ITEM 3. Legal Proceedings.
On January 7, 1994, the Bureau of Securities of the State of New Jersey
filed a complaint in the matter of Capital General Corporation, David R. Yeaman
(former officer and director of the Company) and 74 other named defendants,
Nevada and Utah corporations including the Company, which complaint proposes
that civil monetary penalties totalling $30,000.00 be assessed against Capital
General Corporation for alleged violations of the Uniform Securities Law
(1967), N.J.S.A. 49:3-47 et. seq. by (1) selling to 24 New Jersey residents
between April 1986 and May 1991, securities in 25 of the 74 above referred
to respondent corporations named in the proceeding, not including the Company,
which were neither registered nor exempt from registration, and (2) making
untrue statements of material fact and omitting to state material facts in
connection with said New Jersey sales in 6 of the 74 above referred to resident
corporations named in the proceeding, not including the Company. Also on January
7, 1994, the Bureau of Securities of the State of New Jersey, based on
substantially similar allegations as in the above referred complaint, issued its
Order Denying Exemptions and to Cease and Desist. This order summarily denied
the exemptions contained in N.J.S.A. 49:3- 50(b), (1), (2), (3), (9), (11)
and (12) of the securities of Capital General Corporation and the other 74
respondent corporations, including the Company, except that excluded from the
summary denial of the exemption contained in N.J.S.A. 49-3-50(b)(12) is the
Offer of Rescission by Capital General Corporation to 24 New Jersey residents
pursuant to the offer of rescission which began about April 28, 1993. This order
also ordered Capital General Corporation and David Yeaman to Cease and Desist
from offering or selling any securities in blind pool corporations into, or from
the State of New Jersey.
Capital General and David Yeaman filed answers denying the material
allegations of said complaint and resisting the imposition of said civil
monetary penalties, and the said Order Denying Exemptions and to Cease and
Desist. Subsequently the issues raised in said complaint and order were settled
by agreement between the said Bureau of Securities and Mr. Yeaman and Capital
General Corporation in a consent order dated July 11, 1994 and approved by an
administrative law judge of the State of New Jersey Office of Administrative Law
September 2, 1994. Under the terms of said consent order, all claims in the
complaint against all named respondents were settled by the payment of $3,000
civil penalty, and the order was modified so that it does not apply to 27 of the
respondent companies; however said order does still apply to the Company.
During 1986 and 1987, Capital General gifted very small percentages of
stock (usually 100 shares to each giftee) in the following companies, which
includes the Company, to approximately 1,000 persons or entities: Amenity,
Inc., Dogmatic, Inc., Mystic Industries, Inc., Highland Mfg., Inc., Kowtow,
Inc., Noble Industries, Inc., Oryan Capital Corporation, Pegasus Star
Enterprise, Inc., Showstoppers, Inc., Hightide, Inc., Grandeur, Inc.,
Fantastic Industries, Inc., Jugglar, Inc., Xebec Galleon, Inc., Golden Home
Health Care Equipment Centers, Inc., Nighthawk Capital, Inc., Instrument
Development Corporation, Panther Industries, Inc., Owl Enterprises, Inc.,
Quail, Inc., GBS Technologies Corporation, H & B Carriers Inc., Florida Growth
Industries, Inc., Macaw, Inc., Longhorn Enterprise, Inc., Koala Corporation,
Yahwe Corporation, Star Dolphin, Inc., Jackal, Inc., Hyena Capital, Inc.,
Gopher, Inc., Flamingo Capital, Inc., Egret, Inc., Cetacean Industries, Inc.,
Bonito, Inc., Alpaca, Inc., Zeus Enterprise, Inc., Tamarind, Inc., Saber, Inc.,
Radar, Inc., Quiescent Corporation, Vanadium, Inc., Upsilon, Inc., Why Not?,
Inc., Bestmark, Inc., and Missouri Illinois Mining Co., Inc.
6
Capital General did not register the gifts of shares in these companies
with the Securities Division of the State of Utah or with the Securities
Exchange Commission because it believed these gifts to be outside the scope of
the Utah Uniform Securities Act and the Securities Act of 1933 in as much as
such acts require registration for sales and do not require registration of
gifts. Nevertheless, in connection with the distribution of shares of its
subsidiaries, Capital General was found by the Utah Securities Advisory Board,
in two decisions affirmed by the Utah State Courts, to have violated the
registration provisions of the Utah Uniform Securities Act. See In re Amenity
Inc., No. SD-86-11 (Utah Sec. Adv. Bd. February 18, 1987) aff'd C87-2625 (3d
Dist. Ct. September 18, 1987) aff'd sub nom Capital General Corp. v. Utah Dep't
of Business Reg., 777 P.2d 494, 498 (Utah Ct. App.) cert. denied, 781 P.2d 873
(Utah S.Ct. 1989); In re H&B Carriers Inc., No. 87-09-28-01 (Utah Sec. Adv. Bd.,
Apr. 15, 1988) aff'd No. 88-5900053 (3d Dist. Ct. Sept 10, 1990) aff'd sub nom
Capital General Corp. v. Utah Dep't of Business Reg., Case No 91-196 (Utah Ct.
App. February 10, 1992.) All of the remaining companies listed above were
parties to the H&B Carriers order.
Both of these actions sought suspension of transactional exemptions
respecting the shares of these companies pursuant to Section 14 (3) of the Utah
Uniform Securities Act. Capital General defended both actions on the grounds
that the Utah Uniform Securities Act did not apply to gifts of securities, that
the gifts were good faith gifts specifically exempted by the Act, and that in
any event even if it had "sold" shares in violation of the Act, suspension of
transactional exemptions was not an authorized remedy under the statute. These
defenses were rejected at the administrative agency level, and upon judicial
review at the District Court level and by the Utah Court of Appeals.
See also Item 10 regarding legal proceedings against officers and
directors.
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