EXHIBIT 10.1
VALUATION AND RELATED FAIRNESS OPINION
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EXHIBIT 10.1
VALUATION REPORT AND
RELATED FAIRNESS OPINION
PEPPERMILL CAPITAL CORPORATION
Vancouver, British Columbia
December 2, 1999
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Valuation Report and Related Fairness Opinion: December 2, 1999
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TABLE OF CONTENTS
Page
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1.0 - BACKGROUND AND THE PROPOSED TRANSACTION 1
2.0 - ASSIGNMENT 3
3.0 - CREDENTIALS OF EVANS & EVANS, INC. 4
4.0 - SCOPE OF VALUATION REVIEW 6
5.0 - ASSUMPTIONS 14
6.0 - DEFINITION OF FAIR MARKET VALUE 15
7.0 - VARNER TECHNOLOGIES, INC. 16
8.0 - REVIEW OF FINANCIAL POSITION - VARNER TECHNOLOGIES, INC. 38
9.0 - REVIEW AND ASSESSMENTS OF VARNER TECHNOLOGIES, INC. 45
10.0 - PEPPERMILL CAPITAL CORPORATION 50
11.0 - TANGIBLE ASSET BACKING OF PEPPERMILL
CAPITAL CORPORATION 52
12.0 - VALUATION METHODOLOGIES 52
13.0 - VALUATION OF VARNER TECHNOLOGIES, INC. 58
14.0 - VALUATION OF PEPPERMILL CAPITAL CORPORATION 64
15.0 - FAIRNESS CONSIDERATIONS 66
16.0 - CONCLUSION AS TO FAIRNESS 69
17.0 RESTRICTIONS AND CONDITIONS 71
18.0 - STATEMENT OF INDEPENDENCE 77
Appendix 1: Comparable Companies
Appendix 2: Business Plan, Financial Statements, and Projections
(i)
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DRAFT VALUATION REPORT AND RELATED FAIRNESS OPINION
PEPPERMILL CAPITAL CORPORATION
1.0- BACKGROUND AND THE PROPOSED TRANSACTION
Peppermill Capital Corporation ("Peppermill" or the "Public Company") of
Vancouver, British Columbia was incorporated on April 10, 1998 under the
laws of the State of Nevada. Peppermill is in the process of becoming a
fully registered and reporting public company on the National Association
of Securities Dealers ("NASD") Over-the-Counter ("OTC") Bulletin Board
("BB"). In order to do this Peppermill management has completed and filed
on October 29, 1999 a Form 10QSB with the U.S. Securities and Exchange
Commission ("SEC"). The common shares of Peppermill began trading on the
NASD OCT BB on November 29, 1999.
Peppermill was originally incorporated in 1998 with the intention of
operating within the mining and exploration industry. Since this time, the
management of Peppermill has decided to examine other business
opportunities for the Public Company.
On October 19, 1999 Peppermill entered into a Share Purchase Agreement with
Varner Technologies, Inc ("VTI" or the "Company") of Chesterfield, Missouri
by which certain shareholder of Peppermill will sell 90.0024% (representing
all of their shareholdings) to VTI for US$300,000. The result of this
transaction will create a reverse merger between VTI and Peppermill. In
addition it is intended that VTI will enter into a reverse merger with
Peppermill as follows:
(1) Peppermill will acquire all of the issued and outstanding common
shares of VTI on the basis of issuing 1.0 Peppermill common share in
exchange for 1.8624479 common shares of VTI; and
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(2) exchange 1.0 preferred share of Peppermill for 1.0 preferred shares of
VTI (the share purchase agreement and reverse merger is collectively
referred to as the "Proposed Transaction").
Varner Technologies, Inc. was incorporated on November 17, 1994. In March
of 1997 the Company founded a marketing arm, Networking People with
Technology, LLC ("NPWT") of which Varner owns 60% of the issued and
outstanding shares of NPWT.
The remaining 40% of NPWT is held beneficially by the Company's founder
Clay Varner. Mr. Varner has informed the authors of the Report he intends
to transfer his 40% interest in NPWT to the Company in return for a nominal
sum. This is to be completed prior to the closing of the Proposed
Transaction.
NPWT was originally formed to test distribution of products and services.
After a successful test, VTI entered into a licensing agreement NPWT to
market products and services through its so-called Independent
Representatives.
VTI currently has representatives in 49 states with its greatest market
share in Illinois and Missouri, as well as, pockets of influence in
Maryland, Pennsylvania, Virginia, Nebraska, Arkansas and California.
VTI and Peppermill are collectively referred to as "the Companies".
The Proposed Transaction is subject to the approval of Peppermill
shareholders and to the approval of the SEC.
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2.0- ASSIGNMENT
Given the above Proposed Transaction, Evans & Evans, Inc. ("Evans & Evans"
or the "authors of the Report") were asked and engaged by the Independent
Committee of Peppermill to prepare a Valuation Report and related Fairness
Opinion (the "Report") with respect to the fairness of the terms of the
Proposed Transaction, from a financial point of view, to the shareholders
of Peppermill.
Accordingly, Evans & Evans was required to prepare a formal valuation of
all of the issued and outstanding shares of VTI and all of the issued and
outstanding shares of Peppermill as at October 31, 1999 (as noted earlier,
the Valuation Date), the most recent date for which the most recent
financial information was available on VTI and a date that was close to the
Valuation Date as well as to the most recent Peppermill financial
statements (i.e., September 30, 1999). Also, consideration was given to
pick a Valuation Date that was also close to the date of the signing of the
Share Purchase Agreement.
In connection with the Proposed Transaction cited above, the management and
directors of Peppermill have conducted their own independent investigation,
due diligence and financial analysis of the Proposed Transaction.
The Independent Committee of Peppermill has requested Evans & Evans'
opinion to provide a secondary, independent verification of, rather than a
substitute for, Peppermill's internal analysis.
The Report is prepared for the directors and shareholders of Peppermill and
may also be submitted to the SEC.
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3.0- CREDENTIALS OF EVANS & EVANS, INC.
Evans & Evans, Inc. was founded in 1989. For the past ten years the firm
has been extensively involved in the financial services and management
consulting fields.
Today, Evans & Evans has offices in Vancouver, British Columbia; Calgary,
Alberta; Toronto, Ontario; Kanata, Ontario; Halifax, Nova Scotia and
Portland, Oregon.
Mr. Michael A. Evans, Principal, founded Evans & Evans, Inc. in 1989. For
the past nine years he has been extensively involved in the financial
services and management consulting fields in Vancouver where he was a
Vice-President of two firms, The Genesis Group (1986-1989) and Western
Venture Development Corporation (1989-1990). Over this period he has been
involved in the preparation of over 250 technical and assessment reports,
business plans, business valuations, and feasibility studies for submission
to the Vancouver Stock Exchange and the British Columbia Securities
Commission as well as for private purposes. Formerly, he spent three years
in the computer industry in Western Canada with Wang Canada Limited
(1983-1986) where he worked in the areas of marketing and sales. Mr. Evans
also possesses several years' management experience in the food services
industry with McDonald's Restaurants of Canada Ltd. in Richmond, British
Columbia (1977-1980). Mr. Evans is an Instructor at the British Columbia
Institute of Technology in the Faculty of Business.
Richard W. Evans, Principal, began full-time work with Evans & Evans, Inc.
in 1992. Since then he has been involved in the financial services and
management consulting fields and has been involved in the preparation of
over 50 technical and assessment reports, business plans, business
valuations, and feasibility studies for
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submission to the Vancouver and Alberta Stock Exchanges and the British
Columbia and Alberta Securities Commissions as well as for private
purposes.
For ten years previous to this, he was extensively involved in the computer
industry in Vancouver where he served for two years as the General Manager
of Sidus Systems Inc. responsible for the company's C$15 million business
operation in Western Canada. Previous to this, he spent eight years with
Digital Equipment of Canada Limited where he was laterally involved in a
sales, marketing and management capacity in the company's direct and
channel organizations. In his capacity with Digital and Sidus he was
involved in assessing and assisting various technology companies with their
marketing and financial operations. Furthermore, he was involved with over
fifty software, hardware and telecommunications organizations in
establishing various OEM, distribution and VAR marketing agreements with
Digital and Sidus. During his tenure with Digital he initially held
positions as Technical Service and Support Analyst as well as System
Integration Project Manager. As a Technical Service and Support Analyst he
was responsible for reviewing various mainframe, mini-computer and PC
software and network applications as well as supporting a variety of
Digital software applications. In this capacity he was involved with over
thirty different western Canadian corporate accounts. As a System
Integration Project Manager with Digital he was involved directly in the
software development process. This included formal training and experience
in software development and design and in undertaking reviews regarding
software construction using a "Plan, Design, Implement and Manage"
methodology. In this capacity he was involved with a number of large
corporate accounts in installing and servicing various software
applications. Mr. Evans' software application experience included extensive
work with real-time, BASIC, C, PASCAL, C++, COBOL, FORTRAN, Ada languages
as well as with relational database and fourth generation application
development tools. Mr. Evans has and is presently working with the Unified
Modeling Language, Booch, Coad/Yourdon, CRC, Fusion, Martin/Odell,
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MOSES, OMT, and Shlaer/Mellor, Business Object Notation, Software
Engineering Institute, Data Modeling Techniques, Dynamic Modeling
Techniques, Implementation Modeling Techniques, Organization Modeling
Techniques and User Interface Modeling Techniques. During the past year he,
through Evans & Evans, Inc. has actively been involved in the process of
evaluating and valuing various types of software applications for Canadian
regulatory bodies, private companies, Canadian financial institutions and
brokerage firms as well as government agencies related to: Shop Floor Data
Collection and Analysis, Programmable Logic Controllers, Real-Time Data
Analysis, Internet Software, Medical Software, Government Utility and
Engineering Design, Telecommunications, Bank Debt Collection, Seismic Data
Processing, 3D Engineering, Wireless Communication and Trading Floor
Telecommunication. Mr. Evans holds: a Bachelor of Business Administration
degree from Simon Fraser University, British Columbia (1981); a Master's
degree in Business Administration from the University of Portland, Oregon
(1983) where he graduated with honours. Mr. Evans is a Registered Student
in the British Columbia Chapter of the Canadian Institute of Chartered
Business Valuators (CICBV).
4.0- SCOPE OF VALUATION REVIEW
The authors of the Report have reached the opinions contained here within
by relying on the following:
Varner Technologies, Inc.
o Interviewed management and principals of VTI during October and
November of 1999. The interviews were conducted to elicit management
perceptions of its actions. The authors of the Report found that Mr.
Varner and Mr. Heflin have a clear understanding of the goals and
objectives of the
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Company, both short and long term, and of steps that must be
undertaken in order to achieve those goals and objectives.
o Reviewed and confirmed the education credentials and occupational
backgrounds of the Company's Directors/Officers whose expertise is
critical to the Company in achieving its stated business objectives.
These reviews were generally positive. Reviewed Shareholders list for
the Company.
o Reviewed the audited financial statements of VTI for the periods
ending December 31, 1996, 1997 and 1998 as well as management-prepared
financial statements for the period ended October 31, 1999.
o Reviewed Separation Agreement dated January 7, 1997 between Varner
Technologies, Inc. and Craig E. Caesar.
o Reviewed Subscription Agreement, date of Memorandum is October 31,
1996, for VTI.
o Reviewed Private Placement for VTI including Financial Statements
dated June 30, 1995.
o Reviewed Stock Option Agreement dated June 11, 1996 for VTI.
o Reviewed Incorporation Documents for VTI and related material.
o Reviewed annual General Meeting Minutes dated November 28, 1998 for
VTI and related material.
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o Reviewed APLIO Authorized Reseller Application Form dated December 8,
1998 for VTI.
o Reviewed Internet Dial-Up Service Agreement dated January 1, 1998
between Varner Technologies, Inc. and Calvary Temple.
o Reviewed resellers agreement between the Company and Soflo, Inc. of
Florida providing unrestricted access for basic service of #13.45 per
month per account.
o Reviewed AlterDial Subscription Agreement for Current T1 Customers
between the Company and UUNET Technologies, Inc. of Fairfax, Virginia.
o Reviewed Lease Agreement dated 9/11/98 between Varner Technologies,
Inc. and Bull Moose Tube Inc.
o Reviewed Equipment Leases dated 9/18/97 between VTI and Inter-Tel, and
dated September 8, 1998 and between VTI and Inland Associates, Inc.
o Reviewed Lyrix Interactive Voice Response Service Agreement March 12,
1997 between Varner Technologies, Inc. and Lyrix.
o Reviewed World Wide Web Page Service Agreement between Varner
Technologies, Inc. and Socket Internet Services Corporation.
o Reviewed Proposal for Pre-Paid Phone Cards dated September 4, 1998
between Varner Technologies, Inc. and Office Forms & Graphics.
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o Reviewed Wholesale Customer Agreement dated 09/01/98 between Varner
Technologies, Inc. and PSINet.
o Reviewed Re-Seller Agreement between Varner Technologies, Inc. and
VIVE Synergies Inc.
o Reviewed Agreement between Varner Technologies, Inc. and STATS Inc. as
outlined in letter dated March 26, 1996 from STATS Inc. to Varner
Technologies, Inc.
o Reviewed various press releases of competitors of Varner Technologies,
Inc.
o Reviewed documents and correspondence regarding Arbitration between
Sports Team Analysis & Tracking Systems of Missouri, Inc. (STATS) and
Varner Technologies, Inc.
o Reviewed U.S. Corporation Income Tax Returns for Varner Technologies,
Inc. for 1994, 1995, 1997, 1998; U.S. Income Tax Return for an S
Company for Varner Technologies, Inc. for 1995; U.S. Corporation
Short-Form Income Tax Return for Varner Technologies, Inc. for 1996;
U.S. Partnership Return of Income for 1998 for Networking People with
Technology, LLC.
o Reviewed 1999 Summary Business Plan for Varner Technologies, Inc. and
Executive Summary of Varner Technologies, Inc. - Mission Statement:
Network People with Technology and projections (refer to Appendix 2).
o Reviewed Power Point Presentation, February 18, 1999.
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o Analyzed the Company's planned targeted market and its related
marketing plans thereto. This was facilitated through discussions with
software and Internet Service Providers in the following interview
order: America Online; Internet Direct, Sprint, Freei.Net; SuccessNet;
Twisted Pair Networking, Access, Quick Connection; Active InterLink;
UUNet; PSINet; American Internet Services; Apex Internet Services;
AT&T Worldnet Service; Bridgadoon.com, Inc.; FlashNet; IBM; MCI; MSN;
Mindspring; EarthLink; OSNet; Quest; and SpryNet, Inc.
o Assessed market, financial and other information on the various
industries and the their target market(s). This included conducting
searches and reviewing various industry surveys, market studies, trade
magazines and other publications.
o Investigated the Company's relationships with its existing and
proposed principal customers to the extent appropriate in the
circumstances.
o Certain current and historical public stock market and financial data
on comparable publicly traded companies and other data with respect to
past business transactions involving Internet Service Providers
considered by Evans & Evans to be relevant.
o The authors of the Report did not visit the Company's facility in
Chesterfield, Missouri and are therefore unable to comment on the
Company's physical operations and technical capabilities, other than
management disclosure.
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Peppermill Capital Corporation
o Reviewed the SEC filed form 10-SB and related materials contained
within this documents.
o Reviewed the February 28, 1999, September 30, 1998 and September 30,
1999 management-prepared financial statements of Peppermill.
o Reviewed the articles of incorporation and the corporate charter and
certificate of Peppermill.
Conditions of the Report
o Evans & Evans will rely on a letter of representation, to be obtained
from management of Peppermill and VTI prior to issuance of the final
form of the Report, wherein they confirm certain representations and
warranties that they made to the authors of the Report, including a
general representation that they have no information or knowledge of
any material facts or information not specifically noted in this
Report, which, in their view, would reasonably be expected to affect
the valuation conclusions expressed herein.
o All dollar amounts specified in the Report are expressed in U.S.,
unless noted. Where applicable, an exchange rate of $1.50 Canadian
Dollars ("C") to $1.00 United States Dollar ("US") has been applied.
o At the Valuation Date, Peppermill and VTI had no material contingent
liabilities, unusual contractual obligations or substantial
commitments other than in the ordinary course of business, and there
was no material litigation
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threatened or pending that would affect the authors of the Report's
conclusions, other than that disclosed to the authors of the Report.
o At the Valuation Date, no specific special purchaser was identified
that would pay a premium to purchase the Companies. Management of the
Companies could not provide the authors of the Report with any formal
written offers.
o Key management of VTI will continue to be employed subsequent to the
Proposed Transaction for a period not less than twenty-four months.
o The draft Report may not be issued to any Canadian stock exchange or
to any U.S. Stock Exchange or regulatory bodies. The draft Report may
only be relied upon by the Companies. The Report may not be issued to
any third parties, legal authorities, or other foreign stock
exchanges, or other regulatory authorities, or Revenue Canada or the
Internal Revenue Service, without the prior written approval of Evans
& Evans. Nor can it be used or relied upon in any legal proceeding
and/or court matter.
o At the Valuation Date, unless otherwise noted in the Report, the fair
market value of the Companies' assets and liabilities approximate
their net carrying values.
o The Companies' financial information, as provided by the Companies'
representatives and management, is assumed to be accurate and
complete. Evans & Evans has not verified the accuracy or completeness
of this financial data.
o Evans & Evans have assumed that the Companies and all of its related
parties and their principals have no contingent liabilities, unusual
contractual
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arrangements, or substantial commitments, other than in the ordinary
course of business, nor litigation pending or threatened, nor
judgments rendered against, other than those disclosed by management
and included in the Report that would affect our evaluation or
comments.
o Evans & Evans, Inc. makes no recommendations, either expressed or
implied, as to the suitability of the companies described herein, or
their securities, as investments.
o Evans & Evans, Inc. has not verified the status of any of the
Companies' potential legal affairs and/or matters and can, therefore,
provide the reader no comfort or make any comments as to whether there
are any off-balance sheet or contingencies, claims, possible claims,
substantial commitments, or litigation pending or threatened against
the Companies, and/or any of the Directors/Officers of the Companies.
o The Valuation Report, and more specifically the assessments and views
contained therein, is meant as independent review of the Companies as
at October 31, 1999. The authors of the Report make no
representations, conclusions, or assessments, expressed or implied,
regarding the Companies or events after the date of the
management-prepared financial statements, October 31, 1999. The
information and assessment contained in the Report pertain only to the
conditions prevailing at the time the Valuation Report was
substantially completed in November of 1999.
o The Companies have satisfactory title to all of their assets and there
are no liens or encumbrances on such assets nor has any assets been
pledged in any way. The Companies have complied with all government
taxation and regulatory practices as well as all aspects of their
contractual agreements that
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would have an effect on the Report, and there are no other material
agreements entered into by the Companies that are not disclosed in the
Report.
o Evans & Evans has not carried out any audit procedures on historical
expenditures or financial statements. Nor have the authors of the
Report examined the financial accounts of the Companies. Accordingly,
the authors of the Report's reliance on the historical financial
information and the financial statements is based solely on the
representations of management of the Companies.
o This analysis and Report does not constitute in any manner a tax
opinion. Evans & Evans has not carried out any audit procedures or
otherwise attempted to independently verify the financial information
as set out above. No other material information known by any parties
that are related to the Companies has not been disclosed to Evans &
Evans.
5.0- ASSUMPTIONS
The following assumptions, limiting conditions and disclaimers apply to the
Report:
1. An audit of VTI's financial statements dated October 31, 1999, would
not result in any material changes to the management-prepared
financial statements as provided to the authors of the Report. An
audit of Peppermill's financial statements dated September 30, 1999,
would not result in any material changes to the management-prepared
financial statements as provided to the authors of the Report. There
is no material change in the financial conditions of Peppermill from
September 30, 1999 to October 31, 1999.
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2. The preferred shares of VTI don' t have an option to be converted to
common shares and payment of such shares would be through a debt
financing.
3. Representations made by management of Peppermill and VTI as to the
number of shares outstanding in the respective companies are assumed
to be accurate.
4. Mr. Varner has informed the authors of the Report he intends to
transfer his 40% interest in NPWT to the Company in return for a
nominal sum. This is to be completed prior to the closing of the
Proposed Transaction.
5. The loss carryovers within VTI would have no significant fair market
value to a notional purchaser of the Company.
The authors of the Report believe these assumptions to be reasonable
and appropriate for the purposes of this valuation and our conclusion
as to fairness.
6.0- DEFINITION OF FAIR MARKET VALUE
In this Report, fair market value is defined as the highest price available
in an open and unrestricted market between informed and prudent parties,
acting at arm's length and under no compulsion to act, expressed in terms
of money or money's worth.
With respect to the market for the shares of a company viewed "en bloc"
there are, in essence, as many "prices" for any business interest as there
are purchasers and each purchaser for a particular "pool of assets", be it
represented by overlying shares or the assets themselves, can likely pay a
price unique to it because of its ability to utilize the assets in a manner
peculiar to it. In any open market transaction, a purchaser will review a
potential acquisition in relation to what
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economies of scale (e.g., reduced or eliminated competition, ensured source
of material supply or sales, cost savings arising on business combinations
following acquisitions, and so on), or "synergies" that may result from
such an acquisition.
Theoretically, each corporate purchaser can be presumed to be able to enjoy
such economies of scale in differing degrees and therefore each purchaser
could pay a different price for a particular pool of assets than can each
other purchaser.
Based on our experience, it is only in negotiations with such a special
purchaser that potential synergies can be quantified and even then, the
purchaser is generally in a better position to quantify the value of any
special benefits than is the vendor. Accordingly, we have not reflected any
special purchaser considerations in our assessment of fair market value.
The shares of the Companies have been valued en bloc.
7.0- VARNER TECHNOLOGIES, INC.
7.1 Company Background and Business
VTI is an Internet service provider ("ISP") offering a range of Internet
access services to organizations and individuals by means of the Company's
developing computer network. The Company's focus is on the so-called
"dial-up" (i.e., individual) market. VTI's goal has been to create a
reliable, high speed and low-cost network allowing local access to the
Internet across the United States. In addition to the Internet access
services, the Company also offers prepaid phone cards.
VTI was established for the purpose of providing low- and fixed-cost access
for individuals and organizations to the Internet. The Company offers
unlimited
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Internet access for US$9.95 per month, which must be paid for yearly in
advance. The Company charges a $30 setup fee for Local Access Service and a
$60 setup fee for 800 Nationwide Access Service.
A critical success factor for any ISP, as noted to the authors of the
Report by a number of industry participants, is an ISP's ability to expand
and maintain local access capabilities. It is very important that ISPs
provide subscribers local access (i.e., local, not long-distance, telephone
calls). Within the ISP market this capability is referred to as points of
presence ("POPs"). VTI currently has 3,400 points of presence ("POPs") in
North America. The Company owns twelve POPs and has entered into agreements
with other ISPs for access to the remaining POPs. The Company's individual
and corporate subscriber base consists of approximately --- subscribers as
of October 31, 1999 (awaiting info from management).
The Company licenses the right to market VTI products and services to NPWT.
NPWT then enters into agreements with Independent Representatives who
market the Company's products and services. VTI currently has over 5,000
Independent Representatives ("IRs"). Accordingly, all revenue is generated
in NPWT and paid out to VTI as a royalty. The diagram below outlines the
Company's structure:
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-------------------------
Varner Technologies, Inc.
-------------------------
| | -------------------
| | Licenses right to
----- | | use VTI name and
60% | |---------- sell VTI products
----- | | and services in
| | return for royalty
| | payment.
| | -------------------
| |
--------------------------------------
Networking People With Technology, LLC
--------------------------------------
|
|
|
|
|
---------------------------
Independent Representatives
---------------------------
|
|
|
---------
End Users
---------
In addition to Internet access the Company offers low cost long distance
rates through the use of prepaid calling cards, prepaid computer usage
cards, and computer hardware.
Further the Company has agreements in place to provide Voice over the
Internet technology, and prepaid cellular phone cards.
7.2 Products and Services
The Company's goal with the Internet via the service it calls Income Online
are: (1) to provide the largest Internet network available through
consolidation of ISPs; (2) to develop nationwide high-speed access; (3) to
provide voice over the Internet; (4) to standardize protocols for commerce
and telecommunications; (5) to allow consumers to earn income through the
Internet at their home (virtual employment); (6) to customize information
via phone, personal computer and
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home network computer; and (7) to provide multiple interfaces to allow
consumers and business to access the Internet.
One of VTI's main products is Income Online, which has been developed based
on the assumption that individuals will be able to make money at home using
Web sites of the future. Management of VTI believes that the advertising
community will, over the medium- to long-term compensate consumers to come
to a given site in the Internet thus allowing the consumer to make Income
Online.
VTI has two principal services available:
1. Nationwide 800 Internet Access:
Internet access from any city or rural area without the cost of long
distance charges. With the 800 basic package a subscriber receives
their first 30 hours of Internet access for free.
2. Expanded Nationwide 800 Internet Access:
Same features as above package but includes the first 60 hours of
Internet access for free.
3. Local Nationwide Internet Access:
VTI has organized over 3,400 locations all across the country.
In addition to operating as an ISP, VTI offers a wide variety of pre-paid
calling card options. VTI Pre-Paid calling cards range in prices from 12 to
15 cents per minute for domestic calls.
The Company operates as an ISP providing low cost local service in major
metropolitan areas. Internet installation disks are distributed by IRs for
ease of subscription. The Company offers high speed Internet access through
128K and ISDN links.
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The Company plans to launch the following products and services upon recent
of additional funding:
o Voice over Internet converting the ISP to an Internet Local Exchange
Carrier making it possible to make long distance calls over the
Internet with only a connection fee and no cost per minute.
o Asymmetrical Digital Subscriber Line ("ADSL") Internet access.
o 800 Internet to allow penetration of rural communities and expand
market share.
o Computer Pal support center to aid the growing number of PC users in
obtaining the advice of hardware, software, and Internet technicians
and experts through the use of a prepaid service plan.
o Internet Emergency Backup Service allowing systems to backup computers
anywhere on the Internet.
o E-Commerce and Account Processing Service will be used to market
services and products.
o Distribution of products over the Internet including Banking Services,
Prepaid Telephone Services, Voice X-Net, Computer Hardware/Software,
High Speed 2000, and Internet Service.
o Lay-It-Away permitting customers to purchase a product for the future
and pay for it over a period of time with an identified delivery date.
o 2nd Trade providing a conduit for matching buyers and sellers of
business interests.
o E-Commerce to generate revenues through transactions across the
Internet for proprietary products.
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7.3 Management and Organization
Executive Committee:
VTI is guided by an Executive committee consisting of Clayton W. Varner,
CEO & President; B. Ray Heflin, Chief Operating Officer; Tjody Varner,
President, Sales and Marketing; and Jessica Varner, Vice President, Rep
Relations.
Chief Executive Officer - Clayton W. Varner is responsible for the overall
design, management and direction of VTI. He has 20 years of experience in
the areas of computer technology, Information Services, and the development
and management of an Information System for a start-up network marketing
business, Reliv International, which grew to be a public company with sales
of $50 million a year. Mr. Varner is educated in Business Administration
and Computer Science.
Chief Operating Officer - B. Ray Heflin is responsible for the Information
Systems and Operation's functions of the Company. He has 25 years
experience in executive management and retail business operations and is an
experienced consultant to small and medium sized retail, manufacturing, and
technology businesses. Mr. Heflin held executive positions at Federated
Department Stores and Dillard Department Stores. He has a BSEE in
Electrical Engineering from University of Arkansas, BSBA in Management
(Magna Cum Laude) and MBA in Management from Columbia State University.
Executive Vice-President - Robert W. Rapp has 12 years experience in
capitalization of and investment in start-up companies. He has experience
in real estate development and in the management and operations of
insurance agencies. He was Senior Vice-President and Director of American
Life Investors, a holding company previously a minority owner of Reliv
International
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Management & Operations:
President, Sales and Marketing - Tjody Varner is responsible for marketing
and sales. She has 20 years of experience in sales and marketing and has
held accounting positions with Milnot Company and Prairie Farms Dairy. Ms.
Varner has owned and operated a sales and marketing firm. In 1997, Ms.
Varner became one of the first IRs with VTI.
Vice-President of Rep Relations - Jessica Varner is responsible for the
nationwide communications with the independent marketing representatives.
She assists in the training of representatives and is responsible for
providing information on the conduct of their business, distributing
informational mailings, handling commission processing, and coordinating
Teleconferences and National Leadership Conferences. She has previously
held positions in retail sales and operations. Ms. Varner is in the process
of receiving an education in the area of communications and public
relations from Maryville University.
Board of Directors:
Each of the members of the Executive Committee hold seats on the Board of
Directors. The remaining Directors, Robert Rapp, John Snow, Fred Jarosz,
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Marvin Solomonson, Bryan Thomas, and Jim Cragg average 20 years of
experience in start-up companies, network marketing, finance and
technology.
7.4 Market and Competition
Internet Use and Technology Trends
In February of 1999, International Data Corporation ("IDC") of Framingham,
Massachusetts released a report entitled "IDC Predictions '99: The "Real"
Internet Emerges". Excerpts from the report are outlined below.
o The number of Internet users will increase 28%, to 147 million.
o Internet commerce will more than double, to US$69 billion.
o Small businesses will take off as a key online business community
o Personalization / customization will be the "ante" for successful
Internet sites.
The Computer Almanac Industry estimated in April of 1999 that at the end of
1998 there were 364.4 million personal computers in use globally. The
report also ranked the top fifteen personal computer markets around the
world. The U.S. topped the list with 129 million personal computers in use,
followed by Japan, Germany, the UK and France.
Determining how many users are connected to the Internet is still an
inexact science, and experts and those who constantly monitor the markets
differ with respect to exact numbers. According to Internet surveys by NUA
Ltd. ("NUA") of New York, New York and Dublin, Ireland, the vast majority
of Internet users are located in North America, with over 179 million
currently connected to the Internet worldwide. Approximately two-thirds of
Internet users and hosts reside in Canada and the U.S. Nielsen/Net Ratings
estimates that in June 1999, 105
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million people in the US were online, up 3.2% from May at 101.0 million and
April at 95.8 million.
============================
Millions of Users
----------------------------
Africa 1.14
----------------------------
Asia/Pacific 26.97
----------------------------
Europe 42.69
----------------------------
Middle East 0.88
----------------------------
Canada/USA 102.03
----------------------------
Latin America 5.29
----------------------------
World Total 179.00
----------------------------
Source: NUA Internet
Surveys: How Many
Online? June 1999
============================
Analysts project that worldwide usage will increase as PC penetration
increases outside North America, new telecommunications infrastructures are
developed, and increased bandwidth technology is introduced.
According to a January 1999 study released by InfoBeads, a subsidiary of
Ziff-Davis Inc., there were over 67.5 million personal computers connected
to the Internet in the U.S., a 50% increase over January 1998. IntelliQuest
Research recently reported that average time spent per month online is up
an hour, from 6.0 to 7.0, over last year. Home viewing ran at 206.5 pages
per month in 1998 and 293.1 in 1999. The average home user is spending five
hours a month online at home. IntelliQuest Research also noted that an
additional 41 million people plan to go online at some point in the future
- 17.2 million within the next year. IntelliQuest Research reports that
users are spending more time online, averaging 12.1 hours per week (i.e.,
at home and work), as compared to 10.9 hours per week a year ago.
IntelliQuest Research also noted that there is an increase in online
shopping and purchasing activity, with 56 million people, or nearly 70% of
the online population, shopping online in the last three months. At the
same time, 23.5 million, or 28% of the population, reported that they
actually made a purchase online in the past three months.
Although the number of Web users is increasing in many foreign countries,
Internet commerce is currently U.S.-centric. In 1998, 56% of Web users
resided
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outside the United States; however, non-U.S. Internet commerce accounted
for only 26% of worldwide spending. By 2003, IDC estimates 65% of Web users
will be international, and non-U.S. countries will account for just less
than half of worldwide Internet commerce.
According to eStats, a division of eland, Inc. of New York, New York half
of U.S. households currently own a PC and one-third (33%) have access to
online services, according to Odyssey Research of San Francisco. There are
58 million online adults in 1999, out of which 23 million are 18 - 34 years
old, 25.2 million are 35 - 54 and 9.8 million are seniors aged 55+.
Millions of Online Adults, By Age Group
100 MILLION
[THE FOLLOWING TABLE WAS REPRSENTED AS A BAR CHART IN THE PRINTED MATERIAL]
100 MILLIONS
Number
Online % Total
Age 18-34 23.0 64.0
Age 35-50 25.2 80.6
Age 55+ 9.8 58.0
Internet Service Provider Market
According to a recent article from the online news source InternetNews.com
entitled "ISPs Threatened by Cable Access Encroachment" the international
technologies research firm Arthur D. Little Inc. ("ADL") reported in
November that there is a growing preference in the U.S for cable access for
those subscribers desiring high speed Internet access.
ADL reports that in the U.S. consumers favor cable modem Internet access by
a
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2:1 margin over Digital Subscriber Line ("DSL") services. ADL further
reports that cable access providers report that more than one million cable
modems have been installed in U.S. homes to date.
Cable modem access may be a small fraction of the 38 million households
currently utilizing online services, but the ADL study found that up to 28
percent of U.S. households would subscribe to a cable access provider and
pay $40 a month for the service. As much as 43 percent of these households
would drop their current dial-up ISP, rather than pay $10 extra to be able
to continue to use their ISP's e-mail service, chat, and other features in
addition to cable access. According to the report, 21 percent of the same
households would pay the extra fee to connect through both their cable and
dial-up access providers. As much as 25 percent of those surveyed, said
they would postpone adoption of the cable modem service in order to wait
for their ISP to offer a comparable high-speed Internet access solution.
Peter D. Shapiro, ADL's communications practice principal, noted the
following: "America Online Inc. and other dial-up ISPs are vulnerable. This
is a major reason they are campaigning around the country and in Washington
to win direct access to cable modem users," Shapiro said. "There are good
business reasons for both AOL and cable companies to resolve their
differences now. AOL faces a steady erosion of their subscriber base as
this process goes forward. On the cable side, they need to build their
infrastructure to be the network of choice."
Gartner Group's Dataquest unit and Frost & Sullivan of New York, New York
report that while ISP subscription fees from US households are currently
estimated at a rate of $7 billion per year, as the Internet continues to
evolve, ISPs must examine other revenue-generating opportunities to remain
competitive.
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Dataquest reports on two emerging trends in the ISP marketplace:
1. "A serious issue for ISPs to consider is the rapid decline in the
growth at which new households will become subscribers," said Dr.
Harry Hoyle, vice president for Dataquest's e-Home: Telecom and Online
Services US program. "This alone will result in the lower growth rate
of consumer expenditure on home PC-based Internet access from 39
percent annually from 1996 to the middle of 1999, to a projected 8
percent annual growth through 2001."
2. The expanding "free-to-user" mentality. Dataquest analysts said more
US consumers will expect free Internet access in the future. "Free
Internet access at conventional modem speeds is already offered by
e-mail only services, as well as some smaller ISPs," Hoyle said.
"While it's unlikely that US households will migrate en masse to free
access providers, the growth in households with free Internet access
will accelerate due to the intense competition for the remaining new
subscribers and the need to retain existing subscribers."
The trend towards free Internet access is currently more prevalent in
Europe than in the United States. In Europe, ISPs have focused on reducing
customer acquisition costs in an effort to drive down Internet subscriber
fees.
In many instances, ISPs are forming relationships with brick-and-mortar
brands such as banks and retailers through outsourcing agreements or
co-branding. "These new relationships offer established brick-and-mortar
retailers an opportunity to quickly launch a presence on the Internet,"
says Dr. Harry Hoyle, a Dataquest Vice President. "Conversely, it offers
ISPs a way of enriching their sites to attract more transaction income that
will replace the revenue lost from Internet access subscriptions."
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In a report entitled "US Internet Value Added Services Market", Frost and
Sullivan noted that ISPs and Web hosting firms must distinguish themselves
from the 4,000 competitors in the marketplace in order to succeed. "It is
not enough any more just to offer Internet access," said Frost & Sullivan
analyst Generosa Litton. "Services such as Web hosting and application
hosting are both key value-added services that enable a firm to stand out
in a 'noisy' market."
Frost & Sullivan reports that Internet value-added services generated $1.47
billion in 1998, a 316 percent increase over 1997. The report also found
the value-added services market to be poised for tremendous growth, led by
the increasing use of the Internet as a marketing and distribution tool,
the need for management and support services, and new technologies.
According to a recent report from International Data Corp. ("IDC") of
Framingham, Massachusetts, the US ISP market will continue to grow through
the year 2003. The report, entitled "Internet Service Provider Market
Review and Forecast, 1998-2003," projects that s that the US ISP market
will generate almost $4.5 billion-worth of extra revenue annually over the
next three years.
However, IDC projects that a significant portion of this growth will be
realized by market leaders, which IDC identifies as America Online, Inc.
("AOL") and MCI WorldCom. IDC predicts revenues in the US ISP market will
increase 41% from $10.7 billion in 1998 to $15.1 billion in 1999.According
to IDC, revenues will increase at a compound annual growth rate of 28
percent through 2003 to $37.4 billion, making the ISP market the
fastest-growing telecommunications market ever.
IDC's report splits the ISP market into four market segments: corporate
access, individual access, wholesale, and value-added services. In 1998 the
individual access segment was the largest, with $4.7 billion in revenues.
According to Mark
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Winther, IDC's Group Vice President of Worldwide Telecommunications, the
individual market looks set to maintain its position as the largest segment
until 2003, when value-added services will become the largest segment.
According to the report, AOL owns the largest share of the overall market,
with 23% and MCI WorldCom is second, with 17%.
IDC is also projecting competition to increase in the market. Mr. Winther
was quoted as saying "Access will become a commodity and vendors will have
limited opportunity to differentiate or compete other than on cost. To
maintain growth and competitiveness into the first decade of the 21st
century, ISPs will have to invest in value-added services,". According to
Winther, the key growth drivers in the near term are a mix of new customers
and existing customers' expanded spending.
Competition
Current estimates of the ISP market in the U.S. place the number of ISPs at
over 4,000. Many of these are small local or regional ISPs that offer dial
up services only for a small regional area. However, the growth in the
Internet usage rates and the cost associated with developing a network have
also resulted in a number of large, national ISPs. Outlined below is a
small sample of some of the direct competitors to the Company.
America Online, Inc. ("AOL") of Dulles, Virginia
Founded in 1985, America Online, Inc. (NYSE: AOL) operates two worldwide
Internet online services -- AOL Interactive Services and CompuServe
Interactive Services and several Internet brands including ICQ, AOL Instant
Messenger and Digital City, Inc.; the Netscape Netcenter and AOL.COM
portals; and the Netscape Navigator and Communicator browsers; and AOL
MovieFone, the nation's largest movie listing guide and ticketing service.
AOL is the single
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largest ISP in the U.S. with more than 19 million subscribers. In 1998 AOL
acquired CompuServe (now subsidiary CompuServe Interactive Services), which
has 2 million subscribers. In 1999, AOL purchased Netscape Communications
and its a Navigator Web browser and the Netcenter Internet portal.
Through its strategic alliance with Sun Microsystems, the AOL develops and
offers businesses wishing to become e-businesses easy-to-deploy, end-to-end
e-commerce and enterprise solutions under the alliance iPlanet brand.
The Interactive Services Group operates the AOL and CompuServe services and
their related brand and product extensions; Netscape Netcenter; and the
Netscape Navigator and Communicator browsers. This group also includes
broadband development, AOL Devices like AOL-TV, and Integrity Assurance.
The Interactive Properties Group's mission is to continue to seek out
opportunities to build or acquire branded properties that operate across
multiple services or platforms. It oversees ICQ, Digital City, and AOL
MovieFone.
The Netscape Enterprise Group serves Netscape's enterprise customers and
contributes to AOL's part of the alliance with Sun Microsystems.
AOL Interactive Services offers 19 channels covering everything from news
to finance to entertainment and more that give AOL members a variety of
popular content and features, products, e-mail, chat, Buddy ListTM, and
Instant MessageTM features, along with fully integrated Internet access.
AOL's pricing plan is outlined below:
o $21.95 per month standard plan providing access to AOL and the
Internet, without hourly fees.*
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o $19.95 per month ($239.40 1 year prepaid subscription) providing
access to AOL and the Internet, without hourly fees, for members
who pay in advance for 1 year.*
o $9.95 per month "bring-your-own-access " plan providing unlimited
access to thousands of unique AOL features*, including access to
the Internet, for individuals who already have an Internet
connection or access through the work or school environment.
o $4.95 per month light usage plan providing 3 hours of AOL,
including the Internet, with additional time priced at just $2.50
per hour*.
o $9.95 per month limited usage plan providing 5 hours of AOL,
including the Internet, with additional time priced at just $2.95
per hour*.
* Pricing plans do not include premium services, which carry additional
charges.
PSINet, Inc. ("PSINet") of Herndon, Virginia
PSINet offers a variety of access services, Web-site design and hosting,
electronic commerce, and security programs. PSINet has offices in 11
countries and serves 60,000 corporate customers. PSINet refers to itself as
an Internet Super Carrier offering global e-Commerce infrastructure and a
full suite of retail and wholesale Internet services through wholly-owned
PSINet subsidiaries. Services are provided on PSINet-owned and operated
fiber, satellite, Web hosting and switching facilities providing direct
access in more than 800 metropolitan areas in 22 countries on five
continents. PSINet is no longer an Internet service provider (ISP) for
individual consumers, but it does allow other consumer-based ISPs to use
its networks for a fee.
PSINet reported it had more than 530 points of presence (POPs) around the
world serving primary markets in Belgium, Brazil, Canada, France, Germany,
Hong Kong, Italy, Japan, Mexico, the Netherlands, Republic of Korea,
Switzerland, the United Kingdom and the United States.
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PSINet's Internet access services includes electronic mail, Internet voice
and fax, and other productivity tools for businesses. PSINet also offers an
exclusive range of productivity tools for modern business, live
audio-video. Business customers are also offered PSINet's hosting,
collocation, and design services, e-commerce and virtual storefront
solutions.
For the third quarter of 1999, PSINet revenues of $140.6 million with a net
loss of $87.7 million. The Company reports its global customer base has
grown to approximately 80,000 business accounts and over 1.2 million
carrier customers.
MindSpring Enterprise, Inc. ("MindSpring") of Atlanta, Georgia
MindSpring has more than one million subscribers throughout the US,
rivaling EarthLink for the #4 spot behind AOL (17 million accounts), the
Microsoft Network, and AT&T WorldNet. Dial-up Internet access offerings
account for nearly 85% of MindSpring's sales. MindSpring also provides Web
hosting (45,000 accounts) and dedicated access lines for business
customers.
On September 23, MindSpring and EarthLink Network, Inc. announced plans to
merge in a transaction that will create the second largest Internet Service
provider in the U.S. The transaction is expected to close in first quarter
of 2000.
In the third quarter of 1999 MindSpring released a new Internet Software
package, MindSpring 4.0, designed to appeal to a broader customer base of
"switchers" and first-time Internet users. In September of 1999, MindSpring
launched the company's first TV advertising campaign, "You'd be Happier
Using MindSpring," in 12 markets nationwide. A recent J. D. Power and
Associates 1999 National ISP Online Residential Customer Satisfaction study
ranked MindSpring number one in overall customer satisfaction among the
largest National Internet Service Providers. MindSpring's services include:
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<TABLE>
<S> <C>
o Space for personal web pages o The "Spaminator" tool to reduce junk email
o MindSpring Internet Software o 56k access in most areas
o Access to over 20,000 newsgroups o Internet chat access
o No risk, 30-day money back guarantee
</TABLE>
MindSpring's pricing policy is outlined below:
========================================================================
The Works Unlimited Standard Light
========================================================================
Monthly Cost $26.95 $19.95 $14.95 $6.95
========================================================================
Access/month unlimited unlimited 20 hours 5 hours
========================================================================
Extra Hours n/a n/a $1/hr $2/hr
========================================================================
Web space 10MB 5MB 5MB 5MB
========================================================================
Extra Web space $4.95/ea. $4.95/ea. $4.95/ea. $4.95/ea.
========================================================================
Bandwidth 450MB 225MB 225MB 225MB
========================================================================
Mailboxes 5 3 1 1
========================================================================
Extra Mailboxes $5.00/ea $5.00/ea $5.00/ea $5.00/ea
========================================================================
For the third quarter ended September 30, 1999, MindSpring reported income
of $3,380,000 on revenues of $88,179,000. MindSpring had approximately
1,297,000 customers at the end of the third quarter of 1999, up from
1,228,000 at the end of the prior quarter and 455,000 at the end of the
third quarter 1998. Included in the total are approximately 61,000 Web
Hosting customers, and approximately 3,000 dedicated Internet access
accounts.
The merger of Mindspring and Earthlink Network, Inc. will create an ISP
with the following characteristics:
o An estimated combined member base of approximately 3 million
subscribers
o Initial projected marketing expenditure of $80 million per quarter
o 90,000 member Web hosting accounts and a full range of related
products and services
o Nearly 4,000 employees in Atlanta; Dallas; Phoenix; Harrisburg, PA;
Pasadena, Sacramento and San Jose, CA; and Seattle, WA
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o A strong history of award-winning service and customer support. A 1999
JD Power and Associates study ranked MindSpring and EarthLink numbers
one and two, respectively, in overall customer satisfaction among the
largest National Internet Service Providers.
EarthLink Network, Inc. ("ENI") of Pasadena, California
Founded in July of 1994, ENI now has more than 1.5 million customers
throughout the US and Canada. ENI's services include Internet access, high
speed access, web site hosting, e-commerce, personal web pages, and a
variety of value added services for both individual consumers and business
clients. ENI's pricing policy is outlined below:
o TotalAccess USA: $19.95 per month for unlimited access to the Internet
o TotalAccess 800: TotalAccess 800 provides toll-free 800 access to the
Internet from anywhere in the continental United States. $24.95 per
month for five free hours $4.95 for each additional hour.
In July of 1999 ENI entered into an agreement with UUNET, a subsidiary of
MCI WorldCom, Inc. of Clinton, Missouri team up to offer the nationwide
consumer DSL access, to begin rollout in late 1999.
As noted above, ENI has entered into a merger agreement with MindSpring to
be completed in the first quarter of 2000.
FlashNet Communications, Inc. ("FlashNet") of Fort Worth, Texas
FlashNet provides Internet access to approximately 244,000 customers
through more than 697 POPs in more than 450 cities across the US.
FlashNet's services include Web access, e-mail, newsgroup access, and Web
pages. FlashNet offers its 2,900 small and medium-sized business clients
high-speed dedicated and
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broadband access, Web hosting, and e-commerce opportunities. It plans to
add long-distance access and advanced data services.
FlashNet was founded in 1995 with two POPs; one in Dallas (Irving), the
other in Fort Worth, Texas. As growth in the ISP industry began, FlashNet
looked to expand its operations by implementing three more POPs in major
markets. By early January 1996, FlashNet was serving Tucson, Little Rock,
and Albuquerque. By December 1996, FlashNet had grown to over 50,000
customers.
FlashNet serves individual and small business customers with unlimited use,
flat rate pricing and a full range of Internet services. FlashNet's pricing
plan is outlined below:
---------------------------------------------------------------------------
Plan Name Monthly Semi-Annual Annual
Price Price Price
---------------------------------------------------------------------------
Flashchoice Standard $17.95 $99.95 $169.95
$129.95
$149.95
---------------------------------------------------------------------------
$189.95
Flashchoice Preferred $149.95
$19.95 $109.95 $169.95
---------------------------------------------------------------------------
Flashchoice Daytime $6.95
---------------------------------------------------------------------------
CleanNet Package $19.95
---------------------------------------------------------------------------
For the third quarter ended September 30, 1999, the company reported
revenues of $12.6 On November 8th, 1999, FlashNet entered into a definitive
agreement to merge with Prodigy Communications Corporation ("Prodigy") of
White Plains, New York (NASDAQ: PRGY). Prodigy has a member base of
approximately 1.5 million subscribers. Under the terms of the merger
agreement, Prodigy will issue 0.35 shares of Prodigy common stock for each
share of FlashNet common stock outstanding on the closing date of the
transaction. Based on the number of
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shares of FlashNet and Prodigy currently outstanding, Prodigy will issue
approximately 4,990,000 shares to complete the merger, representing
approximately 7% of Prodigy's then outstanding shares.
7.5 Marketing Plan
The Company plans to increase the number of subscribers for its Internet
service through the acquisition of independent ISPs across the United
States and through its network of independent representatives.
The Company does not restrict marketing regions or geographical territories
for its IRs. The Company provides IRs with ongoing training and management
support services.
All of the Company's marketing efforts are undertaken by the system of IRs
which are compensated as outlined below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Title Requirement Commission
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Independent o Sign IR o Purchase prepaid cards at 15%
Representative (IR) agreement discount
o Enroll for VTI o Eligible for first-line
Independent Management generation royalty of 5% on sponsored IR
Representative enrolled in Services Program o Quick Start Bonus ("QSB") is paid
Management Services Program (WR) (Optional) to first up-line sponsor
-------------------------------------------------------------------------------------------------------------
Managing o 20 Qualifying o Purchase pre-paid cards at 20%
Directors (MD) Points* ("QP") discount
o 6 new WRs or 3 o Eligible for 9 levels of
New WRs and generation royalties (max. 15%)
becomes a local o Management Bonus ("MB") and QSB
trainer is paid to first up-line MD and first
o Must maintain up-line sponsor
a total of 20 QPs
-------------------------------------------------------------------------------------------------------------
Regional Manager (RM) o 10 new QPs Purchase pre-paid cards at 20%
</TABLE>
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<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Title Requirement Commission
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
o 12 new WRs or discount
6 New WRs and o Eligible for 9 levels of
becomes a national generation royalties (max. 15%)
trainer o MB and QSB are paid to first
o Must maintain up-line MD and first up-line sponsor
a total of 30 QPs
-------------------------------------------------------------------------------------------------------------
Executive o 5 RMs o Purchase pre-paid cards at 30%
Manager (EM) established for discount
120 days who have o Eligible for 9 levels of
completed the generation royalties (max. 25%)
requirements for RM o MB and QSB are paid to first
o Must maintain up-line EM and first up-line sponsor
a total of 100 QPs
-------------------------------------------------------------------------------------------------------------
Entrepreneur Level o 2 EMs o Purchase pre-paid cards at 35%
Representative (ELR) established for discount
120 days o Eligible for 9 levels of
o Must maintain royalties plus an additional 5% on
a total of 340QPs 9th level (max. 10%)
o Eligible for 2-year auto lease
-------------------------------------------------------------------------------------------------------------
Presidential Director Level o 3 ELRs o Purchase pre-paid cards at 40%
Representative (PDLR) o Must maintain discount
a total of 1,000 o Eligible for 9 levels of
QPs royalties plus an additional 5% on
9th level (max. 10%)
o Eligible for 3-year auto lease
-------------------------------------------------------------------------------------------------------------
</TABLE>
*Each of the Company's products and services has an associated number
of Qualifying Points as determined by management of the Company.
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 38
--------------------------------------------------------------------------------
8.0- REVIEW OF FINANCIAL PLAN -- VARNER TECHNOLOGIES, INC.
8.1 Financial Position
The current and historical financial position of VTI is outlined in the
table below:
Varner Technologies, Inc.
Total Assets
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
October 31, % of December 31, % of December 31, % of
1999 Assets 1998 Assets 1997 Assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
-----------------------------------------------------------------------------------------------------------
Current Assets
-----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 388,772 39.0 65,940 15.5 83,442 17.7
-----------------------------------------------------------------------------------------------------------
Notes Receivable 0 0.0 0 0.0 0 0.0
-----------------------------------------------------------------------------------------------------------
Inventory 35,605 3.6 70,811 16.6 83,930 17.8
-----------------------------------------------------------------------------------------------------------
Prepaid Expenses 78,615 7.9 5,260 1.2 1,888 0.4
-----------------------------------------------------------------------------------------------------------
Accounts Receivable 75,097 7.5 24,971 5.9 0 0.0
-----------------------------------------------------------------------------------------------------------
Accounts Receivable -
Stockholders 0 0.0 36,556 8.6 31,556 6.7
------- ----- ------- ----- ------- -----
-----------------------------------------------------------------------------------------------------------
578,089 58.0 203,538 47.8 200,816 42.6
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Net Property and Equipment 164,852 16.6 213,038 50.0 258,158 54.8
-----------------------------------------------------------------------------------------------------------
Incorporation Costs, 95,620 9.6 5,592 1.3 8,400 1.8
-----------------------------------------------------------------------------------------------------------
Notes Receivable -
Shareholders 157,481 15.8 0 0.0 0 0.0
-----------------------------------------------------------------------------------------------------------
Security Deposits 0 0.0 3,587 0.8 3,587 0.8
------- ----- ------- ----- ------- -----
-----------------------------------------------------------------------------------------------------------
417,953 42.0 222,217 52.2 270,145 57.4
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total Assets 996,042 100.0 425,755 100.0 470,961 100.0
-----------------------------------------------------------------------------------------------------------
</TABLE>
8.2 Operating History
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 39
--------------------------------------------------------------------------------
The historical results of VTI are outlined in the table below:
Varner Technologies, Inc.
Income Statement
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
10 Months Ended Year Ended Year Ended
October 31, % Of December 31, % Of December 31, % Of
1999 Revenue 1998 Revenue 1997 Revenue
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
-------------------------------------------------------------------------------------------------------------------
Sales 1,803,952 100.0 1,551,621 100.0 380,424 100.0
-------------------------------------------------------------------------------------------------------------------
Cost Of Goods Sold 932,817 51.7 1,479,374 95.3 530,807 139.5
--------- ---- --------- ----- --------- -----
-------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) 871,135 48.3 72,247 4.7 -150,383 -39.5
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Operating Expenses:
-------------------------------------------------------------------------------------------------------------------
Commissions 1,015,421 56.3 799,762 51.5 223,194 58.7
-------------------------------------------------------------------------------------------------------------------
Salaries 211,209 11.7 193,717 12.5 214,422 56.4
-------------------------------------------------------------------------------------------------------------------
Payroll Taxes 15,071 0.8 17,163 1.1 19,644 5.2
-------------------------------------------------------------------------------------------------------------------
Contract Labor 222,476 12.3 68,785 4.4 69,588 18.3
-------------------------------------------------------------------------------------------------------------------
Advertising 0 0.0 0 0.0 51,652 13.6
-------------------------------------------------------------------------------------------------------------------
Professional Fees 0 0.0 24,379 1.6 20,936 5.5
-------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization 80,500 4.5 119,833 7.7 115,702 30.4
-------------------------------------------------------------------------------------------------------------------
Entertainment 1,545 0.1 3,603 0.2 4,397 1.2
-------------------------------------------------------------------------------------------------------------------
Travel 62,050 3.4 45,829 3.0 31,362 8.2
-------------------------------------------------------------------------------------------------------------------
Bank And C/C Charges 39,648 2.2 2,041 0.1 359 0.1
-------------------------------------------------------------------------------------------------------------------
Office Supplies 10,656 0.6 14,420 0.9 13,824 3.6
-------------------------------------------------------------------------------------------------------------------
Telephone 24,083 1.3 21,819 1.4 21,544 5.7
-------------------------------------------------------------------------------------------------------------------
Operating Supplies 4,421 0.2 2,249 0.1 5,370 1.4
-------------------------------------------------------------------------------------------------------------------
Repairs And Maintenance 3,054 0.2 3,225 0.2 908 0.2
-------------------------------------------------------------------------------------------------------------------
Insurance 10,768 0.6 17,897 1.2 18,944 5.0
-------------------------------------------------------------------------------------------------------------------
Outside Service 144 0.0 8,522 0.5 24,397 6.4
-------------------------------------------------------------------------------------------------------------------
Rent 58,573 3.2 25,895 1.7 24,647 6.5
-------------------------------------------------------------------------------------------------------------------
Promotional 19,973 1.1 12,397 0.8 30,402 8.0
-------------------------------------------------------------------------------------------------------------------
Trade Shows And Meetings 85,860 4.8 46,154 3.0 3,292 0.9
-------------------------------------------------------------------------------------------------------------------
Prizes & Awards 3,773 0.2 99,350 6.4 0 0.0
-------------------------------------------------------------------------------------------------------------------
Legal 109,957 6.1 117,802 7.6 24,057 6.3
-------------------------------------------------------------------------------------------------------------------
Other Taxes & Licenses 2,015 0.1 16,041 1.0 1,638 0.4
-------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 40
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
10 Months Ended Year Ended Year Ended
October 31, % Of December 31, % Of December 31, % Of
1999 Revenue 1998 Revenue 1997 Revenue
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Postage And Freight 18,326 1.0 35,757 2.3 11,362 3.0
-------------------------------------------------------------------------------------------------------------------
Interest 5,154 0.3 7,569 0.5 5,145 1.4
-------------------------------------------------------------------------------------------------------------------
Artwork And Design 527 0.0 176 0.0 7,300 1.9
-------------------------------------------------------------------------------------------------------------------
Auto 285 0.0 2,119 0.1 465 0.1
-------------------------------------------------------------------------------------------------------------------
Administrative 13,247 0.7 17,742 1.1 9,928 2.6
-------------------------------------------------------------------------------------------------------------------
Equipment Rental 31,260 1.7 21,720 1.4 6,178 1.6
--------- ---- --------- ----- --------- -----
-------------------------------------------------------------------------------------------------------------------
Total Expenses 2,049,996 113.6 1,745,966 112.5 960,657 252.5
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Operating Loss -1,178,861 -65.3 -1,673,719 -107.9 -1,111,040 -292.1
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Other Income:
-------------------------------------------------------------------------------------------------------------------
Interest Income 4,999 0.3 2,119 0.1 7,147 1.9
-------------------------------------------------------------------------------------------------------------------
Miscellaneous 0 0.0 0 0.0 343 0.1
--------- ---- --------- ----- --------- -----
-------------------------------------------------------------------------------------------------------------------
Net Loss -1,173,862 -65.1 -1,671,600 -107.7 -1,103,550 -290.1
-------------------------------------------------------------------------------------------------------------------
</TABLE>
8.4 Tangible Asset Backing
In determining the underlying book value of the shares of VTI as at the
Valuation Date and in assessing the risk associated with the Company, it is
useful to view the tangible asset backing of the Company.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Tangible Asset
Net Book Value Adjustment Backing
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
------------------------------------------------------------------------------------------------------
Current Assets
------------------------------------------------------------------------------------------------------
Cash 388,772 0 388,772
------------------------------------------------------------------------------------------------------
Notes Receivable 0 0 0
------------------------------------------------------------------------------------------------------
Inventory 35,605 0 35,605
------------------------------------------------------------------------------------------------------
Accounts Receivable 75,097 0 75,097
------------------------------------------------------------------------------------------------------
Accounts Receivable - Stockholders 0 0 0
------------------------------------------------------------------------------------------------------
Prepaid Expense 78,615 0 78,615
---------- -------- ---------
------------------------------------------------------------------------------------------------------
578,089 578,089
------------------------------------------------------------------------------------------------------
Liabilities
------------------------------------------------------------------------------------------------------
Current Liabilities
------------------------------------------------------------------------------------------------------
Accounts Payable & Accruals 696,773 0 696,773
------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 41
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Tangible Asset
Net Book Value Adjustment Backing
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes Payable-ST-Bank 100,000 0 100,000
------------------------------------------------------------------------------------------------------
Advances from Stockholders 0 0 0
------------------------------------------------------------------------------------------------------
Unearned Revenue 258,771 0 258,771
------------------------------------------------------------------------------------------------------
Taxes Payable 8 0 8
------------------------------------------------------------------------------------------------------
Current Portion of Capitalized Lease Payable 39,896 0 39,896
---------- -------- ---------
------------------------------------------------------------------------------------------------------
1,095,448 1,095,448
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Working Capital ($517,359) ($517,359)
------------------------------------------------------------------------------------------------------
Net Property and Equipment 164,852 164,852
------------------------------------------------------------------------------------------------------
Incorporation Costs, 95,620 -95,620 0
------------------------------------------------------------------------------------------------------
Notes Receivable - Shareholders 157,481 157,481
------------------------------------------------------------------------------------------------------
Capitalized Lease Payable 1,665 1,665
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Tangible Asset Backing, say (200,000)
------------------------------------------------------------------------------------------------------
</TABLE>
8.5 Financial Projections
Management of the Company has prepared financial projections for the years
ended December 31, 2000 through 2003 as outlined below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
% of % of % of % of
2000 Income 2001 Income 2002 Income 2003 Income
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income
------------------------------------------------------------------------------------------------------------------
Internet Prods 2,100,000 21.5 3,640,000 26.4 5,200,000 26.4 6,750,000 27.3
------------------------------------------------------------------------------------------------------------------
Voice Xnet Prods 1,000,000 10.2 840,000 6.1 800,000 4.1 0 0.0
------------------------------------------------------------------------------------------------------------------
Voice If Prods 3,600,000 36.9 5,600,000 40.6 8,400,000 42.6 10,750,000 43.4
------------------------------------------------------------------------------------------------------------------
Prepaid Card Prod 700,000 7.2 140,000 1.0 0 0.0 0 0.0
------------------------------------------------------------------------------------------------------------------
Hard/Software, Di 277,000 2.8 383,800 2.8 554,000 2.8 692,500 2.8
------------------------------------------------------------------------------------------------------------------
Pop Install Fees 0 0.0 0 0.0 0 0.0 0 0.0
------------------------------------------------------------------------------------------------------------------
Consulting 0 0.0 0 0.0 0 0.0 0 0.0
------------------------------------------------------------------------------------------------------------------
Rep Sign-Ups 2,600,000 26.6 3,780,000 27.4 5,600,000 28.4 7,500,000 30.3
------------------------------------------------------------------------------------------------------------------
Duplic Kits, Supd 0 0.0 0 0.0 0 0.0 0 0.0
------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 42
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
% of % of % of % of
2000 Income 2001 Income 2002 Income 2003 Income
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Miscellaneous 50,000 0.5 75,000 0.5 100,000 0.5 125,000 0.5
------------------------------------------------------------------------------------------------------------------
Chargebacks/ -327,000 -3.3 -458,800 -3.3 -654,000 -3.3 -817,500 -3.3
Allowance
------------------------------------------------------------------------------------------------------------------
Unearned - -233,680 -2.4 -203,200 -1.5 -304,800 -1.5 -254,000 -1.0
--------- ----- ---------- ----- ---------- ----- ---------- -----
Prepaid Sv
------------------------------------------------------------------------------------------------------------------
Total Income: 9,766,320 100.0 13,796,800 100.0 19,695,200 100.0 24,746,000 100.0
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Cost Of Sales
------------------------------------------------------------------------------------------------------------------
Internet Accts/Ac 1,069,442 11.0 1,731,654 12.6 2,410,703 12.2 3,013,636 12.2
------------------------------------------------------------------------------------------------------------------
Voice Xnet Product 486,760 5.0 408,879 3.0 389,408 2.0 0 0.0
------------------------------------------------------------------------------------------------------------------
Voice Ip Products 763,776 7.8 1,188,096 8.6 1,782,144 9.0 2,280,721 9.2
------------------------------------------------------------------------------------------------------------------
Prepaid Phone 459,886 4.7 91,977 0.7 0 0.0 0 0.0
Cards
------------------------------------------------------------------------------------------------------------------
Unexpired Ph Mins 95,400 1.0 -166,000 -1.2 -41,000 -0.2 0 0.0
------------------------------------------------------------------------------------------------------------------
Switch Efficiency -500,000 -5.1 -725,000 -5.3 -725,000 -3.7 -725,000 -2.9
------------------------------------------------------------------------------------------------------------------
Computer HW/SW 193,900 2.0 266,560 1.9 387,800 2.0 484,750 2.0
------------------------------------------------------------------------------------------------------------------
Building Sales 2,600,000 26.6 3,780,000 27.4 5,600,000 28.4 7,500,000 30.3
------------------------------------------------------------------------------------------------------------------
Delivery & 80,000 0.8 95,000 0.7 120,000 0.6 140,000 0.6
--------- ----- ---------- ----- ---------- ----- ---------- -----
Packing-Ups/E
------------------------------------------------------------------------------------------------------------------
Total 5,249,164 53.7 6,671,166 48.4 9,924,055 50.4 12,694,107 51.3
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Gross Margin 4,517,156 46.3 7,125,634 51.6 9,771,145 49.6 12,051,893 48.7
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Operating Expenses
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Commiss - Internet 371,998 3.8 645,994 4.7 923,277 4.7 1,199,040 4.8
------------------------------------------------------------------------------------------------------------------
COMMISS - Xnet 149,240 1.5 125,361 0.9 119,392 0.6 0 0.0
------------------------------------------------------------------------------------------------------------------
Commiss - Ip 690,624 7.1 1,074,304 7.8 1,611,450 8.2 2,062,281 8.3
------------------------------------------------------------------------------------------------------------------
Commis - Prepds 92,414 0.9 18,483 0.1 0 0.0 0 0.0
------------------------------------------------------------------------------------------------------------------
Credit Card Fees 200,000 2.0 280,000 2.0 400,000 2.0 500,000 2.0
------------------------------------------------------------------------------------------------------------------
Wages - Employees 720,740 7.4 1,006,210 7.3 1,414,600 7.2 1,746,100 7.1
------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 43
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
% of % of % of % of
2000 Income 2001 Income 2002 Income 2003 Income
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wages - Officers 265,000 2.7 378,490 2.7 540,700 2.7 675,900 2.7
------------------------------------------------------------------------------------------------------------------
Contract 100,000 1.0 125,000 0.9 125,000 0.6 125,000 0.5
Labor/Consul
------------------------------------------------------------------------------------------------------------------
Contests - 250,000 2.6 350,000 2.5 500,000 2.5 625,000 2.5
Prizes/Awards
------------------------------------------------------------------------------------------------------------------
Payroll 97,144 1.0 136,600 1.0 193,000 1.0 240,000 1.0
Taxes/Employees
------------------------------------------------------------------------------------------------------------------
Audit & Payroll 70,000 0.7 70,000 0.5 95,000 0.5 100,000 0.4
------------------------------------------------------------------------------------------------------------------
Advertising/Promotion 40,000 0.4 55,000 0.4 80,000 0.4 90,000 0.4
------------------------------------------------------------------------------------------------------------------
Artwork & Design 4,000 0.0 5,000 0.0 6,000 0.0 7,000 0.0
------------------------------------------------------------------------------------------------------------------
Auto Lease Expense 15,000 0.2 20,000 0.1 20,000 0.1 20,000 0.1
------------------------------------------------------------------------------------------------------------------
Bank Charges 2,500 0.0 2,500 0.0 2,500 0.0 2,500 0.0
------------------------------------------------------------------------------------------------------------------
Dues & 700 0.0 1,200 0.0 1,200 0.0 1,200 0.0
Subscriptions
------------------------------------------------------------------------------------------------------------------
Employment Exp - 10,000 0.1 15,000 0.1 15,000 0.1 17,500 0.1
Hiring
------------------------------------------------------------------------------------------------------------------
Entertain/Meal 10,000 0.1 15,000 0.1 20,000 0.1 25,000 0.1
Exp - 50
------------------------------------------------------------------------------------------------------------------
Equipment Rental 33,000 0.3 38,000 0.3 43,000 0.2 48,000 0.2
------------------------------------------------------------------------------------------------------------------
Insurance - Health 83,600 0.9 126,640 0.9 177,818 0.9 244,026 1.0
------------------------------------------------------------------------------------------------------------------
Insurance - Risk, 32,000 0.3 45,000 0.3 65,000 0.3 83,000 0.3
Cont
------------------------------------------------------------------------------------------------------------------
Insurance - S/H 5,000 0.1 5,000 0.0 5,000 0.0 5,000 0.0
Life
------------------------------------------------------------------------------------------------------------------
Legal/Professional 125,000 1.3 125,000 0.9 125,000 0.6 125,000 0.5
Ex
------------------------------------------------------------------------------------------------------------------
Licenses & Permits 1,000 0.0 1,200 0.0 1,500 0.0 1,500 0.0
------------------------------------------------------------------------------------------------------------------
Meetings & 200,000 2.0 250,000 1.8 400,000 2.0 450,000 1.8
Conference
------------------------------------------------------------------------------------------------------------------
Miscellaneous 5,000 0.1 10,000 0.1 10,000 0.1 10,000 0.0
Expense
------------------------------------------------------------------------------------------------------------------
Office Supplies 30,000 0.3 35,000 0.3 40,000 0.2 45,000 0.2
------------------------------------------------------------------------------------------------------------------
Outside 25,000 0.3 35,000 0.3 45,000 0.2 60,000 0.2
Services-Temp
------------------------------------------------------------------------------------------------------------------
Postage/Frt - 40,000 0.4 55,000 0.4 70,000 0.4 95,000 0.4
Non-Sales
------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 44
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
% of % of % of % of
2000 Income 2001 Income 2002 Income 2003 Income
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Printing/Copying 30,000 0.3 35,000 0.3 40,000 0.2 45,000 0.2
------------------------------------------------------------------------------------------------------------------
Rent Expense - 75,000 0.8 75,000 0.5 85,000 0.4 90,000 0.4
Space
------------------------------------------------------------------------------------------------------------------
Repairs & 20,000 0.2 25,000 0.2 35,000 0.2 40,000 0.2
Maintenance
------------------------------------------------------------------------------------------------------------------
Security Services 750 0.0 1,250 0.0 1,250 0.0 1,250 0.0
------------------------------------------------------------------------------------------------------------------
Supplies - 40,000 0.4 45,000 0.3 50,000 0.3 55,000 0.2
Computers<$25
------------------------------------------------------------------------------------------------------------------
Taxes - Other 15,000 0.2 25,000 0.2 30,000 0.2 35,000 0.1
Deducti
------------------------------------------------------------------------------------------------------------------
Telephone/Cellular 60,000 0.6 75,000 0.5 85,000 0.4 95,000 0.4
------------------------------------------------------------------------------------------------------------------
Transfer Agent 10,000 0.1 10,000 0.1 25,000 0.1 25,000 0.1
Fees
------------------------------------------------------------------------------------------------------------------
Travel - Excl 125,000 1.3 150,000 1.1 150,000 0.8 175,000 0.7
Meals &
------------------------------------------------------------------------------------------------------------------
Utilities 500 0.0 1,000 0.0 1,000 0.0 1,000 0.0
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Total Operating 4,045,210 41.4 5,492,232 39.8 7,551,687 38.3 9,165,297 37.0
Expenses:
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Other Income And
Expenses
------------------------------------------------------------------------------------------------------------------
Interest Income 72,000 0.7 55,000 0.4 80,000 0.4 110,000 0.4
------------------------------------------------------------------------------------------------------------------
Licensing Fees - 150,000 1.5 250,000 1.8 500,000 2.5 750,000 3.0
Software
------------------------------------------------------------------------------------------------------------------
Deprec. & -594,767 -6.1 -1,521,967 -11.0 -1,831,967 -9.3 -2,191,967 -8.9
Amortiz. Expense
------------------------------------------------------------------------------------------------------------------
Interest Expense 0 0.0 0 0.0 0 0.0 0 0.0
--------- ----- ---------- ----- ---------- ----- ---------- -----
------------------------------------------------------------------------------------------------------------------
Other Net -372,767 -3.8 -1,216,967 -8.8 -1,251,967 -6.4 -1,331,967 -5.4
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Pretax Income 99,179 1.0 416,435 3.0 967,491 4.9 1,554,629 6.3
(Loss)
------------------------------------------------------------------------------------------------------------------
Income Tax -29,000 -0.3 -133,000 -1.0 -314,000 -1.6 -508,000 -2.1
--------- ----- ---------- ----- ---------- ----- ---------- -----
------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 70,179 0.7 283,435 2.1 653,491 3.3 1,046,629 4.2
------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 45
--------------------------------------------------------------------------------
9.0- REVIEW AND ASSESSMENTS OF VARNER TECHNOLOGIES, INC.
The overall rating of the business is as follows:
-------------------------------
Financial & Financial Plan
6.5
-------------------------------
-------------------------------
Technologies and Products
7.0
-------------------------------
-------------------------------
Overall
7.125
-------------------------------
-------------------------------
Markets & Marketing Plans
8.0
-------------------------------
-------------------------------
Management Team
7.0
-------------------------------
Ratings are based on a scale of 1 to 10, 10 being the best.
Management and Organization
1. Evans & Evans, Inc. have verified the educational and occupational
backgrounds of the operational management team. Their work related
backgrounds and educational references were acceptable.
2. The management team is adequate in the areas of understanding the
Internet and in technical and sales and marketing issues as they
relate to the Internet.
3. The Company's management team is adequate to implement its business
plans in the medium-term.
4. The Company is the beneficiary of a $1.0 million key man insurance
policy on Mr. Varner.
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 46
--------------------------------------------------------------------------------
Products & Technology
1. The Company currently offers no proprietary products and services.
2. The Company has entered into wholesale agreements with such ISPs such
as PSINet, Inc. of Herndon, Virginia for dial up access in those areas
where it does not have POPs. This allows the Company to expand its
service area without the capital cost associated with installing and
maintaining network infrastructure. Under the agreement with PSINet,
Inc. the Company pays a base charge of $10 per account.
3. There does not appear to exist any significant risk with respect to
the technical feasibility of the Company's service and products as
discussed above.
4. The heart of the Company's potential, sustainable competitive
advantage lies in its ability to be the long-term, fixed- and low-cost
supplier of Internet access to the U.S. market. To the degree that the
Company's planned procedures and methods do not achieve levels of
efficiency and productivity planned by management, the Company's
business plans may be severely impacted.
Markets and Marketing Plan
1. The ISP marketplace is very competitive in the U.S. with currently
over 4,000 regional and nationally-based ISP's. However, there has
been a significant trend towards consolidation in the industry
resulting in a number of large,
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 47
--------------------------------------------------------------------------------
publicly traded companies which have access to significantly more
funds then the Company.
2. As competition in the ISP market increases, the ability of ISPs to
offer value added services will become increasingly important. Such
value-added services would include e-commerce, virtual office, unified
messaging, and multimedia networking. The ability of the Company to
continuously upgrade its technology is critical.
3. The use of Internet within the U.S. is seen as extensive and growing
at a satisfactory rate in terms of the use of ISPs so as to support
the Company's projected operating performance over the next three to
five years.
4. Due to the Company's limited operating history, as well as the
likelihood of increased competition and the possibility of slower than
projected industry growth, there can be no assurance that the Company
can achieve its projected market penetration goals.
5. In the future the Company could face competition from firms that offer
products which replace its services and products.
6. The likelihood of competition increasing in the industry is high given
the overall growth potential of the industry. Increasing competition
may lead to margin erosion and the potential shake-out of industry
participants not able to achieve adequate volumes of sales. This is
evidenced by the trend towards free Internet access in Europe, which
many analysts feel will begin to be demanded in the U.S. in the
medium-term.
7. A major risk factor facing the Company is the changing nature of the
Internet access and telecommunication industries. Additional pricing
pressure may be
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 48
--------------------------------------------------------------------------------
brought to bear on the Company because of these changes. Therefore,
the Company's ability to compete on a price basis, particularly for a
service which is so commodity oriented, may become increasingly
important and difficult.
8. The Company has a competitive advantage due to its low- and
fixed-price strategy.
9. A significant amount of funding will be required to fund its expansion
and marketing expenses. There can be no assurance that such funding
will be available, and if so, in a timely manner.
10. Maintaining pricing appears difficult in this marketplace, given the
commodity nature of the business. Given the possibility of constant
price fluctuations, the Company's pricing strategy - to be low-cost -
will be very difficult to maintain. Maintaining low-cost Internet
access lies at the heart of its planned primary sustainable
competitive advantage.
Financial Plan
1. The Company is projecting revenues of approximately $5.2 million for
the year ended December 31, 1999. Based on the results as at the
Valuation Date (revenue of $1.8 million) it does not appear that the
Company will meet these targets.
2. The Company's projections are based on the receipt of $11 million in
equity financing in the year ended December 31, 2000 to fund the
acquisition of a number of independent ISPs as well as the development
of additional POPs at which the Company intends to install its own
network equipment. The authors of the Report have been provided with
no evidence that such a level of
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 49
--------------------------------------------------------------------------------
financing can be raised and as such would advise the reader that the
above noted projections should be discounted by a factor of at least
50%.
3. The Company's projected expenses do appear to be reasonable based on
actual historical results. The Company's largest expenses, have in the
past, and will continue to be associated with commissions to its
marketing representatives.
4. The ability of the Company to achieve its projections are based on the
assumption that the Company receives approximately $11 million in
funding in 2000. The majority of the funds are allocated to mergers
and acquisitions ($2.0 million), investment in infrastructure ($1.25
million) and research and development ($1.5 million). While the
authors of the Report are of the opinion that these amounts are
appropriate, the ability to generate such funds remains a serious
risk.
5. The Company's projected cost of sales and gross margin do appear to be
in line with current results in 1999. This would suggest to the
authors of the Report that the Company has now reached a subscriber
base that covers its fixed network costs and allows the Company to
begin generating the operating cash flows necessary to fund
operations.
6. The Company is projecting significant increases in its Voice Over the
Internet products, with these representing the single largest source
of revenue. Given the current status of these products (i.e., not yet
having been commercially introduced), these must be considered
speculative.
7. Given the number of competitors in the marketplace and the likelihood
of increased competition, which may result in margin compression, the
Company's planned growth in revenues is aggressive.
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 50
--------------------------------------------------------------------------------
8. The ability of the Company to achieve revenues of approximately $10
million in 2000 are based on its ability to acquire a number of ISPs
and absorb the majority of their subscribers. Given the competitive
nature of the marketplace, there can be no assurance that such
acquisition candidates will be available or that the Company will be
able to retain the subscriber bases.
10.0- PEPPERMILL CAPITAL CORPORATION
10.1 Company Background and Business
Peppermill was originally incorporated to undertake mining and exploration
activities.
On June 18, 1998 Peppermill acquired mineral claims known as "Star Claims"
consisting of 11 units located near the town of Merritt, British Columbia
for $2,129 with expiration dated in 1999. The units cover 587 acres.
However due to the poor performance of the mining sector, management of the
Public Company deemed it appropriate to begin pursuing alternative business
opportunities.
As at September 30, 1999, the Public Company had a net loss of US$ 40,832.
10.2 Management and Organization
The Public Company currently has no full-time employees or managers. The
directors of the Public Company are outlined below:
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
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Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 51
--------------------------------------------------------------------------------
Micheal Mitsiadis, attended Langara College in Vancouver, British Columbia
for several years. He obtained his real estate license and was employed
with Royal Pacific Realty for two years and subsequently for five years
with Sutton Group Realty. For the past eleven years, Mr. Mitsiadis has been
the corporate finance officer for Georgian Group.
Raymon Paquette, attended the University of Saskatchewan and subsequently
operated eight large clothing operations, three commercial buildings,
developed real estate property and established eight theme restaurants. He
is currently the Managing Director of The Canadian Mining Company, a public
company whose shares are listed for trading on The Alberta Stock Exchange.
Richard Harderer, attended Mount Royal College in Calgary, Alberta, where
he obtained a diploma in Business Administration, with a major in
marketing.
He was employed with The Alberta Stock Exchange from November 1989 to July
1992 as a Listing and Filing Assistant and from July 1992 to April 1996 as
a Listing Officer.
He has been President of PubCo Services Inc. a firm providing consulting
services to public companies and companies going public since April of
1996.
11.0- TANGIBLE ASSET BACKING -- PEPPERMILL CAPITAL CORPORATION
In determining the underlying book value of the shares of Peppermill and in
assessing the risk associated with the company, it is useful to view the
tangible asset backing of the company as at the Valuation Date.
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 52
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Canadian Dollars 09-30-99 Tangible Asset
Net Book Value Adjustment Backing
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------------------------------------------------------------------------------------------------------
Current Assets
------------------------------------------------------------------------------------------------------
Cash 1,570 1,570
------- --------
------------------------------------------------------------------------------------------------------
1,570 1,570
------------------------------------------------------------------------------------------------------
Liabilities
------------------------------------------------------------------------------------------------------
Current Liabilities
------------------------------------------------------------------------------------------------------
Accounts Payable to Related Parties 9,800 9,800
------------------------------------------------------------------------------------------------------
Accounts Payable & Accrues 1,561 1,561
------- --------
------------------------------------------------------------------------------------------------------
11,361 11,361
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Working Capital ($9,791) ($9,791)
------------------------------------------------------------------------------------------------------
Mining Claim - At Cost 2,129 2,129
------- --------
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Tangible Asset Backing, say (12,000)
------------------------------------------------------------------------------------------------------
</TABLE>
12.0 - VALUATION METHODOLOGIES
In valuing a business, there is no single or specific mathematical formula.
The particular approach and the factors to consider will vary in each case.
Valuation approaches are primarily income based or asset based.
Income based approaches are appropriate where an enterprise's future
earnings are likely to support a value in excess of the value of the net
assets employed in its operation. Commonly used income based approaches are
the capitalization of indicated earnings or cash flow and discounted cash
flow.
Asset based approaches can be founded on either going concern assumptions
(i.e. an enterprise is viable as a going concern but has no commercial
goodwill) or liquidation assumptions (i.e. an enterprise is not viable as a
going concern, or going concern value is closely related to liquidation
value).
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
Valuation approaches applicable to assets that are comprised predominantly
of intangible assets (e.g. high-technology techniques, research, patents)
can be grouped into three general categories: (1) cost approach; (2) market
approach (or sales comparison approach); and (3) income based approach.
As there are many definitions of cost, the cost approach generally reflects
the original cost or cost to reproduce the asset. This approach is premised
on the principle that the most an investor will pay for an investment is
the cost to obtain an investment of equal utility (whether by purchase or
reproduction). With respect to an investment, the most that an intrinsic,
notional purchaser would pay is the costs related to being able to put
oneself in the same situation, at the Valuation Date, as implied in an
option agreement, legal contract and/or earn-out situation, where there is
some reasonable expectation of future cash flows to be generated from such
an agreement(s).
The market or sales comparison approach uses the sales price of comparable
assets as the basis for determining value. If necessary, the market
transaction data is adjusted to improve its comparability and applicability
to the asset being valued.
The income-based approach considers the expected future earnings to be
derived through the use of the asset or the execution of the options. The
present value of the expected future earnings is determined with the
application of a discount or capitalization rate, reflecting the investor's
required rate of return on investment.
Valuation of Varner Technologies, Inc.
Given the nature and status of the Company's overall business operations at
the Valuation Date as well as to the approaches of valuation outlined
above, it is the
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
opinion of the authors of the Report that that the most appropriate method
in determining the enterprise of VTI at the Valuation Date involved an
income-based approach (i.e., Rules-of-Thumb) based on a going concern
assumption for the Company. After which, fair market value of the Company
was determined using the enterprise value and deducting certain amounts for
proper consideration of the obligations to the preferred shareholders.
Accordingly, a notional purchaser would associate certain value to the
goodwill attached to the Company at the Valuation Date in reviewing the
entire business as a going concern entity. In the above Rules-of-Thumb
approach Evans & Evans have relied extensively on information provided by
the Company's management as well as data from industry participants and
competitors as indicative in calculating the determination of the value of
the Company.
Evans & Evans considered a number of separate confirmation approaches, of
which, the comparable companies' approach was utilized as a means to test
the reasonableness of the authors of the Report enterprise valuation
conclusions utilizing the primary valuation method referred to above.
Evans & Evans also attempted to use a variety of additional confirmation
approaches. In this regard, Evans & Evans examined and considered the
following approaches, but were unable to use any of them:
(1) Capitalized Cash Flow approach. With no current significant positive
cash flows or stability of such cash flows assured in the short-term
this approach was deemed inappropriate.
(2) A review of certain ISP transactions. Evans & Evans reviewed a number
of fairly current transactions to the Company to consider any
indication of what these transactions indicated firms were paying for
companies like VTI. For
--------------------------------------------------------------------------------
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Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 55
--------------------------------------------------------------------------------
example, on November 8, 1999 Prodigy Communications Corporation
announced it had signed a definitive agreement to acquire FlashNet
Communications, Inc. (Nasdaq: FLAS) in a stock-for-stock merger. Under
the terms of the merger agreement, Prodigy will issue 0.35 shares of
Prodigy common stock for each share of FlashNet common stock
outstanding on the closing date of the transaction. Based on the
number of shares of FlashNet and Prodigy currently outstanding,
Prodigy will issue approximately 4,990,000 shares to complete the
merger, representing approximately 7% of Prodigy's then outstanding
shares. Another example is a transaction announced on May 6, 1999,
OneMain.com, Inc. (Nasdaq:ONEM) noted it had acquired "The Grid", a
non-metropolitan internet service provider based in San Luis Obispo,
California. At the end of the March 31, 1999, "The Grid" had
annualized revenues in excess of $8 million, more than 35,000
subscribers and was cash flow positive. 'The Grid provides Internet
services including dial-up and dedicated access, web hosting, and
e-commerce solutions to non-metropolitan areas in and around the San
Luis Obispo area. The size and magnitude of these companies and the
related consideration of liquid equity were found not to be enough
comparable to VTI in scope, nature and degree, hence making use of
this approach inappropriate.
(3) A Relief from Royalty approach. The relief from royalty approach is
based on the proposition that a firm would be willing to pay a royalty
in lieu of ownership, to possess the benefits of the Company's
technology. Given a review of the status of the development of the
Company and the lack of proprietary technology to garner such a
royalty this approach was deemed to also be inappropriate.
(4) A Replacement Cost approach. The Replacement Cost approach is based on
using the intellectual thoughts, experience and work which are already
embedded in the existing Intellectual Property as the starting point
for a
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
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Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 56
--------------------------------------------------------------------------------
replacement cost analysis. The Replacement Cost approach, therefore,
considers the cost for undertaking the technical and intellectual work
required to replace the existing technology that presently makes up
the Company's core business operation. The authors of the Report
carefully considered the use of this approach in valuing the Company.
However, as the Company is not a developer of technology -- but a
marketer instead - there is no actual technology in place as at the
Valuation Date to consider for replacement.
(5) A Modified Discounted Cash Flow approach. Evans & Evans considered the
use of taking the Company's projected cash flows and adjusting the
short-term expected results as a realistic means to estimate the fair
market value of the Company. Given, however, the status of the
potential fluctuations in such cash flows in the short- and long-term
before actual stability of operations would be achieved, the use of
this approach was also deemed inappropriate.
(6) Evans & Evans reviewed the implied value for the shares of the Company
based on the comparable transactions between arms-length parties as
follows:
a) In the first quarter of 1998 the Company issued 400,000 common
shares of the Company (representing 2.9% of the 13,567,115 issued
and outstanding shares) for gross proceeds of $400,000, which
would imply that the fair market value of 100% of the shares of
the Company at that date was $1.4 million.
b) In the second quarter of 1998 the Company issued 80,000 common
shares of the Company (representing 0.58% of the 13,647,115
issued and outstanding shares) for gross proceeds of $80,000,
which would imply that the fair market value of 100% of the
shares of the Company at that date was $13.8 million.
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
c) In the first quarter of 1999 the Company issued 316,029 common
shares of the Company (representing 2.1% of the 15,242,388 issued
and outstanding shares) for gross proceeds of $396,785, which
would imply that the fair market value of 100% of the shares of
the Company at that date was $17.6 million.
This approach was reviewed and again decided as an unreliable
determination of actual fair market value because the differences
in the implied values of the Company between the first quarter of
1998 and the first quarter of 1999 were not in any manner
supported by any significant change in the operations and balance
sheet of the Company, nor any reasonable assessment of the
above-identified qualitative factors. Further, these historical
share sales were to a number of investors for relatively small
investment amounts, not to sophisticated investors that would
have conducted sufficient due diligence to meet the standards of
fair market value.
Valuation of Peppermill Capital Corporation
The authors of the Report deemed the most appropriate method of valuation
of Peppermill was an Adjusted Book Value Approach, as effectively
Peppermill is a holding shell company with no active business and has not
yet begun trading on the NASD OTC BB at the time of the Proposed
Transaction.
13.0 - VALUATION OF VARNER TECHNOLOGIES, INC.
13.1 Primary Valuation Approach
Based on a survey and detailed review of the companies in the ISP industry,
particularly in the United States, Evans & Evans has used a
"Rules-of-Thumb"
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
income approach to first determine the enterprise value of VTI as at the
Valuation Date. At least 24 firms - who in total have millions and millions
of subscribers - that were interviewed noted to Evans & Evans that they
"often" use a Rules-of-Thumb approach in valuing ISP companies for
potential acquisition and/or merger candidates.
Evans & Evans discussed with industry insiders and managers - who on
average had five to ten years of ISP experience - their estimation of what
specific Rules-of-Thumb approach would be utilized in determining purchase
prices or values for these companies. The following was collected:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Respondents Opinion on Rules-of-Thumb Utilized
Percentages (rounded)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
<S> <C>
70% Trailing Revenues per Existing Subscriber
----------------------------------------------------------------------------------------------------------
20% Potential 12 month Revenues per Subscriber
----------------------------------------------------------------------------------------------------------
5% Multiple of Trailing Revenues
----------------------------------------------------------------------------------------------------------
5% Trailing Revenues per POP
----------------------------------------------------------------------------------------------------------
</TABLE>
Given the above, Evans & Evans utilized the "Trailing Revenue Per
Subscriber" as the basis for determining the enterprise value of the
Company on a Rules-of-Thumb approach.
Next, Evans & Evans asked managers and officers of the above noted
interviewed companies what was an acceptable range for them of "realistic
potential revenue per subscriber for a firm that provided prepaid Internet
and telecommunications services. The following was collected:
------------------------------------------------------------------
Respondents Opinion on
Percentages (rounded) "Trailing Revenue Per Subscriber"
Industry Rules-of-Thumb
------------------------------------------------------------------
------------------------------------------------------------------
10% US$50
------------------------------------------------------------------
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 59
--------------------------------------------------------------------------------
------------------------------------------------------------------
Respondents Opinion on
Percentages (rounded) "Trailing Revenue Per Subscriber"
Industry Rules-of-Thumb
------------------------------------------------------------------
------------------------------------------------------------------
25% US$51 to US$100
------------------------------------------------------------------
35% US$101 to US$150
------------------------------------------------------------------
30% US$176 to US$200
------------------------------------------------------------------
Given the above, Evans & Evans believed it was reasonable to utilized a
combination of the two ranges of trailing revenue per subscriber that were
most often selected - i.e., US$101 to US$200.
From this Evans & Evans believed that a range of US$150 to US$175 per
subscriber (i.e., the mid-point being US$150) was a reasonable
Rules-of-Thumb range to select. Consideration was given to the Company's
historical capability to acquire client bases of other ISPs and weighting
was also given to all of the above noted positive factors and risk factors
identified and outlined in the qualitative analysis conducted in section
9.0 of the Report.
Thereafter, Evans & Evans applied the management's reported "VTI's number
of Internet dial-up subscribers" (i.e., 25,000) times the Rules-of-Thumb
mid-point in order to assess a value to the Company. This resulted in a
range of enterprise value of between US$3,750,000 (25,000 x US$150) and
US$4,375,000 (25,000 x US$175), or if asked for a specific number, Evans &
Evans would select the midpoint of approximately US$4,000,000.
The Rules-of-Thumb Approach involves multiplying the number of dial up
subscribers of the Company by an industry standard revenue dollar value per
subscriber as determined through Evans & Evans interview process within the
industry in the U.S. Industry insiders made it very clear that paying
"cash" above this range of enterprise value was unlikely with a company
that has characteristics like VTI. Evans & Evans interviews with industry
analysts and competitors, as noted above, indicated that the financial
interest they have in ISP companies in this industry is still largely based
upon a revenue per good-standing subscriber
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
approach. The Company's management did confirm that all 25,000 of its
customer were considered to be in good standing at the Valuation Date.
The management of industry firms made it very clear that acquisition costs
above the early noted prices was highly unlikely. ISP managers noted that
payment for other intangible assets and potential subscribers was also not
very common - as access to the existing customers was the "only" criteria
important to investors acquiring such Internet clients. Fixed price
competition was noted as the main reason for acquiring and consolidating
smaller ISPs, but was also mentioned as a principal determinate in paying
less for such ISPs than even three or six months ago. With certain firms
now offering virtually unlimited free Internet access, price and value
compression was noted by 95% of interviewees to continue over the next five
years.
13.2 Secondary Valuation Approach
Comparable Companies and Transaction Approach
The authors of the Report identified, and examined data on, eleven (11)
companies active in the ISP industry in the United States whose shares
trade on North American stock exchanges.
Based on a review of comparable public companies in the ISP industry, Evans
& Evans have used, as a confirmation approach, the multiple of sales
approach to determine the fair market value of VTI as at the Valuation
Date.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
US $ Millions
--------------------------------------------------------------------------------------------------------------------------
Company Exchange Market TTM TTM Millions Market Cap/ Market Cap/
Cap Revenue Net Income # of Revenue Subscribers
Subscribers
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prodigy Communications Nasdaq 1,800 155.9 (67) 1.5 11.55 1,200
Corporation
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
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EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 61
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
US $ Millions
--------------------------------------------------------------------------------------------------------------------------
Company Exchange Market TTM TTM Millions Market Cap/ Market Cap/
Cap Revenue Net Income # of Revenue Subscribers
Subscribers
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
America Online, Inc. NYSE 187,800 5,058 869 19 37.13 9,884.21
--------------------------------------------------------------------------------------------------------------------------
EarthLink Network, Inc. Nasdaq 1,800 294.1 (100.7) 1.566 6.12 1,149.43
--------------------------------------------------------------------------------------------------------------------------
FlashNet Nasdaq 125.6 36.9 (23.3) 0.244 3.4 514.75
Communications, Inc.
--------------------------------------------------------------------------------------------------------------------------
PSINet, Inc. Nasdaq 3,300 463.1 (329.6) 1.2 7.13 2,750
--------------------------------------------------------------------------------------------------------------------------
Verio Inc. Nasdaq 2,900 188 (159.3) N/A 15.43 N/A
--------------------------------------------------------------------------------------------------------------------------
OneMain.com, Inc. Nasdaq 471.9 64.2 (65.3) 0.561 7.35 841.18
--------------------------------------------------------------------------------------------------------------------------
MindSpring Enterprises, Nasdaq 2,200 275.1 (17.6) 1.247 8.00 1,764.23
Inc.
--------------------------------------------------------------------------------------------------------------------------
Internet America, Inc. Nasdaq 78.6 18.8 (3.3) 0.05 4.18 1,572
--------------------------------------------------------------------------------------------------------------------------
ProtoSource Corporation Nasdaq 12.0 1.0 (1.1) N/A 12.0 N/A
--------------------------------------------------------------------------------------------------------------------------
Frontline Nasdaq 27.1 1.7 (3.9) 0.015 15.9 1,806.67
Communications
Corporation
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Of the above noted competitors, five (5) were deemed the most appropriate
as comparable to the Company.
Evans & Evans have used - as a confirmation approach - the multiple of
these below-listed ISPs 12-month trailing sales results to the 12-month
trailing results of the Company to assist in establishing the first stage
of a range of value first estimated using the Primary Valuation Approach.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------- -------------------------------------------
US $ Millions
----------------------------------------------------------------------------- -------------------------------------------
Company Exchange Market TTM TTM Millions Market Cap/ Market Cap/
Cap Revenue Net Income # of Revenue Subscribers
Subscribers
----------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FlashNet Nasdaq 125.6 36.9 (23.3) 0.244 3.4 514.75
Communications, Inc.
----------------------------------------------------------------------------- -------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 62
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------- -------------------------------------------
US $ Millions
----------------------------------------------------------------------------- -------------------------------------------
Company Exchange Market TTM TTM Millions Market Cap/ Market Cap/
Cap Revenue Net Income # of Revenue Subscribers
Subscribers
----------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OneMain.com, Inc. Nasdaq 471.9 64.2 (65.3) 0.561 7.35 841.18
----------------------------------------------------------------------------- -------------------------------------------
Internet America, Inc. Nasdaq 78.6 18.8 (3.3) 0.05 4.18 1,572
----------------------------------------------------------------------------- -------------------------------------------
ProtoSource Corporation Nasdaq 12.0 1.0 (1.1) N/A 12.0 N/A
----------------------------------------------------------------------------- -------------------------------------------
Frontline Nasdaq 27.1 1.7 (3.9) 0.015 15.9 1,806.67
---- --------
Communications
Corporation
----------------------------------------------------------------------------- -------------------------------------------
Approximate Average 8.5 1,183.65
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
Adjustments to the Above-Noted Average Multiplier
Evans & Evans were required to make adjustments to the above noted
comparable companies in order to account for the far less sales levels
expected by the Company in 1999. Annualized results of the Company to date
in 1999 would result in sales levels of US$2.2 million by the end of 1999.
This compares with average trailing sales levels of US$24.5 million by the
above companies. Accordingly, management's own sales results are
approximately 10% of the levels accomplished by the comparable companies
noted above. Given this, Evans & Evans also believed it realistic and
appropriate to adjust the revenue multiple of the Company down by 75% to
reflect the much lower level of annual sales and the resultant financial
risk associated with the Company. This meant that the market capitalization
to revenue implied value would also have to be reduced from 8.5 to
approximately 2.1. Accordingly, Evans & Evans took the annualized revenue
figure of US$2.2 million and multiplied it by the adjusted comparable
company multiple to obtain a value range of approximately US$4.6 million.
This assessment of enterprise value is supportive of the above valuation
assessment and does provide a confirmation of the high end of the
enterprise value range for
--------------------------------------------------------------------------------
EVANS & EVANS, INC.
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
the Company as at the Valuation Date - which would be expected in using a
comparable companies approach.
13.4 Valuation Conclusion
Based on VTI management's disclosure of 18,840,523 common shares of VTI
issued and outstanding and 620,000 preferred shares of VTI issued and
outstanding as at October 31, 1999 (i.e., for a total of 19,460,523 all
shares issued and outstanding) and an enterprise value of 100% of all of
the issued and outstanding shares of VTI as at that date in the range of to
US$3,750,000 to US$4,375,000. The fair market value of each common share of
VTI (after consideration of payment of the preferred shares) is in the
range of US$0.13 to US$0.16 calculated as:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
US$ Low High
--------------------------------------------------------------------------------------
<S> <C> <C>
All Common Shares, Issued and Outstanding 18,840,523 18,840,523
--------------------------------------------------------------------------------------
Enterprise Value 3,750,000 4,375,000
--------------------------------------------------------------------------------------
Less: Preferred Shares (620,000@US$2.00 per share) (1,240,000) (1,240,000)
--------------------------------------------------------------------------------------
Less: Risk/ Cost of Debt to Pay Preferred Shareholders (100,000) (100,000)
--------------------------------------------------------------------------------------
Fair Market Value (FMV) of Common Shares, say 2,400,000 3,000,000
--------------------------------------------------------------------------------------
FMV Per Common Share, Say US$0.13 US$0.16
--------------------------------------------------------------------------------------
</TABLE>
Note: (1) In calculating the FMV, Evans & Evans had to deduct obligation of
the preferred shareholders, which was taken at declared face value; (2) A
deduction of US$100,000 was done to reflect the incremental risk and cost
for the Company to fund (debt) the payment of the preferred shareholders;
and (3) The 4.25 million options that have been issued were not considered
in the FMV/share calculation as they have yet to be exercised and there is
no provision in any agreement reviewed by Evans & Evans as to terms and
conditions to their being exercised (i.e., and at what prices and time
frames and under what specific conditions).
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EVANS & EVANS, INC.
--------------------------------------------------------------------------------
<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
14.0 - VALUATION OF PEPPERMILL CAPITAL CORPORATION
14.1 Adjusted Book Value Approach
As effectively a holding company (the Public Company is in the process of
divesting its mineral property interests), Peppermill should, in view of
the authors of the Report, be valued under an Adjusted Book Value Approach.
Under the Adjusted Book Value Approach, the following items need to be
considered:
1) The Tangible Asset Backing of Peppermill as at October 31, 1999 was
nominal (refer to section 11.0, "Tangible Asset Backing" of the
Report).
2) A premium or allowance should, in the view of the authors of the
Report, be made for the fact that Peppermill is a public company and
that achieving such status entailed time and expenses not accounted
for in the Tangible Asset Backing of Peppermill. Such premium is
estimated by Evans & Evans to between US$150,000 and US$250,000
(mid-point of US$200,000) based on its discussions with five regional
promotion and investment relations firms that are involved in
establishing basic shell NASD OTC BB companies.
3) Consideration of the transaction between VTI and Peppermill to acquire
approximately 90% of all of the issued and outstanding shares of
Peppermill from an arms' length party for US$300,000; which has an
implied value for 100% of Peppermill of approximately US$330,000.
Given all of the above, the low-end of the valuation range for Peppermill
is calculated as follows:
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--------------------------------------------------------------------------------
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Valuation Approach Fair Market Weighting Adjusted Fair
--------------------------------------------------------------------------------------------------------
Value, Say Market Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Tangible Asset Backing 0 10% 0
("TAB"), October 31, 1999
--------------------------------------------------------------------------------------------------------
2. Public Company Premium 200,000 50% 100,000
--------------------------------------------------------------------------------------------------------
3. Current VTI/Peppermill Transaction 330,000 40% 132,000
--------------------------------------------------------------------------------------------------------
FMV, Say US$230,000
--------------------------------------------------------------------------------------------------------
</TABLE>
Given all of the above, the high-end of the valuation range for Peppermill
is calculated as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Fair Market Adjusted Fair
Valuation Approach Value, Say Weighting Market Value
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. Tangible Asset Backing 0 0% 0
("TAB"), October 31, 1999
--------------------------------------------------------------------------------------------------------
2. Public Company Premium 200,000 0% 0
--------------------------------------------------------------------------------------------------------
3. Current VTI/Peppermill Transaction 330,000 100% 330,000
--------------------------------------------------------------------------------------------------------
FMV, Say US$330,000
--------------------------------------------------------------------------------------------------------
</TABLE>
Based on 11,239,700 shares of Peppermill being actually issued and
outstanding as at the Valuation Date, the fair market value of 100% of the
shares of Peppermill as at that date in the range of US$230,000 to
US$330,000, the fair market value of each share of Peppermill is in the
range of US$0.02 to US$0.03.
--------------------------------------------------------------
U.S. Dollars Low High
--------------------------------------------------------------
Shares, Issued and Outstanding 11,239,700 11,239,700
--------------------------------------------------------------
Fair Market Value ("FMV") 230,000 330,000
--------------------------------------------------------------
FMV Per Share, Say US$0.02 US$0.03
--------------------------------------------------------------
15.0 - FAIRNESS CONSIDERATIONS
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Valuation Report and Related Fairness Opinion: December 2, 1999
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--------------------------------------------------------------------------------
The fairness of the Proposed Transaction is tested by: i) calculating, at
the time of the completion of the Proposed Transaction, the fair market
value of each share of VTI and the fair market value of each share of
Peppermill; ii) calculating whether the fair market value of each share of
Peppermill is in at least a comparable range upon completion of the
Proposed Transaction as prior to the Proposed Transaction; and iii)
considering qualitative factors, such as synergies of availability of
financing, that may result from the Proposed Transaction.
Fair Market Value Per Share of VTI and Peppermill, as at the Valuation Date
The fair market value of each common share of VTI as at the Valuation Date
was calculated to be in the range of US$0.13 to US$0.16. The fair market
value of each common share of Peppermill as at the Valuation Date was
calculated to be in the range of US$0.02 to US$0.03.
Under the Proposed Transaction, the ratio of the common and preferred
shares to be exchanged is:
(1) Peppermill will acquire all of the issued and outstanding common
shares of VTI on the basis of issuing 1.0 Peppermill common share
in exchange for 1.8624479 common shares of VTI. In other words,
Peppermill will issue 10,116,000 of its common shares in exchange
for 18,840,523 of VTI's common shares; and
(2) Peppermill will issue 1.0 preferred shares for each 1.0 preferred
shares of VTI. In other words, Peppermill will issue 620,000 new
preferred shares in exchange for 620,000 preferred shares of VTI.
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<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 67
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Fair Market Value of Peppermill, Post-Proposed Transaction ("NewCo")
The truest test of fairness - from the Peppermill shareholder's perspective
- in the opinion of Evans & Evans, is calculating whether the fair market
value of each share of Peppermill is in at least a comparable range upon
completion of the Proposed Transaction as prior to the Proposed
Transaction.
There are many events that are assumed will occur between the Valuation
Date and the closing of the Proposed Transaction. These events are either
conditions (e.g., the Offering) of the Proposed Transaction or are
necessary (e.g. due diligence, legal costs) aspects of the closing process.
This section calculates the fair market value of NewCo upon the closing of
the Proposed Transaction, the number of common and preferred shares of
NewCo that will issued and outstanding upon the closing of the Proposed
Transaction and the fair market value of each common share of NewCo upon
the closing of the Proposed Transaction.
First, the fair market value of NewCo is calculated by:
1) Adding the fair market value of VTI as at the Valuation Date in the
range of US$2,400,000 to US$3,000,000.
2) Adding the fair market value of Peppermill as at the Valuation Date in
the range of US$230,000 to US$330,000.
3) Subtracting the cost of VTI' and Peppermill's due diligence with
respect to the Proposed Transaction of $75,000 (Company management
estimate).
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<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 68
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<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Item/Adjustment Value (Low) Value (High)
in US$ in US$
------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Add: FMV of VTI, as at the Valuation Date 2,400,000 3,000,000
------------------------------------------------------------------------------------------------
2. Add: FMV of Peppermill, as at the Valuation Date 230,000 330,000
------------------------------------------------------------------------------------------------
3. Less: Proposed Transaction Costs (75,000) (75,000)
---------- ----------
------------------------------------------------------------------------------------------------
Total Fair Market Value, Say 2,550,000 3,250,000
------------------------------------------------------------------------------------------------
</TABLE>
The number of shares issued and outstanding of NewCo is calculated by
adding:
1) 11,239,700 shares of Peppermill, as at the Valuation Date.
2) Number of common and preferred shares to be issued to VTI as per the
Proposed Transaction. Out of the 11,239,700 existing common shares,
certain Peppermill shareholders are selling 10,116,000 common shares
to VTI for US$300,000. Hence, the only additional Peppermill shares to
be issued for the completion of the Proposed Transaction will be the
issuance of 620,000 preferred shares from the treasury of Peppermill
to existing VTI preferred shareholders (the terms and conditions of
the preferred shares are not changing as per management's disclosure
and the payment obligation of such shares has been calculated in
determining the fair market value of VTI).
-----------------------------------------------------------------------
Low High
-----------------------------------------------------------------------
Total Shares, Issued and Outstanding
-----------------------------------------------------------------------
1. As at Valuation Date 11,239,700 11,239,700
-----------------------------------------------------------------------
2. As per Proposed Transaction, additional 620,000 620,000
-----------------------------------------------------------------------
Total Shares, Issued and Outstanding 11,859,700 11,859,700
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Fair Market Value ("FMV") 2,550,000 3,250,000
-----------------------------------------------------------------------
FMV Per Share, Say US$0.22 US$0.27
-----------------------------------------------------------------------
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<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 69
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The fair market value of each of all of the shares of NewCo upon closing of
the Proposed Transaction is estimated to be in the range of US$0.22 per
share to US$0.27 per share, compared with a fair market value of each
Peppermill share of approximately US$0.02 per share to US$0.03 per share
prior to the Proposed Transaction.
16.0 - CONCLUSION AS TO FAIRNESS
Based upon Evans & Evans valuation work and subject to all of the
foregoing, Evans & Evans is of the opinion, as at the date of the Report,
that the terms of the Proposed Transaction are fair, from a financial point
of view, to the shareholders of Peppermill.
In assessing the fairness of the Proposed Transaction to the common
shareholders of Peppermill, Evans & Evans has considered, inter alia, the
following:
1. Comparison of the fair market value, as at October 31, 1999, of all
the outstanding common shares of Peppermill, to the fair market value,
on a pro forma basis, of the Peppermill common shareholders'
prospective interests in NewCo. The shares of NewCo, Post-Proposed
Transaction are of higher value than the shares of Peppermill as at
the Valuation Date.
2. Other potential benefits that may be realized subsequent to the
capital reorganization including possible synergies between Peppermill
and VTI. Evans & Evans have not attempted to quantify these potential
benefits, as for purposes of the fairness opinion; any enhancement in
the value of NewCo not otherwise reflected in its valuation conclusion
favors the common shareholders of Peppermill. Some of these potential
benefits are as follows:
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<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 70
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(i) The ability of VTI and their existing business and corporate
finance relationships bring a significant amount of business
development capability to NewCo, the same level of which may not
be available to either independently.
(ii) VTI has ongoing sales and revenues and cash flows. Thus VTI will
provide actual operating cash flows to NewCo.
(iii)The merger with VTI provides Peppermill with access to new
business opportunities and for expansion with operating business
and potential acquisition candidates.
EVANS & EVANS, INC.
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<PAGE>
Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation Page 71
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17.0 - RESTRICTIONS AND CONDITIONS
This opinion is intended for the purpose stated in this Report and, in
particular, is based on assumptions as to results that could reasonably be
expected at the Valuation Date. It is not to be the basis of any subsequent
valuation and is not to be reproduced or used other than for the purpose of
this Report without prior written permission in each specific instance.
Evans & Evans, Inc. disclaims any responsibility or liability for losses
occasioned to any parties as a result of the circulation, publication,
reproduction or use of this opinion contrary to the provisions of this
paragraph. This opinion is based upon information made available to us and
on the assumptions we have made. We reserve the right to review all
calculations included or referred to in this opinion and, if we consider
necessary, to revise our opinion in the light of any information existing
at the Valuation Date which becomes known to us after the date of this
opinion.
This Report has been prepared for the Independent Committee of Peppermill.
The Report may be distributed by the directors of Peppermill to the
shareholders of VTI and Peppermill at its discretion. This Report may not
be relied upon by any other person or entity without our express, prior
written consent.
18.0 - STATEMENT OF INDEPENDENCE
Evans & Evans, Inc. is, for the purposes of preparing this Report, an
independent valuator. None of the partners, employees or associates of
Evans & Evans, Inc., has, or anticipates the acquisition of any interest in
the assets, shares or business undertakings of Varner Technologies, Inc. or
Peppermill Capital Corporation.
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation
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Appendix 1:
Comparable Companies
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation
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Prodigy Communications Corporation ("Prodigy") of White Plains, New York
Prodigy offers its Internet subscribers Internet access, Web hosting, and
e-commerce services. Prodigy still offers its original online services,
including e-mail and chat groups, as Prodigy Classic. Prodigy, which has a
total of 1.2 million subscribers, which includes 150,000 for Prodigy's
Mexican ISP service. The company has agreed to combine its Internet access
operations with those of SBC Communications (650,000 customers). Prodigy
will own 57% of the partnership, which will operate under the Prodigy brand
name; SBC will own 43%.
PSINet, Inc. ("PSINet") of Herndon, Virginia
PSINet offers a variety of access services, Web-site design and hosting,
electronic commerce, and security programs. PSINet has offices in 11
countries and serves 26,500 corporate customers. PSINet is no longer an
Internet service provider (ISP) for individual consumers, but it does allow
other consumer-based ISPs to use its networks for a fee. PSINet has
assembled a worldwide fiber-optic network with 600 points of presence
(POPs), serving 22 countries in North and South America, Europe, and the
Asia/Pacific region.
Verio, Inc. ("Verio") of Inglewood, Colorado
Verio owns or has majority stakes in more than 35 business-oriented
providers across the US. Verio is buying ISPs with a large number of
dedicated accounts (business accounts with direct lines to the provider)
and is marketing to business and institutional subscribers. Verio has
approximately 190 points of presence (POPs) in the US, and it links its
POPs by leasing fiber capacity, mainly from Qwest Communications
International Inc. of Denver, Colorado. Focusing on small and mid-sized
businesses, Verio provides Internet access through dial-up, DSL (digital
subscriber line), frame relay, and ISDN connections. The company also
provides enhanced Internet services, including Web hosting for about
265,000 sites in some 170 countries.
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
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OneMain.com, Inc. ("OneMain") of Southhampton, New York
OneMain.com focuses on the underserved small town, suburban, and rural
markets. OneMain.com has acquired ISPs in Arkansas, California, Florida,
Illinois, Indiana, Kansas, Missouri, Ohio, Pennsylvania, Tennessee, and
Vermont. Overall the company serves more than 415,000 subscribers.
OneMain.com offers dial-up and high-speed Internet access, Web hosting,
e-mail, and Internet relay chat as a "Hometown Internet" service, allowing
customers to use local phone numbers to connect (instead of pricier
long-distance numbers).
America Online, Inc. ("AOL") of Dulles, Virginia
Its more than 19million subscribers make AOL the world's #1 provider of
online services. AOL's 1998 acquisition of CompuServe (now subsidiary
CompuServe Interactive Services), which has more than 2 million
subscribers, helped to secure AOL's dominance. AOL appeals to those seeking
entertainment, but CompuServe is geared toward professionals and
small-business owners. Its purchase of Netscape Communications in 1999
brought the popular Navigator Web browser and the Netcenter Internet portal
into the AOL fold. The company is also launching an interactive TV service
(AOL TV) via the DIRECTV satellite service and has forged an alliance with
computer maker Gateway.
MindSpring Enterprise, Inc. ("MindSpring") of Atlanta, Georgia
MindSpring has relied on acquisitions to move into the top tier of US ISPs,
and by merging with rival EarthLink the company will become the number two
ISP in the U.S. behind AOL. Dial-up Internet access (more than 1 million
subscribers) accounts for nearly 85% of MindSpring's sales. The company
also provides Web hosting (45,000 accounts) and dedicated access lines for
business customers. MindSpring, is beginning to offer high-speed cable
modem Internet access over leased networks.
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation
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EarthLink Network, Inc. ("ENI") of Pasadena, California
EarthLink Network has more than 1 million customers throughout the US and
Canada. Upon the merger with MindSpring, the combined company will be the
#2 US ISP behind AOL. The company's TotalAccess software package works with
third-party browsers and is marketed through distribution agreements with
several prominent
FlashNet Communications, Inc. ("FlashNet") of Fort Worth, Texas
FlashNet provides Internet access to approximately 244,000 customers in
more than 450 cities across the US. FlashNet's services include Web access,
e-mail, newsgroup access, and Web pages. FlashNet offers its small and
medium-sized business clients high-speed dedicated and broadband access,
Web hosting, and e-commerce opportunities. It plans to add long-distance
access and advanced data services. The company uses radio, TV, and direct
advertising to promote its products and sells several service packages
through a direct sales force and independent representatives. In November
of 1999, the Company agreed to be acquired by Prodigy Communications Corp.
Internet America, Inc. ("IAI") of Dallas, Texas
IAI offers a package that includes unlimited Web access in addition to
e-mail, Internet relay chat, file transfer protocol, and news access. Other
services include multiple e-mail mailboxes and personal Web sites. Its
50,000 customers (primarily individual users) are concentrated in North
Texas. The company's Airnews.net, which is included in its dial-up access
package or can be purchased separately by other customers, offers access to
millions of news articles and serves about 3,800 customers in 35 countries.
ProtoSource Corporation ("ProtoSource") of Santa Monica, California
Through its ProtoSource Network, the Internet service provider offers
online access to about 3,700 residential, business, and government
customers, primarily
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation
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in California. In addition to dial-up and high-speed ISDN Internet access,
ProtoSource provides custom intranet and Web site design and
implementation, Web hosting, and domain registration. The Company offers
nationwide access through an agreement with communications provider
OmniCall.
Frontline Communications Corporation ("Frontline") of Pearl River, New York
Frontline Communications has acquired a number of companies -- including
many ISPs, WebPrime (Web design and development), and WOWFactor (Web
marketplace) Frontline primarily serves individual and small-business
subscribers in the northeastern US. It has about 15,000 subscribers in New
Jersey, New York (including New York City), and the Philadelphia
metropolitan area. Dedicated, dial-up, and high-speed DSL (digital
subscriber line) access options are provided through a network of leased
data lines and 11 POPs (points-of-presence). The company has competitive
local-exchange carrier status in New York and plans to build its own
network infrastructure.
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<PAGE>
Draft Valuation Report and Related Fairness Opinion: December 2, 1999
Peppermill Capital Corporation
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Appendix 2:
VTI Business Plan and Financial Statements and Financial Projections
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