 Market for Common Equity and Related Stockholder Matters 21 Directors, Executive Officers, Promoters and Control Persons 22 Executive Compensation 24 Security Ownership of Certain Beneficial Owners and Management 27 Certain Relationships and Related Transactions 30 Description of Securities 31 Selling Stockholders 31 Plan of Distribution 32 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 34 Legal Proceedings 34 Interest of Named Experts and Counsel 34 Disclosure of Commission Position on Indemnification for Securities Act Liabilities 34
AVAILABLE INFORMATION We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We file periodic reports, proxy materials and other information with the Securities and Exchange Commission (the "Commission"). In addition, we will furnish stockholders with annual reports containing audited financial statements certified by our independent accountants and interim reports containing unaudited financial information as it may be necessary or desirable. We will provide without charge to each person who receives a copy of this prospectus, upon written or oral request, a copy of any information that is incorporated by reference in this prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to: Manfred Sternberg, CEO and President, 701 North Post Oak Road, Suite 630, Houston, Texas 77024, voice: (713) 686-1100 fax: (713) 682-7402. Our Web site is www.bluegate.com. We have filed with the Commission a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the securities offered by this prospectus. This prospectus does not contain all of the information set forth in the Registration Statement, parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to us and this offering, reference is made to the Registration Statement, including the exhibits filed therewith, that may be inspected without charge at the public reference room maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, tel. 1-800-SEC-0330. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates (the Commission may be moving to 100 F Street N.E., Washington , D.C. 20549 in the near future). The Web site of the Commission is www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. Visitors to the Commission's Web site may access such information by searching the EDGAR database. PROSPECTUS SUMMARY We have developed a secured virtual private network ("VPN")for healthcare organizations and physician offices that is HIPAA compliant (Health Insurance Portability and Accountability Act). In 2004, we filed an amendment to our Articles of Incorporation to change our name to Bluegate Corporation. Our former name was Crescent Communication, Inc. In this prospectus, we refer to ourselves as "Bluegate," "We," Us," "Our" and the "Company." References to our common stock herein give effect to our 20:1 reverse stock split which occurred in 2004. In 2004, we took corporate action to increase the number of our authorized shares of common stock to 50,000,000 shares of common stock. Our executive offices are located at: Bluegate Corporation, 701 North Post Oak Road, Suite 630, Houston, Texas 77024, voice: (713) (713) 686-1100 fax: (713) 682-7402 Our growth is dependent on our attaining profit from our operations and our raising capital through the sale of stock or debt. There is no assurance that we will be able to raise any equity financing or sell any of our services at a profit. Our functional currency is the U.S. dollar. Our independent auditors included an explanatory paragraph in their report, dated March 28, 2005, indicating substantial doubt exists relating to our ability to continue as a going concern. Our stock is traded on the OTCBB. Our trading symbol is "BGAT." We are a provider of information technology ("IT") outsourcing and managed security solutions for the healthcare industry. All of our services are compliant with the Health Insurance Portability and Accountability Act ("HIPAA"). We call our HIPAA business "HIT" (Healthcare Information Technology). We have reached the milestone of 1,000 member physicians in our secure medical network. We have created and we operate the first high-speed broadband VPN (Virtual Private Network) designed exclusively for the health-care industry's bandwidth-devouring applications and privacy requirements. Our HIPAA-compliant managed security solution utilizes monitored security appliances and software to extend hospitals' medical-grade networks all the way to the edge, including every physician and facility they touch -- ensuring each is as secure as the hospital itself. Our member physicians are from independent private medical practices throughout Texas and portions of Louisiana and utilize an array of our monitored security appliances and services, including: secured Internet services; managed firewall and virtual private networks (VPN); physician practice network maintenance; and IT outsourcing for medical practices and hospitals. Physicians need a devoted, secure, standardized medical-grade connection with 24/7 maintenance and support. We provide a cost-effective, efficient way for hospitals, clinics, laboratories and other healthcare providers to transmit confidential documents, images and other sensitive patient information across the Internet to and from physicians and patients to enable physicians to comply with HIPAA. Our medical-grade network has superior availability and allows medical practices to reduce the time and costs associated with network connectivity. We provide a competitive advantage to physicians and their medical practices in that HIT allows remote access into their own networks for them to check diagnoses and procedures remotely, transmit images, manage prescriptions and expedite communication among healthcare providers which ultimately enhances patient care. Additionally, HIT offers physician office managers the ability to access their network off-site 24/7 so they can run reports and process claims at their convenience. With the achievement of our 1,000 membership milestone, we are now in a position to begin the next phase of our business strategy which is to deliver key medical-focused content and applications using HIT. We plan to fill the HIT pipeline with content such as imaging systems, diagnostic capabilities, digital dictation, document imaging in ASP and client server, off-site data back-up, charge capture systems, and clinical decision support databases. We also are positioning our member physicians to seamlessly participate in the growing effort to create Regional Healthcare Information Organizations (RHIO) around the country as part of the National Healthcare Infrastructure Initiative (NHII) which should likely include economic incentives for providers to invest in information technology." RISK FACTORS You should carefully consider the following risk factors before purchasing our common stock. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties that are not known to us or that we do not consider to be material at this time. If the events described in these risks occur, our business, financial condition and results of operations would likely suffer. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. This section discusses the business risk factors that might cause those differences. RISKS RELATED TO OUR FINANCIAL OPERATIONS: OUR PAST LOSSES RAISE DOUBTS ABOUT OUR ABILITY TO OPERATE PROFITABLY OR CONTINUE AS A GOING CONCERN. We have experienced substantial operating losses. We expect to incur significant operating losses until sales increase. We will also need to raise sufficient funds to finance our activities. We may be unable to achieve or sustain profitability. Our independent auditors included an explanatory paragraph in their report, dated March 28, 2005, indicating substantial doubt about our ability to continue as a going concern. These factors raise substantial doubt exists relating to our ability to continue as a going concern. OUR EXPECTED FUTURE LOSSES RAISE DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN UNLESS WE CAN RAISE CAPITAL. Future events may lead to increased costs that could make it difficult for us to succeed. To raise additional capital, we may sell additional equity securities, or accept debt financing or obtaining financing through a bank or other entity. There is no limit as to the amount of debt we may incur. Additional financing may not be available to us or may not be available on terms acceptable to us. If additional funds are raised through the issuance of additional stock, there may be a significant dilution in the value of our outstanding common stock. WE MAY NOT BE ABLE TO RAISE THE REQUIRED CAPITAL TO CONDUCT OUR OPERATIONS. We may require additional capital resources in order to conduct our operations. If we cannot obtain additional funding, we may make reductions in the scope and size of our operations. In order to grow and expand our business, and to introduce our services to the marketplace, we will need to raise additional funds. RISKS RELATED TO OUR BUSINESS OPERATIONS: COMPETITION. Many of our competitors have greater financial, marketing and information technology resources than we do. The current scope of our operations is limited to Texas and Louisiana. We could easily lose our first-to-market advantage if larger competitors aggressively entered the HIPAA compliance marketplace. IF WE DO NOT KEEP PACE WITH OUR COMPETITORS AND WITH TECHNOLOGICAL AND MARKET CHANGES, OUR SERVICES MAY BECOME OBSOLETE AND OUR BUSINESS MAY SUFFER. The market for our services is competitive and could be subject to rapid technological changes. We believe that there are potentially many competitive approaches being pursued, including some by private companies from which information is difficult to obtain. Many of our competitors have significantly greater resources and more services that directly compete with our services. Our competitors may have developed, or could in the future develop, new technologies that compete with our services even render our services obsolete. WE COULD HAVE SYSTEMS FAILURES THAT COULD ADVERSELY AFFECT OUR BUSINESS. Our business depends on the efficient and uninterrupted operation of our VPN, computer and communications hardware systems and infrastructure. Although we have taken precautions against systems failure, interruptions could result from natural disasters as well as power losses, Internet failures, telecommunications failures and similar events. Our systems are also subject to human error, security breaches, computer viruses, break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems. We also lease telecommunications lines from local and regional carriers, whose service may be interrupted. Any damage or failure that interrupts or delays network operations could materially and adversely affect our business. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADEQUATELY ADDRESS SECURITY ISSUES. We have taken measures to protect the integrity of our technology infrastructure and the privacy of confidential information. Nonetheless, our technology infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If a person or entity circumvents its security measures, they could jeopardize the security of confidential information stored on our systems, misappropriate proprietary information or cause interruptions in our operations. We may be required to make substantial additional investments and efforts to protect against or remedy security breaches. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. RISKS RELATED TO OUR SECURITIES: THE SHARES AVAILABLE FOR SALE BY THE SELLING STOCKHOLDERS COULD SIGNIFICANTLY REDUCE THE MARKET PRICE OF OUR COMMON STOCK. A total of 2,868,630 shares of our common stock are being registered for resale under this prospectus. The market price of our common stock could drop if a substantial amount of these shares are sold in the public market. A drop in the market price will reduce the value of your investment. SELLING STOCKHOLDERS MAY SELL SECURITIES AT ANY PRICE OR TIME WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK. After effectiveness of this prospectus, the Selling Stockholders may offer and sell their shares at a price and time determined by them. The timing of sales and the price at which the shares are sold by the Selling Stockholders could have an adverse effect upon the public market for our common stock. SINCE WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO DO SO IN THE FUTURE, A PURCHASER OF OUR COMMON STOCK WILL ONLY REALIZE A GAIN ON HIS INVESTMENT IF THE MARKET PRICE OF OUR COMMON STOCK INCREASES. We have never paid, and do not intend, to pay any cash dividends on our common Stock for the foreseeable future. An investor in this offering, in all likelihood, will only realize a profit on his investment if the market price of our common stock increases in value. BECAUSE SHARES OF OUR COMMON STOCK MAY MOST LIKELY TRADE UNDER $5.00 PER SHARE, THE APPLICATION OF THE PENNY STOCK REGULATION COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND MAY AFFECT THE ABILITY OF HOLDERS OF OUR COMMON STOCK TO SELL THEIR SHARES. Our securities may be considered a penny stock. Penny stocks generally are defined as securities with a price of less than $5.00 per share other than securities registered on national securities exchanges or quoted on the Nasdaq stock market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to penny stock rules that impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of penny stock securities and have received the purchaser's written consent to the transaction prior to the purchase. For any transaction involving a penny stock, unless exempt, the penny stock rules require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements must be sent by the broker-dealer disclosing recent price information on the limited market in penny stocks. The penny stock rules may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the public market. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. From time to time, certain of our stockholders may be eligible to sell all or some of their shares of restricted common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have material adverse effect on the market price of our securities. RISKS RELATED TO OUR CORPORATE GOVERNANCE: OUR OFFICERS AND DIRECTORS HAVE LIMITED LIABILITY AND HAVE INDEMNITY RIGHTS. The Nevada Revised Statutes, our Articles of Incorporation and our By-Laws provide that we may indemnify our officers and directors against losses or liabilities which arise in their corporate capacity. The effect of these provisions could be to dissuade lawsuits against our officers and directors. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this prospectus, including, without limitation, statements containing the words "believes," "anticipates," "expects," and other words of similar import, are "forward-looking statements." Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. In addition to the forward-looking statements contained in this prospectus, the following forward-looking factors could cause our future results to differ materially from our forward-looking statements: market acceptance of our services, competition, the availability of capital and financing, changes in technology, changes in government regulation and government compliance. USE OF PROCEEDS We will pay for the cost of registering the shares of common stock in this offering. We will not receive any proceeds from the sale of the common stock by the Selling Stockholders. However, we may receive proceeds from the exercise of the options and warrants overlying the common stock. If all the options and warrants overlying the common stock in this offering, we will receive proceeds in the aggregate amount of $$1,708,630. We will use such proceeds for general corporate purposes and working capital. DESCRIPTION OF BUSINESS INTRODUCTION We have developed a secured VPN for the healthcare enterprise and the physician's office that will be HIPAA compliant. Our Web site is www.bluegate.com. In 2004, we filed an amendment to our Articles of Incorporation to change our name to Bluegate Corporation. Our former name was Crescent Communication, Inc. In this prospectus, we refer to ourselves as "Bluegate", "We", Us" and "Our." References to our common stock herein give effect to our 20:1 reverse stock split which occurred in 2004. In 2004, we took corporate action to increase the number of our authorized shares of common stock to be 50,000,000 shares of common stock. Our executive offices are located at: Bluegate Corporation, 701 North Post Oak Road, Suite 630, Houston, Texas 77024, tel. voice: (713) 686-1100 fax: 713-682-7402. Our Web site is www.bluegate.com. Our growth is dependent on attaining profit from our operations and our raising capital through the sale of stock or debt. There is no assurance that we will be able to raise any equity financing or sell any of our services at a profit. Our functional currency is the U.S. dollar. Our independent auditors included an explanatory paragraph in their report, dated March 28, 2005, indicating substantial doubt exists relating to our ability to continue as a going concern. Our stock is traded on the OTCBB. Our trading symbol is "BGAT." CORPORATE HISTORY On June 21, 2004, we sold our Internet Service Provider ("ISP") customer base. Under the terms of the ISP sales agreement, the total sales price was $1,150,000, consisting of $900,000 of up-front cash paymants and $250,000 in the form of a one-year promissory note due June 2005. During the due diligence period prior to June 21, 2004, the buyer loaned us $400,000 which was repaid by crediting $400,000 to the purchase price. We decided to exit the ISP business to concentrate on our HIPAA business. The ISP business had become a commodity business. However, we believe that HIPAA service providers will have a big future. In 1996, Congress passed the Health Insurance Portability and Accountability Act ("HIPAA"). Two of the many features of HIPAA were a mandate that the healthcare industry move toward using electronic communication technology to streamline and reduce the cost of healthcare, and a requirement that healthcare providers treat virtually all healthcare information as confidential, especially when electronically transmitted. In 2003, a minority amount of our revenue was from our HIPAA business. In 2004, a majority of our revenue was from our HIPAA business. In 2005 we anticipate that over 90% of our revenue will be from our HIPAA business. In 2004, we contracted with the largest healthcare system in Texas, Memorial Hermann Health Net Providers (MHHNP), to our HIT, also called BLUEGATE SHIELD (tm), provide physicians with Internet bandwidth and managed security services using our VPN. OUR BUSINESS--OVERVIEW Although we have disposed of our ISP business, we retained our Virtual Private Network ("VPN") capability. A VPN is an extremely secure method of electronic communications, as opposed to an ordinary Internet connection which is not as secure. HIPAA requires standardization of electronic patient health, administrative and financial data, unique health identifiers for individuals, employers, health plans and healthcare providers, and security standards protecting the confidentiality and integrity of "individually identifiable health information," past, present or future. Virtually all healthcare organizations - including all healthcare providers, health plans, public health authorities, healthcare clearinghouses, and self-ensured employers - as well as life insurers, information systems vendors, various service organizations, and universities must be HIPAA compliant. We digitally link physician practices, hospitals, laboratories, pharmacies, insurers and other healthcare businesses to each other. BLUEGATE (tm) is our branded HIPAA-compliant broadband digital VPN connectivity gateway for healthcare providers nationally. Aside from our network, there is not a generally accepted and available secure broadband answer to physicians' "last mile" problem which is the problem of completing the space between a digital telecommunications backbone (the Internet or VPN) and the offices of independent healthcare providers. We bridge that last mile gap using a variety of local and national data networks that create a vast footprint for our high speed secure VPN data network. Our mission is to support the medical community by providing secure, reliable VPN connectivity. Our VPN also provides connectivity to the Internet. Our VPN provides a secure platform for healthcare industry participants (e.g., physicians, hospitals, clinics, labs, insurance companies, pharmacies, etc.) to exchange patient information. Since virtually all healthcare establishments already have an Internet connection of some kind, they already have a budget for communications connectivity. As a result, the connectivity cost for a healthcare provider using our VPN is already in their budget. In most situations, it is not necessary for a healthcare provider to pay more than they are paying now to ISPs to instead use our VPN. At the same time the healthcare providers get a much higher level of communications security which they need to comply with HIPAA. Our VPN is "always on." In connection with our VPN, we act as a network service provider and help desk for the healthcare participant. The benefits of our VPN and our branded services to the healthcare industry are: COST SAVINGS: VPNs enable healthcare organizations to utilize cost effective third-party secure Internet transport to connect remote physician offices and remote users to the main corporate site, thus eliminating expensive dedicated WAN links and modem banks. Furthermore, with our cost-effective, high-bandwidth technologies such as DSL, organizations can use VPNs to reduce their connectivity costs while simultaneously increasing remote connection bandwidth. SECURITY: VPNs provide the highest level of security using advanced encryption and authentication protocols that protect data from unauthorized access. SCALABILITY: VPNs allow hospitals, insurance companies, pharmacies and labs to utilize Internet infrastructure to easily add new users. These types of organizations are able to add large amounts of capacity without adding significant infrastructure or technology management resources. COMPATIBILITY WITH BROADBAND TECHNOLOGY: VPNs allow remote healthcare providers to take advantage of cost effective, high speed, broadband connectivity, such as DSL and Cable, when gaining access to the larger healthcare organization's networks, providing the level of security and significant efficiency sought to be implemented by HIPAA. SECURE E-MAIL: Our proprietary, branded, secure e-mail platform allows secure e-mail with others inside and outside of our VPN. Our secure e-mail platform is called BLUEGATE MAIL (tm). Our proprietary research shows that the medical market is extremely receptive to employing a secure e-mail system, and HIPAA is the catalyst for widespread implementation of such a service. EASE-OF-USE: Bluegate Mail is transparent: customers send e-mail the way they always have. POLICY-BASED CONTROL: Bluegate Mail security policies are enforced at the gateway, controlling what is encrypted, virus scanned, filtered, archived, or flagged for review. This takes the burden off the employee, ensuring that confidential information is always protected. MESSAGE CONTROL: The customer as the e-mail sender maintains control over his message. He decides who can read the document, when and for how long. He can de-authorize a recipient or even shred the key before the document is read. PUSH DELIVERY: The e-mail recipient receives the secure e-mail just as he receives conventional e-mail. MULTIPLE RECIPIENT OPTIONS: Decryption is invisible if the partner or customer has an affiliate gateway, or the decryption is done in one easy step with a Plug-In or using our unique Send Anywhere option. Alternately, the recipient's S/MIME system can decrypt the e-mail. SECURE REPLY: With our Secure Reply feature, recipients can safely reply to an encrypted message and engage in two-way confidentiality without any client-side software. INSTANT MESSENGER: Our customers have the ability to securely use Instant Messenger (IM) with other physicians on our network. We call our service BLUEGATE CONSULT (tm). It enables physicians to securely consult with other physicians in real time. We own an OEM license for an Instant Messaging service named Sametime (tm) from IBM. In conjunction with this, we are a member in IBM's Partner World for Developers program. IBM's service will be seamlessly integrated into our gateway software. The primary capabilities of IBM's service are: - Instant Messaging - The ability to communicate real-time with another party using different methods of encryption to secure communications depending on the need and feature being used. - Instant Message Conferencing - The ability to communicate real-time with multiple parties. - Instant Meeting - The ability to view screen contents and communicate real-time with multiple parties. - Other features that may prove to be beneficial including audio/video conferencing. Lotus Sametime is by far the leading instant messaging, presence awareness and Web conferencing application of choice for businesses. Osterman Research has reported that over two-thirds of the companies that have standardized on an instant messaging (IM) platform have selected Lotus Sametime, and IDC has already credited Lotus Sametime as the market leader in Web conferencing. Over 60% of the Global Fortune 100 currently use Sametime to boost productivity and control costs, including 8 out of the top 10 worldwide commercial banks, 7 out of the top 10 worldwide automobile manufacturers, 4 out of the top 5 worldwide diversified financial institutions and 5 out of the top 10 U.S.-based pharmaceuticals companies. IM is rapidly moving from teenagers' computer screens to their parents' computer screens in the workplace. International Data Corp., a Framingham, Mass., market-research firm, reported that by the end of 2002, 20 million people world-wide were using IM in businesses, and it predicts that figure will soar to 300 million by the end of 2005. We also act as a resource to assist our customers in their obtaining software for HIPAA-specific activities such as medical record keeping, health insurance claims, patient appointment scheduling, prescriptions, clinic scheduling and lab work. Since our VPN is secure, it is possible for direct physician-patient e-mail communications to occur. The same secure, direct communication by e-mail is available among all the healthcare industry participants. Our VPN is scalable to fit any size individual customer or any number of customers. Some customers will decide to keep certain third-party vendor HIPAA application software on their internal system, while other customers may chose to use us as an application provider. In either case, the backbone of HIPAA compliance is our VPN. We believe that we have the only HIPAA compliant, dedicated VPN in existence. OUR BUSINESS--VPN AND HIPAA RELATED SOFTWARE A vitally important component to us is BLUEGATE SHIELD (tm), our security consulting division. Medical institutions face a complicated situation complying with HIPAA, which requires all healthcare organizations, such as hospitals, nursing homes, physicians, managed care organizations and medical insurance companies that deal with private patient data in electronic form, to secure and transfer that data appropriately. To comply with HIPAA, an organization must first know where its electronic vulnerabilities. Then it must mitigate those vulnerabilities. BLUEGATE SHIELD (tm) is our security consulting division. Bluegate offers network security consulting services to provide highly specialized, unmatched expertise largely gained from years of experience in military and classified backgrounds. These services focus on providing comprehensive, operational security for corporate IP networks. Instead of concentrating on policy-intensive exercises and reviews, Bluegate security consulting teams focus on the bits and bytes of the network: where the security vulnerabilities are; how to fix them; and what architectural changes the network should undergo to provide the level of security that patients want and organizations must provide. In a customized offering tailored toward the healthcare industry, and in conjunction with Bluegate's IT Solutions Group, we offer a comprehensive HIPAA Security Posture Assessment. By providing a network security-oriented "snapshot in time" and by taking the unique perspective of quantifying the current level of network security, Bluegate's Security Posture Assessment service can help an organization effectively and objectively understand the security state of the network and identify areas to improve. We will offer services as cost-effectively as possible to physicians, ensuring that each expansion of the customer base is profitable. This can be accomplished by securing complementary revenues from firms that value these physicians as clients or that rely on broadband connectivity to create or enhance business partnerships with physicians. Such firms include insurance companies, pharmaceutical companies, laboratories, transcription services, financial services, application service providers and others. We sell, install, and maintain network components such as routers, Ethernet switches, and load-balancing devices from vendors such as Dell, Cisco and Netopia. As part of our network security solutions, we sell and configure hardware components for corporate firewalls. When these hardware components are sold as part of an enterprise network solution, it typically drives additional revenue in the form of professional engineering services. We derive revenue from professional services performed by our engineers or outsourcing partners relative to design, configuration, installation, monitoring, and maintenance. We offer high-end network services such as monitoring and maintenance of sophisticated VPNs and security implementations (firewalls). Unlike many ISPs, our network infrastructure is especially designed and equipped to offer these high-level managed services. We also sell tier-1 facilities, such as Level (3) Communications, SBC Communications, Time-Warner, Covad Communications, New Edge Networks, and El Paso Global for hosting and co-location with multiple paths to the Internet. OUR BUSINESS--MARKETING Healthcare digital connectivity is not about obtaining an Internet connection at the lowest possible price. It's about value, security and confidence. When selling our solutions to the healthcare community, we use HIPAA compliance as a persuasive, but nevertheless, secondary marketing tool. Instead, what creates Bluegate's immediate value proposition to physicians to join our network is the economic benefit and single source of solutions that our total offering provides. In 2004, Memorial Hermann Health Net Providers (MHHNP), announced to its physician members that MHHNP entered into an exclusive contract with us as the newest "member value" program for all its physicians. Pursuant to that contract, we are MHHNP's exclusive preferred Internet and VPN provider. We have established a secure data communication network for MHHNP's membership. The installation schedule began in 2004. As of May 24, 2005, we had 1,000 customers for our HIPAA compliant connectivity services, most of whom are physicians. Full implementation is expected to take place in 2005. MHHNP has been working towards a goal of establishing a secure data communication network among our physician membership. This secure VPN information platform will drive increased clinical integration within its physician organization and more tightly align MHHNP physicians with the necessary patient information shared with Memorial Hermann Hospital System. MHHNP's secure VPN provided by us allows compliance with HIPAA by MHHNP's physician network prior to HIPAA's April 2005 deadline. In support of this goal, MHHNP will provide each MHHNP physician with an appropriate level of hardware and support services as a result of being a MHHNP member in good standing. Contracting with us enables MHHNP to seamlessly support physician use of the Memorial Hermann Care4, a clinical information network, whether they are on campus, in their office, or at home. In practical terms, it is the difference between dealing with several IT support systems and/or ISPs, or, interfacing with a single point of contact when physicians are in need of Internet and/or information systems support. MHHNP is an independent network of physicians. It was founded in 1982 and is affiliated with the Memorial Hermann Healthcare System. MHHNP is governed by its own board of directors, all of whom are physicians, as state law requires. MHHNP membership includes nearly 3,000 physicians covering 15 counties in Southeast Texas. The network's goals are to improve the overall quality of patient care and create efficiencies that help lower the cost of healthcare for patients and providers. OUR BUSINESS--COMPETITION Our competitors include vendors of HIPAA software and Internet Protocol ("IP") networks whose security is questionable when looked at in terms of the HIPAA confidentiality compliance requirements. Our main advantage is our VPN and the ability to provide network service to our customers. Our goal is to install our VPN at customer locations and be ready to solve any VPN network problems. We have positioned ourselves as the "go to" organization for HIPAA compliant communications technology. There are many companies marketing into the healthcare segment of the market for information technology services. BellSouth and Sprint are two companies that are specifically marketing vertical market solutions to the healthcare industry. BellSouth has a healthcare management solution using their high speed service. Their practice management solution is operated over the Internet or via Web-based services to allow for the mobility of physicians and nurses working in healthcare. All transmissions are secured through encrypted data for protection, which is one of the most important concerns for healthcare providers today. BellSouth hosts the solution in their state-of-the-art business center, which provides bandwidth that has reliable lines of communication. Sprint is leveraging its current enterprise and business offerings and working with healthcare organizations to customize solutions that improve the quality of healthcare in the U.S. Sprint offers the healthcare providers with vertical key services such as Internet e-business solutions, security and firewall solutions, customer and contact center solutions, conferencing solutions, and other customized solutions. Sprint knows HIPAA regulations and how the changes are and will continue to affect the healthcare providers in the nation. Sprint also offers customized solutions for other vertical market such as finance, manufacturing, retail and government. Neither BellSouth nor Sprint have an interest, or successful experience, in dealing with small to medium businesses. Most physicians work in the small to medium business setting and they are the ones to which the healthcare industry wants to "connect." WebMD is another potential competitor that has a large number of physicians as customers for its practice management software called Medical Manager, as well as its claims clearinghouse. However, as a result of WebMd's merger and acquisition growth strategy, it does not offer any managed IT security services for physicians. As there has been no dominant player in this relatively new HIPAA market space, there has been no managed security service provider for WebMD to acquire. The Internet, VPN and data services market is extremely competitive, highly fragmented and has grown dramatically in recent years. The market is characterized by the absence of significant barriers to entry and the rapid growth in Internet and VPN usage among customers. Other competitors are: - Access and content providers, such as AOL, Microsoft , Earthlink and Time Warner; - Local, regional and national Internet service providers, such as Megapath, EarthLink, XO Communications and Mindspring; - Regional, national and international telecommunications companies, such as SBC, MCI and Allegiance Telecom; - On-line services offered by incumbent cable providers such as Time Warner; - DSL providers such as Covad. Most of our competitors have greater financial and other resources than we have, and there is no assurance that we will be able to successfully compete. CUSTOMERS Forecast of Growth in our HIPAA Customer Base. As of May 24, 2005, we -------------------------------------------------- had 1,000 customers for our HIPAA compliant connectivity services, most of whom are physicians. All of these customers have been added since we refocused our business activities in 2004 to concentrate on our Healthcare Information Technology ("HIT") business. We forecast an increase in the number of HIT customers throughout 2005. This forecast is based on the rate that we are currently acquiring new HIT customers. This growth in the number of HIT customers is tempered somewhat because we incur marketing costs when we add new customers. EMPLOYEES We currently have 22 full-time employees of whom 6 are in management positions. None of our employees is subject to a collective bargaining agreement. We believe that our employee relations are good. RECENT EVENTS STOCK-FOR-DEBT EXCHANGES. On March 31, 2005, we entered into separate agreements with (a) Manfred Sternberg, our director and CEO, (b) an entity (the "Sternberg Entity") under the control of Mr. Sternberg, and (c) three entities (collectively, the "Davis Entities") under the control of Robert Davis, a former director. Pursuant to these agreements, we issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities shares of our common stock in satisfaction of indebtedness separately owed by us to them. This indebtedness totaled $130,018, $154,297, and $222,000 for Mr. Sternberg, the Sternberg Entity and the Davis Entities, respectively. Of the preceding amounts of indebtedness, $55,185 of the indebtedness owned to Mr. Sternberg was for a loan while $74,833 of such indebtedness was for accrued salary, all of the indebtedness owned to the Sternberg Entity was for accrued fees for legal services provided, and all of the indebtedness owned to the Davis Entities was for a loan. In satisfaction of these debts, Mr. Sternberg, the Sternberg Entity and the Davis Entities respectively received 260,036, 308,594 and 440,000 shares of our common stock. The shares issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities respectively constituted approximately 5.5%, 6.5% and 9.3% of our outstanding shares after the completion of all of the stock issuances occurring on or about March 31, 2005. The number of shares that Mr. Sternberg, the Sternberg Entity and the Davis Entities received was computed on the basis of a $.50 per share stock price. The closing price of our common stock on March 24, 2005 (the last date on which such stock traded before March 31, 2005) was $.70. In arriving at the $.50 per-share stock price used in computing the number of shares received, we considered the comparative lack of liquidity of our common stock and the legal restrictions on transferability that would exist on such shares. In connection with and as additional consideration for this stock-for-debt transaction, we issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities warrants to purchase an aggregate of 260,036, 308,594 and 440,000 shares, respectively, of our common stock at an exercise price of $1.00 per share. Because the shares of common stock received by Mr. Sternberg, the Sternberg Entity and the Davis Entities were not registered under the Securities Act of 1933, as amended (the "Act"), such shares are "restricted securities" (as defined in Rule 144 promulgated under the Act) and accordingly, may not be sold or transferred by Mr. Sternberg, the Sternberg Entity or the Davis Entities unless such shares are registered under the Act or are sold or transferred pursuant to an exemption therefrom. In connection with the stock-for-debt transactions, we granted "piggyback" registration rights to include all shares being issued separately to Mr. Sternberg, the Sternberg Entity and the Davis Entities in connection with this transaction. We continue to owe $34,000 to Mr. Sternberg for a loan made by him to us. In March 2005, we sold to CCII Joint Venture No. 1 (the "Joint Venture"), a Texas joint venture comprised of family members of Greg J. Micek, our CFO, 450,000 shares of our common stock and a warrant to purchase an additional 450,000 shares of our common stock at a per share price of $1.00. The aggregate purchase price for these shares and warrants was $225,000. AVAILABLE INFORMATION ABOUT US Our filings with the SEC may be obtained in person or by writing to the SEC's Public Reference Branch at 450 Fifth Street, N.W., Washington, D.C. 20549, tel. 1-800-SEC-0330, or through SEC's e-mail address: publicinfo@sec.gov (the Commission may be moving to 100 F Street N.E., Washington , D.C. 20549 in the near future. In most cases, this information is also available on the SEC's Web site: www.sec.gov. DESCRIPTION OF PROPERTY We lease approximately 8,932 square feet of office located at 701 North Post Oak Road, Suite 630, Houston, Texas 77024, for a lease payment of approximately $10,793 per month. The lease expires on November 30, 2008. During months 38-48 the lease payment increases to $11,538 per month. During months 49-61 the lease payment increases to $11,910 per month. This space is leased from R.M. Crowe Houston Portfolio III, LP. Under this lease, we are required to pay a percentage of the building operating costs. We sublease a portion of this space to other companies. We believe this space is adequate for our current needs, and that additional space is available to us at a reasonable cost, if needed. FINANCIAL STATEMENTS Our financial statements begin on page F-1. MANAGEMENT'S DISCUSSION AND ANALYSIS FORWARD-LOOKING STATEMENT Certain statements contained in this report, including, without limitation, statements containing the words, "likely," "forecast," "project," "believe," "anticipate," "expect," and other words of similar meaning, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to announce publicly the results of any revision of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. In addition to the forward-looking statements contained in this prospectus, the following forward-looking factors could cause our future results to differ materially from our forward-looking statements: competition, capital resources, credit resources, funding, government compliance and market acceptance of our products and services. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates. We base our estimates on historical experience and on assumptions that are believed to be reasonable. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUE RECOGNITION. Revenue is recognized based upon contractually determined monthly service charges to individual customers. Services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided. At March 31, 2005, total deferred service revenue was $196,202. STOCK-BASED COMPENSATION. Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". We account for compensation cost for stock option plans in accordance with APB Opinion No. 25. In June, 2004, we entered into an Asset Sale Agreement (the "Agreement") with DFW Internet Services, Inc. ("DFW"), a Texas corporation and a wholly-owned subsidiary of MobilePro Corporation for the sale of certain assets related to connectivity services including wireless, digital subscriber line and traditional communication technologies to business and residential customers. Under the terms of this Agreement, we will receive a total of $1,150,000 of which $900,000 was already paid to us in cash and $250,000 was a one-year promissory note due in June 2005. Additionally, DFW acquired 85% of accounts receivable associated with services provided to our customers through June 17, 2004. Further, DFW entered into a one-year sublease for a portion of our office space at 701 N. Post Oak Road, Suite 630, Houston, Texas, at a rental rate of $3,000 per month. The terms and conditions of the transactions were the result of arms-length negotiations by the parties. We received a fairness opinion from an independent third-party that the asset sale was fair and equitable to us. As a result of the Agreement our operations are now solely based on BLUEGATE (tm), our branded HIPAA compliant broadband digital connectivity offering for healthcare providers nationally. We remain dependent on outside sources of funding for continuation of our operations. Our independent auditors included an explanatory paragraph in their report, dated March 28, 2005, indicating substantial doubt exists relating to our ability to continue as a going concern. During the three months ended March 31, 2005, and the years ended December 31, 2004 and 2003, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt and equity raised from qualified individual investors. During the years ended December 31, 2004 and 2003, we experienced negative financial results as follows:
Year Ended December 31, 2004 2003 ------------ ------------ Net loss $ (640,199) $(2,543,629) Negative cash flow from operations (1,299,842) (1,423,363) Negative working capital (1,241,177) (1,743,942) Stockholders' deficit (1,167,719) (1,140,379)
During the three months ended March 31, 2005, we experienced negative financial results as follows:
Three Months Ended March 31, 2005 2004 ------------ ------------ Net loss $(1,501,150) $ (436,272) Negative cash flow from operations (219,226) (228,887) Negative working capital (699,397) (1,868,580) Stockholders' deficit (552,434) (1,337,064)
These factors raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future. We have supported current operations by: 1) selling off our traditional connectivity services business, 2) raising additional operating cash through the private sale of our common stock and options, 3) selling convertible and 4) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided us with the cash flows to continue our business plan, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our critical cash flow situation that include: - Raising capital through additional sale of our common and preferred stock and/or debt securities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of our stock in lieu of cash payments to employees or vendors. These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that our current financial position can be improved, that we can raise additional working capital or that we can achieve positive cash flows from operations. Our long-term viability as a going concern is dependent upon the following: - Our ability to locate sources of debt or equity funding to meet current commitments and near-term future requirements. - Our ability to achieve profitability and ultimately generate sufficient cash flow from operations to sustain our continuing operations. Our fiscal year end is December 31. Our operations are located in Houston, Texas. Our business consists of the sales and marketing of our HIPAA compliant VPN and HIPAA application software. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005. During the three months ended March 31, 2005, our service revenue was $359,547 compared to $194,535 for the three months ended March 31, 2004. This represents a revenue increase of $165,012 and is primarily attributable to our efforts to market BLUEGATE (tm) which is our core business. Our cost of sales (cost of services) for the three months ended March 31, 2005 was $175,764 compared to $165,442 for the three months ended March 31, 2004. The increase in cost of sales is due to higher interconnect fees and costs associated with BLUEGATE (tm). Our gross margin for the three months ended March 31, 2005 was $183,783 compared to $29,093 for the three months ended March 31, 2004. The increase in gross margin is attributable to the fact that our gross margin improves as HIPAA revenue increases because our fixed costs are a relatively high portion of our total costs. However, we anticipate that our variable costs will increase as we expand our HIPAA business. We incurred selling, general and administrative expenses of $724,788 for the three months ended March 31, 2005 compared to $238,173 for the three months ended March 31, 2004. The increase in SG&A is attributable to our ramp up of our sale and marketing efforts. We incurred a net loss of $1,501,150 for the three months ended March 31, 2005 compared to a loss of $436,272 for the three months ended March 31, 2004. The increase in net loss is primarily attributable to non-cash expense of $946,971 that we recorded upon conversion of notes payable to common stock. YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003. During the year ended December 31, 2004, our service revenue was $1,109,502 compared to $380,853 for the year ended December 31, 2003. This represents a revenue increase of $785,241 and is primarily attributable to our efforts to market BLUEGATE (tm) as it has become the core of our business. Our cost of sales for the year ended December 31, 2004 was $597,818 compared to $279,266 for the year ended December 31, 2003. The increase in cost of sales is due to higher interconnect fees and costs associated with BLUEGATE (tm). Our gross margin for the year ended December 31, 2004 was $511,684 compared to $101,587 for the year ended December 31, 2003. The improvement in gross margin is attributable to the fact that our gross margin improves as HIPAA revenue increases because our fixed costs are a relatively high portion of our total costs. However, we do anticipate our variable costs will increase as we expand our HIPAA business. We incurred selling, general and administrative expenses of $1,389,723 for the year ended December 31, 2004 compared to $ 1,180,496 for the year December 31, 2003. The increase in SG&A is attributable to fixed costs that remained after sale of our broadband Internet business. We incurred as net loss of net loss of $640,199 for the year ended December 31 2004 compared to a net loss of $2,543,629 for the year ended December 31, 2003. This reduction in the size of the net loss is primarily due to our increase in revenue and proceeds from the sale of our ISP business. Forecast of Growth in our HIPAA Customer Base. As of May 24, 2005, we -------------------------------------------------- had 1,000 customers for our HIPAA compliant connectivity services, most of whom are physicians. All of these customers have been added since we refocused our business activities in 2004 to concentrate on our Healthcare Information Technology (HIT) business. We forecast an increase in the number of HIT customers throughout 2005. This forecast is based on the rate that we are currently acquiring new HIT customers. This growth in the number of HIT customers is tempered somewhat because we incur marketing costs when we add new customers. LIQUIDITY AND CAPITAL RESOURCES Our operations for the three months ended March 31, 2005 were funded by our issuance of common stock and options for cash in private transactions, loans and the proceeds from the sale of our traditional connectivity business in 2004. We have continued to take steps to reduce operating expenses relating to our core business. We have expanded efforts to creating a market for the healthcare industry. Because of the uncertainty associated with this new market, breakeven cash flow is not expected until late 2005 at the earliest. We disposed of our ISP business in 2004 for cash proceeds of $900,000 and a promissory note for $250,000 due in June 2005. Our cash on hand at March 31, 2005 was $36,617. We are seeking additional capital to fund expected operating costs. We believe that future funding may be obtained from public or private offerings of equity securities, debt or convertible debt securities or other sources. Stockholders should assume that any additional funding will likely be dilutive. If we are unable to raise additional funding, we may have to limit our operations to an extent that we cannot presently determine. The effect of this on our business may require the sale of assets, the reduction or curtailment of new customer acquisition, reduction in the scope of current operations or the curtailment of business operations. Our ability to achieve profitability will depend upon our ability to raise additional operating capital, the continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services. Our growth is dependent on attaining profit from our operations and our raising additional capital either through the sale of stock or borrowing. There is no assurance that we will be able to raise any equity financing or sell any of our products at a profit. Our future capital requirements will depend upon many factors, including the following: - The cost of operating our VPN. - The cost of third-party software. - The cost of sales and marketing. - The rate at which we expand our operations. - The response of competitors. - Our capital expenditures. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. Our stock is traded on the OTCBB. Our trading symbol is "BGAT." The following table sets forth the quarterly high and low bid price per share for our common stock. These bid and asked price quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual prices. Our fiscal year ends December 31.
COMMON STOCK PRICE RANGE (1) YEAR AND QUARTER HIGH LOW - ------------------------------ 2003: - ----- First Quarter $10.80 $4.00 Second Quarter $ 6.60 $3.80 Third Quarter $ 7.00 $3.40 Fourth Quarter $ 9.00 $3.80 2004: - ----- First Quarter $ 5.20 $2.80 Second Quarter $ 4.00 $2.40 Third Quarter $ 3.80 $2.40 Fourth Quarter $ 2.80 $0.51
- --------------------------------- (1) Adjusted for 20:1 reverse stock split. COMMON STOCK. On May 26, 2005, we had outstanding 4,899,637 shares of Common Stock, $0.001 par value per share. On May 26, 2005, the closing bid price of our stock was $1.50 per share. On May 26, 2005, we had approximately 398 shareholders of record which includes shares held directly by shareholders and shares beneficially owned by shareholders who have deposited their shares into an account at a broker-dealer. Most such deposited shares are accumulated in a nominee account in the name of Cede, Inc. Cede, Inc. is the primary nominee account that most broker-dealers use to deposit shares held in the name of the broker-dealer. Cede, Inc. is counted as one record shareholder, even though it could represent many beneficial shareholders who have deposited their shares into an account at a broker-dealer. We believe that one of our record stockholders is a nominee located offshore with ownership of approximately 43% of our shares of common stock. Our transfer agent is American Register & Transfer. We have not paid any cash dividends and we do not expect to declare or pay any cash dividends in the foreseeable future. Payment of any cash dividends will depend upon our future earnings, if any, our financial condition, and other factors as deemed relevant by the Board of Directors. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Weighted-average Number of securities securities to exercise price of remaining available be issued outstanding for future issuance upon options, under equity exercise of warrants and compensation outstanding rights plans (excluding options, securities reflected warrants and in column (a)) rights (a) (b) (c) PLAN CATEGORY: Equity compensation plans approved by security holders -0- -0- 112,500 (1) Equity compensation plans not approved by security holders 500,000 (2) $ 4.80 325,000 (3) 3,000,000 (4) n/a (4) 3,000,000 (4) - --------------------------------------------------------------------------------- Total 500,000 $ 4.80 437,500
- --------------------------------- (1) These 112,500 shares are the remaining unissued shares under our 2002 Stock and Stock Option Plan (the "Plan"). (2) This amount is pursuant to various compensation agreements with directors and executive officers as follow: Director compensation: 25,000 options. Mr. Sternberg's employment agreement: 125,000 options. Mr. Micek's employment agreement: 350,000 options. (3) This amount consists of options that are to be issued in 2005 and 2006 to Mr. Sternberg pursuant to his employment agreement. However, in 2005, and made effective February 2005, we entered into a new employment agreement with Mr. Sternberg which canceled unissued, non-granted options related to Mr. Sternberg's old employment. Pursuant to Mr. Sternberg's new employment agreement, Mr. Sternberg will receive an aggregate of 1,000,000 options with an exercise price of $0.50 per share vesting over the 24 month term of the new employment agreement. Pursuant to, and as described in, Mr. Sternberg's new employment agreement, we repriced 275,000 options previously granted from an old employment agreement by reducing the exercise price of those options to $2.00 per share. On May 27, 2005, the bid price per share on the OTCBB was $1.50 per share. The repricing was made to provide further incentive to Mr. Sternberg. (4) Our 2005 Stock and Stock Option Plan consists of 3,000,000 shares of common stock and options. As of May 26, 2005, no stock or options have been granted under this Plan. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION - --------------------------------------------------- Manfred Sternberg 45 Director, CEO and President Greg J. Micek 50 CFO Gilbert Gertner 80 Director William Koehler 39 Director
Our Directors hold office until their successors have been duly elected. Manfred Sternberg, has been our Chief Executive Officer and a Director since 2001. Prior to 2001, Mr. Sternberg was an investor and board member of several broadband providers in Houston, Texas including our predecessor. He is a graduate of Tulane University and Louisiana State University School of Law. Mr. Sternberg is licensed to practice law in Texas, Louisiana and the District of Columbia and is Board Certified in Consumer and Commercial Law by the Texas Board of Legal Specialization. Gilbert Gertner has been a Director since May, 2003. Mr. Gertner is a private investor and co-founder of a number of industrial, real estate development and high-tech companies. Mr. Gertner is known for his philanthropic endeavors including the construction of schools and medical facilities in developing countries. Mr. Gertner currently serves as Chairman of the Board and CEO of Worldwide Petromoly, Inc., a company with which he has been associated since 1993. During the period from 1994 to 1997 Mr. Gertner served as a Director of Citadel Computer Systems. William Koehler has been a Director since May, 2003. Mr. Koehler was a co-founder and has been President/CEO of Trilliant Corporation since 2000. From 1992 until 2000, Mr. Koehler was the Vice President of Business Development of an Electrical Engineering firm that specialized in the assessment, design and project implementation of technology efforts for their clients. Trilliant is a Technology Consulting firm serving Fortune 500 companies, K-12 and higher education and companies with specialized IT applications. Mr. Koehler has a BBA from Texas A&M in Business Analysis, with a specialization in Production Operation Management. Mr. Koehler has spent the last 15 years of his career working in the IT and Professional Services industry and has a broad range of skills. His experience ranges from the design and management of the implementation of multination voice and data networks to the needs assessment and the development of a Global technology strategy for large multinational corporations. The customers that Mr. Koehler has worked with include Pennzoil, American General Insurance, Texaco, British Petroleum, Brown and Root and many others. At the same time he has worked with dozens of school districts by assisting in the development of more cost effective and robust systems in an attempt to help these districts move technology into the classrooms and help children learn. Mr. Koehler has spoken at many state and local events about technology and continues to look for opportunities to continue this effort. Gregory J. Micek became our CFO in 2005. Mr. Micek has served as a Director of IQ Biometrix, Inc. ("IQB"), a publicly traded corporation, since 1997. In addition, from March to September 2003, Mr. Micek served as IQB's Vice President of Corporate Development. From July 2002 until March 2003, he served as IQB's President. From March 2002 until July 2002, Mr. Micek served as IQB's Executive Vice President and Chief Financial Officer. Since 1983, he has been a principal of The Micek Group, a consulting firm. Mr. Micek received a Bachelor of Arts and a Doctorate of Jurisprudence from Creighton University. He has no family relationship with any of our directors or officers. COMMITTEES OF THE BOARD OF DIRECTORS We do not have any nominating, or compensation committees of the Board, or committees performing similar functions. In March 2005, our Board adopted our Audit Committee Charter (the "Charter") which established our Audit Committee. The Board of Directors has selected Gil Gertner, an independent Director, to be on the Audit Committee. Mr. Gertner is not a financial expert. We have determined Mr. Gertner's independence using the definition of independence set forth in NASD Rule 4200-(14). We have not yet been able to recruit an independent director who is also a financial expert. At the present time, Mr. Gertner is the sole member of our Audit Committee. We have no other committees of the Board. The primary purpose of the Audit Committee is to oversee our financial reporting process on behalf of the Board of Directors. The Audit Committee will meet privately with our Chief Financial Officer and with our independent public accountants and evaluate the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent accountants. The Charter establishes the independence of our Audit Committee and sets forth the scope of the Audit Committee's duties. The Purpose of the Audit Committee is to conduct continuing oversight of our financial affairs. The Audit Committee conducts an ongoing review of our financial reports and other financial information prior to filing them with the Securities and Exchange Commission, or otherwise providing them to the public. The Audit Committee also reviews our systems, methods and procedures of internal controls in the areas of: financial reporting, audits, treasury operations, corporate finance, managerial, financial and SEC accounting, compliance with law, and ethical conduct. A majority of the members of the Audit Committee will be independent directors. The Audit Committee is objective, and reviews and assesses the work of our independent accountants and our internal audit department. The Audit Committee will review and discuss the matters required by SAS 61 and our audited financial statements for the coming year ending December 31, 2005 with our management and our independent auditors. The Audit Committee will receive the written disclosures and the letter from our independent accountants required by Independence Standards Board No. 1, and the Audit Committee will discuss with the independent accountant the independent accountant's independence. The work of our Audit Committee will commence on June 1, 2005. MEETINGS OF THE BOARD OF DIRECTORS The Board of Directors held 5 meetings during the year ended December 31, 2004, and acted by written consent on 4 occasions during 2004. All directors were present for at least 75% of the meetings. There is no family relationship between any of our directors and executive officers. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our officers, directors and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. These reporting persons also are required to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, all persons required to file reports under Section 16(a) of the Exchange Act have done so. CODE OF ETHICS We have a Code of Ethics that applies to our principal executive officers and our principal financial officers. We undertake to provide to any person, without charge, upon request, a copy of our Code of Ethics. You may request a copy of our Code of Ethics by mailing your written request to us. Your written request must contain the phrase "Request for a Copy of the Code of Ethics of Bluegate Corporation." Our address is: Bluegate Corporation, 701 North Post Oak Road, Suite 630, Houston, Texas 77024. SHAREHOLDER NOMINEES FOR DIRECTOR AND SHAREHOLDER COMMUNICATIONS WITH DIRECTORS The deadline for stockholders to submit proposals to be considered for inclusion in the Proxy Statement for the 2005 Annual Meeting of Stockholders is February 27, 2005. If you have any proposals that you would like to be included in the Proxy Statement for the 2005 Annual Meeting of Stockholders, including nominees for Director, kindly mail them to us. We encourage our shareholders to communicate with our Directors by mail addressed to any Director or to all Directors. Our address is: Bluegate Corporation, 701 North Post Oak Road, Suite 630, Houston, Texas 77024. We will not screen such communications. EXECUTIVE COMPENSATION The following table sets forth certain information as to our highest paid officers and directors for our fiscal year ended December 31, 2004. No other compensation was paid to any such officers or directors other than the compensation set forth below.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Pay- Awards Outs Other Securities All Annual Restricted Under- Other Name and Compen- Stock lying Comp- Principal Year Salary Bonus sation Award(s) Options/ LTIP pen- Position SARs Payouts sation $ $ $ $ # $ $ CEO Manfred 2004 180,000 -0- -0- -0- 125,000 -0- -0- Sternberg 2003 180,000 -0- -0- -0- -0- -0- 94,000(1) 2002 94,800 -0- -0- -0- -0- -0- 34,000(1) CFO Greg J. 2004 (2) Micek 2003 (2) 2002 (2)
- ---------------------------------- (1) This is the value of the note payable conversion feature for funds loaned to us by Mr. Sternberg. The value is based on the difference in the common stock conversion price and the market value at the date of the loan. (2) Mr. Micek became employed with us in 2005. OUTSTANDING STOCK OPTIONS
OPTIONS / SAR GRANTS IN THE LAST FISCAL YEAR (INDIVIDUAL GRANTS) Number of Securities Percent of Total Exercise Underlying Options/ SARs Options/SARs of Expir- Granted Granted to Employees Base ation In Fiscal Year Price Date Name # ($/sh.) (a) (b) (c) (d) (e) - ------------------------------------------------------------------------------------- CEO Manfred Sternberg 125,000 100% $ 4.40 1-1-09 CFO Greg J. Micek (1)
- ------------------------------------- (1) Mr. Micek became employed with us in 2005.
AGGREGATED OPTION / SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/ SAR VALUES Number of Unexercised Value of Securities Unexercised Underlying In-the-Money Options/SARs Options/SARs Shares At FY-End (#) At FY-End ($) Acquired On Value exercisable/ exercisable/ Name Exercise Realized unexercisable unexercisable (#) ($) (a) (b) (c) (d) (e) - ----------------------------------------------------------------------------------- CEO Manfred Sternberg -0- -0- exercisable 125,000 exercisable $63,750 unexercisable -0- unexercisable $-0- CFO Greg J. Micek (1)
- -------------------------- (1) Mr. Micek became employed with us in 2005. COMPENSATION OF DIRECTORS We do not currently pay any cash Directors' fees, but we pay the expenses of our Directors in attending Board meetings. On July 22, 2003, Gilbert Gertner and William Koehler, two independent Directors, were each granted 12,500 warrants which entitle each of them to purchase 12,500 shares of common stock at an exercise price of $3.80 per share. These warrants expire on July 22, 2008. We did not compensate our Directors in 2004. In June 2005, two Directors, Mr. Gertner and Mr. Koehler, were each granted 50,000 stock options at an exercise price of $0.50 per share expiring in February 2010. EMPLOYEE STOCK OPTION PLANS We have been successful in attracting and retaining qualified Personnel. We believe that our future success will depend in part on our continued ability to attract and retain highly qualified personnel. We pay wages and salaries that we believe are competitive. We also believe that equity ownership is an important factor in our ability to attract and retain skilled personnel. In 2002, we adopted the 2002 Stock and Stock Option Plan (the "2002 Plan"). The purpose of the 2002 Plan is to further our interests our stockholders interests by providing incentives in the form of stock options to key employees, consultants, directors and others who contribute materially to our success and profitability. The grants recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. The 2002 Plan also assists us in attracting and retaining key employees and Directors. The 2002 Plan is administered by the Board of Directors. The Board of Directors has the exclusive power to select the participants in the 2002 Plan, to establish the terms of the stock and options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least 85% of the fair market value of the common stock covered by the option on the grant date and to make all determinations necessary or advisable under the 2002 Plan. The maximum aggregate number of shares of common stock that may be granted or optioned and sold under the 2002 Plan is 450,000 shares. As of May 26 2005, 68,904 shares of common stock remain unissued in the 2002 Plan. In April 2005, we adopted the 2005 Stock and Stock Option Plan (the "2005 Plan"). The purpose of the 2005 Plan is to further our interests and our stockholders interests by providing incentives in the form of stock options to key employees, consultants, directors and others who contribute materially to our success and profitability. The grants recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. The 2005 Plan also assists us in attracting and retaining key employees and Directors. The 2005 Plan is administered by the Board of Directors. The Board of Directors has the exclusive power to select the participants in the 2005 Plan, to establish the terms of the stock and options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least 85% of the fair market value of the common stock covered by the option on the grant date and to make all determinations necessary or advisable under the 2005 Plan. The maximum aggregate number of shares of common stock that may be granted or optioned and sold under the 2005 Plan is 3,000,000 shares. As of May 26 2005, no shares of common stock have been granted pursuant to the 2005 Plan. EMPLOYMENT AGREEMENTS We have a two-year employment agreement with Manfred Sternberg (the "Sternberg Agreement"). The Sternberg Agreement extends through January 31, 2007 and provides for an annual base salary of $180,000. The Sternberg Agreement also provides for participation in all benefit plans maintained by us for salaried employees. The Sternberg Agreement contains a confidentiality provision and an agreement by Mr. Sternberg not to compete with us upon the expiration of the Sternberg Agreement. We have not established long-term incentive plans or defined benefit or actuarial plans. Under the Sternberg Agreement, Mr. Sternberg received options to purchase 1,000,000 shares at an exercise price of $0.50 per share which vest at the rate of 50,000 options per month. Any shares issued pursuant to these options shall be restricted securities with piggyback registration rights, and shall terminate and become null and void after the expiration of five (5) years from the date of the grant. Mr. Micek's Employment Agreement has a term of two years and will expire in February 2007. Under the Employment Agreement, Mr. Micek is to receive an annual salary of $120,000, and may receive bonuses in such amounts as are mutually agreed upon if major transactions occur. Mr. Micek is also entitled to participate in employee benefit plans. Mr. Micek has been granted options to purchase 350,000 shares of our common stock at an exercise price of $0.50 per share expiring in February 2010. The options vest pro rata on a monthly basis over the two-year term of the Employment Agreement. The Employment Agreement contains a covenant not to compete and confidentiality provisions. In 2005, pursuant to, and as described in, Mr. Sternberg's new employment agreement, we repriced 275,000 options previously granted from an old employment agreement by reducing the exercise price of those options to $2.00 per share. On May 27, 2005, the bid price per share on the OTCBB was $1.50 per share. The repricing was made to provide further incentive to Mr. Sternberg. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the number of shares of common stock owned beneficially as of May 23, 2005 by: (i) each person (including any group) known by us to own more than five percent (5%) of any class of our voting securities, (ii) each of our directors and executive officers, and (iii) and our officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown.
- --------------------------------------------------------------------- Title Name And Amount And Percent Of Address Of Nature Of of Class Beneficial Beneficial Class Owner Ownership - --------------------------------------------------------------------- Common Stock Manfred Sternberg (a)(b) 1,980,098 (1) 32.8% 701 N. Post Oak, Suite 630 Houston, Texas 77024 Common Stock Robert Davis 1,397,513 (2) 25.9% 701 N. Post Oak, Suite 630 Houston, Texas 77024 Common Stock Gilbert Gertner (a) 62,500 (4) 1.3% 1000 Uptown Park Blvd. Suite 232 Houston, Texas 77056 Common Stock William Koehler (a) 62,500 (4) 1.3% 1602 Lynnview Houston, Texas 77055 Common Stock Greg Micek (b) 158,336 (6) 3.2% 701 N. Post Oak, Suite 630 Houston, Texas 77024 Common Stock Jeff Olexa 300,040 (3) 6.1% 701 N. Post Oak, Suite 630 Houston, Texas 77024 Common Stock George Speaks 385,199.9 (5) 7.9% 221 W. Canino Houston, TX 77037 Common Stock CCII Joint Venture No. 1 900,000 (7) 16.8% 11420 Blondo Street Suite 103 Omaha, Nebraska 68164 Common Stock Diablo Consultants, Inc. 555,000 (8) 11.0% 2815 Mitchell Drive, Ste. 212 Walnut Creek, CA 94598 Common Stock Platinum Partners Global 300,000 (9) 5.8% Macro Fund, LP 152 West 57th Street 54th Floor New York, NY 10013 Common stock All of our Directors and 2,034,266 34.1% Officers as a Group of four persons
- ------------------------------- (a) This person is a Director. (b) This person is an Executive Officer. (1) Of the 1,980,098 shares beneficially owned by Mr. Sternberg: 308,720 shares are common shares issuable upon the conversion of preferred shares of which 215,450 shares are owned indirectly through Five Star Mountain, L.P. The general partner of Five Star Mountain, L.P. is Manfred Sternberg & Associates, P.C. whose president is Manfred Sternberg. 1,043,630 shares are common shares issuable upon the exercise of options of which options for 308,594 common shares are owned indirectly through Manfred Sternberg & Associates, P.C.; 269,154 shares are common shares owned directly by Mr. Sternberg; 308,594 shares are common shares owned by Manfred Sternberg & Associates, P.C.; and 50,000 shares are common shares owned by Five Star Mountain, L.P. (2) Of the 1,397,513 shares beneficially owned by Mr. Davis: 460,130 shares are common shares issuable upon the conversion of preferred shares of which 397,950 shares are owned indirectly through Madred Partners, Ltd. which is a family partnership of Mr. Davis; 440,000 shares are common shares issuable upon the exercise of options of which options for 357,050 common shares are owned indirectly through Madred Partners, Ltd., options for 52,950 common shares are owned indirectly through Laguna Rig Services, Inc., an entity owned by Mr. Davis, and options for 40,000 common shares are owned indirectly through MPH Production Company, Inc., an entity owned by Mr. Davis; 383,510 shares are common shares owned by Madred Partners Ltd.; 52,950 shares are common shares owned by Laguna Rig Services, Inc.; 40,000 shares are common shares owned by MPH Production Company, Inc., and 20,923 are common shares owned by Mr. Davis individually; (3) The 300,040 shares beneficially owned by Mr. Olexa are common shares issuable upon the conversion of preferred shares, of which preferred shares, Mr. Olexa granted an option for the number of preferred shares convertible into an aggregate of 155,450 shares of common stock to Messrs. Sternberg and Davis. (4) The 62,500 shares beneficially owned by Mr. Gertner and Mr. Koehler are common shares issuable upon the exercise of warrants which were granted to each of them upon their appointment and for their serving as Directors. (5) Of the 385,199.9 shares beneficially owned by Mr. Speaks 8,950 are common shares owned by Mr. Speaks and 376,249.9 are common shares issuable upon the conversion of preferred shares. (6) Of the 158,336 shares beneficially owned by Mr. Micek, 100,000 common shares are owned by Mr. Micek's children of which Mr. Micek is the custodian and 58,336 shares are common shares issuable upon the exercise of options. (7) Of the 900,000 shares beneficially owned by CCII Joint Venture No. 1, a Texas joint venture, 450,000 shares are common shares issuable upon the exercise of warrants. (8) Of the 555,000 shares beneficially owned by Diablo Consultants, Inc., 125,000 shares are common shares issuable upon the exercise of warrants. (9) Of the 300,000 shares beneficially owned by Platinum Partners Global Macro Fund, LP, 200,000 shares are common shares issuable upon the conversion of a convertible debenture and 100,000 shares are common shares issuable upon the exercise of warrants. We are not aware of any arrangements that could result in a change of control.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Number of Weighted-average Number of securities securities to exercise price of remaining available be issued outstanding for future issuance upon options, under equity exercise of warrants and compensation outstanding rights plans (excluding options, securities reflected warrants and in column (a)) rights (a) (b) (c) PLAN CATEGORY: Equity compensation plans approved by security holders -0- -0- 112,500 (1) Equity compensation plans not approved by security holders 500,000 (2) $ 4.80 325,000 (3) 3,000,000 (4) n/a (4) 3,000,000 (4) - ---------------------------------------------------------------------------------- Total 500,000 $ 4.80 437,500
- ---------------- (1) These 112,500 shares are the remaining unissued shares under our 2002 Stock and Stock Option Plan (the "Plan"). (2) This amount is pursuant to various compensation agreements with directors and executive officers as follow: Director compensation: 25,000 options. Mr. Sternberg's employment agreement: 125,000 options. Mr. Micek's employment agreement: 350,000 options. (3) This amount consist of options that are to be issued in 2005 and 2006 to Mr. Sternberg pursuant to his employment agreement. However, in 2005, and made effective February 2005, we entered into a new employment agreement with Mr. Sternberg which canceled unissued, non-granted options related to Mr. Sternberg's old employment. Pursuant to Mr. Sternberg's new employment agreement, Mr. Sternberg will receive an aggregate of 1,000,000 options with an exercise price of $0.50 per share vesting over the 24 month term of the new employment agreement. Pursuant to, and as described in, Mr. Sternberg's new employment agreement, we repriced 275,000 options previously granted from an old employment agreement by reducing the exercise price of those options to $2.00 per share. On May 27, 2005, the bid price per share on the OTCBB was $1.50 per share. The repricing was made to provide further incentive to Mr. Sternberg. (4) Our 2005 Stock and Stock Option Plan consists of 3,000,000 shares of common stock and options. As of May 26, 2005, no stock or options have been granted under this Plan. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have a policy that our business affairs will be conducted in all respects by standards applicable to publicly held corporations and that we will not enter into any future transactions and/or loans between us and our officers, directors and 5% shareholders unless the terms are: (a) no less favorable than could be obtained from independent third parties, and (b) will be approved by a majority of our independent and disinterested directors. In our view, all of the transactions described below meet this standard. STOCK-FOR-DEBT EXCHANGES. On March 31, 2005, we entered into separate agreements with (a) Manfred Sternberg, our director and CEO, (b) an entity (the "Sternberg Entity") under the control of Mr. Sternberg, and (c) three entities (collectively, the "Davis Entities") under the control of Robert Davis, a former director. Pursuant to these agreements, we issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities shares of our common stock in satisfaction of indebtedness separately owed by us to them. This indebtedness totaled $130,018, $154,297, and $222,000 for Mr. Sternberg, the Sternberg Entity and the Davis Entities, respectively. Of the preceding amounts of indebtedness, $55,185 of the indebtedness owned to Mr. Sternberg was for a loan while $74,833 of such indebtedness was for accrued salary, all of the indebtedness owned to the Sternberg Entity was for accrued fees for legal services provided, and all of the indebtedness owned to the Davis Entities was for a loan. In satisfaction of these debts, Mr. Sternberg, the Sternberg Entity and the Davis Entities respectively received 260,036, 308,594 and 440,000 shares of our common stock. The shares issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities respectively constituted approximately 5.5%, 6.5% and 9.3% of our outstanding shares after the completion of all of the stock issuances occurring on or about March 31, 2005. The number of shares that Mr. Sternberg, the Sternberg Entity and the Davis Entities received was computed on the basis of a $.50 per share stock price. The closing price of our common stock on March 24, 2005 (the last date on which such stock traded before March 31, 2005) was $.70. In arriving at the $.50 per-share stock price used in computing the number of shares received, we considered the comparative lack of liquidity of our common stock and the legal restrictions on transferability that would exist on such shares. In connection with and as additional consideration for this stock-for-debt transaction, we issued to Mr. Sternberg, the Sternberg Entity and the Davis Entities warrants to purchase an aggregate of 260,036, 308,594 and 440,000 shares, respectively, of our common stock at an exercise price of $1.00 per share. Because the shares of common stock received by Mr. Sternberg, the Sternberg Entity and the Davis Entities were not registered under the Securities Act of 1933, as amended (the "Act"), such shares are "restricted securities" (as defined in Rule 144 promulgated under the Act) and accordingly, may not be sold or transferred by Mr. Sternberg, the Sternberg Entity or the Davis Entities unless such shares are registered under the Act or are sold or transferred pursuant to an exemption therefrom. In connection with the stock-for-debt transactions, we granted "piggyback" registration rights to include all shares being issued separately to Mr. Sternberg, the Sternberg Entity and the Davis Entities in connection with this transaction. Those shares are being registered in the Form SB-2 that contains this prospectus. We continue to owe $34,000 to Mr. Sternberg for a loan made by him to us. In March 2005, we sold to CCII Joint Venture No. 1 (the "Joint Venture"), a Texas joint venture comprised of family members of Greg J. Micek, our CFO, 450,000 shares of our common stock and a warrant to purchase an additional 450,000 shares of our common stock at a per share price of $1.00. The aggregate purchase price for these shares and warrants was $225,000. During the years ended December 31, 2004 and 2003, we incurred interest expenses on aggregate related party debt of approximately $35,000 in each year. DESCRIPTION OF SECURITIES The holders of shares of our common stock are entitled to one vote per share on each matter submitted to a vote of stockholders. If we are required to go into liquidation, holders of common stock are entitled to share ratably in the distribution of assets remaining after payment of liabilities and preferred stock. Holders of common stock have no cumulative voting rights. Holders of common stock have no preemptive rights. Holders of common stock are entitled to dividends as declared by the board of directors out of funds legally available. The outstanding common stock is validly issued and non-assessable. THE PENNY STOCK RULES Our securities may be considered a penny stock. Penny stocks generally are securities with a price of less than $5.00 per share other than securities registered on national securities exchanges or quoted on the Nasdaq stock market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of penny stock securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements must be sent disclosing recent price information on the limited market in penny stocks. The "penny stock rules" may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the secondary market. The penny stock restrictions will not apply to our securities when our market price is $5.00 or greater. The price of our securities may not reach or maintain a $5.00 price level. SELLING STOCKHOLDERS The following table sets forth the name of each Selling Stockholder, the number of shares of common stock offered by each Selling Stockholder, the number of shares of common stock to be owned by each Selling Stockholder if all shares were to be sold in this offering and the percentage of our common stock that will be owned by each Selling Stockholder if all shares are sold in this the offering. The shares of common stock being offered hereby are being registered to permit public secondary trading and the Selling Stockholders may offer all, none or a portion of the shares for resale from time to time.
Name Shares Shares Shares Percentage Of Owned Offered Owned Owned After Selling Before For After Offering If All Stockholder Offering Sale Offering Shares Are Sold Sold If All Offered Shares Are Sold (1) (2) (2) - ----------------------------------------------------------------------------------------- Diablo Consultants, Inc. (3) 555,000 555,000 -0- -0-% Platinum Partners Global Macro Fund, LP 300,000 300,000 -0- -0-% Brandon Green 5,000 5,000 -0- -0-% CCII Joint Venture No. 1 (4) 900,000 900,000 -0- -0-% Manfred Sternberg & Associates, P.C. (5) 617,188 308,594 308,594 25.5% (5) Manfred Sternberg (6) 614,092 260,036 354,056 26.3% (6) Laguna Rig Service, Inc. 105,900 52,950 52,950 24.9% (7) MPH Production Company, Inc. (8) 80,000 40,000 40,000 24.8% (8) MADRED Partners, Ltd. (9) 781,460 347,050 434,410 19.4% (9) Joel Seidner 71,667 50,000 21,667 .0004% Randall W. Heinrich -0- 50,000 -0- -0-% - --------------------------------------------- (1) To the best of our knowledge, no Selling Stockholder has a short position in our common stock. To the best of our knowledge, no Selling Stockholder that is a beneficial owner of any of these shares is a broker-dealer or an affiliate of a broker-dealer (a broker-dealer may be a record holder). Except as set forth below, no Selling Stockholder has held any position or office, or has had any material relationship with us or any of our affiliates within the past three years. (2) Assumes no sales are transacted by the Selling Stockholder during the offering period other than in this offering. (3) Diablo Consultants, Inc. beneficially owns 11% of our common stock. (4) CCII Joint Venture No. 1 beneficially owns 16.8%. (5) Manfred Sternberg & Associates, P.C. is controlled by Manfred Sternberg, our President. Mr. Sternberg beneficially owns an aggregate of 30.4% of our common stock directly and indirectly through various entities that he controls. The percentage shown includes all of Mr. Sternberg's beneficial ownership positions except for sale of the shares registered in this offering directly by the named entity (6) Manfred Sternberg is our President. Mr. Sternberg beneficially owns an aggregate of 30.4% of our common stock directly and indirectly through various entities that he controls. The percentage shown includes all of Mr. Sternberg's beneficial ownership positions except for the sale of the shares registered in this offering directly by Mr. Sternberg. (7) Laguna Rig Service, Inc. is controlled by Robert Davis who was formerly our director. Mr. Davis beneficially owns an aggregate of 25.9% of our common stock directly and indirectly through various entities that he controls. The percentage shown includes all of Mr. Davis's beneficial ownership positions except for the sale of the shares registered in this offering directly by the named entity. (8) MPH Production Company, Inc. is controlled by Robert Davis who was formerly our director. Mr. Davis beneficially owns an aggregate of 25.9% of our common stock directly and indirectly through various entities that he controls. The percentage shown includes all of Mr. Davis's beneficial ownership positions except for the sale of the shares registered in this offering directly by the named entity. (9) MADRED Partners, Ltd. is controlled by Robert Davis who was formerly our director. Mr. Davis beneficially owns an aggregate of 25.9% of our common stock directly and indirectly through various entities that he controls. The percentage shown includes all of Mr. Davis's beneficial ownership positions except for the sale of the shares registered in this offering directly by the named entity.
PLAN OF DISTRIBUTION The Selling Stockholders (of record ownership and of beneficial ownership) and any of their pledgees, assignees, and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders are not required to sell any shares in this offering. There is no assurance that the Selling Stockholders will sell any or all of the common stock in this offering. The Selling Stockholders may use any one or more of the following methods when selling shares: - - Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers. - - Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. - - Purchases by a broker-dealer as principal and resale by the broker-dealer for its own account. - - An exchange distribution following the rules of the applicable exchange. - - Privately negotiated transactions. - - Short sales or sales of shares not previously owned by the seller. - - An agreement between a broker-dealer and a Selling Stockholder to sell a specified number of such shares at a stipulated price per share. - - A combination of any such methods of sale. - - Any other lawful method. The Selling Stockholder may also engage in: - - Short selling against the box, which is making a short sale when the seller already owns the shares. - - Buying puts, which is a contract whereby the person buying the contract may sell shares at a specified price by a specified date. - - Selling calls, which is a contract giving the person buying the contract the right to buy shares at a specified price by a specified date. - - Selling under Rule 144 under the Securities Act, if available, rather than under this prospectus. - - Other transactions in our securities or in derivatives of our securities and the subsequent sale or delivery of shares by the stock holder. - - Pledging shares to their brokers under the margin provisions of customer agreements. If a Selling Stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholder in amounts to be negotiated. If any broker-dealer acts as agent for the purchaser of shares, the broker-dealer may receive commission from the purchaser in amounts to be negotiated. We do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be considered to be "underwriters" within the meaning of the Securities Act for such sales. An underwriter is a person who has purchased shares from an issuer with a view towards distributing the shares to the public. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be considered to be underwriting commissions or discounts under the Securities Act. We are required to pay all fees and expenses incident to the registration of the shares in this offering. However, we will not pay any commissions or any other fees in connection with the resale of the common stock in this offering. If we are notified by a Selling Stockholder that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the Registration Statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the Selling Stockholder and the broker-dealer. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. LEGAL PROCEEDINGS We are a party in the following litigation: Crescent Communications, Inc. [Bluegate Corporation] v. Financial News USA, Inc., Cause No. 820,758, In the County Civil Court at Law Number One, Harris County, Texas. We paid the defendant with the shares of our common stock but the defendant never performed as promised under the contract. On March 9, 2005, the court signed a final judgment in our favor granting us the return of 37,500 shares of common stock (post-reverse split) from the defendant. Bluegate Corporation v. The Navi-Gates Corporation and Robert C. Weslock, Cause No. 2005-00534, In the 234th Judicial District Court of Harris County, Texas. We recently filed this lawsuit. We filed this lawsuit claiming breach of contract, deceptive trade practices and fraud against the defendant. INTEREST OF NAMED EXPERTS AND COUNSEL Joel Seidner, Esq., Attorney At Law, 1240 Blalock Road, Suite 250, Houston, Texas 77055, tel. (713) 461-2627 ext. 210, has acted as our legal counsel for this offering. The validity of the shares offered by this prospectus has been passed upon for us by Mr. Seidner. As of the date of this prospectus, Mr. Seidner owns 71,667 shares of our common stock. Our consolidated balance sheets as of December 31, 2004 and 2003, and the consolidated statements of operations, stockholders' deficit, and cash flows, for the years then ended, have been included in the registration statement on Form SB-2 of which this prospectus forms a part, in reliance on the report of Ham, Langston & Brezina independent certified public accountants, given on the authority of that firm as experts in auditing and accounting. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES The Nevada Revised Statutes Section 78.7502 provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) Is not liable pursuant to NRS 78.138; or (b) Acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: Is not liable pursuant to NRS 78.138; or (b) Acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. The Nevada Revised Statutes Section 78.751 provides that any discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court or advanced pursuant to Section 78.751, may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. The indemnification pursuant to NRS 78.7502 and advancement of expenses authorized in or ordered by a court pursuant to this section: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the advancement of expenses made pursuant to subsection 2, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action, and, (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. Our Articles of Incorporation at Article VIII provides that the Corporation shall, to the fullest extent permitted by the Nevada General Corporation Law, as the same may be amended and supplemented, indemnify any an all persons whom it shall have power to indemnify under said Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Our Bylaws at Article X provide that the: The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner in which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Any indemnification under this Article (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. Expenses (including attorneys' fees) incurred by an officer or director in defending in a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized by this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under this Article. For purposes of this section references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained in this Article or elsewhere in these Bylaws, shall operate to indemnify any director or officer if such indemnification is contrary to law, either as a matter of public policy, or under the provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other applicable state or Federal law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the forgoing provisions or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. FINANCIAL STATEMENTS Our audited financial statements for the years ended December 31, 2004 and 2003 begin on page F-1. Our unaudited financial statements for the three months ended March 31, 2005 begin on page FF-1. F-0 BLUEGATE CORPORATION __________ CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 F-1
BLUEGATE CORPORATION TABLE OF CONTENTS __________ PAGE ---- Report of Independent Registered Public Accounting Firm F-3 Consolidated Financial Statements: Consolidated Balance Sheet as of December 31, 2004 F-4 Consolidated Statement of Operations for the years ended December 31, 2004 and 2003 F-5 Consolidated Statement of Stockholders' Deficit for the years ended December 31, 2004 and 2003 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003 F-7 Notes to Consolidated Financial Statements F-8
F-2 HAM, LANGSTON & BREZINA, L.L.P. Certified Public Accountants - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Stockholders and Directors Bluegate Corporation We have audited the accompanying consolidated balance sheet of Bluegate Corporation as of December 31, 2004, and the related statements of operations, stockholders' deficit and cash flows for each of the two years in the period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bluegate Corporation as of December 31, 2004, and the results of its operations and its cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements and discussed in Note 2, the Company has incurred recurring losses from operations, is in a book overdraft, negative working capital and stockholders' deficit position at December 31, 2004, and is dependent on outside sources of funding for continuation of its operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are also discussed in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Houston, Texas March 28, 2005 F-3
BLUEGATE CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 2004 __________ ASSETS ------ Current assets: Cash and cash equivalents $ 3,708 Accounts receivable, net 209,856 Note receivable 146,814 Other 29,429 ------------ Total current assets 389,807 Property and equipment, net 73,458 ------------ Total assets $ 463,265 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Book overdraft $ 9,620 Notes payable 2,800 Notes payable to related parties 389,018 Accounts payable 715,836 Accrued liabilities 296,637 Deferred revenue 217,073 ------------ Total current liabilities 1,630,984 ------------ Commitment and contingencies Stockholders' deficit: Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized, 110.242 shares issued and outstanding, $5,000 per share liquidation preference ($551,210 aggregate liquida- tion preference) - Series B Convertible Non-Redeemable Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value, 50,000,000 shares auth- orized, 2,548,809 shares issued and outstanding 2,549 Additional paid-in capital 6,184,450 Subscription receivable (11,141) Accumulated deficit (7,343,577) ------------ Total stockholders' deficit (1,167,719) ------------ Total liabilities and stockholders' deficit $ 463,265 ============
The accompanying notes are an integral part of these consolidated financial statements. F-4
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 __________ 2004 2003 ----------- ------------ Service revenue $1,109,502 $ 380,853 Cost of services 597,818 279,266 ----------- ------------ Gross margin 511,684 101,587 Selling, general and administrative expenses 1,389,723 1,180,496 ----------- ------------ Loss from operations (878,039) (1,078,909) ----------- ------------ Other income and (expense): Interest Income 4,400 - Forgiveness of debt 6,467 - Interest expense (46,240) (8,861) ----------- ------------ Other expense, net (35,373) (8,861) ----------- ------------ Loss from continuing operations (913,412) (1,087,770) ----------- ------------ Discontinued operations: Gain from sale of discontinued broadband internet segment 784,213 - Loss from operation of discontinued broadband internet segment (511,000) (1,455,859) ----------- ------------ Income (loss) from discontinued operations 273,213 (1,455,859) ----------- ------------ Net income (loss) $ (640,199) $(2,543,629) =========== ============ Basic and diluted net income (loss) per common share Continuing operations $ (0.42) $ (0.88) Discontinued operations 0.12 (1.18) ----------- ------------ Net income (loss) per common share $ (0.30) $ (2.06) =========== ============ Weighted average shares outstanding 2,161,615 1,233,871 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL -------------------- ------------------- ------------------- PAID-IN SUBSCRIPTION SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE ---------- -------- --------- -------- --------- -------- ------------ ------------- Balance at December 31, 2002 658,176 $ 658 120 $ - 23 $ - $ 3,779,859 $ - Issuance of common stock for cash 926,333 926 - - - 1,298,272 - Issuance of common stock upon conver- sion of 23 shares of Series B Prefer- red Stock 57,500 57 - - (23) - (57) - Issuance of common stock upon conver- sion of 4.274 shares of Series A Prefer- red Stock 50,000 50 (4) - - - (50) - Issuance of common stock to pay pro- fessional fees 42,500 43 - - - - 254,957 - Compensatory stock options and warrants issued to employees and consultants - - - - - - 240,292 - Cancellation of common stock (7,500) (7) - - - - 7 - Net loss - - - - - - - - ---------- -------- --------- -------- --------- -------- ------------ ------------- Balance at December 31, 2003 1,727,009 $ 1,727 116 - - - $ 5,573,280 - ---------- -------- --------- -------- --------- -------- ------------ ------------- DEFERRED ACCUMULATED COMPENSATION DEFICIT TOTAL -------------- ------------- ------------ Balance at December 31, 2002 $ (93,100) $ (4,159,749) $ (472,332) Issuance of common stock for cash - 1,299,198 Issuance of common stock upon conver- sion of 23 shares of Series B Prefer- red Stock - - - Issuance of common stock upon conver- sion of 4.274 shares of Series A Prefer- red Stock - - - Issuance of common stock to pay pro- fessional fees - - 255,000 Compensatory stock options and warrants issued to employees and consultants 81,092 - 321,384 Cancellation of common stock - - - Net loss - (2,543,629) (2,543,629) -------------- ------------- ------------ Balance at December 31, 2003 $ (12,008) $ (6,703,378) $(1,140,379) -------------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-6
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL ------------------ ------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION --------- ------- --------- -------- -------- -------- ------------ -------------- -------------- Balance at December 31, 2003 1,727,009 $ 1,727 116 - - - $ 5,573,280 - $ (12,008) Issuance of common stock for legal services 2,500 3 - - - - 2,161 - - Conversion of Series A preferred stock to common stock 64,160 64 (5) - - - (64) - - Issuance of common stock for cash 755,140 755 - - - - 609,073 (11,141) - Amortization of deferred compen- sation - - - - - - - - 12,008 Net loss - - - - - - - - - --------- ------- --------- -------- -------- -------- ------------ -------------- -------------- Balance at December 31, 2004 2,548,809 $ 2,549 111 $ - - $ - $ 6,184,450 $ (11,141) $ - ========= ======= ========= ======== ======== ======== ============ ============== ============== ACCUMULATED DEFICIT TOTAL ------------- ------------ Balance at December 31, 2003 $ (6,703,378) $(1,140,379) Issuance of common stock for legal services - 2,164 Conversion of Series A preferred stock to common stock - - Issuance of common stock for cash - 598,687 Amortization of deferred compen- sation - 12,008 Net loss (640,199) (640,199) ------------- ------------ Balance at December 31, 2004 $ (7,343,577) $(1,167,719) ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-7
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 __________ 2004 2003 ----------------- ------------ Cash flows from operating activities: Net loss $ (640,199) $(2,543,629) Adjustments to reconcile net loss to net cash used in operating activities: loss (income) from discontinued operations (273,213) 1,455,859 Depreciation expense 43,253 83,506 Provision for bad debt 46,000 2,000 Deferred revenue 169,590 22,515 Common stock issued for services 2,164 67,068 Compensatory stock options 12,008 321,384 Changes in operating assets and liabilities: Accounts receivable (173,081) (41,175) Prepaid and other assets (27,329) 64,497 Accounts payable (1,352) 95,502 Accrued liabilities (1,056) 42,663 Advances from employees - (2,987) ----------------- ------------ Net cash used in continuing operations (843,215) (432,797) Net cash used in discontinued operations (456,627) (990,566) ----------------- ------------ Net cash used in operating activities (1,299,842) (1,423,363) ----------------- ------------ Cash flows from investing activities: Payments received on note receivable 103,186 - Proceeds from sale of broadband operations 500,000 - Purchase of computers and equipment (6,213) (20,715) ----------------- ------------ Net cash used by continuing operations (6,213) (11,244) Net cash provided (used) by discontinued operations 603,186 (9,471) ----------------- ------------ Net cash provided (used) by investing activities 596,973 (20,715) ----------------- ------------ Cash flows from financing activities: Proceeds from book overdraft (54,085) 29,807 Proceeds from notes payable to related parties 74,833 131,080 Repayment of notes payable to related parties (325,143) (41,000) Proceeds from notes payable 450,000 98,183 Repayment of notes payable (47,200) (63,705) Proceeds from issuance of common stock 598,687 1,299,198 ----------------- ------------ Net cash provided by continuing operations 297,092 1,453,563 Net cash provided by discontinued operations 400,000 - ----------------- ------------ Net cash provided by financing activities 697,092 1,453,563 ----------------- ------------ Net increase (decrease) in cash and cash equivalents (5,777) 9,485 Cash and cash equivalents at beginning of period 9,485 - ----------------- ------------ Cash and cash equivalents at end of period $ 3,708 $ 9,485 ================= ============ Supplemental disclosure of cash flow information: Cash paid for interest expense $ 33,277 $ 15,765 ================= ============ Cash paid for income taxes $ - $ - ================= ============
The accompanying notes are an integral part of these consolidated financial statements. F-8 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------------- Bluegate Corporation (the "Company") is a Nevada Corporation that was originally established to conduct an effort to capitalize on the telecommunications industry downturn that began during 2000. The Company has now focused its efforts on providing the healthcare community BLUEGATE, the Company's secure medical network using Cisco System's(TM) virtual private network technology to assist in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPPA"). The Company was originally incorporated as Solis Communications, Inc. ("Solis") on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse acquisition of Berens Industries, Inc. Following is a summary of the Company's significant accounting policies: SIGNIFICANT ESTIMATES ---------------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term. PRINCIPLES OF CONSOLIDATION ----------------------------- The consolidated financial statements include the accounts of the Company and its majority owned or controlled subsidiaries after elimination of all significant intercompany accounts and transactions. CASH AND CASH EQUIVALENTS ---------------------------- The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents. PROPERTY AND EQUIPMENT ------------------------ Property and equipment is recorded at cost and depreciated on the straight-line method over the estimated useful lives of the various classes of depreciable property as follows. Furniture and equipment 5-7 years Telecommunications networks 5 years Computer equipment 3 years Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations. IMPAIRMENT OF LONG-LIVED ASSETS ---------------------------------- In the event facts and circumstances indicate the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Based upon a recent evaluation by management, an impairment write-down of the Company's long-lived assets was not deemed necessary. Continued F-9 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED --------------------------------------------------------------------------- INCOME TAXES ------------- The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value. STOCK-BASED COMPENSATION ------------------------- Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25. LOSS PER SHARE ---------------- Basic and diluted net loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Potentially dilutive options that were outstanding during 2004 and 2003 were not considered in the calculation of diluted earnings per share because the Company's net loss rendered their impact anti-dilutive. Accordingly, basic and diluted losses per share were identical for the years ended December 31, 2004 and 2003. FAIR VALUE OF FINANCIAL INSTRUMENTS --------------------------------------- The Company includes fair value information in the notes to consolidated financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made. COMPREHENSIVE INCOME --------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which requires a company to display an amount representing comprehensive income as part of the Company's basic consolidated financial statements. Comprehensive income includes such items as unrealized gains or losses on certain investment securities and certain foreign currency translation adjustments. The Company's consolidated financial statements include none of the additional elements that affect comprehensive income. Accordingly, comprehensive income and net income are identical. Continued F-10 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED --------------------------------------------------------------------------- REVENUE RECOGNITION -------------------- Revenue from broadband telecommunications services are recognized based upon contractually determined monthly service charges to individual customers. Telecommunications services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided. At December 31, 2003, deferred service revenue was $193,038. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -------------------------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. The implementation of SFAS No. 146 is not expected to have any impact on the Company's results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation", which amends SFAS No. 123 to provide alternative methods of transaction for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. The Company will continue to follow the provisions of APB Opinion No. 25 in recognizing employee stock-based compensation; however, the Company began following the disclosure requirements of SFAS No. 148 in January 2003. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46 "Consolidation of Variable Interest Entities." FIN No. 46 requires a company to consolidate a variable interest entity ("VIE") if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN No. 46, VIEs were commonly referred to as SPEs. FIN No. 46 is effective immediately for VIEs created after January 31, 2003. This interpretation did not have a material effect on the Company's financial condition or results of operations. Continued F-11 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED --------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED -------------------------------------------------------- In April 2003, the FASB issued SFAS No. 149, Amendment to Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances detailed in the statement, and hedging relationships designated after June 30, 2003. Except as otherwise stated in SFAS No. 149, all provisions should be applied prospectively. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150, which is effective at the beginning of the first interim period beginning after June 15, 2003, must be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The statement requires that a financial instrument which falls within the scope of the statement to be classified and measured as a liability. The following financial instruments are required to be classified as liabilities: (1) shares that are mandatorily redeemable, (2) an obligation to repurchase the issuer's equity shares or one indexed to such an obligation and that requires or may require settlement by transferring assets and (3) the embodiment of an unconditional obligation that the issuer may or may not settle by issuing a variable number of equity shares if, at inception, the monetary value of the obligation is based on certain measurements defined in the statement. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment". SFAS No. 123R sets accounting requirements for "share-based" compensation to employees and requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation. SFAS No. 123R is effective in interim or annual periods beginning after June 15, 2005. The Company will be required to adopt SFAS No. 123R in its third quarter of fiscal 2005 and currently discloses the effect on net (loss) income and (loss) earnings per share of the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". The Company is currently evaluating the impact of the adoption of SFAS 123R on its financial position and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards. In November 2004 the FASB issued SFAS No. 151, "Inventory Costs". The new Statement amends ARB No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have any impact on our financial condition or results of operations. Continued F-12 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED --------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED -------------------------------------------------------- In December 2004 the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is to be applied prospectively for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's adoption of SFAS No. 153 is not expected to have any impact on its financial position or results of operations. 2. GOING CONCERN CONSIDERATIONS ------------------------------ During the years ended December 31, 2004 and 2003 the Company has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. The Company experienced negative financial results as follows:
2004 2003 ------------ ------------ Net loss $ (640,199) $(2,543,629) Negative cash flow from operations (1,299,842) (1,423,363) Negative working capital (1,241,177) (1,743,942) Stockholders' deficit (1,167,719) (1,140,379) Book overdraft (9,620) (63,705)
These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) raising additional operating cash through private placements of its common stock, 2) issuing debt and debt convertible to common stock to certain key stockholders and 3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided the Company with the cash flows to continue its business plan, but have not resulted in significant improvement in the Company's financial position. Management is considering alternatives to address its critical cash flow situation that include: - Raising capital through additional sale of its common and preferred stock and/or debt securities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of the Company's stock in lieu of cash payments to employees or vendors. - Selling assets that managements feels are not critical These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that the Company's current financial position can be improved, that it can raise additional working capital or that it can achieve positive cash flows from operations. The Company's long-term viability as a going concern is dependent upon the following: - The Company's ability to locate sources of debt or equity funding to meet current commitments and near term future requirements. - The ability of the Company to achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations. Continued F-13 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 3. DISCONTINUED INTERNET SERVICE PROVIDER OPERATIONS ----------------------------------------------------- Effective June 21, 2004, the Company entered into an Asset Sale Agreement (the "Agreement") with DFW Internet Services, Inc. ("DFW"), a Texas corporation and a wholly-owned subsidiary of MobilePro Corporation for the sale of certain assets related to connectivity services including wireless, digital subscriber line and traditional communication technologies to business and residential customers. Under the terms of this Agreement, the Company received a total of $1,150,000, consisting of $900,000 in cash and a $250,000 was a one-year promissory note. Additionally, DFW acquired 85% of accounts receivable associated with services provided to the Company's customers through June 17, 2004. Further, DFW entered into a one-year sublease for the Company's leased space at 701 N. Post Oak Road, Suite 630, Houston, Texas, for rental rate of $3,000 per month. The terms and conditions of the transactions were the result of arms-length negotiations by the parties. As a result of the Agreement the Company's operations are now solely based on Bluegate (TM), the Company's branded HIPAA compliant broadband digital connectivity service for health care providers. Following is analysis of assets sold under the agreement:
Assets sold: Property and equipment $ 238,346 Goodwill associated with connectivity business 200,346 Accounts receivable 72,650 ---------- 511,342 ---------- Consideration received Note payable assumed 400,000 Deferred revenue 145,555 Cash 500,000 Note receivable 250,000 ---------- 1,295,555 ---------- Gain recognized $ 784,213 ----------
Following is an analysis of the discontinued operations of Crescent ISP, presented in the accompanying financial statements:
2004 2003 ---------- ------------ Sales and service revenue $ 847,551 $ 1,854,289 Cost of sales and services 680,830 1,359,690 ---------- ------------ Gross margin 166,721 494,599 Selling, general and administrative expenses 657,395 1,919,626 ---------- ------------ Loss from operations (490,674) (1,425,027) Interest expense (20,326) (30,832) ---------- ------------ Net loss $(511,000) $(1,455,859) ========== ============
Continued F-14 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 4. ACCOUNTS RECEIVABLE, NET -------------------------- Accounts receivable, net consists of the following at December 31, 2004:
Accounts receivable $257,856 Less allowance for bad debts 48,000 -------- $209,856 ========
5. FURNITURE AND EQUIPMENT, NET ------------------------------- Furniture and equipment, net consists of the following at December 31, 2004:
Computer and internet equipment $ 35,677 Software 164,934 Office furniture and equipment 55,964 ---------- 256,575 Less accumulated depreciation (183,117) ---------- $ 73,458 ==========
Depreciation expense for the years ended December 31, 2004 and 2003 was $97,626 and $197,506, respectively. Depreciation expense is presented in the accompanying statement of operations as follows
2004 2003 ------- -------- Cost of sales and services $43,253 $ 83,506 Discontinued operations 54,373 114,000 ------- -------- $97,626 $197,506 ======= ========
6. NOTES PAYABLE Note payable at December 31, 2004 consists of a note payable to a corporation, bearing interest at a 15% per year and is due on demand. This note is unsecured. Continued F-15 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 7. NOTES PAYABLE TO RELATED PARTIES ------------------------------------ Notes payable to related parties consist of the following at December 31, 2004:
Convertible note payable to Laguna Rig Service, Inc., (a company controlled by Robert Davis, a director/founding stockholder of the Company). This note bears interest at a stated rate of 8% per year and is due on demand. If demand is not made by the note holder, the final maturity date is January 1, 2010. Interest is due monthly. This note provides the holder an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date this note was negotiated was below the fair value of the Com- pany's common stock. $ 26,475 Convertible notes payable to Manfred Sternberg (officer/director/founding stockholder of the Company) and Madred Partners, Ltd. (a company controlled by Robert Davis, a director/ founding stockholder of the Company). These notes bear interest at a stated rate of 8% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur at various dates through January 2010. Interest is due monthly. These notes provide the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date these notes were negotiated was below the fair value of the Company's common stock. 128,710 Convertible notes payable to Manfred Sternberg (officer/director/founding stockholder of the Company)and Madred Partners, Ltd. (a company controlled by Robert Davis, a officer/founding stockholder of the Company). These notes bear interest at a stated rate of 8% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur at various dates through January 2010. Interest is due monthly. These notes provide the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date these notes were negotiated was below the fair value of the Company's common stock. 134,000
Continued F-16 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 7. NOTES PAYABLE TO RELATED PARTIES, CONTINUED ------------------------------------------------
Notes payable to MPH Production Company (a company controlled by Robert Davis, an officer/founding stockholder of the Company) and Manfred Sternberg (an officer/founding stockholder of the Company). These notes bear interest at a stated rate of 15% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur on January 1, 2014. Interest is due monthly beginning on February 1, 2004. These notes are collateralized by substantially all assets of the Company. 99,833 -------- Total notes payable to related parties $389,018 ========
8. ACCRUED LIABILITIES -------------------- Accrued liabilities consists of the following at December 31, 2004:
Accrued payroll tax liability $122,596 Accrued penalties on payroll tax liability 81,836 Accrued medical insurance 9,287 Accrued sales taxes 9,052 Accrued interest expense 73,866 -------- $296,637 ========
The accrued payroll tax liability includes a $81,836 balance that was assumed in connection with the reverse acquisition of Berens Industries, Inc. in 2002. Penalties and interest incurred on this liability have been accrued through December 31, 2004; however such penalties and interest may continue to accrue. Accordingly, this payroll tax liability could increase significantly if not settled in the near term in an amount that is satisfactory to the Company. 9. INCOME TAXES ------------- The composition of deferred tax assets and the related tax effects at December 31, 2004 were as follows:
Liability - --------- Basis of property and equipment $ 5,000 ------------ Assets - ------ Benefit from carryforward of net 2,487,000 operating loss Accrued interest to related parties 25,000 Allowance for doubtful accounts 16,000 ------------ Total assets 2,528,000 Less valuation allowance (2,523,000) ------------ 5,000 ------------ Net deferred tax asset $ - ------------
Continued F-17 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 9. INCOME TAXES, CONTINUED ------------------------- The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss for the years ended December 31, 2004 and 2003 is as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT ---------- --------- ---------- --------- Benefit for income tax at federal statutory rate $ 217,668 34.0% $ 864,834 34.0% Non-deductible meals and entertainment (2,599) (0.4) (4,115) (0.2) Non-deductible interest expense (25,000) (3.9) - - Non-deductible compensation - - (195,971) (7.7) Increase in valuation allowance (190,069) (29.7) (664,748) (26.1) ---------- --------- ---------- --------- Total $ - -% $ - -% ========== ========= ========== =========
At December 31, 2004, for federal income tax and alternative minimum tax reporting purposes, the Company has approximately $7,308,000 of unused net operating losses available for carryforward to future years. The benefit from carryforward of such net operating losses will expire in various years through 2024. Under the provisions of Section 382 of the Internal Revenue Code, the benefit from utilization of approximately $1,144,000 of net operating losses incurred prior to July 23, 2001 was significantly limited as a result of the change of control that occurred in connection with the Company's reverse acquisition of Berens Industries, Inc. (See Note 2). The benefit could be subject to further limitations if significant future ownership changes occur in the Company. 10. STOCKHOLDERS' EQUITY --------------------- REVERSE STOCK SPLIT --------------------- Effective September 24, 2004, the Company's board of directors declared a 20 for 1 reverse stock split. The reverse stock split has been reflected in the accompanying consolidated financial statements and all references to common stock outstanding, additional paid in capital, weighted average shares outstanding and per share amounts prior to the record date of the reverse stock split have been restated to reflect the stock split on a retroactive basis. COMMON STOCK ------------- The Company entered into agreements to sell common stock under Regulation S to various foreign investors. During the years ended December 31, 2004 and 2003, the Company issued 755,140 and 902,634 shares under Regulation S at prices ranging from approximately $0.50 to approximately $2.80 per share. During the years ended December 31, 2004 and 2003, the Company issued common stock to an attorney and to various consultants for legal and financial services. These transactions were exempt pursuant to Section 4(2) of the Securities Act of 1933. During the years ended December 31, 2004 and 2003, the Company issued 2,500 and 42,500 shares for services aggregating $2,164 and $255,000, respectively, under these arrangements. Continued F-18 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 10. STOCKHOLDERS' EQUITY --------------------- SERIES A PREFERRED STOCK --------------------------- During 2001 the Company's board of directors approved the issuance of 120 shares of Series A voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $5,000 per share. Each share of Series A convertible preferred stock may be converted, at the option of the shareholder, into 11,698.75 shares of common stock with fractional shares permitted. SERIES B PREFERRED STOCK --------------------------- During 2002 the Company's board of directors approved the issuance of 100 shares of Series B convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $200 per share. On October 11, 2002 the Company issued 23 shares of such stock to retire certain liabilities totaling $72,768 and to obtain indemnification from certain contingencies assumed in the reverse acquisition of Berens Industries, Inc. (See Note 2). All Series B Preferred Stock was converted to common in 2003. STOCK OPTIONS -------------- The Company periodically issues incentive stock options to key employees, officers and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The board of directors approves the issuance of all stock options. The exercise price of an option granted is determined by the fair market value of the stock on the date of grant, less a discount approved by the board of directors. The options vest immediately or over a period of time as determined at the date of grant. STOCK OPTION PLAN ------------------- The Company has adopted the 2002 Stock and Stock Option Plan (the "Plan") under which incentive stock options for up to 450,000 shares of the Company's common stock may be awarded to officers, directors and key employees. The Plan is designed to attract and reward key executive personnel. As of December 31, 2004, the Company has granted 125,000 options under the Plan. Stock options granted pursuant to the Option Plan expire as determined by the board of directors. All of the options granted by the Company are to be granted at an option price equal to the fair market value of the common stock at the date of grant. Continued F-19 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 10. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- PRO-FORMA DISCLOSURES ---------------------- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater than or equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. Proforma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is included in expense over the option's vesting period or expected life. The Company's proforma information for the years ended December 31, 2004 and 2003 follows:
2004 2003 ----------- ----------- Net loss as reported $ 640,199 $2,543,629 Proforma net loss 1,161,499 $2,685,006 Basic and diluted loss per share as reported $ 0.30 $ 2.06 Proforma basic and diluted loss per share $ 0.54 $ 0.11 Risk free interest rate 4.5% 3.5% Dividend yield -0- -0- Weighted average volatility 190% 100% Weighted-average expected life of options 5 yrs. 3 yrs.
Continued F-20 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 10. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- SUMMARY OF STOCK OPTIONS --------------------------- A summary of the Company's stock option activity and related information for the years ended December 31, 2004 and 2003 follows:
NUMBER OF WEIGHTED- SHARES AVERAGE UNDER EXERCISE EXERCISE OPTIONS PRICE PRICE --------- ----------- ---------- Outstanding-December 31, 2002 137,690 $2.10 $ 2.10 Granted 85,850 $2.00-$6.00 $ 3.00 Cancelled - --------- Outstanding-December 31, 2003 223,540 $2.00-$6.00 $ 2.40 Granted 125,000 $4.40 $ 4.40 Cancelled - - - --------- Outstanding-December 31, 2004 348,540 $2.00-$6.00 $ 3.12 =========
The weighted-average fair value of options granted during the years ended December 31, 2004 and 2003 was $0.21 and $0.19, respectively. The compensation expense associated with these options is being recognized ratably over the service period required of the employees.
NUMBER OF REMAINING COMMON STOCK CURRENTLY CONTRACTUAL EXERCISE EQUIVALENTS EXERCISABLE EXPIRATION DATE LIFE (YEARS) PRICE - ------------ ----------- --------------- ------------ ------ 68,176 68,176 November 2011 6.8 $ 2.00 67,015 67,015 February 2012 7.2 2.00 2,500 2,500 October 2012 7.8 2.00 5,000 5,000 January 2008 3.0 6.00 12,500 12,500 January 2008 3.0 2.00 8,333 8,333 April 2008 3.3 2.00 8,333 8,333 July 2008 3.5 2.00 8,333 8,333 October 2008 3.8 2.00 30,850 30,850 October 2008 3.8 4.00 12,500 12,500 December 2008 3.9 2.00 125,000 125,000 January 2009 4.0 4.40 - ------------ ----------- 348,540 348,540 ============ ===========
Continued F-21 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 10. STOCKHOLDERS' EQUITY, CONTINUED ------------------------------- SUMMARY OF STOCK WARRANTS ------------------------- A summary of the Company's warrant activity and related information for the years ended December 31, 2004 and 2003 follows:
NUMBER OF WEIGHTED- SHARES AVERAGE UNDER EXERCISE EXERCISE OPTIONS PRICES PRICE --------- ------------ ---------- Outstanding-December 31, 2002 73,500 $2.00-$10.00 $ 8.20 Granted 43,040 $0.20-$4.00 $ 3.80 --------- Outstanding-December 31, 2003 116,540 $0.20-$10.00 $ 6.60 Granted - - - --------- Outstanding-December 31, 2004 116,540 $0.20-$10.00 $ 6.60 =========
The weighted-average fair value of warrants granted during the year ended December 31, 2003 was $0.38.
NUMBER OF REMAINING COMMON STOCK CURRENTLY CONTRACTUAL EXERCISE EQUIVALENTS EXERCISABLE EXPIRATION DATE LIFE (YEARS) PRICE - ------------ ----------- --------------- ------------ --------- 37,500 37,500 November 2005 3.9 $ 10.00 5,000 5,000 February 2008 3.2 2.00 11,000 11,000 July 2008 3.5 2.00 20,000 20,000 March 2009 4.2 10.00 15,000 15,000 March 2008 3.3 4.00 25,000 25,000 July 2008 3.5 3.80 2,500 2,500 November 2008 3.8 2.00 540 540 November 2008 3.8 0.20 - ------------ ----------- 116,540 116,540 ============ ===========
11. LEASE COMMITMENT ----------------- The Company operates from leased office space under an operating lease that expires in July 2005 and includes no provisions for extension. The lease includes lease payments escalation and provisions for other increases to rental payments should certain costs of the landlord increase. The Company also pays monthly access fees to the buildings in which it provides its broadband services. Future annual lease payments due under this lease in 2005 are $54,539 Rent expense incurred under operating leases for years ended December 31, 2004 and 2003 was $92,591 and $95,416, respectively. During the years ended December 31, 2004 and 2003, the Company received sublease income of $45,725 and $2,500, respectively. Continued F-22 BLUEGATE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 12. RELATED PARTY TRANSACTIONS ---------------------------- During the years ended December 31, 2004 and 2003, the Company engaged in various related party transactions as follows: - During 2003, 2002 and 2001 the Company entered into note payable agreements with various, officers, employees, directors and/or founding stockholders. These notes are described in Note 5. - During 2002, the Company entered into a factoring arrangement on its accounts receivable with Manfred Sternberg. The amount due under this factoring arrangement was $34,265 at December 31, 2002 and the factoring agreement was fully repaid in 2003. - During 2001, the company entered into a $150,000 line of credit agreement with Manfred Sternberg and Robert Davis. The total amount due under this line of credit agreement at December 31, 2003 was 100,755 and the balance was fully repaid in 2004. - During the years ended December 31, 2004 and 2003, the Company incurred interest expenses on related party debt of approximately $35,000 in each year. - The Company has a three year employment agreement with Manfred Sternberg, the Company's chief executive officer, that extends through January 1, 2007 and provides for a base salary of $180,000. Under the employment agreement, the Company committed to the issuance of options for 450,000 shares of the Company's common stock at $4.40 per share in three stages. On January 1, 2004, the Company's CEO was granted 125,000 five year options to purchase shares at $4.40 per share. The CEO will be issued 150,000 and 175,000 additional options at January 1, 2005 and 2006, respectively. The employment agreement also contains a provision that in the event of a change of control, the Company will pay Mr. Sternberg the sum of $2,000,000, all pending compensation for future consideration would become immediately due and payable, and all options would become immediately fully vested. 12. NON CASH INVESTING AND FINANCING ACTIVITIES ------------------------------------------------ During the year ended December 31, 2004, he Company engaged in certain non-cash investing and financing activities as follows: The Company recognized proceeds from a $400,000 note payable as a component of the sales price of its broadband operations. (See Note 3) The Company accepted a $250,000 note receivable as part of the sales price of its broadband operations. (See Note 3) F-23 BLUEGATE CORPORATION __________ UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 FF-1
BLUEGATE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET __________ MARCH 31, DECEMBER 31, 2005 2004 ASSETS (UNAUDITED) (NOTE) ------ ------------ -------------- Current assets: Cash and cash equivalents $ 36,617 $ 3,708 Accounts receivable, 212,124 209,856 Note receivable 126,026 146,814 Other 30,234 29,429 ------------ -------------- Total current assets 405,001 389,807 Goodwill 50,160 - Property and equipment, net 96,803 73,458 ------------ -------------- Total assets $ 551,964 $ 463,265 ============ ============== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Book overdraft $ - $ 9,620 Notes payable 12,800 2,800 Notes payable to related parties 34,000 389,018 Accounts payable 592,021 715,836 Accrued liabilities 269,375 296,637 Deferred revenue 196,202 217,073 ------------ -------------- Total current liabilities 1,104,398 1,630,984 ------------ -------------- Commitment and contingencies Stockholders' deficit: Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized, 110,242 shares issued and outstanding, $5,000 per share liquidation preference ($551,210 aggregate liquida- tion preference) - - Series B Convertible Non-Redeemable Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value, 50,000,000 shares auth- orized, 3,239,825 shares issued and outstanding 3,240 2,549 Additional paid-in capital 7,597,229 6,184,450 Subscription receivable (8,510) (11,141) Deferred compensation (346,867) - Unissued common stock 1,047,201 - Accumulated deficit (8,844,727) (7,343,577) ------------ -------------- Total stockholders' deficit (552,434) (1,167,719) ------------ -------------- Total liabilities and stockholders' deficit $ 551,964 $ 463,265 ============ ==============
Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. See accompanying notes. FF-2
BLUEGATE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS MARCH 31, 2005 AND 2004 __________ MARCH 31, MARCH 31, 2005 2004 ------------ ----------- Service revenue $ 359,547 $ 194,535 Cost of services 175,764 165,442 ------------ ----------- Gross margin 183,783 29,093 Selling, general and administrative expenses 724,788 238,173 ------------ ----------- Loss from operations (541,005) (209,080) ------------ ----------- Other income and (expense): Interest income 728 - Loss on conversion of notes payable to common stock (946,971) - Interest expense (11,283) (2,768) Other expense (2,619) - ------------ ----------- Other expense, net (960,145) (2,768) ------------ ----------- Loss from continuing operations (1,501,150) (211,848) ------------ ----------- Discontinued operations: Loss from operation of discontinued broadband internet segment - (224,424) ------------ ----------- Net income (loss) $(1,501,150) $ (436,272) ============ =========== Basic and diluted net loss per common share $ (0.46) $ (0.20) ============ =========== Weighted average shares outstanding 3,263,370 1,924,627 ============ ===========
See accompanying notes. FF-3
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL ------------------ -------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION --------- ------- --------- --------- --------- ------- ----------- -------------- -------------- Balance at December 31, 2004 2,548,809 $ 2,549 111 $ - - $ - $ 6,184,450 $ (11,141) $ - Issuance of common stock for cash 161,016 161 - - - - 26,704 - - Conversion of notes payable and accrued interest for unis- sued common stock and stock options - - - - - - 806,818 - - Issuance of common stock to an officer as compensation 100,000 100 - - - - 100,900 - - Issuance of common stock to pay con- sulting fees 430,000 430 - - - - 377,969 - (346,867) Purchase of certain assets of a company for unissued common stock - - - - - - - - - Cash received for com- mon stock that has not been issued - - - - - - - - - Receipt of cash for subscription receiv- able - - - - - - - 2,631 - Stock options issued for services - - - - - - 100,388 - - Net loss - - - - - - - - - --------- ------- --------- --------- --------- ------- ----------- -------------- -------------- Balance at March 31, 2005 3,239,825 $ 3,240 111 $ - - $ - $ 7,597,229 $ (8,510) $ (346,867) ========= ======= ========= ========= ========= ======= =========== ============== ============== UNISSUED COMMON ACCUMULATED STOCK DEFICIT TOTAL_ ---------- ------------- ------------ Balance at December 31, 2004 $ - $ (7,343,577) $(1,167,719) Issuance of common stock for cash - - 26,865 Conversion of notes payable and accrued interest for unis- sued common stock and stock options 706,041 - 1,512,859 Issuance of common stock to an officer as compensation - - 101,000 Issuance of common stock to pay con- sulting fees - - 31,532 Purchase of certain assets of a company for unissued common stock 116,160 - 116,160 Cash received for com- mon stock that has not been issued 225,000 - 225,000 Receipt of cash for subscription receiv- able - - 2,631 Stock options issued for services - - 100,388 Net loss - (1,501,150) (1,501,150) ---------- ------------- ------------ Balance at March 31, 2005 $1,047,201 $ (8,844,727) $ (552,434) ========== ============= ============
See accompanying notes. FF-4
BLUEGATE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 __________ MARCH 31, MARCH 31, 2005 2004 ------------ ----------- Cash flows from operating activities: Net loss $(1,501,150) $ (436,272) Adjustments to reconcile net loss to net cash used in operating activities: 1,281,924 207,385 ------------ ----------- Net cash used by continuing operations (219,226) (206,477) Net cash used by discontinued operations - (22,410) ------------ ----------- Net cash used by operating activities (219,226) (228,887) ------------ ----------- Cash flows from investing activities: Payments received on note receivable 20,788 - Purchase of computers and equipment (42,769) - Proceeds from disposition of property and equipment - 4,366 ------------ ----------- Net cash used by continuing operations (21,981) 4,366 Net cash used by discontinued operations - - ------------ ----------- Net cash provided (used) by investing activities (21,981) 4,366 ------------ ----------- Cash flows from financing activities: Repayment of book overdraft (9,620) (28,766) Proceeds from notes payable 10,000 40,000 Repayment of notes payable - (795) Repayment of notes payable to related parties - (14,000) Collection of subscription receivable 2,631 - Proceeds from sale of common stock 251,865 227,587 ------------ ----------- Net cash provided by continuing operations 274,116 224,026 Net cash provided by discontinued operations - - ------------ ----------- Net cash provided by financing activities 274,116 224,026 ------------ ----------- Net increase (decrease) in cash and cash equivalents 32,909 (495) Cash and cash equivalents at beginning of period 3,708 9,485 ------------ ----------- Cash and cash equivalents at end of period $ 36,617 $ 8,990 ============ =========== Non-Cash Investing and Financing Activities: Issuance of common stock for acquisition of TEKMedia Communications, Inc. $ 116,160 $ - Common stock issued for conversion of notes payable 355,018 - Common stock issued for conversion of accrued interest 56,573 - Common stock issued for conversion of Accounts payable 154,297 - See accompanying notes.
FF-5 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES ------------------------------------------------------------ Bluegate Corporation (the "Company") is a Nevada Corporation that was originally established to conduct an effort to capitalize on the telecommunications industry downturn that began during 2000. The Company has now focused its efforts on providing the healthcare community BLUEGATE, the Company's secure medical network using Cisco System's(TM) virtual private network technology to assist in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPPA"). The Company was originally incorporated as Solis Communications, Inc. ("Solis") on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse acquisition of Berens Industries, Inc. The unaudited consolidated condensed financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations. These unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Bluegate Corporation (the "Company") included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004. In the opinion of management, the unaudited consolidated condensed financial information included herein reflect all adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for a full year or any other interim period. STOCK-BASED COMPENSATION ------------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to either record expenses for stock options and other employee compensation plans based on their fair value at the date of grant or to continue to apply our current accounting policy under Accounting Principles Board, ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees," and recognize compensation expense, if any, based on the intrinsic value of the equity instrument at the measurement date. In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - An Amendment to FASB Statement No. 123" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company elected to not change to the fair value based method of accounting for stock based compensation. Additionally, the statement amended disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements. FF-6 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES, CONTINUED ------------------------------------------------------------------------ SIGNIFICANT ESTIMATES ---------------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term. REVENUE RECOGNITION -------------------- Revenue from telecommunications services are recognized based upon contractually determined service charges to individual customers. Telecommunications services are billed in advance and revenues are deferred until the period in which the services are provided. At March 31, 2005 and December 31, 2004, deferred service revenue was $196,202 and $217,073, respectively. 2. GOING CONCERN CONSIDERATIONS ------------------------------ During the three months ended March 31, 2005, and the years ended December 31, 2004 and 2003 the Company has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. During the years ended December 31, 2004 and 2003, the Company experienced negative financial results as follows:
2004 2003 ------------ ------------ Net loss $ (640,199) $(2,543,629) Negative cash flow from operations (1,299,842) (1,423,363) Negative working capital (1,241,177) (1,743,942) Stockholders' deficit (1,167,719) (1,140,379)
These negative factors have continued during the three months ended March 31, 2005 and raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) raising additional operating cash through private placements of its common stock, and 2) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided the Company with the cash flows to continue its business plan, but have not resulted in significant improvement in the Company's financial position. Management is considering alternatives to address its critical cash flow situation that include: FF-7 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 2. GOING CONCERN CONSIDERATIONS, CONTINUED ------------------------------------------ - Raising capital through additional sale of its common and preferred stock and/or debt securities. - Merging the Company with another business that compliments current activities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of the Company's stock in lieu of cash payments to employees or vendors. These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that the Company's current financial position can be improved, that it can raise additional working capital or that it can achieve positive cash flows from operations. The Company's long-term viability as a going concern is dependent upon the following: - The Company's ability to locate sources of debt or equity funding to meet current commitments and near term future requirements. - The ability of the Company to achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations. 3. ACQUISITION OF TEKMEDIA COMMUNICATIONS, INC.("TEKMEDIA") ------------------------------------------------------------ On March 1, 2005, the Company acquired the assets of TEKMedia in exchange for 132,000 shares of the Company's common stock. Following is an analysis of the assets acquired and the purchase price:
Assets acquired: Accounts receivable 66,000 Goodwill 50,160 -------- Common stock issued $116,160 ========
4. INCOME TAX ----------- The difference between the Federal statutory income tax rate of 34% and the Company's effective rate is primarily attributable to increases in the valuation allowance offset against deferred tax assets associated with the Company's net operating losses. FF-8 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 5. STOCKHOLDERS' EQUITY --------------------- During the three months ended March 31, 2005, the Company engaged in various transactions affecting stockholders' equity, as follows: - The Company sold common stock under Regulation S to various foreign investors under investment agreements entered into during 2002. The investment agreements generally provide for the sale of restricted common stock at 35% of the current trading price in the United States. During the three month period ended March 31, 2005 161,016 shares were issued for $26,865. - Officers and directors holding convertible notes totaling $355,018, agreed to convert those notes, related accrued interest of $56,573 and accounts payable for legal services of $154,297 into common stock. The stock was issued subsequent to March 31, 2005. In connection with the conversions, the Company issued the officers and directors a total of 1,008,630 three-year options to acquire shares of the Company's common stock. The options are exercisable after a vesting period at $1.00 per share. The unissued common stock and the stock options granted under the conversion totaled were valued at $1,512,859 and the Company recognized a loss on the conversion of $946,971 - The Company issued 10,000 shares of common stock to a director as compensation totaling $101,000. - The Company issued common stock for consulting services totaling $31,532. - The Company purchased certain assets of TEKMedia in exchange for 132,000 shares of common stock valued at $116,160. These shares were not yet issued at March 31, 2005. - The Company sold common stock for $225,000 in, however the shares have not been issued. - The Company received cash totaling $2,631 for subscription receivable. - The Company issued options to acquire shares of the Company's common stock to a consultant. The options are exercisable after a vesting period at $1.00 per share. FF-9 FORM SB-2 PART II--INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Nevada Revised Statutes, law, our Articles of Incorporation and our By-Laws provide that we may indemnify our officers and directors against losses or liabilities which arise in their corporate capacity. The effect of these provisions could be to dissuade lawsuits against our officers and directors. The Nevada Revised Statutes Section 78.7502 provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) Is not liable pursuant to NRS 78.138; or (b) Acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: Is not liable pursuant to NRS 78.138; or (b) Acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. The Nevada Revised Statutes Section 78.751 provides that any discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court or advanced pursuant to Section 78.751, may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. The indemnification pursuant to NRS 78.7502 and advancement of expenses authorized in or ordered by a court pursuant to this section: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the advancement of expenses made pursuant to subsection 2, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action, and, (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. Our Articles of Incorporation at Article VIII provides that the Corporation shall, to the fullest extent permitted by the Nevada General Corporation Law, as the same may be amended and supplemented, indemnify any an all persons whom it shall have power to indemnify under said Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Our Bylaws at Article X provide that the: The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner in which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Any indemnification under this Article (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. Expenses (including attorneys' fees) incurred by an officer or director in defending in a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized by this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under this Article. For purposes of this section references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained in this Article or elsewhere in these Bylaws, shall operate to indemnify any director or officer if such indemnification is contrary to law, either as a matter of public policy, or under the provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other applicable state or Federal law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the forgoing provisions or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount Paid or be Paid (1) SEC registration fee $ 509.00 Printing and engraving expenses 1,000.00 Attorneys' fees and expenses 20,000.00 Accountants' fees and expenses 3,000.00 Transfer agent's and registrar's fees and expenses 1,000.00 Edgar service provider fee 2,000.00 Miscellaneous 1,000.00 ---------------- Total $ 28,509.00 ================
- ----------------------- (1) The amounts set forth are all estimates. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES During the three year period ended May 26, 2005, we issued unregistered securities in transactions summarized below. In 2004, we had a 20:1 reverse stock split. All of the amounts set forth below account for the reverse split. During the second quarter of 2002, we issued an aggregate of 5,000 shares of common stock to one investor for total cash proceeds of $10,000. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2002, we issued an aggregate of 20,000 shares of common and options to purchase 20,00 shares of common tock with an exercise price of $10.00 per share stock to one investor for total cash proceeds of $100,000. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2002, we issued an aggregate of 46,037 shares of common stock pursuant to Regulation S for total cash proceeds of $91,204. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During 2002, we issued to six employees and consultants an aggregate of 26,000 options to purchase shares of common stock with an exercise price of $2.00 per share as compensation. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During 2002, we issued to six employees and consultants an aggregate of 26,000 options to purchase shares of common stock with an exercise price of $2.00 per share. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the third quarter of 2002, we issued an aggregate of 335,911 shares of common stock pursuant to Regulation S for total cash proceeds of $1,425,821. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the fourth quarter of 2002, we issued an aggregate of 31,117 shares of common stock pursuant to Regulation S for total cash proceeds of $104,798. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2003, we issued we issued an aggregate of 320,189 shares of common stock pursuant to Regulation S for total cash proceeds of $545,556. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2003, we issued 57,500 shares of common stock to one investor upon conversion of other of our securities. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2003, we issued an aggregate of 220,710 shares of common stock pursuant to Regulation S for total cash proceeds of $301,901. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the third quarter of 2003, we issued an aggregate of 140,327 shares of common stock pursuant to Regulation S for total cash proceeds of $134,445. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the fourth quarter of 2003, we issued 50,000 shares of common stock to one investor upon conversion of other of our securities. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the fourth quarter of 2003, we issued 37,500 shares of common stock to one vendor for services rendered. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the fourth quarter of 2003, we issued an aggregate of 221,411 shares of common stock pursuant to Regulation S for total cash proceeds of $230,579. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During 2003, we issued to 32 employees and consultants an aggregate of 178,939 options to purchase shares of common stock with an exercise prices ranging from $2.00 per share to $4.00 per share as compensation. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2004, we issued an aggregate of 219,123 shares of common stock pursuant to Regulation S for total cash proceeds of $227,582. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2004, we issued an aggregate of 175,171 shares of common stock pursuant to Regulation S for total cash proceeds of $135,248. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the third quarter of 2004, we issued 64,159 shares of common stock to one investor upon conversion of other of our securities. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the third quarter of 2004, we issued an aggregate of 218,361 shares of common stock pursuant to Regulation S for total cash proceeds of $164,650. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the fourth quarter of 2004, we issued an aggregate of 139,425 shares of common stock pursuant to Regulation S for total cash proceeds of $77,018. This transaction was made in reliance upon exemptions from registration under Regulation S of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. A foreign underwriter participated in this transaction and we paid commissions to the underwriter. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued 430,000 shares of common stock and options to purchase 125,000 shares of commons tock at an exercise price of $1.00 per share to one vendor for services rendered. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued 100,000 shares of common stock and options to purchase 100,000 shares of common stock with an exercise price of $1.00 per share to one investor for total cash proceeds of $200,000. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued 100,000 shares of common stock to one employee as compensation. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued an aggregate of 215,178 shares of common stock to ten investors for total cash proceeds of $31,642. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued 68,572 shares of common stock to one vendor for services rendered. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2005, we issued 132,000 shares of common stock to purchase assets from on person. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2005, we issued 568,630 shares of common stock and options to purchase 568,630 shares of common stock with an exercise price of $1.00 per share to one person to extinguish $284,315 in debt. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2005, we issued 450,000 shares of common stock and options to purchase 450,000 shares of common stock at an exercise price of $1.00 per share to one investor for cash proceeds of $225,000. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2005, we issued 33,771 shares of common stock to one vendor for services rendered. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the second quarter of 2005, we issued 440,000 shares of common stock and options to purchase 440,00 shares of common stock with an exercise price of $1.00 per share to one person extinguish $220,000 in debt. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During the first quarter of 2005, we issued options to purchase 150,000 shares of common stock with an exercise price of $0.50 per share to one vendor for services rendered. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities. During 2005, we issued to 2 employees an aggregate of 1,800,000 options to purchase shares of common stock with an exercise prices ranging from $0.50 to $4.40 per share as compensation. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. The investor had knowledge and experience in financial and business matters that allowed him to evaluate the merits and risk of receipt of these securities.
ITEM 27. EXHIBITS - ---------------------------------------------------------------------------------------------------- Exhibit Number Description - ---------------------------------------------------------------------------------------------------- 3.1 Articles of Incorporation as amended ---- provided herewith. 3.2 By-laws as amended ----- provided herewith. 4.1 Form of common stock ---- provided herewith. 4.2 Form of convertible debenture ---- provided herewith. 4.3 Form of option Agreement: ---- provided herewith. 4.4 Form of warrant Agreement: ---- provided herewith. 4.5 Form of preferred Stock Certificate ------- provided herewith 4.6 Form of convertible Debt Agreement -------- provided herewith 4.7 Designation of Series A preferred stock . --- provided herewith. 5.1 Opinion re: legality ---- provided herewith. 10.1 Employment Agreement of Manfred Sternberg ---- provided herewith. 10.2 Employment Agreement of Greg Micek ---- provided herewith. 23.1 Consent of Independent Auditors ---- provided herewith. 23.2 Consent of Counsel (see Exhibit 5.1) ---- provided herewith.
ITEM 28. UNDERTAKINGS The Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new Registration Statement of the securities offered, and the Offering of the securities at that time to be the initial bona fide Offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the Offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES In accordance with the requirements of 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 authorized this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, Texas on May 31, 2005. BLUEGATE CORPORATION May 31, 2005 By: /s/ Manfred Sternberg Manfred Sternberg Director, Chief Executive Officer, 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. Signature Title Date - ------------------------------------------------------------------------------- May 31, 2005 By: /s/ Manfred Sternberg Manfred Sternberg Director, Chief Executive Officer, President May 31, 2005 By: /s/ Greg J. Micek Greg J. Micek Chief Financial Officer May 31, 2005 By: /s/ Gil Gertner Gil Gertner Director May 31, 2005 By: William Koehler William Koehler Director
EXHIBIT INDEX - ---------------------------------------------------------------------------------------------------- Exhibit Number Description - ---------------------------------------------------------------------------------------------------- 3.1 Articles of Incorporation as amended ---- provided herewith. 3.2 By-laws as amended ----- provided herewith. 4.1 Form of common stock ---- provided herewith. 4.2 Form of convertible debenture ---- provided herewith. 4.3 Form of option Agreement: ---- provided herewith. 4.4 Form of warrant Agreement: ---- provided herewith. 4.5 Form of preferred Stock Certificate ------- provided herewith 4.6 Form of convertible Debt Agreement -------- provided herewith 4.7 Designation of Series A preferred stock . --- provided herewith. 5.1 Opinion re: legality ---- provided herewith. 10.1 Employment Agreement of Manfred Sternberg ---- provided herewith. 10.2 Employment Agreement of Greg Micek ---- provided herewith. 23.1 Consent of Independent Auditors ---- provided herewith. 23.2 Consent of Counsel (see Exhibit 5.1) ---- provided herewith.
EX-3.1 2 ex3_1.txt EXHIBIT 3.1 DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 SEAL] Carson City, Nevada 89701-4299 FILED #C173-85 (775) 684 5708 ------- Website: secretaryofstate.biz NOV 15 2004 - -------------------------------------------- | | IN THE OFFICE OF | Certificate of Amendment | /s/ Dean Heller | (PURSUANT TO NRS 78.385 and 78.390) | DEAN HELLER, SECRETARY OF STATE | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Amendment to Articles of Incorporation ----------------------------------------------------- For Nevada Profit Corporations ------------------------------ (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) 1. Name of corporation: - -------------------------------------------------------------------------------- Bluegate Corporation - -------------------------------------------------------------------------------- 2. The articles have been amended as follows (provide article numbers, if available): - -------------------------------------------------------------------------------- The total number of shares which the Corporation is authorized to issue is 60,000,000. The number of Common shares authorized is 50,000,000 and the par value of each share is $0.01 per share. The number of preferred shares authorized is 10,000,000 and the par value of each share is $0.01 per share. - -------------------------------------------------------------------------------- 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: majority vote ---------------------------------------- 4. Effective date of filing (optional): 11/23/04 ---------------------------------------- (must not be later than 80 days after the certificate is filed) 5. Officer Signature (required): /s/ signature illegible CEO --------------------------------------------- *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 11/05/03 DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 SEAL] Carson City, Nevada 89701-4299 FILED #C173-85 (775) 684 5708 ------- Website: secretaryofstate.biz NOV 15 2004 - -------------------------------------------- | | IN THE OFFICE OF | Certificate of Change Pursuant | /s/ Dean Heller | to NRS 78.209 | DEAN HELLER, SECRETARY OF STATE | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Change filed Pursuant to NRS 78.209 -------------------------------------------------- For Nevada Profit Corporations ------------------------------ 1. Name of corporation: - -------------------------------------------------------------------------------- Bluegate Corporation - -------------------------------------------------------------------------------- 2. The board of directors have adopted a resolution pursuant to NRS 78.207 and have obtained any required approval of the stockholders. 3. The current number of authorized shares and the par value, if any, of each class or series, if any, of shares before the change: - -------------------------------------------------------------------------------- 95,000,000 total shares consisting of 85,000,000 common shares with par value of $.001 per share and 10,000,000 preferred shares with par value of $.001 per share. - -------------------------------------------------------------------------------- 4. The number of authorized shares and the par value, if any, of each class or series, if any, of shares after the change: - -------------------------------------------------------------------------------- 14,250,000 total shares consisting of 4,250,000 common shares with par value of $.001 per share and 10,000,000 preferred shares with par value of $.001 per share. - -------------------------------------------------------------------------------- 5. The number of shares of each affected class or series, if any, to be issued after the change in exchange for each issued share of the same class or series: - -------------------------------------------------------------------------------- 20-for-1 reverse split of common shares - -------------------------------------------------------------------------------- 6. The provisions, if any, for the issuance of fractional shares, or for the payment of money or the issuance of scrip to stockholders otherwise entitled to a fraction of a share and the percentage of outstanding shares affected thereby: - -------------------------------------------------------------------------------- Holders of less than 20 shares will receive 1 whole share - -------------------------------------------------------------------------------- ------------------------------------ 7. Effective date of filing (optional): 11/23/04 ------------------------------------ (must not be later than 90 days after the certificate is filed) ------------------------- 8. Officer Signature: /s/ Signature illegible CEO ---------------------------- ------------------------- Signature Title IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 10/24/03 DEAN HELLER Secretary of state [GRAPHIC 204 North Carson Street, Suite 1 OMITTED] Carson City, Nevada 89701-4299 (775) 684 5708 FILED# C173-85 Website: secretaryofstate.biz ------- NOV 15 2004 - ---------------------------------------- CERTIFICATE OF CORRECTION IN THE OFFICE OF (PURSUANT TO NRS 78,78A, 80, 81, /s/ Dean Heller 82, 84, 86, 87, 58, 88A, 89 AND 92A) DEAN HELLER, SECRETARY OF STATE - ---------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR OFFICE USE ONLY before completing form. CERTIFICATE OF CORRECTION ------------------------- (PURSUANT TO NRS 78, 78A, 80, 81, 82, 84, 86, 87, 88, 88A, 89 AND 92A) 1. The name of the ENTITY for which correction is being made: - -------------------------------------------------------------------------------- Bluegate Corporation - -------------------------------------------------------------------------------- 2. Description of the original document for which correction is being made: - -------------------------------------------------------------------------------- Certificate of Amendment - -------------------------------------------------------------------------------- 3. Filing date of the original document for --------------------- which correction is being made: November 2,2004 --------------------- 4. Description of the inaccuracy or defect. - -------------------------------------------------------------------------------- Certificates of Amendments incorrectly stated: "The total number of shares which the Corporation is authorized to issue is 60,000,000. The number of Common shares authorized is 50,000,000 and the par value of each share is $.001 per share. The number of preferred shares authorized is 10,000,000 and par value of each share is $.001 per share." - -------------------------------------------------------------------------------- 5. Correction of the inaccuracy or defect. - -------------------------------------------------------------------------------- The total number of shares which the Corporation is authorized to issue is 95,000,000. The number of Common shares authorized is 85,000,000 and the par value of each share is $.001 per share. The number of preferred shares authorized is 10,000,000 and par value of each share is $.001 per share. - -------------------------------------------------------------------------------- 6. Signature: ------------------------ ---------------------- /s/ Signature illegible CEO 11-15-04 - -------------------------- ------------------------ ---------------------- AUTHORIZED SIGNATURE TITLE * DATE *lf entity is a Corporation, it must be signed by an Officer if stock has been issued, OR an Incorporator or Director if stock has not been issued; a Limited - -Liability Company, by a manager or managing members; a Limited Partnership or Limited-Liability Limited Partnership, by a General Partner; a Limited-Liability Partnership, by a Managing Partner; a Business Trust, by a Trustee. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied by Nevada Secretary of State appropriate fees. AM Correction 2003 See attached fee schedule. Revised on: 10/24/03 DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 SEAL] Carson City, Nevada 89701-4299 FILED #C173-85 (775) 684 5708 ------- Website: secretaryofstate.biz NOV 02 2004 - -------------------------------------------- | | IN THE OFFICE OF | Certificate of Amendment | /s/ Dean Heller | (PURSUANT TO NRS 78.385 and 78.390) | DEAN HELLER, SECRETARY OF STATE | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Amendment to Articles of Incorporation ----------------------------------------------------- For Nevada Profit Corporations ------------------------------ (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) 1. Name of corporation: Crescent Communications, Inc. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2. The articles have been amended as follows (provide article numbers, if available): The name of the Corporation is changed to Bluegate Corporation. The total number - -------------------------------------------------------------------------------- of shares which the Corporation is authorized to issue is 60,000,000. The number - ------------------------------------------------------------------------------- of Common shares authorized is 50,000,000 and the par value of each share is - -------------------------------------------------------------------------------- $0.01 per share. The number of preferred shares authorized is 10,000,000 and the - -------------------------------------------------------------------------------- par value of each share is $0.01 per share. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: majority vote ------------------------ 4. Effective date of filing (optional): ---------------------------------------- (must not be later than 80 days after the certificate is filed) 5. Officer Signature (required): /s/ signature illegible --------------------------------------------- *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. SUBMIT IN DUPLICATE This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 11/05/03 DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 C 173-85 ------------------------------- SEAL] Carson City, Nevada 89701-4299 FILED # (775) 684 5708 ------- Website: secretaryofstate.biz JAN 26 2004 - -------------------------------------------- | | IN THE OFFICE OF | Certificate of Amendment | /s/ Dean Heller | (PURSUANT TO NRS 78.385 and 78.390) | DEAN HELLER, SECRETARY OF STATE | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Amendment to Articles of Incorporation ----------------------------------------------------- For Nevada Profit Corporations ------------------------------ (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) 1. Name of corporation: - ------------------------------------------------------------------------------- Crescent Communications, Inc. - ------------------------------------------------------------------------------- 2. The articles have been amended as follows (provide article numbers, if available): - -------------------------------------------------------------------------------- ARTICLE II (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock", and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title at shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or no series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series there of unless a vote of any such holder; is required pursuant to any Preferred Stock Designation." SEE ATTACHED - --------------------------------------------------------------------------- 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: ------------------------- 4,474,031 c/s, 120 Series A, 23 Series B - -------------------------------------------------------------------------------- ---------------------------------------- 4. Effective date of filing (optional): ---------------------------------------- (must not be later than 90 days after the certificate is filed) 5. Officer Signature (required): /s/ signature illegible, Secretary --------------------------------------------- *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 11/05/03 CERTIFICATE OF AMENDMENT FILED # C 173-85 -------- TO THE JAN 26 2004 RESTATED ARTICLES OF INCORPORATION IN THE OFFICE OF OF /s/ Dean Heller CRESCENT COMMUNICATIONS, INC. DEAN HELLER, SECRETARY OF STATE We, the undersigned, David Loeschner, President of CRESCENT COMMUNICATIONS, INC., and Barbara Fullerton, Secretary of CRESCENT COMMUNICATIONS, INC., hereby certify that Pursuant to Nevada Revised Statutes NRS 78.385 and NRS 78390, the undersigned corporation adopted the following Articles of Amendment to its Articles of Incorporation, Article II of the Articles of Incorporation is amended in its entirety to read: "Article II. (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock"), and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications. limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to tune by the Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock, may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the "Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation." The Board of Directors recommended and consented to this amendment on April 1,2003. A majority of the shareholders of the corporation voted at a meeting of shareholders to amend the Articles of Incorporation. A total of 4,474,031,shares of common stock, 120 shares of the Series A Preferred Stock and 23 shares of the Series B STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared David Loeschner, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, GIVEN UNDER MY HAND AND SEAL of office this 21st day of January ____, 2004. ---- (signed) /s/ Barbara C. Fullerton --------------------- [Notary Seal]/s/ Barbara C. Fullerton --------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS My commission expires 11/13/07 -------- -------------------------------------------------- [GRAPHIC OMMITTED] Barbara C. Fullerton Notary Public Notary Public State of Texas State of Texas My Commission Expires November 13, 2007 -------------------------------------------------- STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Barbara Fullerton, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, GIVEN UNDER MY HAND AND SEAL of office this 22 day of January 2004. --- /s/ Loretta Crane --------------------- [Notary Seal] /s/ --------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS -------------------------------------------------------- [GRAPHIC OMMITTED] Loretta Crane Notary Public Notary Public State of Texas State of Texas My Comm. Expires 12-13-07 -------------------------------------------------------- My commission expires 12/13/07 -------- Preferred Stock voted in favor of the amendment to the Articles of Incorporation, which constituted the vote of a majority of the shares entitled to vote on this amendment and a majority of each class of stock entitled to vote on this amendment. (signed) /s/ David Loeschner -------------------------- David Loeschner, President (signed) /s/ Barbara Fullerton ---------------------------- Barbara Fullerton, Secretary STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Jeffrey Olexa, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, GIVEN UNDER MY HAND AND SEAL of office this 13th day of September, 2001. ----- (signed) /s/ Barbara C. Fullerton ------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS [Notary Seal] - -------------------------------------------------- [GRAPHIC OMMITTED] Barbara C. Fullerton Notary Public Notary Public State of Texas State of Texas My Commission Expires November 13, 2003 - -------------------------------------------------- My commission expires 11/13/03 -------- STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Manfred Sternberg, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, GIVEN UNDER MY HAND AND SEAL of office this 13th day of September, 2001. ----- (signed) /s/ Barbara C. Fullerton ------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS [Notary Seal] - -------------------------------------------------- [GRAPHIC OMMITTED] Barbara C. Fullerton Notary Public Notary Public State of Texas State of Texas My Commission Expires November 13, 2003 - -------------------------------------------------- My commission expires 11/13/03 -------- DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 SEAL] Carson City, Nevada 89701-4299 (775) 684 5708 Website: secretaryofstate.biz - -------------------------------------------- | | | Certificate of Amendment | | (PURSUANT TO NRS 78.385 and 78.390) | | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Amendment to Articles of Incorporation ----------------------------------------------------- For Nevada Profit Corporations ------------------------------ (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) 1. Name of corporation: - ------------------------------------------------------------------------------- Crescent Communications, Inc. - ------------------------------------------------------------------------------- 2. The articles have been amended as follows (provide article numbers, if available): - -------------------------------------------------------------------------------- ARTICLE II (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock", and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title at shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or no series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series there of unless a vote of any such holder; is required pursuant to any Preferred Stock Designation." SEE ATTACHED - --------------------------------------------------------------------------- 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: 4,474,031 c/s, 120 Series A, 23 Series B - -------------------------------------------------------------------------------- ---------------------------------------- 4. Effective date of filing (optional): ---------------------------------------- (must not be later than 90 days after the certificate is filed) 5. Officer Signature (required): /s/ signature illegible, Secretary --------------------------------------------- *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 11/05/03 CERTIFICATE OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF CRESCENT COMMUNICATIONS, INC. We, the undersigned, David Loeschner, President of CRESCENT COMMUNICATIONS, INC., and Barbara Fullerton, Secretary of CRESCENT COMMUNICATIONS, INC., hereby certify that: Pursuant to Nevada Revised Statutes NRS 78.385 and NRS 78390, the undersigned corporation adopted the following Articles of Amendment to its Articles of Incorporation. Article II of the Articles of Incorporation is amended in its entirety to read: "Article II. (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock"), and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications. limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to tune by the Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock, may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the "Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation." The Board of Directors recommended and consented to this amendment on April 1,2003. A majority of the shareholders of the corporation voted at a meeting of shareholders to amend the Articles of Incorporation. A total of 4,474,031,shares of common stock, 120 shares of the Series A Preferred Stock and 23 shares of the Series B STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared David Loeschner, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 21st day of January ____, 2004. ----- (signed) /s/ Barbara C. Fullerton ------------------------ [Notary Seal]/s/ Barbara C. Fullerton ------------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS My commission expires 11/13/07 -------- -------------------------------------------------- [GRAPHIC OMMITTED] Barbara C. Fullerton Notary Public Notary Public State of Texas State of Texas My Commission Expires November 13, 2007 -------------------------------------------------- STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Barbara Fullerton, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 22 day of January 2004. --- /s/ Loretta Crane --------------------- [Notary Seal] /s/ --------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS -------------------------------------------------------- [GRAPHIC OMMITTED] Loretta Crane Notary Public Notary Public State of Texas State of Texas My Comm. Expires 12-13-07 -------------------------------------------------------- My commission expires 12/13/07 -------- Preferred Stock voted in favor of the amendment to the Articles of Incorporation, which constituted the vote of a majority of the shares entitled to vote on this amendment and a majority of each class of stock entitled to vote on this amendment. (signed) /s/ David Loeschner -------------------------- David Loeschner, President (signed) /s/ Barbara Fullerton ---------------------------- Barbara Fullerton, Secretary DEAN HELLER [NEVADA Secretary of State STATE 204 North Carson Street Suite 1 SEAL] Carson City, Nevada 89701-4299 (775) 684 5708 Website: secretaryofstate.biz - -------------------------------------------- | | | Certificate of Amendment | | (PURSUANT TO NRS 78.385 and 78.390) | | | - -------------------------------------------- Important: Read attached instructions ABOVE SPACE IS FOR before completing form. OFFICE USE ONLY Certificate of Amendment to Articles of Incorporation ----------------------------------------------------- For Nevada Profit Corporations ------------------------------ (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) 1. Name of corporation: - -------------------------------------------------------------------------------- Crescent Communications, Inc. - -------------------------------------------------------------------------------- 2. The articles have been amended as follows (provide article numbers, if available): - -------------------------------------------------------------------------------- ARTICLE II (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock", and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title at shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or no series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series there of unless a vote of any such holder; is required pursuant to any Preferred Stock Designation." SEE ATTACHED - -------------------------------------------------------------------------------- 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: 4,474,031 c/s, 120 Series A, 23 Series B - -------------------------------------------------------------------------------- ---------------------------------------- 4. Effective date of filing (optional): ---------------------------------------- (must not be later than 90 days after the certificate is filed) 5. Officer Signature (required): /s/ signature illegible, Secretary --------------------------------------------- *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and submit the proper fees may cause this filing to be rejected. This form must be accompanied Nevada Secretary of State AM 78.209 2003 by appropriate fees. Revised on: 11/05/03 CERTIFICATE OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF CRESCENT COMMUNICATIONS, INC. We, the undersigned, David Loeschner, President of CRESCENT COMMUNICATIONS, INC., and Barbara Fullerton, Secretary of CRESCENT COMMUNICATIONS, INC., hereby certify that: Pursuant to Nevada Revised Statutes NRS 78.385 and NRS 78390, the undersigned corporation adopted the following Articles of Amendment to its Articles of Incorporation. Article II of the Articles of Incorporation is amended in its entirety to read: "Article II. (a) The total number of shares of stock that the Corporation shall have authority to issue is 95,000,000 shares, consisting of 85,000, 000 shares of common stock, par value $.001 per share ("Common Stock"), and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). (b) Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications. limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to tune by the Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock, may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the Directors (the "Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation." The Board of Directors recommended and consented to this amendment on April 1,2003. A majority of the shareholders of the corporation voted at a meeting of shareholders to amend the Articles of Incorporation. A total of 4,474,031,shares of common stock, 120 shares of the Series A Preferred Stock and 23 shares of the Series B STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared David Loeschner, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 21st day of January ____, 2004. ----- (signed) /s/ Barbara C. Fullerton -------------------- [Notary Seal]/s/ Barbara C. Fullerton --------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS My commission expires 11/13/07 -------- -------------------------------------------------- [GRAPHIC OMMITTED] Barbara C. Fullerton Notary Public Notary Public State of Texas State of Texas My Commission Expires November 13, 2007 -------------------------------------------------- STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared Barbara Fullerton, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 22 day of January 2004. --- /s/ Loretta Crane --------------------- [Notary Seal] /s/ --------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS -------------------------------------------------------- [GRAPHIC OMMITTED] Loretta Crane Notary Public Notary Public State of Texas State of Texas My Comm. Expires 12-13-07 -------------------------------------------------------- My commission expires 12/13/07 -------- Preferred Stock voted in favor of the amendment to the Articles of Incorporation, which constituted the vote of a majority of the shares entitled to vote on this amendment and a majority of each class of stock entitled to vote on this amendment. (signed) /s/ David Loeschner -------------------------- David Loeschner, President (signed) /s/ Barbara Fullerton ---------------------------- Barbara Fullerton, Secretary ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF BERENS INDUSTRIES, INC. CHANGING ITS NAME TO; CRESCENT COMMUNICATIONS, INC. We, the undersigned, Jeffrey Olexa, President of Berens Industries, Inc., and Manfred Stemberg, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary of Berens Industries, Inc., do hereby certify that: Pursuant to Nevada Revised Statutes Sec.78.385 and Sec.78390, the undersigned corporation adopted the following Articles of Amendment to its Restated Articles of Incorporation. Article I of the Restated Articles of Incorporation is amended in its entirety to read: 1. The name of the corporation shall be: CRESCENT COMMUNICATIONS, INC. The Board of Directors recommended and consented to this change and amendment on July 23, 2001. A majority of the shareholders of the corporation consented pursuant to Sec.78.320 to change and amend the Articles of Incorporation. A total of 12,426,350 shares of common stock and 600 shares of the Series A Preferred Stock consented, which constituted the consent of a majority of the shares entitled to vote on this amendment. /s/ Jeffery Olexa -------------------------------------------------- by /s/ Jeffery Olexa President, Berens Industries, Inc. /s/ Manfred Sternberg -------------------------------------------------- by /s/ Manfred Sternberg Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary of Berens Industries, Inc. --------- EXHIBIT A --------- ARTICLES OF INCORPORATION BERENS INDUSTRIES, INC. RESTATED ARTICLES OF INCORPORATION OF NATIONAL AIR CORPORATION National Air Corporation, pursuant to Sections 78.390 and 78.403 of the Nevada Revised Statutes, adopts this Amended and Restated Articles of Incorporation. The following Amended and Restated Articles of Incorporation was adopted by unanimous consent of the Board of Directors pursuant to Section 78.315 of the Nevada Revised Statutes and by Consent of Majority Stockholders pursuant to Section 78.320 of the Nevada Revised Statutes. The following Amended and Restated Articles of Incorporation amends the original Articles of Incorporation in its entirety, as follows: ARTICLE I. The name of the corporation shall be Berens Industries, Inc. (hereinafter called the "Corporation"). ARTICLE II. The total number of shares of stock that the Corporation shall have authority to issue is 60,000,000, consisting of 50,000,000 shares of common stock, par value $.001 per share ("Common Stock"), and 10,000,000 shares of preferred stock par value $.001 per share ("Preferred Stock"). Shares of Preferred Stock of the Corporation may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by the Board of Directors of the Corporation ("Board of Directors") prior to the issuance of any shares thereof Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of the directors (the "Voting Stock"), voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation. ARTICLE III. The nature of the business of the Corporation and the objects or the purposes to be transacted, promoted, or carried on by it are as follows: To engage in any lawful activity for which Corporations may be incorporated under the Nevada General Corporation Law. ARTICLE IV. No fully paid shares of any class of stock of the Corporation shall be subject to any further call or assessment in any manner or for any cause. The good faith determination of the Board of Directors of the Corporation shall be final as to the value received in consideration of the issuance of fully paid shares. ARTICLE V. The Corporation shall have perpetual existence. ARTICLE VI. The holders of a majority of the outstanding shares of stock which have voting power shall constitute a quorum at a meeting of stockholders for the transaction of any business unless the action to be taken at the meeting shall require a greater proportion. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to fix the amount to be reserved as working capital over and above its paid-in capital stock, and to authorize and cause to be executed, mortgages and liens upon the real and personal property of the Corporation. ARTICLE VII. The personal liability of die directors of the Corporation is hereby eliminated to the fullest extent permitted by the Nevada General Corporation Law, as the same may be amended and supplemented. ARTICLE VIII. The Corporation shall, to the fullest extent permitted by the Nevada General Corporation Law, as the same may be amended and supplemented, indemnify any an all persons whom it shall have power to indemnify under said Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. 2 ARTICLE IX. The corporation reserves the right to amend, alter, change, ore repeal any provision contained in these Articles of Incorporation in the manner now or hearafter prescribed by statute, and all rights conferred upon stockholder ARTICLE X. Shareholders of the Corporation shall not have cumulative voting rights nor preemptive rights. ARTICLE XI. Special meetings of the stockholders of the Corporation for any purpose or purposes may only be called at any time by the Board of Directors or a committee thereof, the Chairman of the Board, or the President. Signed the 2nd day of August, 1999. NATIONAL AIR CORPORATION By: Marc L. Berens --------------------------------------- Name: Marc L. Berens Title: President 3 BERENS INDUSTRIES, INC. OFFICER'S CERTIFICATE I, Marc Berens, President of Berens Industries, Inc., a Nevada corporation (the Corporation), hereby certify that: 1. Attached hereto as Exhibit "A" is a true and correct copy of the Corporation's Articles of Incorporation; 2. Attached hereto as Exhibit "B" is a true and correct copy of the Corporation's Bylaws; 3. Attached hereto as Exhibit "C" are true and correct copies of resolutions adopted by the Corporation's Board of Directors dated the 13th day of July, 2001. IN WITNESS WHEREOF, I have executed this Certificate and have affixed the seal of the Corporation this the 19th day of July, 2001. /s/ Marc Berens ------------------------- Marc Berens President THIS FORM SHOULD A COMPANY AMENDED AND/OR RESTATE ARTICLES OF INCORPORATION FOR A NEVADA CORPORATION 1. Name of corporation: National Air Corporation ------------------------------------------------------ 2. Date of adoption of Amended and/or Restated Articles: August 2, 1999 ---------------------- 3. If the articles were amended, please indicate what changes have been made:_______________ (a) Was there a name change? Yes [_] No [_]. If yes, please indicate new address: Berens Industries, Inc. ---------------------------------------------------------------------- (b) Did you change your resident agent? Yes [_] No [X]. If yes, please indicate new address: ---------------------------------------------------------------------- (c) Did you change the purposes? Yes [_] No [X]. Did you add Banking? [_], Gaming? [_], Insurance [_], None of these? [_]. ------------------ (d) Did you change the capital stock Yes [X] No [_]. If yes, what is the new capital stock? Common Stock - authorized 50,000,000, par value $0.001 Preferred ---------------------------------------------------------------------- Stock - authorized 10,000,000, par value $0.001 ---------------------------------------------------------------------- (e) Did you change the directors? Yes [_] No [X]. If yes, indicate the change: ________________ (f) Did you add the directors liability provision? Yes [X] No [_]. (g) Did you change the period of existences? Yes [_] No [X]. If yes, what is the new existence? ---------------------------------------------------------------------- (h) If none of the above apply, and you have amended or modified the articles, how did you change your articles? ---------------------------------------------------------------------- /s/ Marc I. Berens ---------------------- Signature Marc I. Berens, President ------------------------- Name and Title of Officer August 2, 1999 -------------- Date State of Texas } ------------ } County of Harris } ----------- On August 2, 1999 personally appeared before me, a Notary Public, __________ -------------- who acknowledged that he/she executed the above document. ------------------------- Notary Public [Stamp/Seal] EX-3.2 3 ex3_2.txt EXHIBIT 3.2 ----------- EXHIBIT B ----------- BYLAWS OF BLUEGATE CORPORATION FORMERLY: CRESCENT COMMUNICATIONS AND BERENS INDUSTRIES, INC. AMENDED AND RESTATED BYLAWS OF BERENS INDUSTRIES, INC. A NEVADA CORPORATION ARTICLE 1. DEFINITIONS 1.1 Definitions. Unless the context clearly requires otherwise, in ----------- these Bylaws: (a) "Board" means the board of directors of the Company. (b) "Bylaws" means these bylaws as adopted by the Board and includes amendments subsequently adopted by the Board or by the Stockholders. (c) "Certificate of incorporation" means the Certificate of Incorporation of Berens Industries. Inc. as filed with the Secretary of State of the State of Nevada and includes all amendments thereto and restatements thereof subsequently filed. (d) "Company" means Berens Industries, Inc., a Nevada corporation. (e) "Section" refers to sections of these Bylaws. (f) "Stockholder" means stockholders of record of the Company. 1.2 Offices. The title of an office refers to the person or persons ------- who at any given time perform the duties of that particular office for the Company. ARTICLE 2. OFFICES 2.1 Principal Office. The Company may locate its principal office ----------------- within or without the state of incorporation as the Board may determine. 2.2 Registered Office. The registered office of the Company required ----------------- by law to be maintained in the state of incorporation may be, but need not be, the same as the principal place of business of the Company. The Board may change the address of the registered office from time to time. 2.3 Other Office. The Company may have offices at such other places, ------------- either within or without the state of incorporation, as the Board may designate or as the business of the Company may require from time to time. ARTICLE 3. MEETINGS OF STOCKHOLDERS 3.1 Annual Meetings. The Stockholders of the Company shall hold their --------------- annual meetings for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings at such time, date and place as the Board shall determine by resolution. 3.2 Special Meetings. Only the Board, the Chairman of the Board, the ----------------- President, a committee of the Board duly designated and whose powers and authority include the power to call meetings, and holders of at least fifty percent (50%) of all the shares entitled to vote at the proposed meeting, may call special meetings of the Stockholders of the Company at any time for any purpose or purposes. 3.3 Place of Meetings. The Stockholders shall hold all meetings at ------------------- such places, within or without the State of Nevada, as the Board or a committee of the Board shall specify in the notice or waiver of notice for such meetings. 3.4 Notice of Meetings. Except as otherwise required by law, the -------------------- Board or a committee of the Board shall give notice of each meeting of Stockholders, whether annual or special, not less than 10 nor more than 60 days before the date of the meeting. The Board or a committee of the Board shall deliver a notice to each Stockholder entitled to vote at such meeting by delivering a typewritten or printed notice thereof to him personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to him at his address as it appears on the records of the Company, or by transmitting a notice thereof to him at such address by telegraph, telecopy, cable or wireless. If mailed, notice is given on the date deposited in the United States mail, postage prepaid, directed to the Stockholder at his address as it appears on the records of the Company. An affidavit of the Secretary or an Assistant Secretary or of the Transfer Agent of the Company that he has given notice shall constitute, in the absence of fraud, prima facie evidence of the facts stated therein. Every notice of a meeting of the Stockholders shall state the place, date and hour of the meeting and, in the case of a special meeting, also shall state the purpose or purposes of the meeting. Furthermore, if the Company will maintain the list at a place other than where the meeting will take place, every notice of a meeting of the 2 Stockholders shall specify where the Company will maintain the list of Stockholders entitled to vote at the meeting. 3.5 Stockholder Notice. Subject to the Certificate of Incorporation, ------------------- the Stockholders who intend to nominate persons to the Board of Directors or propose any other action at an annual meeting of Stockholders must timely notify the Secretary of the Company of such intent. To be timely, a Stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the date of such meeting; provided, however, that in the event that less than 75 days' notice of the date of the meeting is given or made to Stockholders, notice by the Stockholder to be timely must be received not later than the close of business on the 15th day following the date on which such notice of the date of the annual meeting was mailed. Such notice must be in writing and must include a (i) a brief description of the business desired to the brought before the annual meeting and the reasons for conducting such business at the meeting; (ii) the name and record address of the Stockholder proposing such business; (iii) the class, series and number of shares of capital stock of the Company which are beneficially owned by the Stockholder; and (iv) any material interest of the Stockholder in such business. The Board of Directors reserves the right to refuse to submit any such proposal to stockholders at an annual meeting if, in its judgment, the information provided in the notice is inaccurate or incomplete. 3.6 Waiver of Notice. Whenever these Bylaws require written nonce, a ----------------- written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall constitute the equivalent of notice. Attendance of a person at any meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. No written waiver of notice need specify either the business to be transacted at, or the purpose or purposes of any regular or special meeting of the Stockholders, directors or members of a committee of the Board. 3.7 Adjournment of Meeting. When the Stockholders adjourn a meeting ------------------------ to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Stockholders may transact any business which they may have transacted at the original meeting. If the adjournment is for more than 30 days or, if after the adjournment, the Board or 3 a committee of the Board fixes a new record date for the adjourned meeting, the Board or a committee of the Board shall give notice of the adjourned meeting to each Stockholder of record entitled to vote at the meeting. 3.8 Quorum. Except as otherwise required by law, the holders of a ------ majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes at any meeting of the Stockholders. In the absence of a quorum at any meeting or any adjournment thereof, the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, or, in the absence therefrom of all the Stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting to another place, date or time. If the chairman of the meeting gives notice of any adjourned special meeting of Stockholders to all Stockholders entitled to vote thereat, staring that the minimum percentage of stockholders for a quorum as provided by Nevada law shall constitute a quorum, then, except as otherwise required by law, that percentage at such adjourned meeting shall constitute a quorum and a majority of the votes cast at such meeting shall determine all matters. 3.9 Organization. Such person as the Board may have designated or, in ------------ the absence of such a person, the highest ranking officer of the Company who is present shall call to order any meeting of the Stockholders, determine the presence of a quorum, and act as chairman of the meeting. In the absence of the Secretary or an Assistant Secretary of the Company, the chairman shall appoint someone to act as the secretary of the meeting. 3.10 Conduct of Business. The chairman of any meeting of Stockholders ------------------- shall determine the order of business and the procedure at the meeting, including such regulations of the manner of voting and the conduct of discussion as he deems in order. 3.11 List of Stockholders. At least 10 days before every meeting of ---------------------- Stockholders, the Secretary shall prepare a list of the Stockholders entitled to vote at the meeting or any adjournment thereof, arranged in alphabetical order, showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. The Company shall make the list available for examination by any Stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting will take place or at the place designated in the notice of the meeting. 4 The Secretary shall produce and keep the list at the time and place of the meeting during the entire duration of the meeting, and any Stockholder who is present may inspect the list at the meeting. The list shall constitute presumptive proof of the identity of the Stockholders entitled to vote at the meeting and the number of shares each Stockholder holds. A determination of Stockholders entitled to vote at any meeting of Stockholders pursuant to this Section shall apply to any adjournment thereof. 3.12 Fixing of Record Date. For the purpose of determining ------------------------ Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or Stockholders entitled to receive payment of any dividend, or in order to make a determination of Stockholders for any other proper purpose, the Board or a committee of the Board may fix in advance a date as the record date for any such determination of Stockholders. However, the Board shall not fix such date, in any case, more than 60 days nor less than 10 days prior to the date of the particular action. If the Board or a committee of the Board does not fix a record date for the determination of Stockholders entitled to notice of or to vote at a meeting of Stockholders, the record date shall be at the close of business on the day next preceding the day on which notice is given or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held or the date on which the Board adopts the resolution declaring a dividend. 3.13 Voting of Shares. Each Stockholder shall have one vote for every ---------------- share of stock having voting rights registered in his name on the record date for the meeting. The Company shall not have the right to vote treasury stock of the Company, nor shall another corporation have the right to vote its stock of the Company if the Company holds, directly or indirectly, a majority of the shares entitled to vote in the election of directors of such other corporation. Persons holding stock of the Company in a fiduciary capacity shall have the right to vote such stock. Persons who have pledged their stock of the Company shall have the right to vote such stock unless in the transfer on the books of the Company the pledgor expressly empowered the pledgee to vote such stock. In that event, only the pledgee, or his proxy, may represent such stock and vote thereon. 5 A plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vole shall determine all elections and, except when the law or Certificate of Incorporation requires otherwise, the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote shall determine all other matters. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. The Stockholders may vote by voice vote on all matters. Upon demand by a Stockholder entitled to vote, or his proxy, the Stockholders shall vote by ballot. In that event, each ballot shall state the name of the Stockholder or proxy voting, the number of shares voted and such other information as the Company may require under the procedure established for the meeting. 3.14 Inspectors. At any meeting in which the Stockholders vote by ---------- ballot, the chairman may appoint one or more inspectors. Each inspector shall take and sign an oath to execute the duties of inspector at such meeting faithfully, with strict impartiality, and according to the best of his ability. The inspectors shall ascertain the number of shares outstanding and the voting power of each; determine the shares represented at a meeting and the validity of proxies and ballots; count all votes and ballots; determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The certification required herein shall take the form of a subscribed, written report prepared by the inspectors and delivered to the Secretary of the Company. An inspector need not be a Stockholder of the Company, and any officer of the Company may be an inspector on any question other than a vote for or against a proposal in which he has a material interest. 3.15 Proxies. A Stockholder may exercise any voting rights in person ------- or by his proxy appointed by an instrument in writing, which he or his authorized attorney-in-fact has subscribed and which the proxy has delivered to the secretary of the meeting pursuant to the manner prescribed by law. 6 A proxy is not valid after the expiration of 13 months after the date of its execution, unless the person executing it specifies thereon the length of time for which it is to continue in force (which length may exceed 12 months) or limits its use to a particular meeting. Each proxy is irrevocable if it expressly states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. The attendance at any meeting of a Stockholder who previously has given a proxy shall not have the effect of revoking the same unless he notifies the Secretary in writing prior to the voting of the proxy. 3.16 Action by Consent. Any action required to be taken at any annual ----------------- or special meeting of stockholders of the Company or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Company by delivery to its registered office, its principal place of business, or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section to the Company, written consents signed by a sufficient number of holders to take action are delivered to the Company by delivery to its registered office, its principal place of business or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 7 ARTICLE 4. BOARD OF DIRECTORS 4.1 General Powers. The Board shall manage the property, business and -------------- affairs of the Company. 4.2 Number. The number of directors who shall constitute the Board ------ shall equal not less than one nor more than 10, as the Board may determine by resolution from time to time. 4.3 Election of Directors and Term of Office. The Stockholders of the ---------------------------------------- Company shall elect the directors at the annual or adjourned annual meeting (except as otherwise provided herein for the filling of vacancies). Each director shall hold office until his death, resignation, retirement, removal, or disqualification, or until his successor shall have been elected and qualified. 4.4 Resignations. Any director of the Company may resign at any time ------------ by giving written notice to the Board or to the Secretary of the Company. Any resignation shall take effect upon receipt or at the time specified in the notice. Unless the notice specifies otherwise, the effectiveness of the resignation shall not depend upon its acceptance. 4.5 Removal. Stockholders holding a majority of the outstanding ------- shares entitled to vote at an election of directors may remove any director or the entire Board of Directors at any time, with or without cause. 4.6 Vacancies. A majority of the remaining directors, although less --------- than a quorum, or a sole remaining director may fill any vacancy on the Board, whether because of death, resignation, disqualification, an increase in the number of directors, or any other cause. Any director elected to fill a vacancy shall hold office until his death, resignation, retirement, removal, or disqualification, or until his successor shall have been elected and qualified. 4.7 Chairman of the Board. At the initial and annual meeting of the ----------------------- Board, the directors may elect from their number a Chairman of the Board of Directors. The Chairman shall preside at all meetings of the Board and shall perform such other duties as the Board may direct. The Board also may elect a Vice Chairman and other officers of the Board, with such powers and duties as the Board may designate from time to time. 4.8 Compensation. The Board may compensate directors for their ------------ services and may provide for the payment of all expenses the directors incur by attending meetings of the Board or otherwise. 8 ARTICLE 5. MEETINGS OF DIRECTORS 5.1 Regular Meetings. The Board may hold regular meetings at such ----------------- places, dates and times as the Board shall establish by resolution. If any day fixed for a meeting falls on a legal holiday, the Board shall hold the meeting at the same place and time on the next succeeding business day. The Board need not give notice of regular meetings. 5.2 Place of Meetings. The Board may hold any of its meetings in or ------------------- out of the State of Nevada, at such places as the Board may designate, at such places as the notice or waiver of notice of any such meeting may designate, or at such places as the persons calling the meeting may designate. 5.3 Meetings by Telecommunications. The Board or any committee of the ------------------------------ Board may hold meetings by means of conference telephone or similar telecommunications equipment that enable all persons participating in the meeting to hear each other. Such participation shall constitute presence in person at such meeting. 5.4 Special Meetings. The Chairman of the Board, the President, or ----------------- one-half of the directors then in office may call a special meeting of the Board. The person or persons authorized to call special meetings of the Board may fix any place, either in or out of the State of Nevada as the place for the meeting. 5.5 Notice of Special Meetings. The person or persons calling a ----------------------------- special meeting of the Board shall give written notice to each director of the time, place, date and purpose of the meeting of not less than three business days if by mail and not less than 24 hours if by telegraph or in person before the date of the meeting. If mailed, notice is given on the date deposited in the United States mail, postage prepaid, to such director. A director may waive notice of any special meeting, and any meeting shall constitute a legal meeting without notice if all the directors are present or if those not present sign either before or after the meeting a written waiver of notice, a consent to such meeting, or an approval of the minutes of the meeting. A notice or waiver of notice need not specify the purposes of the meeting or the business which the Board will transact at the meeting. 5.6 Waiver by Presence. Except when expressly for the purpose of -------------------- objecting to the legality of a meeting, a director's presence at a meeting shall constitute a waiver of notice of such meeting. 9 5.7 Quorum. A majority of the directors then in office shall ------ constitute a quorum for all purposes at any meeting of the Board. In the absence of a quorum, a majority of directors present at any meeting may adjourn the meeting to another place, date or time without further notice. No proxies shall be given by directors to any person for purposes of voting or establishing a quorum at a directors meetings. 5.8 Conduct of Business. The Board shall transact business in such --------------------- order and manner as the Board may determine. Except as the law requires otherwise, the Board shall determine all matters by the vote of a majority of the directors present at a meeting at which a quorum is present. The directors shall act as a Board, and the individual directors shall have no power as such. 5.9 Action by Consent. The Board or a committee of the Board may take ----------------- any required or permitted action without a meeting if all members of the Board or committee consent thereto in writing and file such consent with the minutes of the proceedings of the Board or committee. ARTICLE 6. COMMITTEES 6.1 Committees of the Board. The Board may designate, by a vote of a ------------------------ majority of the directors then in office, committees of the Board. The committees shall serve at the pleasure of the Board and shall possess such lawfully delegable powers and duties as the Board may confer. 6.2 Selection of Committee Members. The Board shall elect by a vote -------------------------------- of a majority of the directors then in office a director or directors to serve as the member or members of a committee. By the same vote, the Board may designate other directors as alternate members who may replace any absent or disqualified member at any meeting of a committee. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or they constitute a quorum, may appoint by unanimous vote another member of the Board to act at the meeting in the place of the absent or disqualified member. 6.3 Conduct of Business. Each committee may determine the procedural -------------------- rules for meeting and conducting its business and shall act in accordance therewith, except as the law or these Bylaws require otherwise. 10 Each committee shall make adequate provision for notice of all meetings to members. A majority of the members of the committee shall constitute a quorum, unless the committee consists of one or two members. In that event, one member shall constitute a quorum. A majority vote of the members present shall determine all matters. A committee may take action without a meeting if all the members of the committee consent in writing and file the consent or consents with the minutes of the proceedings of the committee. 6.4 Authority. Any committee, to the extent the Board provides, shall --------- have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Company, and may authorize the affixation of the Company's seal to all instruments which may require or permit it. However, no committee shall have any power or authority with regard to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the Stockholders the sale, lease or exchange of all or substantially all of the Company's property and assets, recommending to the Stockholders a dissolution of the Company or a revocation of a dissolution of the Company, or amending these Bylaws of the Company. Unless a resolution of the Board expressly provides, no committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger. 6.5 Minuets. Each committee shall keep regular minutes of its ------- proceedings and report the same to the Board when required. ARTICLE 7. OFFICERS 7.1 Officers of the Company. The officers of the Company shall -------------------------- consist of a President, a Secretary and such Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other officers as the Board may designate and elect from time to time. The same person may hold at the same time any two or more offices, except the offices of President and Secretary. 7.2 Election and Term. The Board shall elect the officers of the ------------------- Company. Each officer shall hold office until his death, resignation, retirement, removal or disqualification, or until his successor shall have been elected and qualified. 11 7.3 Compensation of Officers. The Board shall fix the compensation of ------------------------ all officers of the Company. No officer shall serve the Company in any other capacity and receive compensation, unless the Board authorizes the additional compensation. 7.4 Removal of Officers and Agents. The Board may remove any officer ------------------------------- or agent it has elected or appointed at any time, with or without cause. 7.5 Resignation of Officers and Agents. Any officer or agent the Board ---------------------------------- has elected or appointed may resign at any time by giving written notice to the Board, the Chairman of the Board, the President, or the Secretary of the Company. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified. Unless otherwise specified in the notice, the Board need not accept the resignation to make it effective. 7.6 Bond. The Board may require by resolution any officer, agent, or ---- employee of the Company to give bond to the Company, with sufficient sureties conditioned on the faithful performance of the duties of his respective office or agency. The Board also may require by resolution any officer, agent or employee to comply with such other conditions as the Board may require from time to time. 7.7 President. The President shall be the chief operating officer of --------- the Company and, subject to the Board's control, shall supervise and direct all of the business and affairs of the Company. When present, he shall sign (with or without the Secretary, an Assistant Secretary, or any other officer or agent of the Company which the Board has authorized) deeds, mortgages, bonds, contracts or other instruments which the Board has authorized an officer or agent of the Company to execute. However, the President shall not sign any instrument which the law, these Bylaws, or the Board expressly require some other officer or agent of the Company to sign and execute. In general, the President shall perform all duties incident to the office of President and such other duties as the Board may prescribe from time to time. 7.8 Vice Presidents. In the absence of the President or in the event --------------- of his death, inability or refusal to act. the Vice Presidents in the order of their length of service as Vice Presidents, unless the Board determines otherwise, shall perform the duties of the President. When acting as the President, a Vice President shall have all the powers and restrictions of the Presidency. A Vice President shall perform such other dunes as the President or the Board may 12 assign to him from time to time. 7.9 Secretary. The Secretary shall (a) keep the minutes of the --------- meetings of the Stockholders and of the Board in one or more books for that purpose, (b) give all notices which these Bylaws or the law requires, (c) serve as custodian of the records and seal of the Company, (d) affix the seal of the corporation to all documents which the Board has authorized execution on behalf of the Company under seal, (e) maintain a register of the address of each Stockholder of the Company, (f) sign, with the President, a Vice President, or any other officer or agent of the Company which the Board has authorized, certificates for snares of the Company, (g) have charge of the stock transfer books of the Company, and (h) perform all dunes which the President or the Board may assign to him from time to time. 7.10 Assistant Secretaries. In the absence of the Secretary or in the --------------------- event of his death, inability or refusal to act, the Assistant Secretaries in the order of their length of service as Assistant Secretary, unless the Board determines otherwise, shall perform the duties of the Secretary. When acting as the Secretary, an Assistant Secretary shall have the powers and restrictions of the Secretary. An Assistant Secretary shall perform such other duties as the President. Secretary or Board may assign from time to time. 7.11 Treasurer. The Treasurer shall (a) have responsibility for all --------- funds and securities of the Company. (b) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, (c) deposit all moneys in the name of the Company in depositories which the Board selects, and (d) perform all of the duties which the President or the Board may assign to him from time to time. 7.12 Assistant Treasurers. In the absence of the Treasurer or in the --------------------- event of his death, inability or refusal to act, the Assistant Treasurers in the order of their length of service as Assistant Treasurer, unless the Board determines otherwise, shall perform the duties of the Treasurer. When acting as the Treasurer, an Assistant Treasurer shall have the powers and restrictions of the Treasurer. An Assistant Treasurer shall perform such other duties as the Treasurer, the President, or the Board may assign to him from time to time. 7.13 Delegation of Authority. Notwithstanding any provision of these ------------------------ Bylaws to the contrary, the Board may delegate the powers or duties of any officer to any other officer or agent. 13 7.14 Action with Respect to Securities of Other Corporations. Unless -------------------------------------------------------- the Board directs otherwise, the President shall have the power to vote and otherwise act on behalf of the Company, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which the Company holds securities. Furthermore, unless the Board directs otherwise, the President shall exercise any and all rights and powers which the Company possesses by reason of its ownership of securities in another corporation. 7.15 Vacancies. The Board may fill any vacancy in any office because --------- of death, resignation, removal, disqualification or any other cause in the manner which these Bylaws prescribe for the regular appointment to such office. ARTICLE 8. CONTRACTS, LOANS, DRAFTS, DEPOSITS AND ACCOUNTS 8.1 Contracts. The Board may authorize any officer or officers, agent --------- or agents, to enter into any contract or execute and deliver any instrument in the name and on behalf of the Company. The Board may make such authorization general or special. 8.2 Loans. Unless the Board has authorized such action, no officer or ----- agent of the Company shall contract for a loan on behalf of the Company or issue any evidence of indebtedness in the Company's name. 8.3 Drafts. The President, any Vice President, the Treasurer, any ------ Assistant Treasurer, and such other persons as the Board shall determine shall issue all checks, drafts and other orders for the payment of money, notes and other evidences of indebtedness issued in the name of or payable by the Company. 8.4 Deposits. The Treasurer shall deposit all funds of the Company -------- not otherwise employed in such banks, trust companies, or other depositories as the Board may select or as any officer, assistant, agent or attorney of the Company to whom the Board has delegated such power may select. For the purpose of deposit and collection for the account of the Company, the President or the Treasurer (or any other officer, assistant, agent or attorney of the Company whom the Board has authorized) may endorse, assign and deliver checks, drafts and other orders for the payment of money payable to the order of the Company. 8.5 General and Special Bank Accounts. The Board may authorize the ------------------------------------ opening and keeping of general and special bank accounts with such banks, trust companies, or other depositories as the Board may select or as any 14 officer, assistant, agent or attorney of the Company to whom the Board has delegated such power may select. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE 9. CERTIFICATES FOR SHARES AND THEIR TRANSFER 9.1 Certificates for Shares. Every owner of stock of the Company ------------------------- shall have the right to receive a certificate or certificates, certifying to the number and class of shares of the stock of the Company which he owns. The Board shall determine the form of the certificates for the shares of stock of the Company. The Secretary, transfer agent, or registrar of the Company shall number the certificates representing shares of the stock of the Company in the order in which the Company issues them. The President or any Vice President and the Secretary or any Assistant Secretary shall sign the certificates in the name of the Company. Any or all certificates may contain facsimile signatures. In case any officer, transfer agent, or registrar who has signed a certificate, or whose facsimile signature appears on a certificate, ceases to serve as such officer, transfer agent, or registrar before the Company issues the certificate, the Company may issue the certificate with the same effect as though the person who signed such certificate, or whose facsimile signature appears on the certificate, was such officer, transfer agent or registrar at the date of issue. The Secretary, transfer agent, or registrar of the Company shall keep a record in the stock transfer books of the Company of the names of the persons, firms or corporations owning the stock represented by the certificates, the number and class of shares represented by the certificates and the dates thereof and, in the case of cancellation, the dates of cancellation. The Secretary, transfer agent, or registrar of the Company shall cancel every certificate surrendered to the Company for exchange or transfer. Except in the case of a lost, destroyed, stolen or mutilated certificate, the Secretary, transfer agent, or registrar of the Company shall not issue a new certificate in exchange for an existing certificate until he has cancelled the existing certificate. 9.2 Transfer of Shares. A holder of record of shares of the Company's ------------------ stock, or his attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary, transfer agent or registrar of the Company, may transfer his shares only on the stock transfer books of the Company. Such person shall furnish to the Secretary, 15 transfer agent, or registrar of the Company proper evidence of his authority to make the transfer and shall properly endorse and surrender for cancellation his existing certificate or certificates for such shares. Whenever a holder of record of shares of the Company's stock makes a transfer of shares for collateral security, the Secretary, transfer agent, or registrar of the Company shall state such fact in the entry of transfer if the transferor and the transferee request. 9.3 Lost Certificates. The Board may direct the Secretary, transfer ------------------ agent, or registrar of the Company to issue a new certificate to any holder of record of shares of the Company's stock claiming that he has lost such certificate, or that someone has stolen, destroyed or mutilated such certificate, upon the receipt of an affidavit from such holder to such fact. When authorizing the issue of a new certificate, the Board, in its discretion may require as a condition precedent to the issuance that the owner of such certificate give the Company a bond of indemnity in such form and amount as the Board may direct. 9.4 Regulations. The Board may make such rules and regulations, not ----------- inconsistent with these Bylaws, as it deems expedient concerning the issue, transfer and registration of certificates for shares of the stock of the corporation. The Board may appoint or authorize any officer or officers to appoint one or more transfer agents, or one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. 9.5 Holder of Record. The Company may treat as absolute owners of ------------------ shares the person in whose name the shares stand of record as if that person had full competency, capacity and authority to exercise all rights of ownership, despite any knowledge or notice to the contrary or any description indicating a representative, pledge or other fiduciary relation, or any reference to any other instrument or to the rights of any other person appearing upon its record or upon the share certificate. However, the Company may treat any person furnishing proof of his appointment as a fiduciary as if he were the holder of record of the shares. 9.6 Treasury Shares. Treasury shares of the Company shall consist of ---------------- shares which the Company has issued and thereafter acquired but not canceled. Treasury shares shall not carry voting or dividend rights. 16 ARTICLE 10. INDEMNIFICATION 10.1 The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo comendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner in which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 10.2 The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly 17 and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. 10.3 To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 10.1 and 10.2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, 10.4 Any indemnification under subsections 10.1 and 10.2 of this Article (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections 10.1 and 10.2 of this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not panics to such action, suit or proceeding, or (b) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. 10.5 Expenses (including attorneys' fees) incurred by an officer or director in defending in a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized by this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. 10.6 The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 10.7 The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a 18 director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under this Article. 10.8 For purposes of this section references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 10.9 The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 10.10 Nothing contained in this Article 10, or elsewhere in these Bylaws, shall operate to indemnify any director or officer is such indemnification is contrary to law, either as a matter of public policy, or under the provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other applicable state or Federal law. ARTICLE 11. TAKEOVER OFFERS In the event the Company receives a takeover offer, the Board of Directors shall consider all relevant factors in evaluating such offer, including, but not limited to, the terms of the offer, and the potential economic and social impact of such offer on the Company's stockholders, employees, customers, creditors and community in which it operates. 19 ARTICLE 12. NOTICES 12.1 General. Whenever these Bylaws require notice to any Stockholder, ------- director, officer or agent, such notice does not mean personal notice. A person may give effective notice under these Bylaws in every case by depositing a writing in a post office or letter box in a postpaid, sealed wrapper, or by dispatching a prepaid telegram addressed to such Stockholder, director, officer or agent at his address on the books of the Company. Unless these Bylaws expressly provide to the contrary, the tune when the person sends notice shall constitute the time of the giving of notice. 12.2 Waiver of Notice. Whenever the law or these Bylaws require ------------------ notice, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein. ARTICLE 13. MISCELLANEOUS 13.1 Facsimile Signatures. In addition to the use of facsimile --------------------- signatures which these Bylaws specifically authorize, the Company may use such facsimile signatures of any officer or officers, agents or agent, of the Company as the Board or a committee of the Board may authorize. 13.2 Corporate Seal. The Board may provide for a suitable seal --------------- containing the name of the Company, of which the Secretary shall be in charge. The Treasurer, any Assistant Secretary, or any Assistant Treasurer may keep and use the seal or duplicates of the seal if and when the Board or a committee of the Board so directs. 13.3 Fiscal Year. The Board shall have the authority to fix and ------------ change the fiscal year of the Company. ARTICLE 14. AMENDMENTS Subject to the provisions of the Certificate of Incorporation, the Stockholders or the Board may amend or repeal these Bylaws at any meeting. 20 The undersigned hereby certifies that the foregoing constitutes a true and correct copy of the Bylaws of the Company as adopted by the Directors on the 27th day of March, 2000. Executed as of this 27th day of March, 2000. /s/ Marc I. Berens ---------------------------------------- Marc I. Berens, President 21 EX-4.1 4 ex4_1.txt EXHIBIT 4.1 NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA BLUEGATE CORPORATION CUSIP NO. 09623A 10 5 formerly CRESCENT COMMUNICATIONS, INC. AUTHORIZED COMMON STOCK: 50,000,000 SHARES PAR VALUE: $.001 THIS CERTIFIES THAT IS THE RECORD HOLDER OF *SEVEN THOUSAND ONE HUNDRED FORTY THREE* SHARES OF BLUEGATE CORPORATION COMMON STOCK Transferable on the books of the Corporation in person or by duly authorized attorney Upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: APRIL 27, 2005 /s/ [ILLEGABLE] /s/ [ILLEGABLE] - -------------------------- [CRESENT COMMUNICATIONS, INC.] -------------------- SECRETARY/TRESURER [CORPORATE SEAL] PRESIDENT [NEVADA] NOTICE: Signature must be guaranteed by a firm which is a member of a registered national stock exchange, or by a bank (other than a saving bank), or a trust company. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT -. . . Custodian . . . TEN ENT - as tenants by the (Cust) (Minor) entireties under Uniform Gifts to Minors JT TEN - as joint tenants with Act . . . . . . . . . . . . . right of suvivorship (State) and not as tenants in common Additional abbreviations may also be used though not in the above list. For Value Received, _______ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE. OR ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - -------------------------------------------------------------------------- of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint Attorney - ------------------------------------------------------------------------ to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated -------------------- ---------------------------------------------------------------------- NOTICE:THE SIGNATURE TO THIS AGREEMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. CURRENT TRANSFER FEE APPLICABLE EX-4.2 5 ex4_2.txt EXHIBIT 4.2 THIS DEBENTURE AND THE SHARES OF COMMON STOCK UNDERLYING THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. BLUEGATE CORPORATION 10% CONVERTIBLE DEBENTURE DUE NOVEMBER 1, 2005 No. 1 $100,000.00 FOR VALUE RECEIVED, Bluegate Corporation, a Nevada corporation (the "Company"), promises to pay to Platinum Partners Global Macro Fund, LP, whose address is 152 West 57th Street, 54th Floor, New York, NY 10013, or registered assigns (the "Holder"), the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) in lawful money of the United States of America on or before the Maturity Date as defined herein, with all Interest thereon as defined and specified herein. 1. INTEREST. This Debenture shall bear interest ("Interest") at the rate of ten percent (10%) per annum from the Issue Date through the Maturity Date. The Company shall pay such Interest in cash on the Maturity Date. 2. PRE-PAYMENTS AND MATURITY DATE. This Debenture shall be due and payable in full, including all accrued Interest thereon, on November 1, 2005 ("Maturity Date"). The Company may prepay this Debenture at any time after issuance without penalty. 3. [INTENTIONALLY OMITTED.] 4. CONVERSION OF DEBENTURE. 4.1 Conversion Price. This Debenture is convertible, at the option of the Holder, into shares ("Shares") of the Company's common stock, par value $.001 per share ("Common Stock"), at any time after the Issue Date and prior to the close of business on the business day prior to the Maturity Date or conversion date, as the case may be. The conversion price for the conversion (the "Conversion Price") will be equal to $.50 per share, subject to adjustment as provided in Subsection 4.2, and the number of Shares to which the Holder shall be entitled shall be determined by dividing the then outstanding principal amount of and interest on this Debenture by the Conversion Price then in effect. 4.2 Adjustment Based Upon Stock Dividends, or Combination of Shares. The Conversion Price shall each be adjusted in the manner described in the remainder of this Subsection 4.2. If the outstanding shares of the Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Conversion Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If the outstanding Shares shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. 4.3 Adjustment Based Upon Merger, Consolidation or Recapitalization. In case of any consolidation or merger to which the Company is a party (other than a merger in which the Company is the surviving entity and which does not result in any reclassification of or change in the outstanding Common Stock of the Company), or in case of any sale or conveyance to another person, firm, or corporation of the property of the Company as an entirety or substantially as an entirety, or in case of any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in Subsection 4.2 immediately above), the Holder shall have the right to convent this Debenture into the kind and amount of securities and property (including cash) receivable upon such consolidation, merger, sale, or conveyance, reorganization or reclassification by a holder of the number of Shares into which such Debenture might have been convened immediately prior thereto. 4.4 Exercise of Conversion Privilege. The conversion privilege provided for herein shall be exercisable by the Holder by written notice to the Company or its successor and the surrender of this Debenture in exchange for the number of shares (or other securities and property, including cash, in the event of an adjustment of the Conversion Price) into which this Debenture is convertible based upon the Conversion Price. Conversion rights will expire at the close of business on the business day prior to the Maturity Date. 4.5 Corporate Status of Common Stock to be Issued. All Common Stock (or other securities in the event of an adjustment of the Conversion Price), which may be issued upon the conversion of this Debenture, shall upon issuance be fully paid and non-assessable. 4.6 Issuance of Certificate. Upon the conversion of this Debenture, the Company shall in due course issue to the Holder a certificate or certificates representing the number of Shares (or other securities in the event of an adjustment of the Conversion Price) to which the conversion relates. 4.7 Fractional Shares. No fractional Shares will be issued. In lieu thereof, the Company will pay cash for fractional Share amounts equal to the closing sale price of the Common Stock on the date of conversion, determined as follows: 4.7.1 If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of conversion of this Debenture, or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange; or -2- 4.7.2 If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the last reported sale price or the mean of the last bid and asked prices reported by the National Association of Securities Dealers Automated Quotation System on the Nasdaq Small-Cap Market, Nasdaq National Market System or OTC Bulletin Board (or, if not so quoted on NASDAQ, by the National Quotation Bureau, Inc. or other reporting system for the public market in which the Common Stock trades) on the last business day prior to the date of the conversion of this Debenture; or 4.7.3 If the Common Stock is not so listed or admitted to unlisted trading privileges and prices are not reported on NASDAQ, the current value shall be an amount, not less than the book value, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 4.8 Automatic Conversion. If prior to the Maturity Date a registration statement covering the resale of the Shares to be issued to the Holder upon conversion of this Debenture shall be declared effective by the Securities and Exchange Commission (the "Commission"), then this Debenture shall fully, automatically and without any action on the part of the Holder, convert into Shares. The conversion price for any automatic conversion under this Subsection 4.8 shall be the Conversion Price then in effect as theretofore adjusted as provided in Subsection 4.2, and the number of Shares to which the Holder shall be entitled shall be determined by dividing the then outstanding principal amount of and interest on this Debenture by the Conversion Price then in effect. 5. STATUS OF HOLDER OF DEBENTURE. This Debenture shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company or to any rights whatsoever except the rights herein expressed, and no dividends shall be payable or accrue in respect of this Debenture or the securities issuable upon the conversion hereof unless and until this Debenture shall be converted. Upon the conversion of this Debenture, the Holder shall, to the extent permitted by law, be deemed to be the holder of record of the Shares issuable upon such conversion, notwithstanding that the stock transfer books of the Company shall then be closed or that the certificates representing such Shares shall not then be actually delivered. Immediately upon the conversion of this Debenture, the rights of Holder under this Debenture shall cease except with regard to the right to receive the Shares issuable upon conversion. As promptly as practicable after either the conversion of this Debenture, Holder shall surrender this Debenture marked "Cancelled." 6. RESERVE OF SHARES. The Company shall reserve out of its authorized Shares (and other securities in the event of an adjustment of the Conversion Price) a number of shares sufficient to enable it to comply with its obligation to issue Shares (and other securities in the event of an adjustment of the Conversion Price) upon the conversion of this Debenture. 7. REGISTRATION RIGHTS. 7.1 The Holder of this Debenture shall have the right to join with the Company to register the Common Stock underlying the Debenture or any warrant to purchase Common Stock issued in connection herewith ("Underlying Common Stock") in any Registration Statement under the Securities Act of 1933 (the "Act") filed by the Company with the Commission, which includes a public offering of equity securities for cash, either for the account of the Company or for the -3- account of any other person. This right to join with the Company in a Registration Statement under the Securities Act of 1933 (the "Act") is not applicable to a Registration Statement filed by the Company with the Commission on Form S-4, S-8, or any other form not registering a public offering of equity securities for cash. If, at any time, the Company proposes to file a Registration Statement as described above with the Commission, it shall, at least thirty (30) days prior to such filing, give written notice of such proposed filing to the Holder and its designees at their addresses appearing on the records of the Company and shall offer to include in any such filing any proposed disposition of the Underlying Common Stock. Within fifteen (15) days of receipt of the Company's notice of filing, the owners of the Underlying Common Stock may request registration of the Underlying Common Stock pursuant to a written request setting forth the intended method of distribution and such other data or information as the Company or its counsel shall reasonably require and the Company shall use its best efforts to cause all Underlying Common Stock, as to which registration shall have been so requested, to be included in the securities to be covered by the Registration Statement, all to the extent requisite to permit the sale or other disposition by the undersigned of the Underlying Common Stock requested to be so registered; provided, however, that: (i) If, at any time after giving such written notice of its intention to register any securities and prior to the effective date of the Registration Statement, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to the undersigned, and thereupon the Company shall be relieved of its obligation to register any Underlying Common Stock in connection with such registration; (ii) If such registration involves an underwritten offering, the undersigned must sell its Underlying Common Stock to the underwriters selected by the Company on the same terms and conditions as apply to the Company (except as otherwise agreed to by the Company in writing); and (iii) The Company shall be obligated to keep the Registration Statement effective only for nine months after its initial effective date. The Company shall supply said owner(s) with copies of such Registration Statement, and of the prospectus included therein, in such quantities as may be reasonably necessary for the purpose of the proposed disposition. The Company will pay all registration expenses in connection with the registration pursuant to this Subsection. Such reasonable expenses will include all registration of filing fees, printing expenses and reasonable fees and disbursements of counsel for the Company and its independent certified public accountants, the fees and expenses associated with any required filing with the National Association of Dealers, Inc. ("NASD"). The Company is not required to pay any fees or expenses of Holder, placement agents or legal counsel of the Holder or placement agent, or accountant or any other advisors, including any transfer taxes, underwriting, brokerage or other discounts and commissions and finder's or similar fees payable with respect to the Common Stock registered in the Registration Statement. 7.2 The number of Underlying Common Stock to be included in an underwritten offering may be reduced, pro rata among all the Company's stockholders selling shares in the -4- offering, in a ratio equal to the respective amounts of shares proposed to be sold by such stockholders, if and to the extent that the managing underwriter shall advise the undersigned and the Company by letter of its belief that the number of securities requested to be registered exceeds the number that can be sold in (or during the term of) such offering without adversely affecting the marketing of the securities to be sold by the Company. 7.3 Each Holder shall pay all costs and expenses incurred by such Holder, including all transfer taxes, underwriting, brokerage and other discounts and commissions and finder's and similar fees payable with respect to the Underlying Common Stock registered pursuant to this Section 7. To the extent any registration expenses are incurred, assumed or paid by any Holder or any placement or sales agent therefor or underwriter thereof with the Company's prior consent, the Company shall reimburse such person for the full amount of the registration expenses so incurred, assumed or paid within a reasonable time after receipt of a written request for the same. Any registration expenses submitted by any Holder, placement agent, sales agent or underwriter on behalf of any such person for payment by the Company shall be itemized in detail and contain clear and accurate receipts of all expenditures made by such parties. 7.4 (a) The Company shall protect, indemnify and hold the Holder, and its officers, directors, stockholders, attorneys, accountants, employees, affiliates, successors and assigns, harmless from any and all demands, claims, actions, causes of actions, lawsuits, proceedings, investigations, judgments, losses, damages, injuries, liabilities, obligations, expenses and costs (including costs of litigation and attorneys' fees), arising out of or based upon (i) any untrue statement or alleged untrue statement of any material fact contained in or incorporated by reference into the Registration Statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, (ii) 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, or (iii) any material violation by the Company of any rule or regulation promulgated under Act applicable to the Company and relating to action or inaction by the Company in connection with any such registration; provided, however, that the Company shall not be liable in the case of (i) and (ii) above if and to the extent that the event otherwise giving rise to indemnification arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information furnished by a person otherwise entitled to indemnification in writing specifically for use in the Registration Statement or prospectus, or information contained in a writing that has been expressly approved by a person otherwise entitled to indemnification. (b) The Holder shall protect, indemnify and hold the Company and its officers, directors, stockholders, attorneys, accountants, employees, affiliates, successors and assigns, harmless from any and all demands, claims, actions, causes of actions, lawsuits, proceedings, investigations, judgments, losses, damages, injuries, liabilities, obligations, expenses and costs (including costs of litigation and attorneys' fees), arising out of or based upon (i) any untrue statement or alleged untrue statement of any material fact contained in or incorporated by reference into the Registration Statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, (ii) 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, or (iii) any material violation by the Holder of any rule or regulation promulgated under -5- the Act applicable to the Holder and relating to action or inaction by the Holder in connection with any such registration; provided, however, that the Holder shall be liable in the case of (i) and (ii) above only if and to the extent that the event giving rise to indemnification arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information furnished by the Holder in writing specifically for use in the Registration Statement or prospectus, or information contained in a writing that has been expressly approved by the Holder. (c) Promptly after receipt by an indemnified party under this Subsection 7.4 of notice of the threat or commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party hereunder, notify each such indemnifying party in writing thereof, but the omission so to notify an indemnifying party shall not relieve it from any liability which it may have to any indemnified party to the extent that the indemnifying party is not prejudice as a result thereof. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Subsection 7.4 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so elected; provided, however, that, if the defendants in any such action include both an indemnified party and an indemnifying party and the related indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be believed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. No indemnifying party shall be subject to any liability for any settlement made without consent, which shall not be unreasonably withheld. No indemnifying party shall consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim or litigation. 8. DEFAULT. The Company shall perform its obligations and covenants hereunder and in each and every other agreement between the Company and Holder pertaining to the Indebtedness evidenced hereby. The following provisions shall apply upon failure of the Company so to perform. 8.1 Event of Default. Any of the following events shall constitute an "Event of Default" hereunder: 8.1.1 Failure by the Company to pay principal of any of the Debenture when due and payable on the Maturity Date; 8.1.2 Failure of the Company to pay Interest when due hereunder, which -6- failure continues for a period of thirty (30) days after the due date of the amount involved; or 8.1.3 Failure of the Company to perform any of the covenants, conditions, provisions or agreements contained herein, or in any other agreement between the Company and Holder pertaining to the Indebtedness evidenced hereby, which failure continues for a period of sixty (60) days after written notice of default has been given to the Company by the Holder; provided, however, that if the nature of the Company's obligation is such that more than sixty (60) days are required for performance, then an Event of Default shall not occur if the Company commences performance within such sixty (60) day period and thereafter diligently prosecutes the same to completion; or 8.1.4 The entry of an order for relief under Federal Bankruptcy Code as to the Company or entry of any order appointing a receiver or trustee for the Company or approving a petition in reorganization or other similar relief under bankruptcy or similar laws in the United States of America or any other competent jurisdiction, and if such order, if involuntary, is not satisfied or withdrawn within sixty (60) days after entry thereof; or the filing of a petition by the Company seeking any of the foregoing, or consenting thereto: or the filing of a petition to take advantage of any debtor's act; or making a general assignment for the benefit of creditors; or admitting in writing inability to pay debts as they mature. 8.2 Acceleration. Upon any Event of Default (in addition to any other rights or remedies provided for under this Debenture), at the option of the Holder, all sums evidenced hereby, including all principal, accrued but unpaid Interest, fees and all other amounts due hereunder, shall become immediately due and payable. If an Event of Default in the payment of principal or Interest should occur and be continuing with respect to the Debenture, the Holder may declare the principal of the Debenture to be immediately due and payable. In the Event of a Default due to a breach of any other covenant or term, Holder may take action to accelerate the Debenture. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or any Subsidiary occurs and is continuing, the principal of and and interest on the Debenture will become and be immediately due and payable without any declaration or other act on the part of the Holder. Under certain circumstances, the Holder may rescind any such acceleration with respect to the Debenture and its consequences. 8.3 Notice by Company. Upon the happening of any Event of Default specified in this Section that is not cured within the respective periods prescribed above, the Company will give prompt written notice thereof to the Holder of this Debenture. 8.4 No Waiver. Failure of the Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event of any subsequent Event of Default, or in the event of continuance of any existing Event of Default after demand or performance thereof. 8.5 Default Interest. Default Interest will accrue on an unpaid principal or Interest due hereunder at the rate of eighteen percent (18%) per annum upon the occurrence of any Event of Default until the Event of Default is cured. -7- 9. INVESTMENT INTENT, RESTRICTIONS ON ASSIGNMENT, ASSIGNMENT, TRANSFER OR LOSS OF THE DEBENTURE. 9.1 (a) The Holder, by acceptance of this Debenture, represents that this Debenture and any Shares issuable upon conversion of this Debenture are being and will be acquired for the Holder's own account for investment and not with a view to, or for resale in connection with, the distribution thereof in violation of applicable securities laws, and that the Holder has no present intention of distributing or reselling this Debenture or any such Shares. The Holder, by acceptance of this Debenture, further represents that it has not offered or sold this Debenture, or any Shares into which this Debenture is convertible, directly or indirectly to any other person, and that the Holder is not acquiring this Debenture or any such Common Stock for the account of any other person. Certificates evidencing Shares issuable upon conversion of this Debenture shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF IN VIOLATION OF APPLICABLE SECURITIES LAWS, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. (b) No Holder of this Debenture may assign, transfer, hypothecate or sell all or any part of this Debenture (or any of the Shares issuable upon conversion of this Debenture) or in any way alienate or encumber the Debenture (or any of the Shares issuable upon conversion of this Debenture) without the express written consent of the Company, the granting or denial of which shall be within the absolute discretion of the Company. Any attempt to effect such transfer without the consent of the Company shall be null and void. The Company has not registered this Debenture (or any of the Shares issuable upon conversion of this Debenture) under the Act or the applicable securities laws of any state in reliance on exemptions from registration. Such exemptions depend upon the investment intent of the Holder at the time he acquires his Debenture or such Shares. Each Holder has acquired his Debenture (and will acquire the Shares issuable upon conversion of this Debenture) for his own account for investment purposes only and not with a view toward distribution or resale of such Debenture or such shares within the meaning of the Act and the applicable securities laws of any state. The Company shall be under no duty to register the Debenture (or any of the Shares issuable upon conversion of this Debenture) or to comply with an exemption in connection with the sale, transfer or other disposition under the applicable laws and regulations of the Act or the applicable securities laws of any state. The Company may require the Holder to provide, at his expense, an opinion of counsel satisfactory to the Company to the effect that any proposed transfer or other assignment of the Debenture (or any of the Shares issuable upon conversion of this Debenture) will not result in a violation of the applicable federal or state -8- securities laws or any other applicable federal or state laws or regulations. 9.2 All expenses, including reasonable legal fees incurred by the Company in connection with any permitted transfer, assignment or pledge of this Debenture will be paid by the Holder requesting such transfer, assignment or pledge. 9.3 Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Debenture and, in the case of any such loss, theft or destruction of any Debenture, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Debenture held by the original Debenture holder, of an indemnity agreement reasonably satisfactory to the Company), or, in the case of any such mutilation, upon the surrender of such Debenture to the Company at its principal office for cancellation, the Company at its expense will execute and deliver, in lieu thereof, a new Debenture of like tenor, dated the date to which interest hereunder shall have been paid on such lost, stolen, destroyed or mutilated Debenture. 9.4 Subject to Subsections 9.1 and 9.2 above and 9.5 below, the Holder may, at his option, either in person or by duly authorized attorney, surrender this Debenture for registration of transfer at the principal office of the Company and, upon payment of any expenses associated with the transfer, receive in exchange therefor the Debenture, dated as of the date to which interest has been paid on the Debenture so surrendered, each in the principal amount of $10,000 or any multiple thereof, for the same aggregate unpaid principal amount as the Debenture so surrendered and registered as payable to such person or persons as may be designated by the Holder. Every Debenture surrendered for registration of transfer shall be duly endorsed or shall be accompanied by a written instrument of transfer duly executed by the Holder or his attorney duly authorized in writing. Every Debenture, so made and delivered by the Company in exchange for any Debenture surrendered, shall in all other respects be in the same form and have the same terms as the Debenture surrendered. No transfer of any Debenture shall be valid unless made in such manner at the principal office of the Company. 9.5 The Company may treat the person in whose name this Debenture is registered as the owner and Holder of this Debenture for the purpose of receiving payment of all principal of and all Interest on this Debenture, and for all other purposes whatsoever, whether or not such Debenture shall be overdue and, except for transfers effected in accordance with this subsection, the Company shall not be affected by notice to the contrary. 10. MODIFICATIONS AND AMENDMENTS. Modifications and amendments to the Debenture may be made by the Company only with the consent of the Holder. 11. NOTICES. All notices provided for herein shall be validly given if in writing and delivered personally or sent by certified mail, postage prepaid, (in the case of the Company) to the office of the Company or such other address as the Company may from time to time designate in writing sent by certified mail, postage prepaid, or (in the case of the Holder) to the Holder at his address set forth above or such other address as the Holder may from time to time designate in writing to the Company by certified mail, postage prepaid. -9- 12. USURY. All Interest, fees, charges, goods, things in action or any other sums or things of value, or other contractual obligations (collectively, the "Additional Sums") paid by the Company hereunder, whether pursuant to this Debenture or otherwise, with respect to the Indebtedness evidenced hereby, or any other document or instrument in any way pertaining to the Indebtedness, which, under the laws of the State of Texas may be deemed to be Interest with respect to such loan or Indebtedness, shall, for the purpose of any laws of the State of Texas, which may limit the maximum amount of Interest to be charged with respect to such loan or Indebtedness, be payable by the Company as, and shall be deemed to be, Interest and for such purposes only, the agreed upon and contracted rate of Interest shall be deemed to be increased by the Additional Sums. Notwithstanding any provision of this Debenture to the contrary, the total liability for payments in the nature of Interest under this Debenture shall not exceed the limits imposed by applicable law. The Company shall not assert a claim, and shall actively resist any attempts to compel it to assert a claim, respecting a benefit under any present or future usury laws against any Holder of this Debenture. 13. BINDING EFFECT. This Debenture shall be binding upon the parties hereto and their respective heirs, executors, administrators, representatives, successors and permitted assigns. 14. COLLECTION FEES. Except as otherwise provided herein, the Company shall pay all costs of collection, including reasonable attorneys' fees and all costs of suit and preparation for such suit (and whether at trial or appellate level), in the event the unpaid principal amount of this Debenture, or any payment of Interest is not paid when due, or in the event Holder is made party to any litigation because of the existence of the Indebtedness evidenced by this Debenture, or if at any time Holder should incur any attorneys' fees in any proceeding under the Federal Bankruptcy Code (or other similar laws for the protection of debtors generally) in order to collect any Indebtedness hereunder or to preserve, protect or realize upon any security for, or guarantee or surety of, such Indebtedness whether suit be brought or not, and whether through courts of original jurisdiction, as well as in courts of appellate jurisdiction, or through a bankruptcy court or other legal proceedings. 15. CONSTRUCTION. THIS DEBENTURE SHALL BE GOVERNED AS TO ITS VALIDITY, INTERPRETATION, CONSTRUCTION, EFFECT AND IN ALL OTHER RESPECTS BY AND IN ACCORDANCE WITH THE LAWS AND INTERPRETATIONS THEREOF OF THE STATE OF TEXAS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE USE OF TERMS IN SINGULAR AND MASCULINE FORM SHALL INCLUDE IN ALL INSTANCES SINGULAR AND PLURAL NUMBER AND MASCULINE, FEMININE AND NEUTER GENDER. 16. SEVERABILITY. In the event any one or more of the provisions contained in this Debenture or any future amendment hereto shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Debenture or such other agreement, and in lieu of each such invalid, illegal or unenforceable provision there shall be added automatically as a part of this Debenture a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. -10- 17. DEFINITIONS. 17.1 "Holder" means a Person in whose name a Debenture is registered on the Company's books. 17.2 "Indebtedness" means, without duplication, with respect to any Person, (a) all obligations of such Person (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services (other than accounts payable or other obligations arising in the ordinary course of business), (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to a capitalized lease obligation under generally accepted accounting principles as in effect in the United States of America as of the Issue Date, or (vi) evidenced by a letter of credit or a reimbursement obligation of such Person with respect to any letter of credit; (b) all net obligations of such Person under interest rate swap obligations and foreign currency hedges; (c) all liabilities of others of the kind described in the preceding clauses (a) or (b) that such Person has guaranteed or that are otherwise its legal liability; (d) Indebtedness (as otherwise defined in this definition) of another Person secured by lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person, the amount of such obligations being deemed to be the lesser of (1) the full amount of such obligations so secured, and (2) the fair market value of such asset, as determined in good faith by the Board of Directors of such Person, which determination shall be evidenced by a board resolution; and (e) any and all deferrals, renewals, extensions, refinancings and refundings (whether direct or indirect) of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a), (b), (c), (d) or this clause (e), whether or not between or among the same parties. 17.3 "Issue Date" means the date on which the Debenture is first issued. 17.4 A "Subsidiary" means (i) a corporation a majority of whose voting stock is at the time, directly or indirectly, owned by the Company, by one or more subsidiaries of the Company or by the Company and one or more subsidiaries of the Company, (ii) a partnership in which the Company or a subsidiary of the Company is, at the date of determination, a general or limited partner of such partnership, but only if the Company or its subsidiary is entitled to receive more than fifty percent (50%) of the assets of such partnership upon its dissolution, or (iii) any other Person (other than a corporation or partnership) in which the Company, directly or indirectly, at the date of determination thereof, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of directors or other governing body of the Company. 18. MISCELLANEOUS. Except as otherwise provided herein, the Company waives demand, diligence, presentment for payment and protest, notice of extension, dishonor, maturity and protest. Time is of the essence with respect to the performance of each and every covenant, condition, term and provision hereof. -11- IN WITNESS WHEREOF, this Debenture has been issued on the 15th day of February, 2005. BLUEGATE CORPORATION By /s/ Manfred Sternberg --------------------------------------- Manfred Sternberg Chief Executive Officer -12- BLUEGATE CORPORATION 10% CONVERTIBLE DEBENTURE DUE NOVEMBER 1, 2005 NOTICE OF CONVERSION AND SUBSCRIPTION (To be completed and signed only upon a conversion of the Debenture into Common Stock in whole or in part) TO: BLUEGATE CORPORATION The undersigned, the Holder of the attached 10% Convertible Debenture Due November 1, 2005 ("Debenture"), hereby irrevocably elects to exercise the right to convert part or all of the outstanding principal balance and accrued Interest on the Debenture into shares ("Shares") of the Company's common stock, par value $.001 per share, and thereby purchase _______ Shares. The undersigned makes payment of $________for the Shares by converting and canceling the indebtedness represented by the Debenture. The undersigned hereby requests that the Certificate(s) for such securities be issued in the name(s) and delivered to the address(es) as follows: Name: Address: Deliver to: Address: If the foregoing Notice of Conversion and Subscription evidences the conversion of less than the entire principal amount of the Debenture and accrued Interest thereon, please issue a new Debenture, of like tenor, for the remaining principal amount of the Debenture in the name(s), and deliver the same to the address(es), as follows: Name: Address: DATED:________________ ___, 2005. _______________________________________________________________________________ (Name of Holder) _______________________________________________________________________________ (Signature of Holder or Authorized Signatory) _______________________________________________________________________________ (Social Security or Taxpayer Identification Number of Holder) EX-4.3 6 ex4_3.txt EXHIBIT 4.3 THIS OPTION AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. CRESCENT COMMUNICATIONS, INC. NO. E-03-23 STOCK OPTION AGREEMENT Date of Grant: October 9, 2003 THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by Crescent Communications, Inc. (the "Company") to Luke Richards (the "Grantee"), who is an employee or consultant of the Company or one of its subsidiaries (the Company is sometimes referred to herein as the "Employer"). WHEREAS, the Board of Directors of the Company (the "Board") on October 9, 2003 granted to Grantee the right to purchase shares of the Common Stock of the Company, par value $0.001 per share (the "Stock"), in accordance with the terms and provisions hereof. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Board, hereby grants to the Grantee, as of the Date of Grant, an option to purchase up to 30,000 shares of Stock at a price of $0.20 PER SHARE. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option Shares to be issued pursuant to this Stock Option Agreement shall be restricted securities. 2. VESTING. This Option shall vest as to 100% of the total number of shares covered by the Option on October 9, 2004, and is otherwise governed by and subject to the Company's Stock Option Plan that is in effect on the vesting date. 3. TERMINATION OF OPTION. (a) The Option and all rights hereunder with respect thereto, to the extent such Option has vested, shall terminate and become null and void after the expiration of five (5) years from the Date of Grant (the "Option Term"). To the extent that the Option has not vested in accordance with Section 2 above, then the non-vested portion of the 1 Option shall terminate and become null and void upon the termination of the Grantee as an employee, officer or director of the Company. (b) In the event of the death of the Grantee, the Option may be exercised by the Grantee's legal representative(s), but only to the extent that the Option would otherwise have been exercisable by the Grantee. (c) In the event the Board (or Committee, if any) finds by a majority vote after full consideration of the facts that Grantee, before or after termination of his employment with the Company or an Affiliate for any reason (i) committed or engaged in fraud, embezzlement, theft, commission of a felony, or proven dishonesty in the course of his employment by the Company or any subsidiary or affiliate of the Company, which conduct damaged the Company or subsidiary or affiliate, or disclosed trade secrets of the Company its subsidiary or its affiliate, or (ii) participated, engaged in or had a material, financial or other interest, whether as an employee, officer, director, consultant, contractor, shareholder, owner, or otherwise, in any commercial endeavor anywhere which is competitive with the business of the Company or a subsidiary or Affiliate without the written consent of the Company, the Grantee shall forfeit all outstanding Options. Clause (ii) shall not be deemed to have been violated solely by reason of the Grantee's ownership of stock or securities of any publicly owned corporation, if that ownership does not result in effective control of the corporation. The decision of the Board (or Committee, if any) as to the cause of the Grantee's discharge, the damage done to the Company or a subsidiary or an affiliate, and the extent of the Grantee's competitive activity shall be final. No decision of the Board (or Committee, if any) however, shall affect the finality of the discharge of the Grantee by the Company. 4. EXERCISE OF OPTIONS. (a) The Grantee may exercise the Option with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof, which date shall be at least five days after the giving of such notice unless an earlier time shall have been mutually agreed upon. Notwithstanding the foregoing, an Option granted under this Agreement may be exercised in increments of not less than 10% of the full number of Shares as to which it can be exercised. A partial exercise of an Option will not affect the Grantee's right to exercise the Option from time to time in accordance with this Agreement as to the remaining Shares subject to the Option. (b) Full payment (in U.S. dollars) by the Grantee of the option price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash, or certified or cashier's check or money order, or, with the prior 2 written consent of the Board, in whole or in part through the surrender of previously acquired shares of Stock at their fair market value on the exercise date. On the exercise date specified in the Grantee's notice or as soon thereafter as is practicable, but not to exceed ten (10) business days, the Company shall cause to be delivered to the Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. (c) If the Grantee fails to pay for any of the Option Shares specified in such notice, the Grantee's right to purchase such Option Shares may be terminated by the Company. The date specified in the Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. (d) Notwithstanding any of the other provisions hereof, Grantee agrees that he will not exercise this Option and that the Company will not be obligated to issue any Option Shares pursuant to this Stock Option Agreement, if the exercise of the Option or the issuance of such Option Shares would constitute a violation by the Grantee or by the Company of any provision of any law or regulation of any governmental authority or national securities exchanges. Upon the acquisition of any Option Shares pursuant to the exercise of the Option herein granted, Grantee will enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws with this Stock Option Agreement. 5. ADJUSTMENT OF AND CHANGES IN STOCK OF THE COMPANY. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of capital stock of the Company, the Board shall make such adjustment in the number and kind of shares of Stock subject to the Option or in the option price; provided, however, that no such adjustment shall give the Grantee any additional benefits under the Option. 6. FAIR MARKET VALUE. As used herein, the "fair market value" of a share of Stock shall be the closing price per share of Stock on the PINK SHEETS, OTCBB, the BBXCHANGE, NASDAQ, the NYSE, the Amex, the composite tape or other recognized market source, as determine by the Board, on the applicable date of reference hereunder, or if there is no sale on such date, then the closing price on the last previous day on which a sale is reported. 7. NO RIGHTS OF STOCKHOLDERS. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 3 8. NON-TRANSFERABILITY OF OPTION. During the Grantee's lifetime, the Option hereunder shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, (i) in case of the death of the Grantee, by will or the laws of descent and distribution, and (ii) to a child, grandchild or stepchild of the Grantee or to a trust or partnership created by the Grantee, who, in each case, will be subject to all of the provisions hereof, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) me levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Grantee and it shall thereupon become null and void and of no value to any such party. 9. DISPUTES. As a condition of the granting of this Option, the Grantee and his heirs and successors agree that any dispute or disagreement which may arise hereunder shall be determined by the Board (or Committee, if any) in its sole discretion and judgment, and that any such determination and any interpretation by the Board (or Committee, if any) of the terms of this Option shall be final and shall be binding and conclusive, for all purposes upon the Company, the Grantee, his heirs and successors. 10. NOTICE. Any notice to the Company provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices at Crescent Communications, Inc., and any notice to the Grantee shall be addressed to the Grantee at the current address shown on the records of the Company. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 11. GOVERNING LAW. The validity, construction, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the State of Texas, except to the extent preempted by federal law, which shall to the extent govern. 12. CAPITALIZED TERMS Capitalized terms used herein shall having the meanings to be set forth in The Crescent Communications, Inc. 2002 Stock and Stock Option Plan. IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute and attest to this Stock Option Agreement, and to apply the corporate seal hereto, and the Grantee has placed his or her signature hereon, effective as of the Date of Grant. 4 Crescent Communications, Inc. By: ------------------------------------------ Manfred Sternberg, Chief Executive Officer Grantee: ------------------------------------------ Luke Richards 5 EX-4.4 7 ex4_4.txt EXHIBIT 4.4 THESE WARRANTS AND THE SHARES OF COMMON STOCK THAT MAY BE PURCHASED ON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THESE WARRANTS AND THE SHARES OF COMMON STOCK THAT MAY BE PURCHASED ON THE EXERCISE HEREOF ARE BEING OFFERED AND SOLD FOR INVESTMENT. EXCEPT AS PROVIDED IN SECTION 7(b) HEREOF, THESE WARRANTS MAY NOT BE TRANSFERRED. THE SHARES OF COMMON STOCK ISSUED OR ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT. IW NO. 1 BLUEGATE CORPORATION WARRANTS FOR THE PURCHASE OF SHARES OF COMMON STOCK OF BLUEGATE CORPORATION (A NEVADA CORPORATION) VOID AFTER 5:00 P.M., CENTRAL STANDARD TIME, ON FEBRUARY 15, 2008 Bluegate Corporation, a Nevada corporation (the "Company") hereby certifies that Platinum Partners Global Macro Fund, LP, (together with his permitted assigns, the "Registered Holder"), is the holder of 100,000 of the Company's Warrants (singly, a "Warrant," and collectively, the "Warrants") thus entitling him, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after February 15, 2005 and on or before February 15, 2008 at not later than 5:00 p.m. (Central Standard Time), one share of Common Stock of the Company ("Common Stock") for each Warrant at a purchase price of $1.00 per share. The number of shares purchasable upon exercise of a Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant Certificate, are hereinafter referred to as the "Warrant Stock" and the "Purchase Price", respectively. 1. Period of Exercise. (a) This Warrant Certificate may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant Certificate, with the purchase form appended hereto as Exhibit A duly executed by such Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, by bank or certified check in lawful money of the United States, of the Purchase Price payable in respect of the number of shares of Warrant Stock purchased upon such exercise. (b) Each exercise of a Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant Certificate shall have been surrendered to the Company as provided in subsection I(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such exercise as provided in subsection l(c) below shall be deemed to have become the holder or holders of record of the Warrant Stock represented by such certificates. (c) As soon as practicable after the exercise of a Warrant, and in any event within ten (10) days thereafter, the Company at its expense shall cause to be issued in the name of, and delivered to, the Registered Holder, or, subject to the terms and conditions hereof, as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full shares of Warrant Stock to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof, and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Warrant Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant Certificate minus the number of such shares purchased by the Registered Holder upon such exercise as provided in subsection 1(a) above. 2. Adjustments. (a) If the outstanding shares of the Company's Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. When any adjustment is required to be made in the Purchase Price, the number of shares of Warrant Stock purchasable upon the exercise of a Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of a Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. (b) If there shall occur any capital reorganization or reclassification of the Company's Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 2(a) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, or the payment of a liquidating distribution then, as part of any such reorganization, reclassification, consolidation, merger, sale or liquidating distribution, lawful provision shall be made so that the Registered Holder of this Warrant Certificate shall have the right thereafter to receive upon the exercise hereof (to the extent, if any, still exercisable) the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger, sale or liquidating distribution, as 2 the case may be, such Registered Holder had held the number of shares of Common Stock which were then purchasable upon the exercise of a Warrant. In any such case, appropriate adjustment (as reasonably determined by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant Certificate such that the provisions set forth in this Section 2 (including provisions with respect to adjustment of the Purchase Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of a Warrant. (c) In any case in which this Section 2 shall require that any adjustment in the number of shares of Warrant Stock or other property for which a Warrant may be exercised be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Registered Holder the amount of Warrant Stock and other property, if any, issuable upon exercise of a Warrant after such record date that is over and above the Warrant Stock and other property, if any, issuable upon exercise of a Warrant as in effect prior to such adjustment; provided that upon request the Company shall deliver to the Registered Holder a due bill or other appropriate instrument evidencing the Registered Holder's right to receive such additional shares or property upon the occurrence of the event requiring such adjustment. (d) When any adjustment is required to be made in the Purchase Price, the Company shall promptly mail to the Registered Holder a certificate setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property for which a Warrant shall be exercisable following the occurrence of any of the events specified in subsection 2(a) or 2(b) above. 3. Fractional Shares. The Company shall not be required upon the exercise of a Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the mean between the low bid and high asked prices of the Warrant Stock on the OTC Bulletin Board, or the mean between the low bid and high asked prices of the Warrant Stock on the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotations ("NASDAQ") System or the closing market price of the Warrant Stock on a national securities exchange on the trading day immediately prior to the date of exercise, whichever is applicable, or if none is applicable, then on the basis of the then market value of the Warrant Stock as shall be reasonably determined by the Board of Directors of the Company. 4. Limitation on Sales. (a) The Registered Holder, and each subsequent holder of this Warrant Certificate, if any, acknowledges that the Warrants and the Warrant Stock have not been registered under the Securities Act of 1933, as now in force or hereafter amended, or any successor legislation (the "Act"), and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of any of the Warrants or the Warrant Stock issued upon its exercise in the absence of (i) an effective 3 registration statement under the Act as to a Warrant or such Warrant Stock and registration or qualification of a Warrant or such Warrant Stock under any applicable blue sky or state securities law then in effect, or (ii) an opinion of counsel, satisfactory to the Company, that such registration and qualification are not required. Without limiting the generality of the foregoing, unless the offering and sale of the Warrant Stock to be issued upon the particular exercise of a Warrant shall have been effectively registered under the Act, the Company shall be under no obligation to issue the shares or warrants covered by such exercise unless and until the Registered Holder shall have executed an investment letter in form and substance satisfactory to the Company, including a warranty at the time of such exercise that he is acquiring such shares or warrants for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any such shares or warrants, in which event the Registered Holder shall be bound by the provisions of a legend to such effect on the certificate(s) representing the Warrant Stock. In addition, without limiting the generality of the foregoing, the Company may delay issuance of the Warrant Stock until completion of any action or obtaining of any consent, which the Company believes necessary or advisable under any applicable law (including without limitation state securities or "blue sky" laws). (b) The Registered Holder agrees, and each other holder of Warrant Stock agrees, if requested by the Company and/or the representative of the underwriters underwriting an offering of Common Stock (or other securities of the Company) from time to time, not to sell or otherwise transfer or dispose of any Warrant Stock then held by the Registered Holder and/or such other holder during such period of time following the effective date of any registration statement of the Company filed under the Act for the period of time with respect to which a majority of the executive officers of the Company agree not to sell shares of Common Stock (or other securities of the Company). Such agreement shall be in writing in a form satisfactory to the Company and such representative. The Company may impose stop-transfer instructions with respect to the Warrant Stock subject to the foregoing restriction until the end of such period. 5. Reservation of Stock. The Company shall at all times reserve and keep available, solely for issuance and delivery upon the exercise of a Warrant, such shares of Warrant Stock and other stock, securities and property, as from time to time shall be issuable upon the exercise of a Warrant. 6. Replacement of Warrant Certificates. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant Certificate, the Company shall issue, in lieu thereof, a new Warrant Certificate of like tenor. 7. Transfers, etc. Subject to Section 4 above: 4 (a) The Company shall maintain a register containing the names and addresses of the Registered Holders of this Warrant Certificate. The Registered Holder may change his address as shown on the warrant register by written notice to the Company requesting such change. (b) This Warrant Certificate shall not be transferable by the Registered Holder and shall be exercisable only by the Registered Holder; provided that this Warrant Certificate may be transferred to, and may be exercisable by, provided that this Warrant may be transferred to, and may be exercisable by, the Registered Holder's spouse, the Registered Holder's naturally born or legally adopted heirs or their issue, or a trust for the benefit of any of the foregoing persons, or to and by any family planning entity herebefore or hereafter established by the Registered Holder or any company or entity that directly, or indirectly through one or more intermediaries, is controlled by, or is under common control with, the Registered Holder. Subject to the foregoing, this Warrant Certificate shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process without the prior written consent of the Company. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Warrant Certificate or of any rights granted hereunder contrary to the provisions of this Section 7, or the levy of any attachment or similar process upon this Warrant Certificate or such rights, shall be null and void. (c) Until any transfer of this Warrant Certificate is made in the warrant register, the Company may treat the Registered Holder of this Warrant Certificate as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant Certificate is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 8. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant Certificate who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant Certificate or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its offices at 701 N. Post Oak Blvd., Suite 630, Houston, Texas 77024, or such other address as the Company shall so notify the Registered Holder. 9. No Rights as Stockholder. Until the exercise of a Warrant, the Registered Holder of this Warrant Certificate shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 10. Change or Waiver. Any term of this Warrant Certificate may be changed or waived only by an instrument in 5 writing signed by the party against which enforcement of the change or waiver is sought. 11. Headings. The headings in this Warrant Certificate are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant Certificate. 12. Governing Law. THIS WARRANT CERTIFICATE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the undersigned has set his hand hereunto as of the 15th day of February, 2005. BLUEGATE CORPORATION By: /s/ Manfred Sternberg ------------------------------------- Manfred Sternberg, Chief Executive Officer 6 EXHIBIT A PURCHASE FORM Bluegate Corporation 701 N. Post Oak Blvd., Suite 630 Houston, Texas 77024 Gentlemen: The undersigned pursuant to the provisions set forth in the attached Warrant Certificate hereby irrevocably elects to purchase _________shares of the Common Stock (the "Common Stock") covered by such Warrant Certificate and herewith makes payment of $______________, representing the full purchase price for such shares at the price per share provided for in such Warrant Certificate. The undersigned understands and acknowledges the terms and restrictions on the right to transfer or dispose of the Common Stock set forth in Section 4 of the attached Warrant Certificate, which the undersigned has carefully reviewed. The undesigned consents to the placing of a legend on his certificate for the Common Stock referring to such restrictions and the placing of stop transfer orders until the Common Stock may be transferred in accordance with the terms of such restrictions. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Dated: ---------------------------- EX-4.5 8 ex4_5.txt EXHIBIT 4.5 CRESCEMT COMMUNICATIONS, INC. (f/k/a Berens Industries, Inc.), a Nevada corporation --Series A Convertible Preferred Stock-- THIS CERTIFIES THAT George Speaks is the owner of 8.54792 ---------------------- ----------- fully paid and non-assessable Shares transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and to be sealed with the Seal of the Corporation. Dated 12/22/03 /s/ (illegible) ----------------------- ----------------------- Chief Executive Officer The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws of regulations. Additional abbreviations may also be used though not in the list.
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian (Minor) TEN ENT - as tenants by the under Uniform Gifts to Minors Act (State) entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________ | | ______________________________ For value received, the undersigned hereby sells, assigns and transfers unto _______________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE _______________________________________________________________________________ _________________________________________________________________________ Shares represented by the within Certificate, and hereby irrevocable constitutes and appoints______________________________ Attorney to transfer the said Shares on the books of the within-named Corporation with full power of substitution in the premises. Dated, ___________________ In presence of _______________________________________ ______________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. EX-4.6 9 ex4_6.txt EXHIBIT 4.6 NOTE AND SECURITY AGREEMENT $15,000.00- Houston, Texas - January 23, 2002 On January 23, 2002, Crescent Communications, Inc., of 701 N. Post Oak Road, Suite 630, Houston, Texas 77024, hereinafter referred to as "Debtor" in this note and security agreement, promises to pay to the order of Manfred Stemberg hereinafter referred to as "Secured Party," at its principal office at 701 N. Post Oak Road, Suite 640, Houston, Texas 77024, the principal amount of $15,000.00 or so much as may be outstanding, together with interest on the unpaid principal balance. Interest shall be calculated from the date of this note until paid. Debtor will pay this note on demand, which can be made at any time. Payment in full is due immediately upon Secured Party's demand on or before January 1, 2010. Interest is computed on a 365/365 simple interest basis. FIXED INTEREST RATE The interest rate on this note is 8% per annum. Interest only payments shall be made beginning February 15, 2002. CONVERTIBLE INTO STOCK The parties agree that Secured Party has the right and option at any time from date, while this agreement is in effect, to convert the unpaid principal or any portion of the unpaid principal into fully paid and nonassessable shares of common stock of Debtor at the conversion price of $.05 per share upon the surrender of this agreement or a proper notation made upon it to Debtor at its offices located at 701 N. Post Oak Road, Suite 630, Houston, Texas 77024. No fractional shares will be issued upon any conversion, but an adjustment in cash shall be made in respect to any fraction of a share that would otherwise be issuable upon the surrender of this agreement or portion of it for conversion. GRANT OF SECURITY INTEREST Debtor grants to Secured Party in this agreement, a security interest in its property, tangible and intangible, including but not limited to: all accounts, now existing or subsequently arising; all contract rights of Debtor, now existing or subsequently arising; all claims and causes of action, now existing or subsequently arising; all accounts receivable, now existing or subsequently arising; all chattel paper, documents, and instruments related to accounts; all inventory, furniture, fixtures, equipment, and supplies now owned or subsequently acquired; and the proceeds, products, and accessions of and to any and all of the foregoing (the "Collateral"). Page 1 of 1 This security interest is granted to secure the debt evidenced by this note and agreement and all costs and expenses incurred by Secured Party in the collection of the debt. PERFORMANCE Debtor agrees: 1. To pay all obligations when due and perform fully all of the Debtor's duties under and in connection with this note and security agreement. 2. To keep the Collateral in good order and repair, to maintain it at Debtor's premises, to use the Collateral for its intended purposes only, and to refrain from encumbering, selling, or leasing any of the Collateral, or permitting it to be encumbered, seized, or transferred. DEFAULT AND REMEDIES OF SECURED PARTY Default in payment or performance of any of the obligations or default under any agreement evidencing any of the obligations is a default under this agreement. On default, the Secured Party may declare all obligations immediately due and payable and will have the remedies of a secured party under the Texas Business and Commerce Code, as well as any other remedies existing under applicable law or by agreement between the parties. Upon default, including failure to pay upon final maturity, the total sum due under this note will bear interest from the date of acceleration or maturity at the highest legal interest rate. GENERAL PROVISIONS This agreement contains the entire understanding of Debtor and Secured Party. Its provisions are to be governed by and interpreted in accordance with Texas law. EXECUTED by the Debtor on . ----------------------------- DEBTOR CRESCENT COMMUNICATIONS, INC. BY: /s/ Jeff Olexa -------------------------------- Jeff Olexa, President Page 2 of 2 EX-4.7 10 ex4_7.txt EXHIBIT 4.7 Exhibit 4.7 -- Bluegate Corporation FILED # C173-85 JULY 19, 2001 IN THE OFFICE OF DEAN HELLER, SECRETARY OF STATE CERTIFICATE OF THE DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES A CONVERTIBLE NON-REDEEMABLE PREFERRED STOCK OF BERENS INDUSTRIES, INC. Berens Industries, Inc., (hereinafter referred to as the "Corporation" or "Company"), a corporation organized and existing under the laws of the State of Nevada. DOES HEREBY CERTIFY: That, the Articles of Incorporation of the Corporation authorizes the issuance of 10,000,000 shares of Preferred Stock, $.00l par value per share, and expressly vests in the Board of Directors of the Corporation the authority to issue any or all of said shares in one or more series and by resolution or resolutions to establish the designation, number, full or limited voting powers, or the denial of voting powers, preferences and relative, participating, optional, and other special rights and the qualifications, limitations, restrictions and other distinguishing characteristics of each series to be issued: RESOLVED, that pursuant to the authority conferred upon the Board of Directors by the Articles of Incorporation, the Series A Convertible Non-Redeemable Preferred Stock, par value $.00l ("Series A Convertible Preferred Stock"), is hereby authorized and created, said series to consist of up to 600 shares, with a stated value of $1,000.00 per share of Series A Convertible Preferred Stock. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof shall be as follows: 1. NO DIVIDENDS ON SERIES A CONVERTIBLE PREFERRED STOCK. There are ------------------------------------------------------- no dividends on Series A Convertible Preferred Stock. 2. CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK -------------------------------------------------------------------- (a) Each holder of shares of Series A Convertible Preferred Stock may, at his option and at any time and from time to time, convert any or all such shares, into fully paid and non-assessable shares of the Corporation's Common Stock at a conversion ratio of 233,975 shares of Common Stock for each share of Series A Convertible Preferred Stock. Fractional conversions are permitted. (b) To exercise his conversion privilege, the holder of any shares of Series A Convertible Preferred Stock shall surrender to the Corporation during regular business hours at the principal executive offices of the Corporation or the offices of the transfer agent for the Series A Convertible Preferred Stock or at such other place as may be designated by the Corporation, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the Corporation (if required by it), accompanied by written notice stating that the holder irrevocably elects to convert such shares. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date." Within five (5) business days after the date on which such delivery is made, the Corporation shall issue and send (with receipt to be acknowledged) to the holder thereof or the holder's designee, at the address designated by such holder, a certificate or certificates for the number of full and fractional shares of Common Stock to which the holder is entitled as a result of such conversion. The holder shall be deemed to have become a stockholder of record of the number of shares of Common Stock into which the shares of Series A Convertible Preferred Stock have been converted on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event he shall be deemed to have become a stockholder of record of such shares on the next succeeding date on which the transfer books are open. Upon conversion of only a portion of the number of shares of Series A Convertible Preferred Stock represented by a certificate or certificates surrendered for conversion, the Corporation shall within three (3) business days after the date on which such delivery is made, issue and send (with receipt to be acknowledged) to the holder thereof or the holder's designee, at the address designated by such holder, a new certificate covering the number of shares of Series A Convertible Preferred Stock representing the unconverted portion of the certificate or certificates so surrendered. (c) The Corporation shall at all times reserve for issuance and maintain available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Convertible Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Series A Convertible Preferred Stock from time to time outstanding. The Corporation shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Nevada, increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Series A Convertible Preferred Stock at the time outstanding. (d) If any shares of Common Stock to be reserved for the purpose of conversion of shares of Series A Convertible Preferred Stock require registration or listing with, or approval of, any governmental authority., stock exchange or other regulatory body under any federal or state law or regulation or otherwise, including registration under the Securities Act of 1933, as amended, and appropriate state securities laws, before such shares may be validly issued or delivered upon conversion, the Corporation will in good faith and as expeditiously as possible meet such registration, listing or approval, as the case may be. (e) All shares of Common Stock which may be issued upon conversion of the shares of Series A Convertible Preferred Stock will upon issuance by the Corporation be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. (f) In case any shares of Series A Convertible Preferred Stock shall be converted pursuant hereto, or purchased or otherwise acquired by the Corporation, the shares so converted, purchased or acquired shall be 2 restored to the status of authorized but unissued shares of preferred stock, without designation as to class or series, and may thereafter be reissued, but not as shares of Series A Convertible Preferred Stock. (g) The conversion ratio of the Series A Convertible Preferred Stock into Common Stock of the Corporation shall be subject to adjustment from time to time as follows: (i) Stock Splits, Dividends and Combinations. In the event that the Corporation shall at any time subdivide the outstanding shares of Common Stock, or shall pay or make a dividend or distribution on any class of capital stock of the Corporation in Common Stock, the conversion ratio in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in case the Corporation shall at any time combine the outstanding shares of Common Stock, the conversion ratio in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision, dividend or combination, as the case may be. (ii) Non-Cash Dividends, Stock Purchase Rights, Capital Reorganization and dissolutions. In the event: (a) that the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend, or any other distribution, payable otherwise than in cash; or (b) that the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to subscribe for or purchase any shares of stock of any class or other securities, or to receive any other rights; or (c) of any capital reorganization of the Corporation, reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock), consolidation or merger of the Corporation with or into another corporation, share exchange for all outstanding shares of Common Stock under a plan of exchange to which the Corporation is a party, or conveyance of all or substantially all of the assets of the Corporation to another corporation; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, and in any such case, the Corporation shall cause to be mailed to the holders of record of the outstanding Series A Convertible Preferred Stock, at least 10 days prior to the date hereinafter 3 specified, a notice stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, share exchange, conveyance, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which holders of Corporation securities of record shall be entitled to exchange their shares of Corporation securities for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, share exchange, conveyance, dissolution, liquidation or winding up. 3. VOTING OF SERIES A CONVERTIBLE PREFERRED STOCK ---------------------------------------------------- The shares of Series A Convertible Preferred Stock shall be entitled to vote, together with the shares of the Corporation's Common Stock, on all matters presented at any annual or special meeting of stockholders of the Corporation, or may act by written consent in the same manner as the holders of the Corporation's Common Stock, upon the following basis: each holder of Preferred Stock shall be entitled to cast such number of votes for each share of Series A Convertible Preferred Stock held by such holder on the record date fixed for such meeting. or on the effective date of such written consent, as shall be equal to the number of shares of the Corporation's Common Stock into which each of such holder's shares of Series A Convertible Preferred Stock is convertible immediately after the close of business on the record date fixed for such meeting or the effective date of Such written consent. The Series A Convertible Preferred Stock and any other stock having voting tights shall vote together as one class, except as provided by law. 4. LIQUIDATION RIGHTS ------------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Convertible Preferred Stock then outstanding shall be entitled to receive out of assets of the Corporation available for distribution to stockholders, before any distribution of assets is made t holders of any other class of capital stock of the Corporation, an amount equal to $1 .000.00 per share ("Liquidation Amount"). (b) A consolidation or merger of the Corporation (in the event that the Corporation is not the surviving entity) or sale of all or substantially all of the corporation's assets shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning herein. In the event of such a liquidation as contemplated herein, the holders of Series A Convertible Preferred Stock shall be entitled to receive an amount equal to the Liquidation Amount. (c) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation which involves the distribution of assets other than cash, the Corporation shall promptly engage competent independent appraisers to determine the value of the assets to be distributed to the holders of shares of this Series A Convertible Preferred Stock other preferred stock, and the holders of 4 shares of Common Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice to each holder of shares of Series A Convertible Preferred Stock of the appraiser's valuation. 5. NO REDEMPTION BY THE CORPORATION. ------------------------------------- Series A Convertible Preferred Stock is not redeemable by the Corporation. [[[SIGNATURES ON FOLLOWING PAGE)]]] 5 IN Witness Whereof, Berens Industries, Inc., has caused Its corporate seal to be hereunto affixed and this certificate to be signed by Marc I. Berens, its president and Jeffrey Hansen, its secretary, this I 3" day of 2001. BERENS Industries, Inc. By /S/ Marc I. Berens ------------------------------- Marc I. Berens, President By /S/ Jeffrey Hansen ------------------------------- Jeffrey Hansen, Secretary THE STATE OF FLORIDA COUNTY OF HARRIS FLORIDA BEFORE ME, the undersigned authority, on this day personally appeared Marc I. Berens, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 13th day of July, 2001. - ----------------------------------------- HENRY J. RAMCE /S/ HENRY J. RAMCE SEAL Notary Public-State of Florida -------------------------------- My Commission Expires Feb 25, 2005 NOTARY PUBLIC IN AND FOR Commission # CC986067 THE STATE OF FLORIDA - ----------------------------------------- THE STATE OF FLORIDA COUNTY OF HARRIS FLORIDA BEFORE ME, the undersigned authority, on this day personally appeared Jeffrey Hansen, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed. GIVEN UNDER MY HAND AND SEAL of office this 16th day of July, 2001. - ----------------------------------------- Barbara C. Fullerton /S/ Barbara C. Fullerton SEAL Notary Public-State of Texas -------------------------------- My Commission Expires NOTARY PUBLIC IN AND FOR November 13, 2003 THE STATE OF TEXAS - ----------------------------------------- EX-5.1 11 ex5_1.txt EXHIBIT 5.1 Exhibit 5.1 Opinion re: legality [JOEL SEIDNER, ESQ. LETTERHEAD] May 31, 2005 Manfred Sternberg, President BLUEGATE CORPORATION 701 North Post Oak Road, Suite 630 Houston, Texas 77024 Dear Mr. Sternberg: As counsel for BLUEGATE CORPORATION, a State of Nevada corporation (the "Company"), you have requested me to render this opinion in connection with the Registration Statement of the Company on Form SB-2 ("Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), filed with the Securities and Exchange Commission relating to the resale of 2,868,630 shares of common stock, par value $.001 per share (the "Common Stock") by certain security holders of the Company who are listed as the Selling Stockholders in the Registration Statement. I am familiar with the Registration Statement and the registration contemplated thereby. In giving this opinion, I have reviewed the Registration Statement and such other documents and certificates of public officials and of officers of the Company with respect to the accuracy of the factual matters contained therein as I have felt necessary or appropriate in order to render the opinions expressed herein. In making my examination, I have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals, the conformity to original documents of all documents presented to us as copies thereof, and the authenticity of the original documents from which any such copies were made, which assumptions I have not independently verified. Based upon the foregoing, I am of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. 2. The shares of Common Stock are validly issued, fully paid and nonassessable. 3. The shares of Common Stock underlying options, warrants and convertible debt, at such time as such options, warrants and convertible debt are exercised or converted and paid for according to their terms, will be validly issued, fully paid and nonassessable. I consent to the use in the Registration Statement of the reference to Joel Seidner, Esq. under the heading "Legal Matters." This opinion is conditioned upon the Registration Statement being declared effective by the Securities and Exchange Commission and upon compliance by the Company with all applicable provisions of the Securities Act and such state securities rules, regulations and laws as may be applicable. Very truly yours, /s/ Joel Seidner, Esq. EX-10.1 12 ex10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT BETWEEN BLUEGATE CORPORATION AND MANFRED STERNBERG This Employment agreement (the "Agreement") is made effective as of the 1st day of February 2005, by and between Bluegate Corporation, a Nevada corporation ("Bluegate"), and Manfred Sternberg (the "Executive"). WHEREAS, The Executive is willing to be employed by Bluegate from and after the effective date on the basis and terms and conditions set forth in this Agreement. THEREFORE, upon the mutual promises and covenants of the parties, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows: 1. Employment. Bluegate hereby employs the Executive, and the Executive hereby accepts such employment, for the period stated in section (3) below and upon the other terms and conditions herein provided. 2. Position and Duties. During the Employment Period the Executive agrees to serve as Chief Executive Officer ("CEO") of Bluegate. In his capacity of CEO, the Executive will perform such duties and responsibilities for Bluegate as may from time to time be assigned to him by the Board of Directors of Bluegate. The Executive shall have no responsibility for payroll nor for the filing of any payroll tax return, nor for payment of any tax of any kind that may be due or payable by Bluegate or any of its divisions. 3. Term. By this Agreement, Bluegate employs the Executive, and the Executive accepts employment with Bluegate, for a period consisting of two (2) years, commencing on the date of this Agreement. 4. Compensation. In consideration of such service, Bluegate agrees to pay the Executive as compensation an annual salary of $180,000.00, in accordance with Bluegate's regular payroll practices in effect from time to time. 1 Stock Options. . In addition to the compensation set forth above, the -------------- Executive shall be entitled to receive options to purchase 1,000,000 shares of Bluegate shares of common stock, par value $.001 per share ("Option Shares"), at the per-share option price of $.50, granted pursuant to a Stock Option Agreement being entered into in connection herewith. This option shall become vested and exercisable with respect to 50,000 Option Shares immediately upon the execution and delivery of the related Stock Option Agreement, and this option shall become vested and exercisable with respect to another 50,000 Option Shares every 30 days thereafter until this option become fully vested. Bonus. In addition to the compensation set forth above, Executive and ----- Bluegate agree to enter into good faith negotiations with a view to reaching an agreement on the payment of one or more bonuses (the "Bonuses") in such amounts as are mutually agreed upon by Executive and Bluegate, if major transactions (such as acquisitions and financings) agreed mutually upon by them shall be achieved. The Bonuses shall be payable at such time as is mutually agreed upon by Executive and Bluegate. All options previously granted under the immediately prior Employment Contract in the total amount of 275,000 options for an equal number of shares are hereby reduced in strike price to $2.00 per share. This Employment Contract serves to cancel the Employment Contract between Crescent Communications Inc. and Executive dated January 2004 and this contract serves as the consideration for the cancellation. 5. (Intentionally Left Blank) 6. Confidentiality. In the course of the performance of Executive's duties hereunder, Executive recognizes and acknowledges that Executive may have access to certain confidential and proprietary information of Company or any of its affiliates. Without the prior written consent of Company, Executive shall not disclose any such confidential or proprietary information to any person or firm, corporation, association, or other entity for any reason or purpose whatsoever, and shall not use such information, directly or indirectly, for Executive's own behalf or on behalf of any other party. Executive agrees and affirms that all such information is the sole property of Company and that at the termination and/or expiration of this Agreement, at Company's written request, Executive shall promptly return to Company any and all such information so requested by Company. The provisions of this Section shall not, however, prohibit Executive from disclosing to others or using in any manner information that: (a) has been published or has become part of the public domain other than by acts, omissions or fault of Executive; (b) has been furnished or made known to Executive by third parties (other than those acting directly or indirectly for or on behalf of Executive) as a matter of legal right without restriction on its use or disclosure; 2 (c) was in the possession of Executive prior to obtaining such information from Company in connection with the performance of this Agreement; or (d) is required to be disclosed by law. 7. Indemnification. The Company shall to the full extent permitted by law or as set forth in the Articles of Incorporation and the Bylaws of the Company, indemnify, defend and hold harmless Executive from and against any and all claims, demands, liabilities, damages, loses and expenses (including reasonable attorney's fees, court costs and disbursements) arising out of the performance by him of his duties hereunder except in the case of his willful misconduct. 8. Termination. This Agreement and the employment relationship created hereby will terminate (i) with cause under Section 8(a); or (ii) upon the voluntary termination of employment by Executive under Section8(b). (a) With Cause. The Company may terminate this Agreement at any time because of (i) the determination by the Board of Directors in the exercise of its reasonable judgment that Executive has committed an act or acts constituting a felony or other crime involving moral turpitude, dishonesty or theft or fraud; or (ii) Executive's willful misconduct in the performance of his duties hereunder, provided, in each case, however, that the Company shall not terminate this Agreement pursuant to this Section unless the Company shall first have delivered to the Executive, a notice which specifically identifies such breach or misconduct and the executive shall not have cured the same within fifteen (15) days after receipt of such notice. (b) Voluntary Termination. The Executive may terminate his employment voluntarily. Obligations of Company Upon Termination. In the event of the termination of Executive's employment pursuant to Section 8 (a) or (b), Executive will be entitled only to the compensation earned by him hereunder as of the date of such termination (plus any life insurance benefits). In the event of the termination of Executive's employment for any reason other than Section 8 (a) or (b) as described immediately above, all compensation of every nature described in this Agreement shall immediately vest and become due and owing to Executive. In the event of the Death of the Executive prior to the end of the Term of this Agreement, Executive's spouse shall be entitled to receive Compensation pursuant to this Agreement through the end of its Term as it accrues. 9. Waiver of Breach. 3 The waiver by any party hereto of a breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach by any party. 10. Arbitration. If a dispute should arise regarding this Agreement the parties agree that all claims, disputes, controversies, differences or other matters in question arising out of this relationship shall be settled finally, completely and conclusively by arbitration in Houston, Texas in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The governing law of this Agreement shall be the substantive law of the State of Texas, without giving effect to conflict of laws. A decision of the arbitrator shall be final, conclusive and binding on the Company and Executive. 11. Covenant Not to Compete. So long as the Executive is employed by the Company and for a period of eighteen (18) months after either (i) the voluntary termination of employment by Executive or (ii) the termination of the Executive by the Company for cause, as set forth in Section 8(b) hereof, the Executive specifically agrees that he will not, for himself, on behalf of, or in conjunction with any person, firm, corporation or entity, other than the Company (either as principal, employee, shareholder, member, director, partner, consultant, owner or part-owner of any corporation, partnership or any type of business entity) anywhere in any county in which the Company is doing business at the time of termination, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any business similar to the type of business conducted by the Company at the time of termination of the Executive's employment. Executive's Acknowledgments and Agreements. The Executive acknowledges --------------------------------------------- and agrees that: (1) Due to the nature of the Company's business, the foregoing covenants place no greater restraint upon the Executive than is reasonably necessary to protect the business and goodwill of the Company; (2) These covenants protect a legitimate interest of the Company and do not serve solely to limit the Company's future competition; (3) This Agreement is not an invalid or unreasonable restraint of trade; (4) A breach of these covenants by the Executive would cause irreparable damage to the Company; (5) These covenants will not preclude the Executive from becoming gainfully employed following termination of employment with the Company; (6) These covenants are reasonable in scope and are reasonably necessary to protect the Company's business and goodwill and valuable and extensive trade which the Company has established through its own expense and effort; (7) The signing of this Agreement is necessary for the Executive's employment; and 4 (8) He has carefully read and considered all provisions of this Agreement and that all of the restrictions set forth are fair and reasonable and are reasonably required for the protection of the interests of the Company. Remedies, Injunction. In the event of the Executive's actual or --------------------- threatened breach of any provisions of this Agreement, the Executive agrees that the Company shall be entitled to a temporary restraining order, preliminary injunction and/or permanent injunction restraining and enjoining the Executive from violating the provisions herein. Nothing in this Agreement shall be construed to prohibit the Company from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the Executive. The Executive further agrees that for the purpose of any such injunction proceeding, it shall be presumed that the Company's legal remedies would be inadequate and that the Company would suffer irreparable harm as a result of the Executive's violation of the provisions of this Agreement. In any proceeding brought by the Company to enforce the provisions of this Agreement, no other matter relating to the terms of any claim or cause of action of the Executive against the Company will be defense thereto. The foregoing remedy provisions are subject to the provisions of Sec.15.51 of the Texas Business and Commerce Code, as amended (the "Code"), which Code provisions shall control in the event of any conflict between the provisions hereof and the Code or any other law in effect relevant and applicable hereto. 12. Benefits Insurance. (i)Medical, Dental and Vision Benefits. During this Agreement, ---------------------------------------- Executive and his dependents will be entitled to receive such group medical, dental and vision benefits as Company may provide to its other executives, provided such coverage is reasonably available, or be reimbursed if Executive is carrying his own similar insurance. (ii)Benefit Plans. The Executive will be entitled to participate --------------- in any benefit plan or program of the Company which may currently be in place or implemented in the future. (iii)Other Benefits. During the Term, Executive will be entitled ---------------- to receive, in addition to and not in lieu of base salary, bonus or other compensation, such other benefits and normal perquisites as Company currently provides or such additional benefits as Company may provide for its executive officers in the future. 13. Vacation and Sick Leave. Vacation Pay. The Executive shall be entitled to an annual vacation ------------- leave of four (4) weeks at full pay. Executive is specifically permitted to work from home or other 5 remote location in his discretion, which time shall not be considered as vacation leave. Sick Pay. The Executive shall be entitled to sick leave as needed. -------- 14. Reimbursement of Expenses. Upon submission of a detailed statement and reasonable documentation, Company will reimburse Executive in the same manner as other executive officers for all reasonable and necessary or appropriate out-of-pocket travel and other expenses incurred by Executive in rendering services required under this Agreement. Executive shall be entitled to a $750 per month car allowance and up to a $1,000 per month discretionary expense account. 15. Withholding of Taxes. Bluegate may withhold from any payments under this Agreement all applicable taxes, as shall be required pursuant to any law or governmental regulation or ruling. 16. Entire Understanding. This Agreement sets forth the entire understanding between the parties with respect to the subject matter hereof and cancels and supersedes all prior oral and written agreements between the parties with respect to the subject matter hereof. 17. Severability. If for any reason any provision of this Agreement shall be held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid. 18. Governing Law. This Agreement has been executed and delivered in the State of Texas and its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws thereof applicable to contracts executed and to be wholly performed in Texas. 19. Notices. All notices shall be in writing and shall have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested to the following address or to such other address as either party may designate by like notice: If to Executive: Manfred Sternberg 1110 Guinea Drive 6 Houston, Texas 77055 If to Bluegate: Bluegate Corp. Attn: Chairman of the Board of Directors 701 N. Post Oak Road, Suite 630 Houston, Texas 77024 Bluegate has caused this Agreement to be executed by its officer and the Executive has signed this Agreement. 20. Successors, Binding Agreement. This Agreement is binding upon Bluegate's successors. Bluegate will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Bluegate to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Bluegate would be required to perform it as if no such succession had taken place. Failure of Bluegate to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement. This Agreement shall inure to the benefit of both Bluegate and its successors and assigns and the Executive and his personal or legal representatives, executors, administrators, heirs, distributes, successors and assigns. Bluegate: Executive: - ------------------------------ ------------------------------ GILBERT GERTNER MANFRED STERNBERG DIRECTOR BOARD OF DIRECTOR 7 EX-10.2 13 ex10_2.txt EXHIBIT 10.2 EMPLOYMENT AGREEMENT BETWEEN BLUEGATE CORPORATION AND GREG J. MICEK This Employment Agreement (the "Agreement") is made effective as of the 15th day of February, 2005, by and between Bluegate Corporation, a Nevada corporation ("Bluegate"), and Greg J. Micek (the "Executive"). WHEREAS, The Executive is willing to be employed by Bluegate from and after the effective date on the basis and terms and conditions set forth in this Agreement. THEREFORE, upon the mutual promises and covenants of the parties, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows: 1. EMPLOYMENT. Bluegate hereby employs the Executive, and the Executive hereby accepts such employment, for the period stated in section (3) below and upon the other terms and conditions hereto provided. 2. POSITION AND DUTIES. During the Employment Period the Executive agrees to serve as Chief Financial Officer ("CFO") of Bluegate. In his capacity of CFO, the Executive will perform such duties and responsibilities for Bluegate as the Board of Directors of Bluegate may from time to time assign to him. 3. TERM. By this Agreement, Bluegate employs the Executive, and (the Executive accepts employment with Bluegate, for a period consisting of two (2) years, commencing on the date of this Agreement. 4. COMPENSATION. In consideration of such service, Bluegate agrees to pay the Executive as compensation an annual salary of $120,000.00, in accordance with Bluegate's regular payroll practices in effect from time to time. Stock Options. In addition to the compensation set forth above, the -------------- Executive shall be entitled to receive options to purchase 350,000 shares of Bluegate shares of common stock, par value $.001 per share ("Option Shares"), at the per-share option price of $.50, granted pursuant to a Stock Option Agreement being entered into in connection herewith. This option shall become vested and exercisable with respect to 14,584 1 Option Shares immediately upon the execution and delivery of the related Stock Option Agreement, and this option shall become vested and exercisable with respect to another 14,584 Option Shares every 30 days thereafter until this option become fully vested; provided, however, that if a suitable replacement for Executive's position is hired by Bluegate within the first year of this Agreement not because of any fault in Executive's performance hereunder, then (notwithstanding the above or anything else contained herein) 100% of the then unvested shares shall immediately become vested. The Option Shares to be issued pursuant to this Agreement shall be restricted securities with piggy back registration rights, and shall terminate and become null and void after the expiration of five (5) years from the date of grant. Bonus. In addition to the compensation set forth above, Executive and ----- Bluegate agree to enter into good faith negotiations with a view to reaching an agreement on the payment of one or more bonuses (the "Bonuses") in such amounts as are mutually agreed upon by Executive and Bluegatc, if major transactions (such as acquisitions and financings) agreed mutually upon by them shall be achieved. The Bonuses shall be payable at such time as is mutually agreed upon by Executive and Bluegate. 5. [INTENTIONALLY OMITTED] 6. CONFIDENTIALITY. In the course of the performance of Executive's duties hereunder, Executive recognizes and acknowledges that Executive may have access to certain confidential and proprietary information of Bluegate or any of its affiliates. Without the prior written consent of Bluegate, Executive shall not disclose any such confidential or proprietary information to any person or firm, corporation, association, or other entity for any reason or purpose whatsoever, and shall not use such information, directly or indirectly, for Executive's own behalf or on behalf of any other party. Executive agrees and affirms that all such information is the sole property of Bluegate and that at the termination and/or expiration of this Agreement, at Bluegate's written request, Executive shall promptly return to Bluegate any and all such information so requested by Bluegate. The provisions of this Section shall not, however, prohibit Executive from disclosing to others or using any manner information that: (a) has been published or has become part of the public domain other than by acts, omissions or fault of Executive; (b) has been famished or made known to Executive by third parties (other than those acting directly or indirectly for or on behalf of Executive) as a matter of legal right without restriction on its use or disclosure; 2 (c) was in the possession of Executive prior to obtaining such information from Bluegate in connection with the performance of this Agreement; or (d) is required to be disclosed by law. 7. INDEMNIFICATION. Bluegate shall to the full extent permitted by law or as set forth in the Articles of Incorporation and the Bylaws of Bluegate, indemnify, defend and hold harmless Executive from and against any and all claims, demands, liabilities, damages, loses and expenses (including reasonable attorney's fees, court costs and disbursements) arising out of the performance by him of his duties hereunder except in the case of his willful misconduct. 8. TERMINATION. This Agreement and the employment relationship created hereby will terminate (i) upon the death of Executive under section 8(a); (ii) with cause under Section 8(b); or (iii) upon the voluntary termination of employment by Executive under Section 8(c). (a) Death. This Agreement will terminate on the Death of the Executive. (b) With Cause. Bluegate may terminate this Agreement at any time because of (i) the determination by the Board of Directors in the exercise of its reasonable judgment that Executive has committed an act or acts constituting a felony or other crime involving moral turpitude, dishonesty or theft or fraud; or (ii) Executive's willful misconduct in the performance of his duties hereunder, provided, in each case, however, that Bluegate shall not terminate this Agreement pursuant to this Section unless Bluegate shall first have delivered to the Executive, a notice which specifically identifies such breach or misconduct and the executive shall not have cured the same within fifteen (15) days after receipt of such notice. (c) Voluntary Termination. The Executive may terminate his employment voluntarily. Obligations of Bluegate Upon Termination. In the event of the termination of Executive's employment pursuant to Section 8 (a), (b) or (c), Executive will be entitled only to the compensation earned by him hereunder as of the date of such termination (plus any life insurance benefits, if any). 9. WAIVER OF BREACH. The waiver by any party hereto of a breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach by any party. 10. ARBITRATION. 3 If a dispute should arise regarding this Agreement the parties agree that all claims, disputes, controversies, differences or other matters in question arising out of this relationship shall be settled finally, completely and conclusively by arbitration in Houston, Texas in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The governing law of this Agreement shall be the substantive law of the State of Texas, without giving effect to conflict of laws. A decision of the arbitrator shall be final, conclusive and binding on Bluegate and Executive. 11. COVENANT NOT TO COMPETE. So long as the Executive is employed by Bluegate and for a period of eighteen (18) months after either (i) the voluntary termination of employment by Executive or (ii) the termination of the Executive by Bluegate for cause, as set forth in Section 8(b) hereof, the Executive specifically agrees that he will not, for himself, on behalf of, or in conjunction with any person, firm, corporation or entity, other than Bluegate (either as principal, employee, shareholder, member, director, partner, consultant, owner, or part-owner of any corporation, partnership or any type of business entity) anywhere in my county in which Bluegate is doing business at the time of termination, directly or indirectly, own, mange, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any business similar to the type of business conducted by Bluegate at the time of termination of the Executive's employment. Executive's Acknowledgment and Agreement. The Executive acknowledges and ------------------------------------------- agrees that: (1) Due to the nature of Bluegate's business, the foregoing covenants place no greater restraint upon the Executive than is reasonably necessary to protect the business and goodwill of Bluegate; (2) These covenants protect a legitimate interest of Bluegate and do not serve solely to limit Bluegate's future competition; (3) This Agreement is not an invalid or unreasonable restraint of trade; (4) A breach of these covenants by the Executive would cause irreparable damage to Bluegate; (5) These covenants will not preclude the Executive from becoming gainfully employed following termination of employment with Bluegate; (6) These covenants are reasonable in scope and are reasonably necessary to protect Bluegate's business and goodwill and valuable and extensive trade which Bluegate has established through its own expense and effort; 4 (7) The signing of this Agreement is necessary for the Executive's employment; and (8) He has carefully read and considered all provisions of this Agreement and that all of the restrictions set forth are fair and reasonable and are reasonably required for the protection of the interests of Bluegate. Remedies, Injunctions. In the event of the Executive's actual or ---------------------- threatened breach of any provisions of this Agreement, the Executive agrees that Bluegate shall be entitled to a temporary restraining order, preliminary injunction and/or permanent injunction restraining and enjoining the Executive from violating the provisions herein. Nothing in this Agreement shall be construed to prohibit Bluegate from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the Executive. The Executive further agrees that for the purpose of any such injunction proceeding, it shall be presumed that Bluegate's legal remedies would be inadequate and that Bluegate would suffer irreparable harm as a result of the Executive's violation of the provisions of this Agreement. In any proceeding brought by Bluegate to enforce the provisions of this Agreement, no other matter relating to the terms of any claim or cause of action of the Executive against Bluegate will be defense thereto. The foregoing remedy provisions are subject to the provisions of Sec.15.15 of the Texas Business and Commerce Code, as amended (the "Code"), which Code provisions shall control in the event of any conflict between the provisions hereof, and the Code or any other law in effect relevant and applicable hereto. 12. Benefits Insurance. (a) Medical, Dental and Vision Benefits. During this Agreement, --------------------------------------- Executive and his dependents will be entitled to receive such group medical, dental and vision benefits as Bluegate may provide to its other executives, provided such coverage is reasonably available, or be reimbursed if Executive is carrying his own similar insurance. (b) Benefit Plan. The Executive will be entitled to participate in any ------------ benefit plan or program of Bluegate that may currently be in place or implemented in the future. (c) Other Benefits. During the Term, Executive will be entitled to --------------- receive, in addition to and not in lieu of base salary, bonus or other compensation, such other benefits and normal perquisites as Bluegate currently provides or such additional benefits as Bluegate may provide for its executive officers in the future. 13. Vacation and Sick Leave. (a) Vacation Pay. The Executive shall be entitled to an annual ------------- vacation leave of four (4) weeks at full pay. Executive is specifically permitted to work from home or 5 other remote location in his discretion, which time shall not be considered as vacation leave. (b) Sick Pay. The Executive shall be entitled to sick leave as needed. -------- 14. REIMBURSEMENT OF EXPENSES. Upon submission of a detailed statement and reasonable documentation, Bluegate will reimburse Executive in the same manner as other executive officers for all reasonable and necessary or appropriate out-of-pocket travel and other expenses incurred by Executive in rendering services required under this Agreement. 15. WITHHOLDING OF TAXES. Bluegate may withhold from any payments under this Agreement all applicable taxes, as shall be required pursuant to any law or governmental regulation or ruling. 16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire understanding between the parties with respect to the subject matter hereof and cancels and supersedes all prior oral and written agreements between the parties with respect to the subject matter hereof. 17. SEVERABILITY. If for any reason any provision of this Agreement shall be held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid. 18. GOVERNING LAW. This Agreement has been executed and delivered in the State of Texas and its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws thereof applicable to contracts executed and to be wholly performed in Texas. 19. NOTICES. All notices shall be in writing and shall have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested to the following address or to such other address as either party may designate by like notice: If to Executive: GREG J. MICEK P.O. BOX 130492 HOUSTON, TEXAS 77219 6 If to Bluegate: Bluegate Corporation Attn: Manfred Sternberg, Chief Executive Officer 701 N. Post Oak Road, Suite 630 Houston, Texas 77024 Bluegate has caused this Agreement to be executed by its officer and the Executive has signed this Agreement. 20. SUCCESSORS, BINDING AGREEMENT. This Agreement is binding upon Bluegate's successors. Bluegate will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Bluegate to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Bluegate would be required to perform it as if no such succession had taken place. Failure of Bluegate to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement. This Agreement shall inure to the benefit of both Bluegate and its successors and assigns and the Executive and his personal or legal representatives, executors, administrators, heirs, distributes, successors and assigns Bluegate: Executive: /s/ Manfred Sternberg /s/ Greg Micek - ------------------------------ ------------------------------ MANFRED STERNBERG, GREG J. MICEK CHIEF EXECUTIVE OFFICER 7 EX-23.1 14 ex23_1.txt EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Auditors CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Bluegate Corporation We consent to the incorporation in this Registration Statement on Form SB-2 of our report dated March 28, 2005, on our audits of the consolidated financial statements of Bluegate Corporation for the years ended December 31, 2004 and 2003. /s/ Ham, Langston & Brezina, L.L.P. Houston, Texas June 3, 2005 -----END PRIVACY-ENHANCED MESSAGE-----