U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 7
To
FORM 10-SB
General Form For Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Exchange Act of 1934
CYPOST CORPORATION
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(Name of Small Business Issuer in Its Charter)
Delaware 98-0178674
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
900-1281 West Georgia Street
Vancouver, British Columbia V6E3J7
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(Address of Principal Executive Offices) (Zip Code)
(604)904-4422
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Item 1. Description of Business.
(a) Business Development.
CyPost Corporation (hereinafter referred to as the "Registrant", the
"Issuer", or as "CyPost") was chartered in Delaware on September 5, 1997. The
original name was "E Post Corporation" but shortly after its formation it
changed its name to minimize potential trademark difficulties with third
parties. From its inception CyPost was headquartered in Vancouver, British
Columbia but in order to access U.S. capital and product markets it was
organized as a Delaware corporation. On the same date as its original date of
charter, ie. September 5, 1997, it also organized a separate wholly owned U.S.
subsidiary, CyPost USA, Inc. CyPost Corporation was chartered to engage in any
lawful activity in which Delaware corporations may engage but it was intended
that it act primarily as a holding company with its business operations
conducted through one or more subsidiaries, either in Canada, the United States
or elsewhere. CyPost acquired a second subsidiary, ePost Innovations, Inc.
("ePost Canada"), a British Columbia corporation, Mushroom Innovations, Inc.
("MII"), also a British Columbia corporation on September 15, 1997. At the time
of this acquisition, ePost Innovations, Inc. possessed certain intellectual
property rights and by virtue of the acquisition, CyPost indirectly acquired
these intellectual property rights. Neither CyPost, CyPost USA nor ePost Canada
had commenced substantial business operations at this time and therefore all
were considered "development stage companies". Under the terms of the ePost
Canada transaction, CyPost acquired all the issued and outstanding shares of
ePost Canada from MII, and in return issued 2,000,000 of its pre-split, or
3,000,000 of its post-split shares to MII.
On October 29,1998, CyPost acquired all of the issued and outstanding
capital stock of Communications Exchange Management Inc. ("CEM"), a British
Columbia corporation, also from MII in exchange for 4,180,000 pre-split, or
6,270,000 post-split shares of CyPost common stock. Both CEM and CyPost were
still development stage companies at the time of this acquisition. CEM remains
a wholly-owned subsidiary of the Registrant. In addition, shareholders of MII
were also shareholders of the Registrant at the time of the CEM acquisition.
CyPost acquired CEM for the itellectual property that CEM possessed. Currently
the encryption technology and software code that was acquired from CEM is
required to build the Navaho family of products. Further details regarding the
CyPost Canada and CEM acquisitions are set forth in "Item 7. Certain
Relationships and Related Transactions". CyPost remained a development stage
company until the first quarter of 1999 when it began to offer the first of its
"Navajo" software encryption products. In February 2000, CyPost acquired Playa
Corporation, a Japanese-based provider of electronic instant messaging services.
Through various acquisitions, CyPost conducts its business through the
subsidiaries listed on Exhibit 21.Today, CyPost conducts, through its
subsidiaries, business operations in Canada, the U.S. and Japan. Unless
otherwise noted herein, all dollar amounts refer to U.S. Dollars ("USD$")--not
Canadian Dollars. In February 2000, CyPost acquired Playa Corporation, a
Japanese- based provider of electronic instant messaging services. Through
various acquisitions, CyPost conducts its business through the subsidiaries
listed on Exhibit 21.
(b) Business of the Issuer.
The Issuer is a holding company, the principal assets of which consist of
the capital stock of the subsidiaries listed on Exhibit 21. To date, the
Issuer, through its operating subsidiaries, has been largely involved in three
<PAGE>
separate, but complementary businesses, i.e.(i)the development and sale of
software products using email encryption to enhance user security and
convenience ("Software Products"), (ii) providing internet connection services
to subscribers and (iii) providing instant messaging and electronic greeting
card services. (Unless otherwise qualified herein, the term "Company" shall be
used to refer to the business operations of the Registrant and its
subsidiaries.) The Company is currently offering two versions of its "Navaho"
software encryption programs (Navaho Lock with Voice (Paid and Promotional) and
, Navaho Zipsafe.) The Company is developing or partnering with a number of
companies to provide products and services to its Internet Service provider
customers through an application server model which promotes server level
distribution of products rather than end user solutions. On February 23, 2000,
the Company completed the acquisition of Playa Corporation developers of the
"Yabumi" instant messaging and e-greeting card service. The "Yabumi" community
of users numbers approximately 85,000 and is located primarily in Japan.
Markets for Software Products.
The Company has developed the Navaho family of software products for the
following markets:
1) Personal Use--consumers who have little or no technical knowledge
of computers and computer programs but who wish to keep electronic
correspondence private.
2) Professional Use--professional business users such as attorneys,
accountants, medical doctors, as well those who need secure communication
capability while traveling
3) Small Businesses--companies between 10-50 employees with a small,
or no Information Services department and who operate out of a single location
the Company is developing software for a fourth target audience:
4) Enterprise--large businesses with more than 50 employees and who
use corporate intranets including LAN's and WAN's, Extranets, and government
institutions
Products Over the last two years, the Company has discussed offering five
(5) different security encryption software products each of which bear the name
"Navaho". These have been re-clarified and re-grouped, changing the total to
two (2)product offerings. (See discussion of these under "Status of any
publicly announced new product or service").
Distribution Method of Software Products and ISP Service.
The CyPost family of Software Products are delivered digitally over the
Internet. CyPost's website, www.cypost.com, offers a full description of its
products and the chance for viewers to make a "cyber-purchase " of its software.
In addition, consumers are able to purchase products directly from popular
online retail sites such as www.beyond.com, and www.futureshop.com to name a
few. CyPost has entered into a distribution agreement with Digital River, Inc.,
a company that provides proprietary software delivery technology to more than
2000 software publishers and online retailers. The Company has also negotiated
with several distribution competitors of Digital River, Inc. who offer similar
capabilities including ReleaseNow.com, NetSales, Inc. and ShopNow.com. The
Company estimates that its Navaho products are currently available at more than
1000 secure websites.
CyPost's acquisition strategy includes the acquisition of Internet Service
providers with a target of acquiring 50,000-100,000 subscribers to add to its
approximately 20,000 existing subscribers. This network of service provider
subscribers become a direct marketing and distribution channel for CyPost. The
Company plans to market the Navaho family of products including Navaho Lock with
Voice (Promotional) (formerly called Navaho Express ) to its ISP client base in
early 2000. CyPost will also distribute a line of privacy and protection
solutions through industry partnerships such as content management solutions and
anti-virus protection.
Further to the ISP distribution network, the Company plans to secure a
relationship with a major advertising firm to work as representatives of the
aforementioned Navaho Express, the promotional version of the Navaho products.
The Company has spoken with several advertising firms, but has not entered into
any definitive agreements. A relationship with an advertising firm, if
consummated, would leverage the advertising firm's client base and their need
for one to one marketing tools.
Status of any publicly announced new product or service. CyPost has announced
and or marketed the following products, over the last two years:
Navaho Lock (version 2.x)
Navaho Lock with Voice (Paid & Promotional)
Navaho Viewer
Navaho ZipSafe
Navaho Office Edition (currently in development)
Early Versions of Software
Navaho Lock version 2.x: Navaho Lock 2.x was the first generation of Navaho
products and have now been superceded by Navaho Lock with Voice. These early
versions of Navaho Lock software enabled consumers to send and receive secure
email and attachments such as documents, spreadsheets, digital sound files, and
business presentation. The program (many of the features available now in the
successor products) is intuitive, simple to operate, and exceptionally fast.
The product's unique combination of features include: full integration with
all major e-mail programs; built-in file compression for faster transmission
times; a user-friendly GUI (Graphical User Interface); and CyPost's exclusive
"drag-and-drop" feature that enables users to encrypt and compress files simply
by dragging and dropping them into an encryption field. Users can select the
strength of privacy protection according to their needs, by simply specifying
40-, 56-, 112-, 128-, or 3DES 168-bit encryption algorithms.
Navaho Lock version 2.x uses private key, or symmetric key, encryption.
Many regard this as superior to public key encryption. In comparison, the
largest-selling competing software relies on an "asymmetric" method of
encryption commonly known as "public/private key". In a public/private key
approach, a publicly available algorithm is used in combination with two
corresponding private keys that generally must be issued by a third party. Not
only is public key encryption notoriously slow (approximately 1,000 times slower
than symmetrical encryption), but the approach also exposes users to the
additional costs and risks involved in relying on a third party to verify the
identity of the sender.
Navaho Viewer: Navaho Viewer provided an alternative for those consumers Who did
not want to purchase a full working copy of Navaho Lock 2.x, but who required
the ability to read encrypted files sent to them by friends or colleagues.
Navaho Viewer was available for download free at CyPost's web site and numerous
shareware web sites on the Internet. This product is no longer offered, as the
company has a free version of Navaho Lock with Voice available to anyone who
wants to view received Navaho email packages.
Software currently offered by CyPost
Navaho Lock with Voice (Paid and Promotional): Released in March 2000,
Navaho Lock with Voice software is the successor to Navaho Lock v2.x above
(Section named "Early Versions of Software"). Incorporating all the unique
combination of features (show below) of CyPost's original product, Navaho Lock
with Voice allows the user to send and receive compressed and encrypted document
packages, as well as private voice messages, over the Internet.
<PAGE>
The product's unique combination of features include: full integration with
all major e-mail programs; built-in file compression for faster transmission
times; a user-friendly GUI (Graphical User Interface); and CyPost's exclusive
"drag-and-drop" feature that enables users to encrypt and compress files simply
by dragging and dropping them into an encryption field. Users can select the
strength of privacy protection according to their needs, by simply specifying
40-, 56-, 112-, 128-, or 3DES 168-bit encryption algorithms.
Navaho Lock family of products uses private key, or symmetric key,
encryption. Many regard this as superior to public key encryption. In
comparison, the largest-selling competing software relies on an "asymmetric"
method of encryption commonly known as "public/private key". In a
public/private key approach, a publicly available algorithm is used in
combination with two corresponding private keys that generally must be issued by
a third party. Not only is public key encryption notoriously slow
(approximately 1,000 times slower than symmetrical encryption), but the approach
also exposes users to the additional costs and risks involved in relying on a
third party to verify the identity of the sender.
Summary of new features include:
o Ability to send and receive encrypted Voice E-mail
o Addition of a shredder for securely deleting data from the hard disk
o A new and improved streamlined user interface for greater ease of
use
o Numerous changes to increase user productivity and maximize usage
Navaho Lock with Voice consists of two products, one paid and the other
promotional. The paid version retails in the same channels as Navaho Lock 2.x
for $49.95 US. Navaho Lock with Voice (Promotional) differs from Navaho Lock
with Voice (Paid) in that it is distributed to users free of charge in exchange
for users agreeing to view advertising supplied within. The paid version
retails at www.cypost.com. The Promotional version is available at
www.cypost.com and other download sites on the web. (e.g. zdnet.com,
download.com, fileworld.com)
Navaho Lock with Voice (Promotional) {product renamed prior to market release
from Navaho Express. It should be noted that this product has replace and made
Navaho Viewer obsolete}: This released product name of the promotional version
of the single user Navaho Lock with Voice product , was used until late 1999
however 'Navaho Express' is no longer being used. Now referred to as 'Navaho
Lock with Voice (Promotional)', it offers a unique one to one marketing
opportunity for any business concerned about their clients' privacy and
protection. This product integrates the functionality of Navaho Lock with Voice
and a promotional HTML window allowing the sponsor company to communicate offers
and promotions directly to their client base. There are no differences (except
for the upgrades that occur in any software development process) except in name
between Nahavo Express and Navaho Lock Promotional.
Navaho ZipSafe: (released in March 1999) This file-security software,
designed to ensure the privacy of data on laptops and home PCS, is an extension
of CyPost's Navaho product line.
Utilizing the same advanced encryption and compression technology used
in Navaho Lock and offering comparable ease-of-use features (including a user-
friendly GUI and similar "drag-and-drop" methodology), ZipSafe has the ability
to encrypt and then condense files by as much as 70% in a matter of seconds.
This product enables users to secure all computer files, folders, and
directories on a local hard drive such as that found on a laptop computer.
Navaho ZipSafe is available on a free thirty (30) day trial basis at the CyPost
owned website www.cypost.com, as well as zdnet.com, download.com and winfile.com
and for immediate purchase for $19.95 USD, at beyond.com, shop.tucows.com and
digitalriver.com.
Products under Development
Navaho Lock Office Edition: On March 24 1999, CyPost announced the commencement
of development of its office edition. The product concept is still under
development, but temporarily on hold with the focus devoted to the launch and
market development of Navaho Lock with Voice (paid and promotional).
Competitive Encryption Products
CyPost's Navaho line of privacy and protection solutions faces competition from
a number of rival products. The largest and most noteworthy competitors are:
NETWORK ASSOCIATES INC., INVISIMAIL INTERNATIONAL LTD., and BALTIMORE. The
following table compares these products to Navaho Lock with Voice version 3.0.
All information was gathered from the respective company web sites and September
1, 1999 issue of PC Magazine.
Table 2. Comparative Analysis of Navaho Lock with Voice 3.0
<TABLE>
<CAPTION>
PRODUCT NAVAHO LOCK PGP DATA RPK INVISIMAIL MAILSECURE 2.4
WITH VOICE 3.0 SECURITY SUITE DELUXE 4.0
6.53
<S> <C> <C> <C> <C>
COMPANY . . . . . . . . . CYPOST CORP. NETWORK ASSOCIATES INVISIMAIL INTL. BALTIMORE
PRICE . . . . . . . . . . $ 49.95 $ $84.00 $ 44.99 $ 49.95
KEY STRENGTH. . . . . . . 40/168 BIT 1024-4906 BIT 607-1279 BIT 128/2048 BIT
SECRET KEY PUBLIC KEY PUBLIC KEY PUBLIC KEY
VOICE EMAIL . . . . . . . Y N N N
DOCUMENT SHREDDER . . . . Y Y Y N
ENCRYPTION METHOD . . . . SYMMETRIC ASYMMETRIC ASYMMETRIC ASYMMETRIC
FILE COMPRESSION. . . . . Y N Y N
DRAG & DROP ENCRYPTION. . Y Y N N
EXPORTABLE OUTSIDE US . . Y Y N N
X.509 CERTIFICATE SUPPORT N Y N Y
</TABLE>
Key Lengths With Similar Resistance to Brute-Force Attacks
The following table compares symmetric key encryption (method used by Navaho
Lock with Voice) against brute-force attacks, defined as an attacker/hacker
trying every possible key until the right one is found. You will note
asymmetric ciphers typically require significantly longer keys to provide the
same level of security as symmetric ciphers. Therefore the system used by
Navaho products utilizes less computing power to accomplish the same level of
security, in less time. All other products compared above use assymetric key
encryption, illustrating a clear advantage for the Navaho line of products.
<TABLE>
<CAPTION>
Symmetric Key Length Public Key Length
<S> <C>
56 bits 384 bits
64 bits 512 bits
80 bits 768 bits
112 bits 1792 bits
128 bits 2304 bits
168 bits 3840+ bits
</TABLE>
NETWORK ASSOCIATES INC. (Nasdaq: NETA), a public company headquartered in Santa
Clara, California is the world's largest independent network security and
management software company, and the eighth largest independent software company
with more than 60 million users worldwide, $683 million in revenue in fiscal
1999, and over 2700 employees worldwide.
According to claims made on the Company web site, NETWORK ASSOCIATES has the
largest market share of email encryption software, with its PGP software being
the most well-known email encryption software program currently on the market.
PGP DATA SECURITY SUITE ($84.00) is available for purchase at the Network
Associates owned web site www.pgp.com as well as other online vendor sites.
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Notable differences between PGP DATA SECURITY SUITE 6.53 and Navaho Lock with
Voice 3.0 are: 1) the lack of voice capability in PGP, 2) the lower purchase
price of Navaho Lock with Voice, 3) built in file compression in Navaho Lock
with Voice 3.0, and 4) use of symmetric key encryption in Navaho Lock with
Voice.
BALTIMORE (Nasdaq: BALT), formerly BALTIMORE TECHNOLOGIES, is a public company
with regional headquarters in Dublin (Ireland), Needham (Massachusetts) and
Sydney (Australia), develops and markets security products and services for a
wide range of e-commerce and enterprise applications. Its products include
Public Key Infrastructure (PKI) systems, cryptographic toolkits, security
applications and hardware cryptographic devices.
BALTIMORE was formed by the merger in January 1999 of Baltimore Technologies
Limited and Zergo Holdings plc. Baltimore now employs nearly 700 people in over
26 global locations. The company reported unaudited pro forma group revenues
for the 12 months to 31 December 1998 of $30 million (More recent financial
figures were not available from the company web site nor www.freeedgar.com).
<PAGE>
BALTIMORE'S email encryption software, named MAILSECURE is an S/MIME plugin for
Microsoft email clients, Lotus Notes and Eudora. Unlike Navaho Lock with Voice,
MAILSECURE is 1) based on public key infrastructure technology, 2) does not have
built in voice email capability and 3) lacks the ability to securely delete
documents via a document shredder.
INVISIMAIL INTERNATIONAL LTD., founded in 1997, specializes in secure Internet
commerce and communications solutions for a wide range of applications.
Developed using RPK SECURITY, Inc.'s core technology, the RPK ENCRYPTONITE
Engine , the INVISIMAIL range of products supports secure message-based
applications including Client Services, E-Commerce, and EDI.
INVISIMAIL INTERNATIONAL LTD., email encryption program called INVISIMAIL DELUXE
automatically encrypts and decrypts e-mail using 607-1279bit public/private key
encryption and signs files using DSA Digital File Signing. The program was
selected in the September 1999 issue of PC Magazine as the Editors Choice for
email encryption.
Market - ISP Division
CyPost Network of Service Providers: Through ISP acquisitions, CyPost has
established approximately 20,000 ISP subscribers to date. The Company hopes to
acquire a target of 50,000 to 100,000 ISP customers. Its goal is not to
establish itself as a competitor of the large service providers, including
telecommunication and cable companies, but rather to establish a niche market in
response to the growing concerns for privacy and protection. The CyPost network
offers a range of services including connectivity services, server co-locations,
web hosting, email services (listservs for corporate emailings) as well as lump
sum payments for custom programming and other specific projects. These services
will be extended to include privacy and protection solutions such as the
previously mentioned content management and anti-virus solutions as well as a
number of other consulting services for network security issues. The Company
has a vendor arrangement with UUNet Canada to provide connectivity across the
country and plans to enter into a similar arrangement in the U.S. These
arrangements allow the CyPost Network of Service Providers to focus on excellent
customer service and security solutions rather than merely providing points of
connectivity. The 'niche' market that the Company hopes to serve will focus
on end to end secure communication services and solutions for small to medium
sized businesses. These customers tend to require additional services (as
smaller companies are less likely to have dedicated individuals to manage
networking issues, web programming, and other technical issues). CyPost does
not believe that larger ISPs will fail to address security issues altogether.
The company does believe that its focus on customer service for smaller
businesses and security will allow it to provide a greater range of security
products and services to its smaller client base.
Competition - ISP Division
The CyPost Network of Service providers operates in the growing and
extremely competitive Internet services market. According to a December 1999
report by International Data Corporation, America Online and UUNet still have a
commanding lead over their competitors in their ISP market segments (consumer
and business access, respectively). Moreover, the U.S. ISP market is projected
to increase at a 27.9% compound annual growth rate from $17.1 billion in 1999 to
$60.5 billion in 2004. The overall market will be driven by wholesale and value
added services. Wholesale services' revenue will be highest in the early part
of the forecast period, and value-added services, led by Web hosting , will
accelerate in 2001 and 2002. Business access services will increase at a brisk
pace throughout the forecast period. Consumer Internet access services will
continue to grow but at a slower rate than the other market segments.
Our competitors in connectivity, wholesale services and value added
services include many large companies that have substantially greater market
presence, financial, technical, marketing and other resources than we have. The
Company competes directly or indirectly with the following types of companies:
- established online services, such as America Online, the Microsoft
Network, Earthlink and Prodigy;
- local, regional and national ISPs;
- national telecommunications companies, such as AT&T and GTE;
- regional Bell operating companies; and
- online cable services.
Competition in the future is likely to increase and we believe this will
happen as diversified telecommunications and media companies acquire ISP's, and
as ISP's consolidate into larger, more competitive entities.
Competitors may bundle security services and products with Internet
connectivity services, potentially placing the CyPost Network of Service
providers at a significant competitive disadvantage. In addition, competitors
may charge less than we do for Internet services, forcing us to reduce and/or
prevent us from raising our fees. Subsequently future revenue growth and
earnings may suffer. CyPost will attempt to compete against such companies by
offering a combination of proprietary software as well as software from partners
to its ISP subscribers. While other larger ISPs offer some security solutions
(many are offering client-end filtering as an example) CyPost is reviewing the
entire spectrum of products and services available in house or through
partnerships, to ensure the CyPost Network of Service Providers have a thorough
selection of security options to utilize or choose from. Specifically, CyPost
can offer its subscribers anti-virus filtering at the server level, content
management filtering (through an arrangement with LogOn Data's Xstop),
proprietary email security products (Navaho product line), secure transaction
solutions (custom programming) and soon to be delivered, secured instant
messaging (Yabumi). Email encryption is merely one piece of the larger security
product line available or soon to be available to the CyPost Network of Service
Providers.
Government Regulation
The Company believes that the design features of the Navaho products are
unique in connecting to existing Crypto Service Providers and using them without
itself containing any direct encryption coding. Because of this feature, the
Navaho products fall outside of government regulations such as the munition or
export laws that previously restricted other forms of software encryption
programs. The term "crypto service provider" is short for "cryptographic
service provider" and refers to the computer language by which cryptographic
standards and algorithms are implemented or used. Different "crypto service
providers " use different programming assumptions and data formatting protocols.
Thus one software encryption program may work well one type of crypto service
provider but not necessarily work well with another type. The result is that it
is difficult to design encryption software that will be readily compatible with
the widely varying crypto service provider formats/protocols which are in use
today in today's digital communication environment. In contrast, CyPost's
"Navaho" family of Software Products is readily compatible with a broad range of
provider formats/protocols.
Dependence on Key Customers
The Company derives the majority of its revenues from its ISP and electronic
messaging operations and as such enjoys the benefit of a broadly diversified
customer base of approximately 115,000 located throughout Ontario, the Canadian
and Pacific Northwest and in Japan.
<PAGE>
With respect to its direct software sales which comprised approximately
1.5% of its 1999 revenues, the Company has derived a significant portion of its
sales revenues from a "Preferred Provider Contract". Under this March 1999
agreement, the Canadian Bar Association, British Columbia branch will license
250 copies of Navaho Lock and Navaho ZipSafe. In addition, clients of these bar
members will be able, for a fee, to license their own versions of these
programs. This contract accounts for a significant portion of the Company's
Software Products revenues to date.
The Company is actively seeking to broadly market its products and has
taken a number of steps to actively market its products including use of a
variety of print and communications media to build consumer awareness such as
direct mailings, featured appearances of Company personnel on various television
and radio shows broadcast in the U.S. and Canada (Caspar Weinberger's World
Business Review, Dave Chalk's Computer Show; Dotto's Cafe, CKNW radio and CKWX
radio), and features in selected magazines (Security Magazine, PC Magazine
Online, Portable Computing, PC Magazine OnLine, Portable Computing , Computer
Paper, and Canadian Bar).
The Company has hired a director of marketing and anticipates hiring a
director of sales in the near future. In addition, during 1999 the Company
concluded acquisitions of five internet service providers. See "The 1999
Acquisitions and the Company's Broadened Strategic Focus".
Research and Development
The Company has abandoned its former development of the CyPost Terminal, a
type of communications software designed to operate on a remote terminal
network. Since December 1998, the Company has focused its research and
development efforts on refinements and/or improvements to its Software Products.
The Company has introduced five(5) versions of its "Navaho" encryption software
during 1999. It is currently developing English and other language versions of
the "Yabumi" Instant Messaging software which it acquired when it bought Playa
Corporation in February of 2000. Any monies expended on research and
development will be absorbed directly by the Company and cannot be "passed
through" to customers in the form of any "cost plus" type of contract.
The 1999 Acquisitions and the Company's Broadened Strategic Focus
The Company has acquired five (5) internet service providers during 1999.
Prior to this time, the company did not provide ISP services.
Acquisition of Hermes Net Solutions, Inc. and Intouch Internet Inc.:
Effective June 30, 1999, the Company purchased all the issued and outstanding
shares of Hermes Net Solutions, Inc. for a total cash consideration of $528,000
USD,of which $453,000 was paid on closing and $75,000 USD holdback was paid to
the seller in December 1999, as defined in the purchase agreement. Also
effective June 30, 1999, the Company purchased all the issued and outstanding
shares of Intouch.Internet Inc. for a purchase price of $293,000 USD. The
consideration for this purchase consisted of cash of $265,000 USD and the
issuance of 6,570 pre-split, or 9,855 post- split, common shares (issued on
August 9, 1999) valued at $28,000 USD. Both acquisitions have been accounted
for by the purchase method of accounting. In both acquisitions, the net assets
acquired included goodwill and customer lists which will be amortized over three
years on the straight line basis.
Acquisition of NetRover Inc. and NetRover Office Inc.: On October 4, 1999,
the Company purchased all the issued and outstanding shares of NetRover Inc.
and NetRover Office Inc. for a purchase price of $2,700,000 USD. The purchase
price was satisfied by a cash payment of $2,000,000 USD, and the issue of
219,000 post-split common shares valued at $680,000 USD. These purchases have
been accounted for under the purchase method of accounting.
Acquisition of Connect Northwest and Internet Arena: On October 24, 1999,
the Company purchased the assets of the business of Connect Northwest for a net
purchase price of $1,400,000 USD. The purchase price was satisfied by a cash
payment of $670,000 USD and the issuance of 147,985 of the Company's common
shares. On November 9, 1999, the Company purchased the assets of the business
of Internet Arena for a purchase price of $600,000 USD. The purchase price was
satisfied by a cash payment of $242,000 USD, the issuance of 100,698 of the
Company's post-split common shares, and a deferred cash payment of $58,000 USD
due in January, 2000. These purchases have been accounted for under the
purchase method of accounting.
ISP's provide several complementary features to CyPost's business strategy.
CyPost gains the advantage of an existing client base who, it is hoped, will
become significant purchasers of encryption products while the ISP gains the
ability to work hand-in-hand with an encryption services provider. Also, much
of an ISP's business is service-based and based on nine months of operating
history have provided predictable cash flows. CyPost has undertaken
negotiations to license software which will protect against virus transmission
at the ISP level and is developing programs to regulate content and provide
"Family Safe Surfing" at the Server level.
The ISPs generate monthly revenues from connectivity services, server
co-locations, web hosting, email services (listservers for corporate emailings)
as well as lump sum payments for custom programming and other specific projects.
An example of custom or specific projects is Hermes generating revenue from
creating a secure area on a web site for a graphic design firm's clients to view
their works in progress, without fear of competitor's eyes. The bulk of the
revenue can be attributed to connectivity currently, although the entire CyPost
Network of Service Providers is moving towards focusing on the custom projects,
web hosting and server co-location, anticipating a strong hold over connectivity
by the larger ISPs in a few years time. CyPost is also actively seeking further
opportunities to ally with ISP's and other cyber-businesses both within North
America and abroad. A brief survey of the various members of the CyPost Network
of Service Providers is provided below:
The company incurred the following costs for software development for the
year-ended December 31, 1998 and December 31, 1997, $150,382 and $16,878,
respectively.
Hermes Net Solutions
Based in Vancouver, British Columbia, Hermes services 800 business clients.
They offer a range of service from connectivity (variety of dial up speeds to
ADSL), server co-location, web hosting, custom programming and email services.
InTouch Internet, Inc.
Based in Vancouver, British Columbia, InTouch has 2000 residential/Small Office
Home Office ("SoHo") clients. InTouch has an excellent "community" feel, and is
primarily focused on dial up connectivity, basic web hosting and email services.
Hermes and InTouch have been integrated (staffing and technically) and
essentially run as a single unit.
NetRover Inc.
NetRover, based in Toronto and Chatham, Ontario, is the largest of CyPost's
ISPs. Currently with 14,000 residential and small business clients, NetRover
offers inexpensive packages focusing on web hosting and dial up as well as some
server co-location. NetRover's management offers CyPost experience with
integrating ISPs (they had completed 3 acquisitions when we purchased them in
October 1999). NetRover has a division called NetRover Office Inc. which
focuses more specifically with the Company's business clientele. NetRover
currently offers dial up service with the network infrastructure hosted through
UUNet in Canada at a cost of $9.50 CDN per user, and has dial up availability
across Canada. With this national reach, CyPost will use the NetRover brand for
expansion.
Connect Northwest
CNW, based in Mt. Vernon and Seattle, Washington, has over 1800 business and
residential services. More focused on custom work, CNW's management experience
includes ethical hacking and other security monitoring. CNW also offers web
hosting, dial up and DSL connectivity to its clients.
<PAGE>
Internet Arena
Internet Arena, based in Portland, Oregon, with 1500 primarily residential/SoHo
clients, offers a similar range of services to InTouch Internet. Internet Arena
was a strategic acquisition geographically as it opened up the Pacific Northwest
and a link to the large California market.
On February 23, 2000, the Company concluded the purchase of Playa
Corporation, the developers of YABUMI instant messaging and e-greeting
technologies. YABUMI is based in Japan and with its 85,000 current users offers
a promising opportunity for both community-building as well as rolling out an
integrated and private solution for instant messaging using the existing
messaging technology as the base. The purchase price was $3,000,000 with
$300,000 being paid in cash with the balance paid in 771,426 shares.
The Yabumi website at Yabumi.com currently generates over 500,000 visitors
per month and offers several "value added" communications services. Yabumi
"Instant Messaging" Software allows users to instantly receive ecommunications
by way of a desktop notification. This allows message recipients to bypass the
need for frequent checking of email mailboxes and permits "real time messaging".
The Yabumi software to do this, Yabumi v.2.1, is available via a free download
and can be downloaded in approximately 2 minutes or less by a user using a 56K
modem. In keeping with CyPost's design philosophy, the software is easy to
install and its user interface is extremely "user friendly". In addition to its
ease of use, the program also features real time chat line capabilities and will
easily allow attachment of files and URL's. The number of Yabumi users has
grown by approximately 25% during the last 3 months of 1999 and CyPost
anticipates that an additional 100,000 Japanese users may be added by the end of
2000. Yabumi is particularly popular among young Japanese women who are a
demographically important group for marketing purposes, as they are considered
to be more receptive to innovative e-communications products and therefore are
more likely to be users of products like Yabumi. The Company has recently
introduced a MacIntosh-compatible version of its "Instant Messaging Software" as
well as a "Business to Business" version designed for use in a networked
computing environment.
CyPost believes that the Yabumi software can be readily "localized" for use
in English- language and other cultural settings. The task of translating and
making the software compatible with existing CyPost technology. has already
begun and will use both internal and outsourced software development personnel.
CyPost anticipates that English-language versions of the Yabumi technology will
be developed during the first six months of 2000 and will be available for
product introduction during the second half of 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General: End of development stage activities and commencement of business
operations
Cypost produces and markets computer privacy protection technologies and
provides Internet conductivity to business and residential customers. From the
Company's inception date until approximately mid-March of 1999, the Company was
considered a development stage enterprise. Since that time, the Company has (i)
discussed five (5) software encryption products under its "Navaho" trademark,
the company is currently marketing two (2) products, (ii) acquired two Internet
service providers during the nine-month period ending September 30, 1999, (iii)
acquired three additional ISPs since September 30,1999, and (iv) acquired Playa
Corporation, the developers of "Yabumi" instant messaging and greeting card
services on February 23, 2000.
Because the Company is an early stage in its business operations its
revenues are subject to wide variation from quarter to quarter. In addition,
the Company is electing to pursue a strategy of growing through acquisition.
The size and timing of acquisitions, both past acquisitions and possible future
acquisitions has been and will be affected by a number of factors which are hard
to predict and many of which are beyond the Company's control. Because of these
factors, the results of operations discussed below are unlikely to be an
accurate indication of future performance and should be viewed with considerable
caution.
Results of operations for the three months and nine months ended September
30, 1999
Substantially all of the Company's revenue, approximately 99%, is earned
from its' ISP operations during the three months and nine months ended September
30, 1999. These revenues are attributable entirely to the operations of the two
Internet service provider companies (Hermes Net Solutions Inc. and
Intouch.Internet Inc.) which the Company acquired on June 30,1999. The Company
generated revenue of $185,670 for the three months ended September 30, 1999 and
$197,068 for the nine months ended September 30, 1999. The Company had no
revenues for the corresponding periods of the prior year as the Company was in
the development stage and had no revenue operations.
Direct costs, which consist of telecommunications charges in respect of
providing internet connection services to customers, of $49,275 were incurred in
the three months and nine months ended September 30, 1999 resulting in a margin
of $136,395 (73%) for the three months and $147,793(75%) for the nine months
ended September 30, 1999. Selling, general and administrative expenses of
$432,521 and $1,167,442 for the three months ended and nine months ended
September 30, 1999, respectively includes $9,590 and $261,093 for sales and
marketing, $381,083 and $406,193 for salaries and benefits, $38,500 and $137,778
for professional services, and $3,348 and $362,378 for general and
administrative expenses. Legal and professional fees, which were incurred
primarily for the filing of registration statements and corporate matters
amounted to $27,556 and $137,778 for the three months ended and nine months
ended September 30, 1999, respectively and are reported as selling, general and
administrative expenses on the statement of operations. The increase in the
above noted costs during 1999 over 1998 results from the Company emerging from
the development stage in 1999 and commencing revenue generating activities. Net
loss before interest expense of $321,000 for the three months ended and
$1,052,860 for the nine months ended September 30, 1999 results from a low
revenue base which was insufficient to cover selling, general and administrative
expenses. Interest expense of $1,378,000 and $1,908,000 for the three months
ended and nine months ended September 30, 1999 is in respect of the beneficial
conversion features on convertible promissory notes between the Company and Blue
Heron Venture Fund, Ltd. A beneficial conversion feature arises when at the
commitment date of the promissory note(the date of agreement to the terms of the
promissory note), the convertible promissory note is "in-the-money" (the
conversion price of the promissory note is less than the fair value of the
common stock into when the promissory note is convertible). The interest
expense is calculated as the difference between the conversion price and the
fair value of the common stock, multiplied by the number of common stock into
which the promissory note is convertible at the commitment date of the loan.
The interest expense is a non-cash item and result in an interest in
paid-in-capital.
The Company hopes to achieve profitable operations with a combination of
additional ISPs through acquisition and providing value added services in its
ISPs, and adding new products to its encryption-related operations.
Liquidity and capital resources
The accompanying financial statements have been prepared on a going concern
basis, which assumes that the company will continue in operation for at least
one year and will be able to realize its' assets and discharge its liabilities
in the normal course of business. The Company incurred net loss of $1,699,000
for the three months ended September 30, 1999 and net loss of $ 2,960,860 for
the nine months ended September 30, 1999. At September 30, 1999, the Company
has a working capital deficiency of approximately $400,000. These factors
indicate that the Company's continuation as a going concern is dependent upon,
among other things, its ability to obtain adequate financing.
<PAGE>
Although the Company's cash position at September 30, 1999 had increased to
$2,414,094, as compared to $47,212 at December 31, 1998, the increase in cash is
primarily attributable to loans made to the Company by Blue Heron Venture Fund,
Ltd. During the nine months ended September 30, 1999, the Company borrowed
$3,650,000 from Blue Heron Venture Fund, Ltd. Subsequently, $1,000,000 of these
loans were converted by the lender into 1,500,000 shares of common stock of the
Company. These loans were made under agreements with that lender under which
the Company may draw up to $16 million in unsecured loans. These loans bear
interest at 8% per annum and are payable on demand. They are convertible at the
lender's option into common stock of the Company. If the total loans of
$2,650,000 as of September 30, 1999 were converted, the lender would be entitled
to an aggregate of 1,766,667 million shares of such common stock. The lender is
free to withdraw this credit facility at any time, and since the loans are
payable on demand the Company's ability to continue operations is dependent upon
the willingness of its lender to forebear from demanding payment. The Company
believes that Blue Heron Venture Fund, Ltd. will continue not to demand payment
of the loan for the immediately foreseeable future, but it is under no
obligation to do so. Should the Company's lender demand payment, the Company
would be required to obtain financing from other sources. The Company does not
believe that bank borrowings are available underpresent circumstances, and there
can be no assurance that the necessary financing could be obtained from other
sources. Even if the necessary funding were available, it might be available
only on terms which management would not find acceptable.
For the three months ended and nine months ended September 30, 1999, the
Company's net cash used in operating activities totaled $365,104 and $930,199,
respectively. The net cash used primarily results from a low revenue base which
was insufficient to cover selling, general and administrative expenses and
development expenses.
The Company's net cash used in investing activities totaled $217,985 and
$894,453 for the three months and nine months ended September 30, 1999,
respectively. The majority of the net cash used in investing activities during
the nine months ended September 30, 1999 related to the Company's acquisition of
Hermes Net Solutions Inc. and Intouch.Internet Inc. In addition, software
development expenditures incurred in developing encryption software products
totaled $114,339 and $142,010 for the three months and nine months ended
September 30, 1999, respectively.
The Company's financing activities during the nine months ended September
30, 1999 included $3,650,000 of loans provided by Blue Heron Venture Fund, Ltd.
and $556,000 provided by issuance of shares of common stock.
The Company's net cash increased by $2,366,882 from $47,212 at December 31,
1998 to $2,414,094 at September 30,1999.
Acquisition of Hermes Net Solutions Inc. and Intouch.Internet Inc.:
Effective June 30, 1999, the Company purchased all the issued and outstanding
shares of Hermes Net Solutions Inc. for a total cash consideration of $528,000
USD, $453,000 USD was paid on closing with the balance of $75,000 USD was paid
to the seller in December 1999 as part of the holdback of the purchase price as
defined in the purchase agreement. Also effective June 30, 1999, the Company
purchased all the issued and outstanding shares of Intouch.Internet Inc. for a
purchase price of $293,000 USD. The consideration for this purchase consisted
of cash of $265,000 USD and the issuance of 6,570 pre-split, or 9,855
post-split, common shares (issued on August 9, 1999) valued at $28,000 USD.
Both acquisitions, have been accounted for under the purchase method of
accounting. In both acquisitions the net assets acquired included goodwill and
customer lists which will be amortized over three years on the straight line
basis.
Acquisition of NetRover Inc. and NetRover Office Inc.: On October 4, 1999,
the Company purchased all the issued and outstanding shares of NetRover Inc.
and NetRover Office Inc. for a purchase price of $2,700,000 USD. The purchase
price was satisfied by a cash payment of $2,000,000 USD, and the issue of
219,000 post-split common shares valued at $680,000 USD. These purchases have
been accounted for under the purchase method of accounting.
Acquisition of Connect Northwest and Internet Arena: On October 24, 1999,
the Company purchased the assets of the business of Connect Northwest for a net
purchase price of $1,400,000 USD. The purchase price was satisfied by a cash
payment of $670,000 USD and the issuance of 147,985 of the Company's common
shares. On November 9, 1999, the Company purchased the assets of the business
of Internet Arena for a purchase price of $600,000 USD. The purchase price was
satisfied by a cash payment of $242,000 USD, the issuance of 100,698 of the
Company's post-split common shares, and a deferred cash payment of $58,000 USD
due in January, 2000. These purchases have been accounted for under the
purchase method of accounting.
Results of Operations for the Year Ended December 31, 1998
During the year-ended December 31, 1998, the Company did not generate any
revenue. It's operations consisted of incurring general and administrative
expenses of $383,046 which includes $NIL for sales and marketing, $253,127 for
salaries and benefits, $32,118 for professional services, and $97,801 for
general and administrative. Development expenses of $150,382 which represents
amounts incurred in developing encryption software products and amortization of
$6,233 were also incurred. The net loss for 1998 totalled $539,661.
For the year-ended December 31, 1998, the Company's net cash used in operating
activities totaled $286,278 and results primarily from a low revenue base which
was insufficient to cover selling, general and administrative expenses and
development expenses.
The Company's financing activities consisted of an issue of common stock which
generated cash of $323,000. The Company's investing activities consisted of
capital asset purchases of $27,711.
On October 29, 1998, the Company acquired Communication Exchange
Management, Inc.("CEM") a wholly-owned subsidiary of Mushroom. The Company and
Mushroom have officers and directors in common.
The Company issued 6,270,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of CEM. The shares
of common stock were valued at $.001 per share for an aggregate consideration
of $4,180. The Company acquired all the rights, title and interest to all
the assets owned by CEM, which consisted of proprietary
knowledge of various computer software products under development by CEM .
The acquisition has been accounted for under the purchase method.
Operating results of CEM prior to the date of acquisition were not significant.
Results of Operations for the period from inception, September 5, 1997 to
December 31, 1997.
The Company's operations for the period from September 5, 1997 to December
31, 1997 were limited and consisted of incurring $16,878 of development
expenses.
During this period, the Company acquired ePost Innovations Inc., a
wholly-owned subsidiary of Mushroom Innovations, Inc. ("Mushroom"). The
Company and Mushroom have officers and directors in common.
The Company issued 3,000,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of ePost. The shares
of common stock were valued at $.001 per share for an aggregate consideration of
$2,000. The Company acquired all the rights, title and interest to all the
assets owned by ePost, and those assets consisted of proprietary knowledge of
various computer software products under development by ePost.
The transaction has been accounted for as a related party transfer between
companies under common control as one of the shareholders of CyPost and
Mushroom had a majority interest in both of the entities.
For the period ended December 31, 1997, the Company's net cash used in
operating activities totaled $14,913 and consisted principally of development
expenses. During this period, the Company's financing activities consisted of
an issue of common stock which generated cash of $20,000. The Company's
financing activities consisted of capital assets purchases of $852.
Item 3. Description of Property.
The Company entered into a net lease with respect to its new office premises
located at 900-1281 West Georgia St.,Vancouver, British Columbia (the"Premises")
for approximately 6500 square feet of office space. The term of the lease is
for 60 months and ends on June 1, 2005. The monthly rent under this lease is
$12,171 CDN$ or approximately $7,911 USD. The Company believes that it could
secure comparable office space in the event that it needed to do so.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
The following information relates to those persons known to the Issuer to
be the beneficial owner of more than five percent (5%) of the Common Stock, par
value $.001 per share, the only class of voting securities of the Issuer
outstanding.
Name and Amount and Title of Address of Nature of Percentage
Class Class Beneficial Owner Beneficial Ownership of Class*
Common Stock, par value
Kelly Shane Montalban 6,062,550 Million shares 29.8%
$0.001 per share P.O Box 700, direct and indirect
British Columbia VON 2EO beneficial ownership
* Based on 20,353,538 shares issued and outstanding. Mr. Montalban's holdings
indicated above include shares owned by Blue Heron Venture Fund Ltd. and Pacific
Gate Capital Fund, the beneficial ownership of which is attributed to Mr.
Montalban.
The Company has not contacted stock brokerage firms holding shares of the
Company's Common Stock in "street name" to determine whether there are
additional substantial shareholders of the Company. 5,314,997 shares or 26.1% of
the Common Stock outstanding is held in the name of Cede & Co., a nominee for
Depository Trust Company, a stock clearing house servicing financial
institutions. The Company know of no other beneficial owners of more than 5% of
its stock.
<PAGE>
(b) Security Ownership of Management.
The number of shares of Common Stock of the Issuer owned by the
Directors and Executive Officers of the Issuer is as follows:
Name and Amount and Title of Address of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class*
Common stock, par value
Carl Whitehead 327,000 shares 1.61%
$0.001 per share 20 Oceanview Road direct ownership
Vancouver, British
Columbia VON 2EO
Common stock, par value
Robert Sendoh 330,000 shares 1.61%
$0.001 per share 990 Beach Avenue, #304 direct ownership
Vancouver, British
Columbia V6Z 2N9
All Officers and Directors (2 persons):
657,000 shares 3.23%
------------------------
* Based on 20,353,538 shares issued and outstanding.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Directors of the Company serve for a term of one year or until their
successors are elected. Officers are appointed by, and serve at the pleasure of,
the Board. Profiles of the current Directors and Executive Officers of the
Issuer are set forth below:
Steven M. Berry, 40, acted as Director, Chief Executive Officer and
President during 1999. Mr. Berry resigned from all positions, including
directorships, held with CyPost and its subsidiaries on January 17, 2000 citing
personal reasons for his departure.
Robert Sendoh, 49, Director and Chief Executive Officer
Mr.Sendoh acted as a Director of CyPost, ePost, CEM and Mushroom from
inception to present and in January, 2000 succeeded to the position of Chief
Executive Officer formerly occupied by Steven Berry. Bob has successfully
conceived and operated three separate companies and brings a wealth of
business knowledge and financial understanding to the Company. After
receiving his B.A. in Economics from Meiji University in Tokyo in 1973, he
founded KKG Incorporated, a project planning and development firm, also located
in Tokyo, Japan. KKG Incorporated was responsible for the planning and
construction of major shopping centers, golf courses and residential complexes
around the world. Dissatisfied with the lack of spreadsheet and product
management software for businesses, Bob developed his own, as well as
implementing a highly efficient security and communication system to maintain
and expand the reputation of his company. After moving to Vancouver, Canada in
1991, Bob started his own sailing school, Windvalley Sailing School, which was
in operation from February 11, 1994 to December 1998. He is currently an
Instructor/Director, and Evaluator with the International Sail and Power
Association, a non-profit organization.
Rounding out his business expertise, since June 23, 1990, Bob has
been a co-owner and director of EFFE Sportswear USA Inc., under the corporate
name; Generator Distribution Company Ltd., which manufactures and markets
their high quality snowboarding apparel internationally.
Carl Whitehead, 30, Director and Head of Strategic Acquisitions and
Partnerships
During the period 1996-99, Carl was a corporate officer and director in
Mushroom Innovations, Inc., CEM and ePost Innovations, Inc., three
technology-oriented companies the latter of which was acquired by CyPost. Carl
also serves as director of CyPost Corporation since 1997 and was named President
in March 2000.
Between 1993-97 he was the founder and owner of Futuresite Productions, a
computer service company which supplies, maintains, and services, home and
business computers in the lower mainland. Specializing in the Windows95
environment and TCP/IP protocols he naturally embraced this opportunity to
develop CyPost into a competitive leader in the software industry. Carl has
completed secondary business courses in accounting and finance.
James T. Johnston, 59, Director.
Mr. Johnston joined our Board in order to fill the vacancy created by the
resignation of Steve Berry on January 17, 2000 and continues to serve as a
director at present. Mr. Johnston is, and has been, a licensed pilot for
Canadian Airlines for 34 years and an airline Captain for 28 years. Mr. Johnston
has been active in representing the airline pilot's union in a number of
capacities and has been involved in several high-level contract negotiations.
Item 6. Executive Compensation.
Steven M. Berry became Chief Executive Officer and Chief Operating Office
in January of 1999 and received an annual salary of $120,000. Mr. Berry had
previously rendered consulting services to the Company prior to his formal
installation as Chief Executive Officer and President. In connection with his
agreement to become Chief Executive Officer, Mr. Berry was awarded 400,000 pre-
split, or 600,000 post-split shares which have been cancelled.
Prior to that time, Carl Whitehead exercised primary executive
responsibilities and in 1999 and 1998 he received $57,000 and $27,200 in cash
compensation. Neither Mr. Whitehead nor any other executive officer received
cash compensation in excess of $100,000 for the years 1997 and 1998.
For the years 1999 and 1998, Mr. Sendoh received cash compensation of
$81,500 and $29,701
Mr. Robert Sendoh currently serves as Chief Executive Officer of the
CyPost for an annual salary of $82,759.
All directors currently serve without pay.
Item 7. Certain Relationships and Related Transactions.
On September 17, 1997 CyPost purchased all of the shares of ePost
Canada. In return for such purchase, CyPost issued a total of 2,000,000
pre-split, or 3,000,000 post-split shares to the following individuals:
Robert Sendoh 1,020,000 pre-split (1,530,000 post-split) shares; Carl
Whitehead 600,000 pre-split (900,000 post-split) shares; William Kaleta 200,000
pre-split (300,000 post-split) shares; and Chiyoko Asanuma 180,000 pre-split
(270,000 post-split shares). There were no other outstanding shares at the
time, and therefore, as a result Mr. Sendoh became a 51% stockholder, Mr.
Whitehead became a 30% stockholder, Mr. Kaleta became a 10% stockholder and
Ms. Asanuma became a 9% stockholder of CyPost.
On October 29, 1998, CyPost acquired all of the issued and outstanding
capital stock of Communications Exchange Management, a Canadian corporation.
CyPost issued 4,180,000 pre-split, or 6,270,000 post-split, shares to the
<PAGE>
following individuals:Robert Sendoh 480,000 pre-split (720,000 post-split)
shares; Carl Whitehead 900,000 pre-split (1,350,000 post-split) shares; William
T. Kaleta 1,300,000 pre-split (1,950,000) post-split shares, and Kelly Shane
Montalban 1,500,000 pre-split (2,250,000) post-split shares. These shares were
issued in proportion to the recipient's proportional share ownership in Mushroom
Innovations. At the time of this transaction, Mr. Sendoh and Mr. Whitehead were
directors of CyPost and Mr. Kaleta was an officer of CyPost. Further information
relating to these transactions can be found in the footnotes to the Consolidated
Financial Statements of CyPost under the caption "Issuance of Common Stock".
CyPost has secured financing through its issuance of certain 8 % Demand
Notes payable to Blue Heron Venture Capital Fund Ltd. ("Blue Heron"), a
corporation in which Kelly Shane Montalban is deemed to have an "indirect
pecuniary" interest as a result of Mr. Montalban's status as investment adviser
for Blue Heron. The Demand Notes are unsecured and are convertible into common
stock at the lender's option. The conversion prices on the Demand Notes were
determined between the lender and the Company with reference to the trading
price of the shares on the date of each commitment from the lender. The table
below shows the discount to market negotiated between CyPost Corporation and
Blue Heron. Between May and June of 1999, at a time when CyPost had virtually
no operating revenues, it obtained $1 Million in financing through issuance of
these Demand Notes. On August 16, 1999, these Demand Notes were later converted
into 1,500,000 post-split (1,000,000) pre-split common shares. The market value
of the Company's common shares on August 16, 1999 were trading at $5.29 per
share. Between July and November of 1999, the Company executed various further
demand notes with similar terms and on November 24, 1999, $3 million of the
demand notes were converted into 3,000,000 post-split (2,000,000 pre-split)
common shares. The market value of the Companies common shares on November 24,
1999 were trading at $4.00 per share. Each borrowing and the execution of the
associated Demand Note was approved by a disinterested majority of Directors.
<TABLE>
<CAPTION>
COMMITMENT DATE AMOUNT OF COMMITMENT SHARE CONVERSION CLOSING SHARE PRICE CONVERSION PRICE DISCOUNT TO MARKET
---------------- --------------------- ---------------- -------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
February 9, 1999 $ 1,000,000 1,500,000 $ 1.0208 $ 0.67 35%
---------------- --------------------- ---------------- -------------------- ----------------- -------------------
March 17, 1999 $ 3,000,000 3,000,000 $ 1.5208 $ 1.00 35%
---------------- --------------------- ---------------- -------------------- ----------------- -------------------
March 17, 1999 $ 2,000,000 1,500,000 $ 1.5208 $ 1.33 14%
---------------- --------------------- ---------------- -------------------- ----------------- -------------------
July 12, 1999 $ 10,000,000 3,750,000 $ 2.9792 $ 2.67 10%
---------------- --------------------- ---------------- -------------------- ----------------- -------------------
</TABLE>
The Company has had preliminary discussions with a number of possible
funding sources which have not led to any agreement on either committed, or
uncommitted, terms of financing. The Company believes that the terms of its Blue
Heron financing and each of the transactions described above are at least as
favorable as it could have negotiated with unaffiliated third parties. The
Company will continue to search for additional sources of financing.
Item 8. Description of Securities.
Common Stock
The Issuer is authorized to issue up to 30,000,000 shares of Common Stock,
par value US$0.001 per share, of which 20,353,538 shares have been issued as of
date hereof. On September 24, 1999, the Company filed an Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State pursuant to
which it effectuated a 3:2 "forward" stock split by which, for example, 100
previously outstanding shares were converted into 150 post-split shares. Holders
of Common Stock are entitled to one vote for each share held of record on each
matter submitted to a vote of stockholders. There is no cumulative voting for
election of directors. Subject to the prior rights of any series of preferred
stock which may from time to time be outstanding, if any, holders of Common
Stock are entitled to receive ratably, dividends when, as, and if declared by
the Board of Directors out of funds legally available therefor and, upon the
liquidation, dissolution, or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and payment of
accrued dividends and liquidation preferences on the preferred stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. The outstanding Common Stock is
validly authorized and issued, fully paid, and nonassessable.
Preferred Stock
Under the Company's Certificate of Incorporation, the Board of Directors
of the Company is authorized to designate, and cause the Company to issue, up to
Five Million (5,000,000) shares of preferred stock of any class or series,
having such rights, preferences, powers and limitations as the Board shall
determine. This form of preferred stock is often referred to as "blank check"
preferred stock and the Board could, therefore, in the future authorize and
cause the Company to issue up to 5,000,000 shares of preferred stock of one or
more series or classes, having rights, preferences and powers senior to those of
the Common Stock, including the right to receive dividends and/or preferences
upon liquidation, dissolution or winding-up of the Company in excess of, or
prior to, the rights of the holders of the Common Stock. This could have the
effect of materially impairing the rights of the holders of the Common Stock to
receive such dividends or preferential payments and/or of reducing, or
eliminating, the amounts that would otherwise have been available for payment to
the holders of the Common Stock. In addition, such preferred stock might feature
a conversion feature which might have the effect of diluting the per cent
ownership of common stock holders at the time when a conversion occurs. Such
features, together with additional features such as an "equal payment" provision
for takeovers could have the effect of preventing a change in control. The
examples stated above are used hypothetically for examples of how Preferred
Stock could be used in different situations, to date the Company has not issued
any preferred stock.
The Company has not, to date, issued or authorized any shares of preferred
stock or authorized the creation of any class or series of preferred stock.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Related Shareholder Matters.
1. (a) The Issuer's Common Stock is listed on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board under the trading symbol of
"POST". The Common Stock became listed on September 21, 1998. Prior to
that time, there has been no trading in the Issuer's Common Stock.
Accordingly, the high and low bid prices for the Issuer's Common Stock for
each quarter since its date of listing, as reported by National Quotation
Bureau, LLC, are as follows:
QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- ---------------
1999 Q4 (10/01 - 12/31) $6.50 $3.00
1999 Q3 (7/1-9/30) $8.25 $3.00
1999 Q2 (4/1 - 6/30) $3.00 $1.78
1999 Q1 (01/01 - 03/31) $1.78 $0.83
1998 Q4 (10/01 - 12/31) $0.89 $0.05
These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.
(b) The approximate number of record holders of the Issuer's Common Stock
according to its transfer agent is 74. Included in this number are shares held
by Cede & Co., the nominee for Depository Trust Company, a stock clearing house
for financial institutions. The Issuer has not contacted stock brokerage firms
shown on the Issuer's stock transfer records to determine the number of
beneficial holders whose stock is held in "street name", or the name of the
brokerage house with which a shareholder's account is maintained.
(c) The Issuer has not paid any cash dividends on its Common Stock, nor
does it intend to do so in the foreseeable future. Under the General Corporation
Law of the State of Delaware, the Issuer may only pay dividends out of capital
<PAGE>
and surplus, or out of certain delineated retained earnings, all as defined in
the General Corporation Law. There can be no assurance that the Issuer will have
such funds legally available for the payment of dividends in the event that the
Issuer should decide to do so.
(d) On August 9,.1999, the Company issued 6,570 pre-split, or 9,855
post-split shares of its common stock to the former owners of InTouch.Internet,
Inc. as partial payment for the Company's acquisition of that company. These
shares were issued under the Section 4(2) exemption for transactions by an
issuer not involving a public offering under the Securities Act.
On August 16, 1999, the Company issued 1,000,000 pre-split, or 1,500,000
post-split, shares of its common stock to Blue Heron Venture Fund Ltd ("Blue
Heron") pursuant to Regulation S under the Securities Act. No underwriting
commissions, fees, or discounts were paid in connection therewith.
On September 29, 1999, the Company agreed to issue 219,000 post split
shares of its common stock to the former owners of NetRover, Inc. The shares
issued in the Net Rover transaction were disclosed in the 8-K Report filed by
the Company on October 2, 1999. The shares issued in the Net Rover acquisition
were issued pursuant to the Section 4(2) Securities Act statutory exemption for
transactions by an issuer not involving a public offering.
On October 26, 1999, the Company issued 147,985 shares of its common stock
to the former owners of Connect Northwest Internet Services LLC as partial
payment for the Company's acquisition of that entity. These shares were issued
under the Section 4(2) Securities Act exemption for transactions by an issuer
not involving a public offering.
On November 24, 1999 the Company issued 3,000,000 shares of its common
stock to Blue Heron in consideration of which Blue Heron cancelled indebtedness
owing from the Company in the aggregate principal amount of $3,000,000 together
with accrued interest. These shares were issued directly to Blue Heron pursuant
to Regulation S under the Securities Act and no underwriting commissions, fees
or discounts were paid in connection therewith. pursuant to Regulation S under
the Securities Act. No underwriting commissions, fees, or discounts were paid
in connection therewith. On November 9, 1999, the Company issued 20,140
shares of its common stock to the former owners of Internet Arena, Inc. as
partial payment for the Company's acquisition of that entity. These shares were
issued under the Section 4(2) Securities Act exemption for transactions by an
issuer not involving a public offering.
On March 10, 2000 the Company issued 80,558 shares of its common stock to
the former owners of Internet Arena,Inc. full payment for the Company's
acquisition of the assets of the business of Internet Arena. These shares were
issued under the Section 4(2) Securities Act exemption for transactions by an
issuer not involving a public offering
On March 21, 2000 the Company issued 26,500 shares of its common stock to
the Adam S. Gottbetter of Kaplan, Gottbetter & Levenson, for payment of legal
fees that the Company incurred. These shares were issued under the Section 4(2)
Securities Act exemption for transactions by an issuer not involving a public
offering
Reference to Exemptions used in distributions
For each sale of securities made in reliance on Section 4(2), the purchaser had
access to the same kind of information as would be included in a registration
statement. The Company determined that each purchaser was sophisticated by
requiring each purchaser to complete a questionnaire prior to any sale to them
of securities. Each questionnaire was reviewed by the Company to determine
whether or not the purchaser was sophisticated. All questionnaires are on file
in the corporate office of the Company.
The only sale of securities made by the Company in reliance on Regulation D was
made pursuant to Rule 504. Use of Rule 504 was appropriate because (i) the
offering was for less than $1,000,000, (ii) no general solicitations were made
and (iii) all investors were given a questionnaire to complete to to determine
whether they were accredited or sophisticated. Each questionnaire was reviewed
by the Company to determine whether or not the purchaser was accredited or
sophisticated. All questionnaires are on file in the corporate office of the
Company.
The only sale of securities made by the Company in reliance on Regulation S, was
a sale of securities to Blue Heron Venture Fund, Ltd. ("Blue Heron"). Use of
Regulation S was appropriate because Blue Heron is a Bahamian entity.
No other sales of securities have occurred.
Item 2. Legal Proceedings.
On June 11, 1999, Canada Post Corporation filed a Statement of Claim in
the Federal Court of Canada in which it sought injunctive and unspecified
monetary relief for the allegedly "improper use by the Company of certain marks
and names which contain the component "post". On October 18, 1999, the Company
filed its Defence and Counterclaim. In a motion heard November 24, 1999, Canada
Post Corporation challenged certain parts of the Counterclaim and the Federal
Court reserved judgment. There has been no pre-trial discovery and no trial date
has been set.
On May 25, 1999, the Company filed a statement of Claim in the BC Court
seeking a declaration that the public notice of Canada Post Corporation's
adoption and use of CYBERPOSTE and CYBERPOST on November 18, 1998 and December
9, 1998 respectively, did not affect the Company's use of CYPOST and EPOST as
trade-marks and trade-names prior to said dates. The Company sought summary
judgment for such a declaration and on September 14, 1999, the BC Court rejected
summary judgment on the basis that no right of the Company was being infringed
and that a trial of the issues was more appropriate. The rejection is pending
appeal. There has been no pre-trial discovery (except to the extent that some
was done as part of the summary judgment application) and no trial date has been
set.
On or about April 13, 2000, Steven Berry, the former CEO of CyPost brought
an action in the civil court of the State of New York, New York County
(Manhattan). The suit involves the release for the transfer of 600,000 shares
of restricted 144 shares that were issued to Steven Berry as a condition of
employment. CyPost and Continental Stock Transfer & Trust Company as
defendants. The damages that the Company expects to incur, are none at present.
As the shares were previously issued and are accounted for from the issued
shares.
Item 3. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None. As disclosed in the 8-K filed on October 19, 1999, CyPost has
engaged Arthur Andersen LLP, a "Big Five" accounting firm with multinational
accounting capability to act as its auditor.
Item 4. Recent Sales of Unregistered Securities.
Pursuant to an Acquisition Agreement dated September 17, 1997, the Company
issued, in a related party transaction, 2,000,000 pre-split or 3,000,000
post-split shares of common stock to Mushroom Innovations, Inc.in consideration
for all of the issued and outstanding shares of common stock of Mushroom
Innovation Inc.'s wholly owned subsidiary, ePost Canada.
The shares of common stock were valued at $.001 per share, on a pre-split
basis, for an aggregate consideration of $2,000.These shares were issued under
the Section 4(2) exemption for transactions by an issuer not involving a public
offering under the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to a Rule 506 under Regulation D, the Company offered on October
27, 1997, 2,000,000 Units at $0.05 per Unit consisting of a share of Common
Stock and a Warrant exercisable for one share of Common Stock at an exercise
price of $0.45 per share which was later reduced to $0.40 per share. The Company
sold an aggregate 400,000 pre-split, or 600,000 post-split, shares of common
stock for an aggregate consideration of $20,000. For the period of January
through April 30, 1998, the Company sold an additional 1,600,000 Units in the
same 506 offering consisting of 1,600,00 pre-split, or 2,400,000 post-split
shares for an aggregate additional consideration of $80,000 less offering
expense of $20,000 with net proceeds to the Company of $80,000 for the total
offering. The warrants were exercisable for one year after issuance and were
redeemable for $0.10 per warrant.
Pursuant to an exempted offering under Rule 504 of Regulation D, the
Company offered on March 26, 1998, 38,000 pre-split, or 57,000 post-split,
shares of common stock at $0.50 per share. As of April 30, 1998, the Company
sold an aggregate 38,000 pre-split, or 57,000 post-split shares of common stock
for an aggregate consideration of $19,000 in an exempted transaction under Rule
504.
On April 30, 1998, the Company issued 15,000 pre-split, or 22,500
post-split, shares of common stock pursuant to Rule 504 of Regulation D to
Kaplan Gottbetter & Levenson, LLP in consideration for $7,500 in legal fees
valued at $0.50 per share.
On October 29, 1998, the Company issued 4,180,000 pre-split, or 6,270,000
post-split shares of common stock in a related party transaction to Mushroom
Innovations, Inc. for the acquisition of Communication Exchange Management, Inc.
("CEM"), a British Columbia corporation. These shares were issued under the
Section 4(2) exemption for transactions by an issuer not involving a public
offering under the Securities Act.
For the year ended December 31, 1998, the Company issued 610,000
pre-split, or 915,000 post-split shares of common stock through warrant exercise
from the Rule 506 offering above at $0.27 per share for an aggregate
consideration of $244,000.
<PAGE>
For the year ended December 31, 1999, the Company issued 1,390,000
pre-split, or 2,085,000 post-split shares of common stock through warrant
exercise from the Rule 506 offering above.
On August 9, 1999, the Company issued 6,570 pre-split, or 9,855 post- split
shares of its common stock to the former owners of InTouch.Internet, Inc. as
partial payment for the Company's acquisition of that company. These shares
were issued under the Section 4(2) exemption for transactions by an issuer not
involving a public offering under the Securities Act.
On August 16, 1999, the Company issued 1,000,000 pre-split, or 1,500,000
post-split, shares of its common stock to Blue Heron Venture Fund Ltd ("Blue
Heron") pursuant to Regulation S under the Securities Act. No underwriting
commissions, fees, or discounts were paid in connection therewith.
On September 29, 1999, the Company agreed to issue 219,000 shares of its
common stock to the former owners of NetRover, Inc. The shares issued in the Net
Rover transaction were disclosed in the 8-K Report filed by the Company on
October 2, 1999. The shares issued in the Net Rover acquisition were issued
pursuant to the Section 4(2) Securities Act statutory exemption for transactions
by an issuer not involving a public offering.
On October 26, 1999, the Company issued 147,985 shares of its common stock
to the former owners of Connect Northwest Internet Services LLC as partial
payment for the Company's acquisition of the assets of the business of Connect
Northwest. These shares were issued under the Section 4(2) Securities Act
exemption for transactions by an issuer not involving a public offering.
On November 4, 1999 the Company issued 3,000,000 shares of its common
stock to Blue Heron in consideration of which Blue Heron cancelled indebtedness
owing from the Company in the aggregate principal amount of $3,000,000 together
with accrued interest. These shares were issued directly to Blue Heron pursuant
to Regulation S under the Securities Act and no underwriting commissions, fees
or discounts were paid in connection therewith.
On November 9, 1999, the Company issued 20,140 shares of its common stock
to the former owners of Internet Arena,Inc. as partial payment for the Company's
acquisition of the assets of the business of Internet Arena. These shares were
issued under the Section 4(2) Securities Act exemption for transactions by an
issuer not involving a public offering.
On March 10, 2000 the Company issued 80,558 shares of its common stock to
the former owners of Internet Arena,Inc. full payment for the Company's
acquisition of the assets of the business of Internet Arena. These shares were
issued under the Section 4(2) Securities Act exemption for transactions by an
issuer not involving a public offering
On March 21, 2000 the Company issued 26,500 shares of its common stock to
the Adam S. Gottbetter of Kaplan, Gottbetter & Levenson, for payment of legal
fees that the Company incurred. These shares were issued under the Section 4(2)
Securities Act exemption for transactions by an issuer not involving a public
offering
Reference to Exemptions used in distributions
For each sale of securities made in reliance on Section 4(2), the purchaser had
access to the same kind of information as would be included in a registration
statement. The Company determined that each purchaser was sophisticated by
requiring each purchaser to complete a questionnaire prior to any sale to them
of securities. Each questionnaire was reviewed by the Company to determine
whether or not the purchaser was sophisticated. All questionnaires are on file
in the corporate office of the Company.
The only sale of securities made by the Company in reliance on Regulation D was
made pursuant to Rule 504. Use of Rule 504 was appropriate because (i) the
offering was for less than $1,000,000, (ii) no general solicitations were made
and (iii) all investors were given a questionnaire to complete to to determine
whether they were accredited or sophisticated. Each questionnaire was reviewed
by the Company to determine whether or not the purchaser was accredited or
sophisticated. All questionnaires are on file in the corporate office of the
Company.
The only sale of securities made by the Company in reliance on Regulation S, was
a sale of securities to Blue Heron Venture Fund, Ltd. ("Blue Heron"). Use of
Regulation S was appropriate because Blue Heron is a Bahamian entity.
No other sales of securities have occurred.
Item 5. Indemnification of Directors and Officers.
The Issuer's Certificate and By-laws contain provisions eliminating the
personal liability of a director to the Issuer and its stockholders for certain
breaches of his or her fiduciary duty of care as a director. This provision does
not, however, eliminate or limit the personal liability of a director (i) for
any breach of such director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Delaware
statutory provisions making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock repurchases or redemptions,
or (iv) for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the Board of Directors of
the Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above), including grossly
negligent business decisions made in connection with takeover proposals for the
Company. As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care has been limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission (the"Commission") has taken the position that the
provision will have no effect on claims arising under the federal securities
laws.
In addition, the Certificate and By-Laws provide mandatory indemnification
rights, subject to limited exceptions, to any person who was or is party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was a director
or officer of the Company, or is or was serving at the request of the Company as
a director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Such indemnification rights include
reimbursement for expenses incurred by such person in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the Delaware General Corporation Law.
PART F/S
Registrant's Consolidated Financial Statements as of December 31,1998 and
for the period from September 5, 1997 (inception) to December 31, 1998, and the
independent auditor's report of Thomas P. Monahan, independent certified public
accountant, with respect thereto, appear on pages F1 to F15 of this Form 10-SB.
Registrant's Consolidated unaudited Financial Statements and related
footnotes for the 9 months and 3 months ending September 30, 1999 and September
30, 1998, appear on pages F16 to F25.
Audited Financial Statements for ePost Innovations, Inc., a predecessor
corporation as of August 31, 1997, and for the period from February 11, 1997
(inception) to August 31, 1998, and the independent auditor's report of Thomas
P. Monahan, independent certified public accountant, with respect thereto,
appear on pages F26 to F35 of this Form 10-SB.
Audited Financial Statements for Communication Exchange Management, Inc.,
a predecessor corporation as of December 31, 1997, and for the period from March
18, 1997 (inception) to June 30, 1998, and the independent auditor's report of
Thomas P. Monahan, independent certified public accountant, with respect
thereto, appear on pages F36 to F45 of this Form 10-SB.
Audited Financial Statements for Connect Northwest, LLC as of December 31,
1998, and for the year ending December 31, 1997 and December 31, 1998, interim
period September 30, 1999, and the independent auditor's report of Thomas P.
Monahan, independent certified public accountant, with respect thereto, and
related pro forma financial statements appear on pages F46 to F55 of this Form
10-SB.
Audited Financial Statements for Intouch.Internet Inc. as of January 31,
1999 and 1998, and for the years ending January 31, 1999 and 1998, also interim
period June 30, 1999, and the independent auditor's report of Robison, Hill &
Co., independent certified public accountants, with respect thereto, appear on
pages F56 to F69 of this Form 10-SB.
Audited Financial Statements for Internet Arena, Inc. as of December 31,
1998 and 1997, and for the years ending December 31, 1998 and 1997, also interim
period September 30, 1999, and the independent auditor's report of Robison, Hill
& Co., independent certified public accountants, with respect thereto, appear on
pages F70 to F81 of this Form 10-SB.
Audited Financial Statements for NetRover, Inc. as of July 31, 1999 and
1998, and for the years ending July 31, 1999 and 1998, also interim period
September 30, 1999, and the independent auditor's report of Robison, Hill & Co.,
independent certified public accountants, with respect thereto, appear on pages
F82 to F95 of this Form 10-SB.
Audited Financial Statements for Hermes Net Solutions, Inc. as of February
28, 1999, and for the year ending February 28, 1999 and 1998, also interim
period June 30, 1999, and the independent auditor's report of Thomas P. Monahan,
independent certified public accountant, with respect thereto, appear on pages
F96 to F106 of this Form 10-SB.
Unaudited Pro forma condensed combined financial statements as of June
30, 1999, and for the nine months ending September 30, 1999, appear under
Item 6, of the September 30, 1999 Audited Financial Statements of this
Form 10-SB.
<PAGE>
PART III
Item 1. Index to Exhibits.
Exhibit No. Description
----------- -----------
2 Certificate of Incorporation of Registrant (previously filed)
2.1 Certificate of Amendment to Certificate of Incorporation of Registrant
(previously filed)
2.2 Amended and Restated Certificate of Incorporation) (previously filed)
2.3 ByLaws (previously filed)
6.1 Preferred Supplier Agreement with Canadian Bar Association (previously
filed)
6.2 Lease re: CyPost headquarters (previously filed)
8.1 Acquisition Agreement dated as of September 17, 1997 between the Issuer
and ePost Canada (previously filed)
8.2 Share Purchase Agreement dated as of October 29,1998 between the Issuer
and Mushroom Innovations,Inc.(previously filed)
8.3 Share Purchase Agreement dated as of June 30, 1999 regarding acquisition
of Hermes Net Solutions Inc. shares (previously filed)
8.4 Share Purchase Agreement dated as of June 30, 1999 regarding acquisition
of InTouch.Internet Inc. shares (previously filed in Amendment 3 10-SB)
8.5 Share Purchase Agreement dated as of October 4, 1999 regarding the
acquisition of NetRover, Inc. and Net Rover Office, Inc. (incorporated by
reference from 8-K filed 10/12/99)
8.6 Asset Purchase Agreement dated as of October 26, 1999 regarding the
acquisition of Connect Northwest, LLC (incorporated by reference from 8-K
filed 11/12/99)
8.7 Asset Purchase Agreement dated as of November , 1999 regarding acquisition
of Internet Arena, Inc. (previously filed)
8.8 Acquistion Agreement regarding capital stock of Playa Corporation.
21 List of Subsidiaries (previously filed)
27 Financial Statement Schedule
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
CYPOST CORPORATION
Date: April 14, 2000 By: /s/ Robert Sendoh
----------------------------
Robert Sendoh
Chief Executive Officer
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
To The Board of Directors and Shareholders
of Cypost Corporation ( a development stage company)
I have audited the accompanying consolidated balance sheet of Cypost
Corporation ( a development stage company) as of December 31, 1998 and the
related consolidated statements of operations, cash flows and stockholders'
equity for the period from inception, September 5, 1997, to December 31,
1997, for the year ended December 31, 1998 and for period from inception,
September 5, 1997, to December 31, 1998. These consolidated financial
statements are the responsibility of the company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted
auditing standards. Those standards require that I plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cypost
Corporation ( a development stage company) as of December 31, 1998 and the
related consolidated statements of operations, cash flows and stockholders'
equity for period from inception, September 5, 1997, to December 31, 1997, for
the year ended December 31, 1998 and for period from inception, September 5,
1997, to December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that Cypost Corporation ( a development stage company) will continue as
a going concern. As more fully described in Note 1, the Company has incurred
operating losses since inception and requires additional capital to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans as to these matters are
described in Note 1. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of Cypost Corporation (a development stage company) to
continue as a going concern.
Thomas P. Monahan, CPA
March 12, 1999
Paterson, New Jersey
F-1
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEET
December 31, 1998
Assets
Current assets
<S> <C>
Cash $ 47,212
Prepaid expenses 27,998
--------
Total current assets 75,210
Capital assets 22,330
Other assets
License agreement 4,180
Organization expense 477
Security deposit 24,000
--------
Total other assets 28,657
--------
Total assets $ 126,197
========
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 11,090
--------
Total liabilities 11,090
Stockholders equity
Preferred stock- $.001 par value authorized
5,000,000 shares. The number of
shares outstanding at December 31, 1998 was Nil
Common stock-$.001 par value, authorized
30,000,000 shares. The number of shares
outstanding at December 31, 1998 was
13,264,500 13,264
Additional paid in capital 624,416
Accumulated deficit during development stage (556,539)
Currency translation adjustment 33,966
--------
Total stockholders' equity 115,107
--------
Total liabilities and stockholders' equity $ 126,197
========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period For the period
from inception For the from inception
September 5, 1997 year ended September 5,
To December 31, December 31, 1997,to
1997 1998 December 31,
1998
------------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues $ -0- -0- -0-
Direct Costs -0- -0- -0-
------------------- ---------------- ----------------
Gross profit -0- -0- -0-
Expenses:
General and administrative -0- 383,046 383,046
Research and development 16,878 150,382 167,260
Depreciation and amortization -0- 6,233 6,233
------------------- ---------------- ----------------
Total operating expense 16,878 539,661 556,539
------------------- ---------------- ----------------
Net Loss $ (16,878) $ (539,661) $ (556,539)
=================== ================ ================
Loss per share-
Basic and Diluted $ (0.02) $ (0.08) $ (0.11)
=================== ================ ================
Weighted average
number of shares outstanding 961,644 7,033,479 5,082,246
=================== ================ ================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period For the period
from inception For the from inception
September 5, 1997 year ended September 5,
to December 31, December 31, 1997,to
1997 1998 December 31,
1998
------------------- -------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net profit (loss) $ (16,878) $ (539,661) $ (556,539)
Add items not affecting cash
Non cash compensation-legal fees
Paid with shares of common stock -0- 7,500 7,500
Non cash compensation
and consulting fees
Paid with shares of common stock 200,000 200,000
Depreciation and amortization -0- 6,233 6,233
Software costs paid with
shares of common stock 83,000 83,000
Prepaid expenses (27,998) (27,998)
Accounts payable and
accrued liabilities 1,965 9,125 11,090
Security deposit (24,000) (24,000)
Organization expense -0- (477) (477)
------------------- -------------- ----------------
NET CASH USED IN
OPERATING ACTIVITIES (14,913) (286,278) (301,191)
CASH FLOWS FROM FINANCING
ACTIVITIES
Sale of stock-net of
offering costs 20,000 323,000 343,000
------------------- -------------- ----------------
NET CASH USED IN FINANCING 20,000 323,000 343,000
ACTIVITIES
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital asset purchases (852) (27,711) (28,563)
------------------- -------------- ----------------
NET CASH USED IN
INVESTING (852) (27,711) (28,563)
ACTIVITIES
Exchange rate changes on cash in
foreign currencies -0- 33,966 33,966
NET INCREASE
IN CASH 4,235 42,977 47,212
CASH BALANCE
BEGINNING OF PERIOD -0- 4,235 -0-
------------------- -------------- ----------------
CASH BALANCE END
OF PERIOD $ 4,235 $ 47,212 $ 47,212
=================== ============== ================
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Additional Deficit Currency
Preferred Common Common paid in accumulated translation
Date Stock Stock stock capital during Adjustment Total
Number Amount development
stage
-------------------------------- ------------ ------------ ------------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
09-17-1997(1) 3,000,000 $ 3,000 (1,000) $ 2,000
01-11-1997(2) 600,000 600 19,400 20,000
Net Loss (16,878) (16,878)
------------ ------------ ------------- ----------- ------------- ------------ -----------
12-31-1997 3,600,000 $ 3,600 18,400 $ (16,878) $ 5,122
03-04-1998(2) 2,400,000 2,400 77,600 80,000
05-05-1998(3) 57,000 57 18,943 19,000
05-05-1998(4) 22,500 22 7,478 7,500
04-30-1998(5) (20,000) (20,000)
09-18-1998(8) 281,000 281,000
10-29-1998(6) 6,270,000 6,270 (2,090) 4,180
06-01-1998 to 12-31-1998(7) 915,000 915 243,085 244,000
Currency translation adjustment 33,966 33,966
Net loss (539,661) (539,661)
------------ ------------ ------------- ----------- ------------- ----------- -----------
12-31-1998 $ -0- 13,264,500 $ 13,264 $ 624,416 $ (556,539) $ 33,966 $ 115,107
<FN>
(A) All stock issuances and per share amounts reflect a 3 for 2 forward split declared subsequent to December 31, 1998
(1) Issuance of shares of common stock for acquisition of ePOST Innovations, Inc. at $.001 per share.
(2) Sale of shares of common stock pursuant to Rule 504 at $.03 per Unit. One share and one warrant for the purchase of
one share of common stock per Unit.
(3) Sale of shares of common stock pursuant to Rule 504 at $0.33 per share.
(4) Sale of common shares pursuant to Rule 504 in consideration for $7,500 in legal fees valued at $0.33 per share.
(5) Write off of offering expenses
(6) Issuance of shares for acquisition at $0.001 per share
(7) Sale of shares pursuant to warrant exercise at $0.27 per share.
(8) Transfer of shares to certain individuals in consideration for consulting services valued at $.33 per share.
</TABLE>
F-5
<PAGE>
CYPOST CORPORATION
(a development stage company)
Notes to Consolidated Financial
Statements December 31, 1998
a. Creation of the Company and Issuance of Common Stock
Cypost Corporation (the "Company") was formed on September 5, 1997 under
the laws of the State of Delaware with an authorized capitalization of
30,000,000 shares of common stock, $.001 par value per share and 5,000,000
shares of preferred stock, $.001 par value per share.
b. Description of the Company
CyPost Corporation and its subsidiaries (the "Company") generate revenues
from value-added protected internet connection services, web-site hosting,
advertising sales, promotional opportunities, and sales of privacy and
protection products. The Company's activities also include determining the
feasibility of encryption software products, beginning initial programming and
product development, conducting market research, and undertaking various private
placement offerings.
c. Issuance of Capital Stock
Pursuant to an acquisition agreement dated September 17, 1997, the Company
issued, in a related party transaction, 3,000,000 shares of common stock to
Mushroom Innovations, Inc. ("Mushroom"), a British Columbia corporation in
consideration for all of the issued and outstanding shares of common stock of
Mushroom's wholly owned subsidiary ePOST Innovations, Inc. ("ePost Canada"), a
corporation formed under the laws of British Columbia. The shares of common
stock were valued at $.001 per share for an aggregate consideration of $2,000.
Pursuant to a private placement under Regulation D, the Company offered on
October 27, 1997, 3,000,000 Units at $0.03 per Unit. As of December 31, 1997,
through the sale of these Units, the Company sold an aggregate 600,000 shares of
common stock for an aggregate consideration of $20,000. For the period of
January through April 30, 1998, the Company sold an additional 2,400,000 Units
for an aggregate additional consideration of $80,000 less offering expense of
$20,000 with net proceeds to the Company of $80,000 for the total offering.
Pursuant to a private placement pursuant to Rule 504 of Regulation D, the
Company offered on March 26, 1998, 57,000 shares of common stock at $0.33 per
share. On May 5, 1998, the Company sold an aggregate 57,000 shares of common
stock for an aggregate consideration of $19,000. On May 5, 1998, the Company
sold 22,500 shares of common stock pursuant to Rule 504 of Regulation D to
Kaplan Gottbetter and Levenson, LLP. in consideration for $7,500 in legal fees
not related to the offering valued at $0.33 per share.
On September 18, 1998, the Company issued 6,270,000 shares of common stock,
valued at $4,180.
On September 18, 1998, Robert Sendoh and Carl Whitehead transferred in lieu
of expending the Company's limited cash resources an aggregate of 843,000 shares
of common stock valued at $281,000 or $.33 per share as follows: 600,000 shares
to Steve Berry for consulting services valued at $200,000 or $.33 per share;
18,000 shares to Pezhman Sharifi and 225,000 shares to Miulet Technologies, Ltd.
for computer services valued at $81,000 or $.33 per share. For the year
ended December 31, 1998, the Company issued 915,000 shares of common stock
through warrants exercise at $0.27 per share for an aggregate consideration of
$244,000.
F-6
<PAGE>
Note 2-Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses
of $556,539 for the period from inception September 5, 1997, to December 31,
1998.
These factors indicate that the Company's continuation as a going concern is
dependent upon its ability to obtain adequate financing. The Company is
anticipating that with the completion of the exercise of the balance of the
outstanding warrants and with the resulting increase in working capital, the
Company will be able to continue to develop the Company's software and
experience an increase in sales. The Company will require substantial
additional funds to finance its business activities on an ongoing basis and will
have a continuing long-term need to obtain additional financing. The Company's
future capital requirements will depend on numerous factors including, but not
limited to, continued progress developing its software, initiating marketing
penetration and signing distributors to software contracts. The Company plans
to engage in such ongoing financing efforts on a continuing basis.
The consolidated financial statements presented consist of the consolidated
balance sheet of the Company as at December 31, 1998 and the related
consolidated statements of operations, stockholders equity and cash flows for
the year ending December 31, 1998,the period from inception, September 5 1997 to
December 31, 1997,and for the period from inception, September 5, 1997 to
December 31, 1998.
b. Cash and cash equivalents
The Company treats temporary investments with a maturity of less than three
months as cash.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight line
methods over a period of five years. Maintenance and repairs are charged
against operations and betterment's are capitalized.
d. Earnings per share
Net income (loss) per share has been computed in accordance with SFAS 128.
Basic net income (loss) per share is computed using the weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average common shares and common equivalent shares
outstanding during the period. The effect of potential common shares such as
warrants have not been included in the computation of diluted earnings per share
as they would be antidilutive. At December 31, 1998, there were an aggregate of
2,085,000 warrants outstanding.
F-7
<PAGE>
e. Revenue recognition
Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software or system has been shipped (or software has been electronically
delivered), remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Maintenance revenue for providing
product updates and customer support is deferred and recognized ratably over the
service period. For subscription sales that have the maintenance fee included
with the licensing fee, maintenance revenue is derived based upon the amount
charged for such services when they are sold separately. Revenue from hardware
products is recognized upon shipment subject to a reserve for returns. Revenues
on rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period.
Revenue generated from products sold through traditional channels where the
right of return exists is reduced by reserves for estimated sales returns. Such
reserves are based on estimates developed by management. As unsold products in
these distribution channels are exposed to rapid changes in consumer preferences
or technological obsolescence due to new operating environments, product updates
or competing products, it is reasonably possible that these estimates will
change in the near term.
f. Advertising, Selling and Marketing Costs
Advertising, Selling and Marketing costs, are expensed as incurred and for
the period from inception, September 5, 1997, to December 31, 1997 was $-0-; for
the year ended December 31, 1998 was $-0-.
g. Software Development
Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed", capitalization of software development costs
begins upon the establishment of technological feasibility of the product, which
the Company has defined as the completion of beta testing of a working product.
The establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and changes in software
and hardware technology. No software development costs have been capitalized by
the Company to date as technical feasibility of product has not been
established.
h. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
i. Foreign Currency Translation
The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally Canadian,
are translated at the current exchange rate as of the balance sheet date.
Income statement items are translated at average exchange rates during the
period. The resulting translation adjustment is recorded as a separate
component of shareholders' equity.
F-8
<PAGE>
j. Significant Concentration of Credit Risk
At December 31, 1998, the Company has concentrated its credit risk by
Maintaining deposits in several banks. The maximum loss that could have
resulted from this risk totaled $-0- which represents the excess of the deposit
liabilities reported by the banks over the amounts that would have been covered
by the federal insurance.
k. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March, 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The implementation of SOP 98-1 does not
have a material impact on the Company's financial position or results of
operations,as the Company has not incurred any costs for computer software
developed or obtained for internal use.
F-9
<PAGE>
l. Recent Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. It is effective for all fiscal years beginning after January 1, 1999.
The new standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for depending
on the use of the derivatives and whether they qualify for hedge accounting.
The key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
m. Stock-based compensation:
The Financial Accounting Standards Board has issued SFAS No.123,
"Accounting for Stock-Based Compensation", which encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation under a fair value based method. The Company has elected to
continue to account for its stock-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.25
("APB No.25"), "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net loss and loss per share basic and diluted had the fair
value of such compensation been expensed. Under the provisions of APB No.25,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock.
F-10
<PAGE>
Note 3 - Private Placements
a. Sale of Units
The Company offered for sale to persons who qualified as "accredited
investors" as defined under Regulation D promulgated by the Securities and
Exchange Commission 3,000,000 Units at $0.033 per Unit. Each Unit consists of
one share of the Company's common stock and one warrant to purchase one share of
common stock at $0.27 per share. Each warrant may be exercised at any time from
time to time after issuance and on or prior to May 11, 1999. The Company, at
its option, may redeem the warrants upon 30 days prior written notice in cash
for the sum of $0.067 per warrant.
The Company sold through a private placement 3,000,000 Units for aggregate
consideration of $100,000 less offering expenses of $20,000.
As of April 30, 1998, the Board of Directors of the Company amended the
offering to reduce the warrant exercise price to $0.27 per share of common stock
from $.30. The reduction was necessary to assure that the aggregate proceeds of
the offering would not exceed the $1,000,000 limitation requirement pursuant to
Rule 504 exemption from registration.
As of December 31, 1998, the Company has sold 915,000 shares respectively
of common stock through the exercise of 915,000 warrants respectively for an
aggregate consideration of $244,000.
As of December 31, 1998, the Company has reserved 2,085,000 shares of
common stock pending the conversion of warrants into shares of common stock.
b. Sale of Common Shares
Pursuant to a private placement which was intended to be effected under an
exemption from registration and to persons who qualify as "accredited investors"
as defined under Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, the Company has sold an aggregate
of 57,000 shares of common stock at $0.33 per share in consideration for
$19,000.
Note 4 - Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$.001 par value per share. The Board of Directors of the Company has the
authority, without further action by the holders of the outstanding shares of
common stock, to issue shares of preferred stock from time to time in one or
more classes or series, to fix the number of shares constituting any class or
series and the stated value, if different from the par value, and to fix the
terms of any such series or class, including dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the liquidation
preference of such class or series. The designations, rights and preferences of
any Shares of Preferred Stock would be set forth in a Certificate of Designation
which would be filed with the Secretary of State of the State of Delaware. As
of December 31, 1998, the number of shares of preferred stock outstanding is
-0-.
Note 5 - Acquisitions
a. Acquisition of ePOST Innovations, Inc.
On September 17, 1997, the Company acquired ePOST Innovations,
Inc.("ePost"), a wholly-owned subsidiary of Mushroom Innovations, Inc.
("Mushroom"). The Company and Mushroom have officers and directors in common.
The Company issued 3,000,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of ePost. The shares
of common stock were valued at $.001 per share for an aggregate consideration of
$2,000. The Company acquired all the rights, title and interest to all the
assets owned by ePost, and those assets consisted of proprietary knowledge of
various computer software products under development by ePost.
The transaction has been accounted for as a related party transfer between
companies under common control as one of the shareholders of CyPost and Mushroom
had a majority interest in both of these entities. The following are the
ownership interests of Mushroom and the Company held by the officers and
directors of both companies after the acquisition. The transaction is accounted
for using historic costs (as if the entities had always been combined. The
following details the identity of the parties which owned CyPost and Mushroom
Innovations both before and after each acquisition transaction. i) Ownership
Interests of CyPost
Prior to the acquisition of ePost, CyPost did not have any issued and
outstanding shares.
The acquisition of ePost involved CyPost issuing 3,000,000 of its
shares to Mushroom; in turn, Mushroom distributed these shares to its
shareholders in the following proportion:
Ownership Interest of CyPost after acquisition of EPost
<TABLE>
<CAPTION>
<S> <C> <C>
Robert Sendoh 1,530,000 shares 51% interest
Carl Whitehead 900,000 shares 30% interest
William Kaleta 300,000 shares 10% interest
Chiyoko Asanumu 270,000 shares 9% interest
---------------- -------------
Total 3,000,000 shares 100% interest
</TABLE>
Robert Sendoh at the time of acquisition was President and Director of
Epost and Chairman and of CyPost Corporation, Carl Whitehead was
Secretary/Treasurer and Director in Epost Innovations and President and Director
in CyPost Corporation and William Kaleta was Chief Technical Officer and
Director in EPost Innovations and Chief Technical Officer in CyPost Corporation.
Note: Robert Sendoh gifted 9% of his shares to Chiyoko Asanuma, his sister.
F-11
<PAGE>
b. Acquisition of Communication Exchange Management, Inc.
On October 29, 1998, the Company acquired Communication Exchange
Management, Inc.("CEM") a wholly-owned subsidiary of Mushroom. The Company and
Mushroom have officers and directors in common.
The Company issued 6,270,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of CEM. The shares
of common stock were valued at $.001 per share for an aggregate consideration
of $4,180. The Company acquired all the rights, title and interest to all
the assets owned by CEM, which consisted of proprietary
knowledge of various computer software products under development by CEM .
The acquisition has been accounted for under the purchase method.
Operating results of CEM prior to the date of acquisition were not significant.
The acquisition of CEM involved CyPost issuing 6,270,000 of its shares
to Mushroom; in turn, Mushroom distributed these shares to its shareholders in
the following proportion:
<TABLE>
<CAPTION>
<S> <C> <C>
ROBERT SENDOH 720,000 SHARES 11% INTEREST
CARL WHITEHEAD 1,350,000 SHARES 22% INTEREST
WILLIAM KALETA 1,950,000 SHARES 31% INTEREST
KELLY MONTALBAN 2,250,000 SHARES 36% INTEREST
---------------- -------------
6,270,000 SHARES 100% INTEREST
</TABLE>
The acquisition has been accounted for under the purchase method.
Operating results of CEM prior to the date of acquisition were not significant.
F-12
<PAGE>
Note 6 - Capital Assets
Capital Assets consisted of the following at December 31, 1998
Office equipment $ 28,563
Accumulated depreciation 6,233
-------
Balance $ 22,330
Note 7 - Related Party transactions
a. Issuance of Shares of Capital Stock
On September 17, 1997 CyPost purchased all of the shares of ePOST
Innovations Inc. from Mushroom In return for such purchase, CyPost issued a
total of 2,000,000 pre-split, or 3,000,000 post-split shares to Mushroom; in
turn, Mushroom distributed these shares to its shareholders in the following
proportion.:
Pre-Split Post-Split
--------- ----------
Robert Sendoh 1,020,000 1,530,000
Carl Whitehead 600,000 900,000
William Kaleta 200,000 300,000
Chiyoko Asanuma 180,000 270,000
There were no outstanding shares of the Company prior to the date of
acquisition of ePost therefore, Mr. Sendoh became a 51% stockholder, Mr.
Whitehead became a 30% stockholder, Mr. Kaleta became a 10% stockholder and Ms.
Asanuma became a 9% shareholder of CyPost.
Robert Sendoh was one of the
founders and director of ePost Innovations. Carl Whitehead was a founder as
well as, director and President, William Kaleta at the time of acquisition was
CTO (Chief Technical Officer) of ePost Innovations and Chiyoko Asanuma (sister
of Robert Sendoh) was gifted 9% of Sendoh's issuance.
On October 29, 1998, CyPost acquired all of the issued and outstanding
capital stock of Communications Exchange Management, a Canadian corporation,
from Mushroom. CyPost issued 4,180,000 pre-split, or 6,270,000 post-split,
shares to Mushroom; in turn, Mushroom distributed these shares to its
shareholders in the following proportion.:
Pre-Split Post-Split
--------- ----------
Robert Sendoh 480,000 720,000
Carl Whitehead 900,000 1,350,000
William Kaleta 1,300,000 1,950,000
Kelly Shane Montalban 1,500,000 2,250,000
These shares were issued in proportion to the recipient's proportional
share ownership in Mushroom. At this time of this transaction, Mr. Sendoh and
Mr. Whitehead were directors of CyPost and Mr. Kaleta was an officer of
CyPost. Mr. Montalban had purchased shares in Mushroom prior to CyPost's
acquisition of CEM on October 29, 1998. Further information relating to these
transactions can be found in the footnotes to the Consolidated Financial
Statements of CyPost under the caption "Issuance of Common Stock".
b. Transfer of Shares of Common Stock
On September 18, 1998, Robert Sendoh and Carl Whitehead, as officers and
directors of the Company, transferred an aggregate of 843,000 shares of common
stock as of the Company that they owned, to the following parties: 600,000
shares to Steve Berry (President and Chief Executive Officer of CyPost during
1999), 18,000 shares to Pezhman Sharifi and 225,000 shares to Miulet
Technologies, Ltd. The transfer was in consideration for past consulting and
other serviced provided by these parties to the Company in order to preserve the
Company's cash resources. The transfer was valued at $281,000 which equate to
$0.33 per share and represents the priced per share based on the offering date
of March 28, 1998.
c. Officer Compensation
For the period from inception, September 5, 1997, to December 31, 1998,
the Company has not paid any officer in excess of $100,000.
F-13
<PAGE>
Note 8 - Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 1998, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carryforward and was fully offset by a
valuation allowance.
At December 31, 1998, the Company has net operating loss carry forwards
for income tax purposes of $556,539. This carryforward is available to offset
future taxable income, if any, and expires in the year 2010. The Company's
utilization of this carryforward against future taxable income may become
subject to an annual limitation due to a cumulative change in ownership of the
Company of more than 50 percent. The components of the net deferred tax asset as
of December 31, 1998 are as follows:
Deferred tax asset:
Net operating loss carry forward $ 189,223
Valuation allowance $(189,223)
----------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit for the loss generated in the
period from inception, September 5, 1997, to December 31, 1998. SFAS No. 109
requires that a valuation allowance be provided if it is more likely than not
that some portion or all of a deferred tax asset will not be realized. The
Company's ability to realize benefit of its deferred tax asset will depend on
the generation of future taxable income. Because the Company has yet to
recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 9 - Commitments and Contingencies
a. Lease agreement for office space
The Company has leased 408.1 square meters of office space from the
Minister of Public Works and Government Services at #101-260 West Esplanade
Street, North Vancouver, British Columbia at a rent of $2,609 per month for an
annual rent of $31,305. The lease began on February 1, 1998 and will terminate
on December 30, 1999. A security deposit of $2,609 was paid and a six month
advance prepaid rental of $16,836.
Rent expense for the period ending December 31, 1997 and for the year
ended December 31, 1998 is $-0- and $27,168 respectively.
Future minimum lease payments as at December 31, 1998 and 1999 is $31,305.
b. Stock Warrants
The Company has authorized 3,000,000 warrants to purchase an additional
3,000,000 shares of common stock as part of a private placement dated October
27, 1997. As of December 31, 1998, the number of warrants outstanding was
2,085,000. The Company has reserved that many shares of common stock at December
31, 1998.
c. Software Development Contracts
(1) The Company has entered into a one year employment agreement with
Marian Miulet through its wholly owned subsidiary ePost Innovations, Inc. for
the development of the software products. The Company is required to pay an
annual salary of $25,200 beginning February 1, 1998. For the year ending
December 31, 1998, the Company paid Marian Miulet $32,834 in cash and received a
transfer from a related party in lieu of cash of 225,000 shares of common stock
valued at $74,250.
F-14
<PAGE>
(2) The Company has entered into an employment agreement with Bill
Kaleta for a period of one year November 1, 1997 at a monthly fee of $1,800
for the development of the Company's computer software products. For the
year ending December 31, 1998, the Company has paid Mr. Kaleta an aggregate of
$36,549.
Note 11 - Non Cash Transactions
In September, 1997, the Company issued 3,000,000 shares of common stock
to Mushroom in consideration for all of the issued and outstanding shares of
ePOST (see note 5 (a)).
On September 18, 1998, Robert Sendoh and Carl Whitehead transferred in lieu
of expending the Company's limited cash resources an aggregate of 843,000 shares
of common stock valued at $281,000 or $0.33 per share and issued as follows:
600,000 shares to Steve Berry for consulting services valued at $200,000 that
was charged to general and administrative expenses; 18,000 shares to Pezhman
Sharifi and 225,000 shares to Miulet Technologies, Ltd. for computer
programming services valued at $81,000 and charged to research and development.
For the year ending December 31, 1998, the Company issued 22,500 shares of
common stock for an aggregate consideration of $7,500 or $0.33 per share
Note 12 - Development Stage Company
The Company is considered to be a development stage company with little
operating history. The Company is dependent upon the financial resources of the
Company's management for its continued existence. The Company will also be
dependent upon its ability to raise additional capital to complete is marketing
program, acquire additional equipment, management talent, inventory and working
capital to engage in profitable business activity. Since its organization, the
Company's activities have been limited to determining the feasibility of the
software products and beginning initial programming and product development and
the conducting of marketing research, and the preparation of documentation and
the sale of a private placement offering.
F-15
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
ASSETS
CURRENT ASSETS
Cash $2,414,094
<S> <C> <C>
Accounts receivable 121,019
Prepaid expenses 49,144
----------
2,584,257
PROPERTY AND EQUIPMENT, net 148,156
GOODWILL AND OTHER INTANGIBLES 751,208
OTHER ASSETS 97,204
SOFTWARE DEVELOPMENT, NET AMORTIZATION OF $14,140 127,870
----------
$3,708,695
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 351,106
Loans 2,650,000
Deferred Revenue 75,283
----------
3,076,389
SHAREHOLDERS' EQUITY
Share capital
Authorized
5,000,000 preferred stock with a par value of $.001
30,000,000 common stock with a par value of $.001
Issued and outstanding
Nil preferred stock
16,859,355 common stock $ 16,859
Additional paid in capital 4,113,346
Deficit (3,517,399)
Currency Translation Adjustment 19,500 632,306
------------ ----------
$3,708,695
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-16
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(U.S. Dollars)
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUE $ 185,670 $ - $ 197,262 $ -
DIRECT COSTS 49,275 - 49,275 -
------------ ------------ ------------ -----------
136,395 - 147,987 -
------------ ------------ ------------ -----------
EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 432,521 34,840 1,167,636 153,004
AMORTIZATION AND DEPRECIATION 24,874 - 33,211 2,852
------------ ------------ ------------ -----------
457,395 34,840 1,200,847 155,856
------------ ------------ ------------ -----------
LOSS BEFORE INTEREST EXPENSE (321,000) (34,840) (1,052,860) (155,856)
INTEREST EXPENSE 1,378,000 - 1,908,000 -
------------ ------------ ------------ -----------
NET LOSS (1,699,000) (34,840) (2,960,860) (155,856)
DEFICIT, BEGINNING OF PERIOD (1,818,399) (137,894) (556,539) ( 16,878)
------------ ------------ ------------ -----------
DEFICIT, END OF PERIOD $(3,517,399) $ (172,734) $(3,517,399) $ (172,734)
============ ============ ============ ===========
LOSS PER SHARE, BASIC AND DILUTED $ (0.11) $ (0.01) $ (0.20) $ (0.03)
============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 16,105,177 6,376,239 14,953,226 5,655,753
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-17
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(U.S. Dollars)
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (1,699,000) $ (34,840) $ (2,960,860) $ (155,856)
Add items not affecting cash
AMORTIZATION 24,874 - 33,211 2,852
INTEREST EXPENSE 1,378,000 - 1,908,000 -
CHANGE IN NON-CASH OPERATING ACCOUNTS (68,978) 2,298 89,450 387
---------------- --------------- ---------------- --------------
NET CASH USED IN
OPERATING ACTIVITIES (365,104) (32,542) ( 930,199) (152,617)
---------------- --------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS (PURCHASE) OF
CAPITAL ASSETS (34,169) 644 (55,194) (18,360)
Acquisition of Hermes Net
Solutions, Inc. - - (445,112) -
Acquisition of Intouch.Internet Inc. - - (197,917) -
PURCHASE OF OTHER ASSETS (69,477) - (54,220) -
Software Development (114,339) - (142,010) -
---------------- --------------- ---------------- --------------
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES
(217,985) 644 (894,453) (18,360)
---------------- --------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
LOAN REPAYMENT (66,841) - - -
LOAN PROCEEDS 2,750,000 - 3,650,000 -
ISSUANCE OF SHARES - 44,000 556,000 185,000
---------------- --------------- ---------------- --------------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 2,683,159 44,000 4,206,000 185,000
---------------- --------------- ---------------- --------------
Exchange rate changes on cash in
Foreign currency (14,466) (2,162) (14,466) (2,847)
NET INCREASE IN CASH 2,085,604 9,940 2,366,882 11,176
CASH, BEGINNING OF PERIOD 328,490 5,103 47,212 3,867
---------------- --------------- ---------------- --------------
CASH, END OF PERIOD $ 2,414,094 $ 15,043 $ 2,414,094 $ 15,043
================ =============== ================ ==============
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in Currency
------------------------- Translation
NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
-------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Incorporation date, September 5, 1997
Issued for acquisition
of ePost Innovations, Inc. 3,000,000 $ 3,000 $ (1,000) $ -- $ -- $ 2,000
Issued on sale of units 600,000 600 19,400 -- -- 20,000
Net loss -- -- -- (16,878) -- (16,878)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 3,600,000 3,600 18,400 (16,878) -- 5,122
Issued on sale of units 2,400,000 2,400 77,600 -- -- 80,000
Issued for cash 57,000 57 18,943 -- -- 19,000
Issued for legal services 22,500 22 7,478 -- -- 7,500
Issued for acquisition of
Communication Exchange
Management, Inc. 6,270,000 6,270 (2,090) -- -- 4,180
Issued for exercise
of warrants 915,000 915 243,085 -- -- 244,000
Offering expenses -- -- (20,000) -- -- (20,000)
Share transfer for
services -- -- 281,000 -- -- 281,000
Net Loss -- -- -- (539,661) -- (539,661)
Currency translation
adjustment -- -- -- -- 33,966 33,966
----------- ----------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 13,264,500 13,264 624,416 (556,539) 33,966 115,107
Issued for acquisition
of InTouch.Internet Inc. 9,855 10 28,515 -- -- 28,525
Issued for loan
conversion 1,500,000 1,500 998,500 -- -- 1,000,000
Issued for exercise
of warrants 2,085,000 2,085 553,915 -- -- 556,000
Beneficial conversion
feature on loans -- -- 1,908,000 -- -- 1,908,000
Currency translation
adjustment -- -- -- -- (14,466) (14,466)
Net Loss -- -- -- (2,960,860) (2,960,860)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1999 16,859,355 $ 16,859 $ 4,113,346 $(3,517,399) $ 19,500 $ 632,306
========== =========== ============= =========== ============ ===========
</TABLE>
F-19
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern" which assume that Cypost Corporation
(the "Company") will continue in operation for at least one year and will be
able to realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses before
interest expense of approximately $1.5 million for the period from inception
September 5, 1997 to September 30, 1999, has a working capital deficiency at
September 30,1999, and requires additional financing for its business
operations. As of September 30, 1999, the Company has $2.3 million of funding
available which can be drawn against a promissory note agreement with a lender.
The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its software
products, and market penetration and profitable operations from its internet
connection services. The Company is actively pursuing alternative financing and
has had discussions with various third parties, although no firm commitments
have been obtained. Management is also pursuing acquisitions of other
businesses with existing positive cash flows. In addition, management is
working on attaining cost and efficiency synergies by consolidating the
operations of the businesses acquired.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned will mitigate the
adverse conditions and events which raise doubts about the "going concern"
assumption used in preparing these financial statements, there can be no
assurance that these actions will be successful.
INTERIM FINANCIAL STATEMENTS
These financial statements do not include certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. These interim financial
statements are prepared pursuant to regulations of the Securities and Exchange
Commission.
In the opinion of management, these financial statements include all
adjustments which are necessary for fair presentation.
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which are
wholly owned, include ePost Innovations Inc., Hermes Net Solutions Inc. and
InTouch.Internet Inc.
F-20
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally Canadian,
are translated at the current exchange rate as of the balance sheet date.
Income statement items are translated at average exchange rates during the
period. The resulting translation adjustment is recorded as a separate
component of shareholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
The Company has, where practicable, estimated the fair value of financial
instruments based on quoted market prices or valuation techniques such as
present value of estimated future cash flows. These fair value amounts may be
significantly affected by the assumptions used, including the discount rate and
estimates of cash flow. Accordingly, the estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
Where these estimates approximate carrying value, no separate disclosure of
fair value is shown.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
method over a period of five years. Maintenance and repairs are charged against
operations and betterments are capitalized.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during the respective periods. Diluted earnings (loss) per
share is computed similarly, but also gives effect to the impact that
convertible securities, such as warrants, if dilutive, would have on net
earnings (loss) and average common shares outstanding if converted at the
beginning of the year. The effects of potential common shares such as warrants
would be antidilutive in each of the periods presented in these financial
statements. At September 30, 1999, there were no warrants outstanding (
September 30, 1998 - 2,250,000)
F-21
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's primary source of revenue is earned from internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are provided.
Revenues applicable to future periods are classified as deferred revenue.
DIRECT COSTS
Direct costs consist of telecommunications charges in respect of providing
internet connection services to customers. These costs are expensed as
incurred.
SELLING AND MARKETING COSTS
Selling and marketing costs are expensed as incurred and totaled $261,093
for the nine months ended September 30, 1999. These costs are reported under
selling, general and administrative expenses on the statement of operations.
SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of software development
costs begins upon the establishment of technological feasibility of the product,
which the Company has defined as the completion of beta testing of a working
product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Software development costs are
amortized on the straight line method over the estimated economic life of the
product of three years.
As at September 30, 1999, the Company has capitalized $142,010 of software
development costs and amortized $14,140 of these costs.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists and goodwill related
to acquisitions accounted for under the purchase method of accounting.
Amortization of these purchased intangibles is provided on the
straight-line basis over the respective useful lives of the intangible
assets which is estimated to be three years.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. The
Company considers factors such as significant changes in the regulatory
or business climate and projected future cash flows. Impairment losses are
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
F-22
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
INCOME TAXES
The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Deferred tax assets and liabilities are
measured using currently enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires the recognition of all derivatives as either assets or
liabilities and the measurement of those instruments at fair value. SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of SFAS No. 133", issued in August 1999,
postpones for one year the mandatory effective date for adoption of SFAS No.
133 to January 1, 2001.
The Company does not currently engage in derivative trading or hedging
activities; hence, SFAS No. 133 and SFAS No. 137 will not have a material
impact on its financial position or results of operations.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation under a fair value based method. Alternatively,
stock-based employee compensation can be accounted for under APB No. 25,
"Accounting for Stock Issued to Employees", under which no compensation is
recorded.
The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106",
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pension and other postretirement
benefits to the extent practicable, requires additional information on changes
in benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful.
The Company does not offer any pension or other postretirement benefits.
F-23
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The implementation of SOP 98-1 does not
have a material impact on the Company's financial position or results of
operations, as the Company has
Not incurred any such costs for the computer software developed or obtained
for internal use.
2. ACQUISITIONS
On June 30, 1999, the Company acquired all the shares of Hermes Net
Solutions, Inc. for cash consideration of Cdn.$770,000 (U.S.$528,000).
Also on June 30, 1999, the Company purchased all the shares of
InTouch.Internet Inc. for Cdn.$428,000 (U.S.$293,000). The consideration for
this purchase included cash of Cdn.$386,000 (U.S.$265,000) and 9,855 shares of
common stock (issued on August 9, 1999) valued at Cdn.$42,000 (U.S.$28,000) as
stated in the Share Purchase Agreement.
Both acquisitions have been accounted for by the purchase method of
accounting. In both acquisitions, the net assets acquired included goodwill and
other intangibles which will be amortized on a straight line basis over its
estimated useful life of three years. These financial statements include the
results of operations of the two acquired businesses for the period from July 1,
1999 to September 30, 1999. Pro forma information in respect of these
acquisitions is provided through each of the acquisitions had occurred on
January 1, 1999 and 1998.
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
a) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
TOTAL
CYPOST HERMES INTOUCH ADJUSTMENT PRO FORMA
<S> <C> <C> <C> <C> <C>
REVENUE $197,000 $187,000 $189,000 $ 0 $573,000
NET LOSS (2,961,000) 0 (7,000) (127,000) (3,095,000)
LOSS PER SHARE (0.21)
b) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
TOTAL
CYPOST HERMES INTOUCH ADJUSTMENT PRO FORMA
REVENUE $ 0 $135,000 $389,000 $ 0 $524,000
NET LOSS (156,000) (1,000) 0 (127,000) (284,000)
LOSS PER SHARE (0.05)
</TABLE>
3. SUBSEQUENT EVENTS
ACQUISITION OF NETROVER INC. AND NETROVER OFFICE INC.
On October 4, 1999, the Company purchased all the shares of NetRover Inc.
and NetRover Office Inc. for Cdn.$4 million (U.S.$2.7 million). The
consideration for the purchase included cash of Cdn.$3 million (U.S.$2 million)
and 219,000 shares of common stock valued at Cdn.$1 million (U.S.$680,000) as
stated in the Share Purchase Agreement. These purchases will be accounted for
under the purchase method of accounting.
ACQUISITION OF CONNECT NORTHWEST AND INTERNET ARENA
On October 27, 1999, the Company purchased certain assets and liabilities
of the business of Connect Northwest for $1.4 million. The purchase price was
satisfied by a cash payment of $670,000, amount payable of $70,000 and the
issuance of 147,985 shares of common stock valued at $660,000 as stated in
the Asset Purchase Agreement.
F-24
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
3. SUBSEQUENT EVENTS (CONTINUED)
On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $242,000, amount payable of $58,000 and 100,698
shares of common stock valued at $300,000 as stated in the Asset Purchase
Agreement.
These purchases will be accounted for under the purchase method of
accounting.
ACQUISTION OF PLAYA CORPORATION
On February 23, 2000, the Company completed the acquisition of Playa
Corportation (a Japan company), developer of Yabumi instant messaging and
e-greeting card services. The acquisition totals $3 million, comprised of
$300,000 in cash and $2.7 million in the Company's shares of common stock.
4. LOANS
During the nine months ended September 30, 1999, the Company borrowed
$3,650,000 pursuant to two promissory note agreements. The loans are
unsecured, bear interest at 8% per annum, and the principal and accrued
interest are due on demand. The lender may elect to convert the loans into
shares of common stock of the Company as follows:
SHARES
-------------------------------
PRINCIPAL PRE-SPLIT POST-SPLIT
------------- ------------- -------------
$ 1,000,000 1,000,000 1,500,000
2,650,000 1,766,667 2,650,000
At the commitment dates of the promissory notes, the conversion prices
were less than the fair values of the common stock, hence a beneficial
conversion feature is attached to these convertible notes. The amount of
this beneficial conversion feature has been recorded as interest expense
and additional paid-in-capital for $1,378,000 for the three months ended
September 30, 1999 and $1,908,000 for the nine months ended September 30,
1999.
During the nine months ended September 30, 1999, $1 million of loans were
settled by the issuance of 1,500,000 shares of common stock valued at $1
million.
At September 30, 1999, the loans balance is $2,650,000. The fair value of
the loans at September 30, 1999 is not practicable to estimate because of
the conversion features associated with the loans; accordingly, it is not
possible to estimate the present value of the future cash flows with any
reasonable degree of precision. On November 24, 1999, these loans were
converted into 2,650,000 of common stock.
5. SHARE CAPITAL
Effective September 24, 1999, the Company effected a three-for-two
subdivision of its shares of common stock. All share and per share amounts
in the accompanying financial statements have been adjusted retroactively
to give effect to this subdivision.
6. PROFORMA DISCLOSURES ON BUSINESS COMBINATION (UNAUDITED)
1. Basis of Presentation
The pro forma condensed consolidated financial statements consisting of a pro
forma balance sheet and pro forma statement of operations ("pro forma financial
statements") of CyPost Corporation (the "Company") have
been prepared by management based on historical financial statements of CyPost
Corporation, Hermes Net Solutions, Inc. ("Hermes"), Intouch.Internet Inc.
("Intouch"), NetRover Inc. and NetRover Office Inc. ("NetRover"), Internet
Arena, and Connect Northwest.
The pro forma balance sheet is presented as at September 30, 1999 and the pro
forma statements of operations for the nine months
ended September 30, 1999 and year ended December 31, 1998.
The pro forma financial statements are not necessarily indicative of the actual
results that would have occurred if the acquisitions had been in effect on the
dates indicated and are not necessarily indicative of what the actual results
will be in the future.
The pro forma financial statements give effect to the acquisitions of Hermes and
Intouch which have both been accounted for under the purchase method of
accounting and summarized as follows. The balance sheets of Intouch and Hermes
as at September 30, 1999 are included in the amounts reported under CyPost in
the proforma balance sheet. The revenue and net income amounts reported for
Intouch and Hermes on the pro forma statement of operations for the nine months
ended September 30, 1999 include the period from January 1, 1999 to
June 30, 1999 and for the year ended December 31, 1998 include the period from
January 1, 1998 to December 31, 1998.
i) Intouch - On June 30, 1999, the Company acquired all the shares of Intouch
for Cdn. $428,000 (US $293,000). The consideration for the purchase
included cash of Cdn. $386,000 (US $265,000) and 9,855 shares of common
stock for a value of Cdn. $42,000 (US $28,000). The purchase included
goodwill and other intangibles of Cdn. $470,000 (US $322,000) which will
be amortized on a straight line basis over its estimated life of
three years. Intouch is based in Vancouver, Canada.
ii) Hermes - On June 30, 1999, the Company acquired all of the shares of Hermes
for cash consideration of Cdn. $777,000 (US $528,000) The purchase
included goodwill and other intangibles of Cdn. $644,000 (US $437,000)
which will be amortized on a straight line basis over its estimated
life of three years. Hermes is based in Vancouver, Canada.
The pro forma financial statements also give effect to the acquisitions of
NetRover, Internet Arena, and Connect Northwest which occurred subsequent to
September 30, 1999 and all are accounted for under the purchase method of
accounting and summarized as follows. The pro forma balance sheet includes the
balance sheets for each of these entities as at September 30, 1999. The pro
forma statement of operations for the nine months ended September 30, 1999 and
year ended December 31, 1998 include the results of operations for these
entities for the respective periods.
iii) NetRover - On October 4, 1999, the Company acquired all of the shares of
NetRover for Cdn. $4 million (US $2.7 million). The consideration
for the purchase included cash of Cdn. $3 million (US $2.0 million)
and 219,000 shares of common stock for Cdn. $1 million (US $680,000).
NetRover is based in Toronto, Canada.
The purchase price was allocated to the net assets acquired which consisted of
current assets of US $100,000, capital assets consisting
primarily of computer equipment of US $300,000, liabilities of US $600,000, and
goodwill and intangibles of US $2.9 million. Goodwill and intangibles represents
the excess of the purchase price over the fair value of the net assets acquired
and will be amortized on a straight line basis over its estimated useful life of
three years.
Details of the purchase price and net assets acquired are as follows:
Purchase Price $2,700,000
Net assets acquired:
Current assets $100,000
Capital assets 300,000
Liabilities (600,000)
(200,000)
Goodwill and intangibles $2,900,000
==========
iv) Internet Arena - On November 9, 1999, the Company purchased certain assets
and liabilities of the business of Internet Arena for $600,000. The
consideration for the purchase included cash of $242,000, amount payable of
$58,000 and 100,698 shares of common stock for a value of $300,000.
The purchase price was allocated to capital assets acquired of US $64,000 and
goodwill and other intangibles of US $536,000.
Goodwill and intangibles represents the excess of the purchase price over the
fair value of the net assets acquired and will be amortized
on a straight line basis over its estimated useful life of three years.
Details of the purchase price and net assets acquired are as follows:
Purchase Price $600,000
Net assets acquired:
Capital assets $ 64,000
64,000
Goodwill and intangibles $534,000
==========
v) Connect Northwest - On October 27, 1999, the Company purchased certain assets
and liabilities of the business of Connect Northwest for $1.4 million. The
consideration for the purchase included cash of $670,000, amount payable of
$70,000 and 147,985 shares of common
Stock for a value of $660,000.
The purchase price was allocated to capital assets acquired of US $100,000 and
goodwill and other intangibles of US $1.3 million. Goodwill and intangibles
represents the excess of the purchase price over the fair value of the net
assets acquired and will be amortized
on a straight line basis over its estimated useful life of three years.
Details of the purchase price and net assets acquired are as follows:
Purchase Price $1,400,000
Net assets acquired:
Capital assets 100,000
100,000
Goodwill and intangibles $1,300,000
==========
2. Pro Forma Adjustments
The pro forma condensed balance sheet as of September 30, 1999 include the
acquisitions of Hermes and Intouch and also assume that the acquisitions of
NetRover, Internet Arena and Connect Northwest were in effect at September 30,
1999. The pro forma condensed statements of operations for the nine months
ended September 30, 1999 and year ended December 31, 1998 assume the
acquisitions occurred on January 1, 1999 and January 1, 1998, respectively. The
pro forma financial statements give effect to the following adjustments.
(a) $2,912,000 long term debt was obtained to finance the acquisitions of
NetRover ($2 million), Connect Northwest ($670,000) and Internet Arena
($242,000).
(b) $4,736,000 goodwill and other intangibles acquired on the acquisitions of
NetRover ($2.9 million), Connect Northwest ($1.3 million) and Internet Arena
($536,000).
(c) Amortization of goodwill and other intangibles for NetRover, Connect
Northwest and Internet Arena for the period from January 1, 1999 to September
30, 1999 on a straight line basis over their estimated useful lives of three
years. Amortization of goodwill and other intangibles for Hermes and Intouch
for the period from January 1, 1999 to June 30, 1999 on a straight line basis
over their estimated useful lives of three years. Total amortization for the
nine months ended September 30, 1999 is $1,311,000 and for the year ended
December 31, 1998 is $1,832,000.
(d) $464,000 capital assets acquired on acquisition of NetRover ($300,000),
Connect Northwest ($100,000), and Internet Arena ($64,000).
(e) Amortization of capital assets acquired in respect of NetRover, Connect
Northwest, and Internet Arena for the period from January 1, 1999 to September
30, 1999 on a straight line basis over their estimated useful lives of three
years. Total amortization for the nine months ended September 30, 1999 is
$116,000 and year ended December 31, 1998 is $155,000.
(f) $128,000 amounts payable to vendors on acquisition of Connect Northwest
($70,000) and Internet Arena ($58,000).
(g) $100,000 current assets acquired on acquisition of NetRover.
(h) $600,000 liabilities acquired on acquisition of NetRover.
(i) $1,660,000 capital stock to issue in respect of acquisitions of NetRover
($700,000), Connect Northwest ($660,000) and Internet Arena ($300,000).
(j) Interest expense of 8% per annum on the $2,912,000 long term debt financing
for an annual interest cost of $233,000. Interest expense for the nine months
ended September 30, 1999 is $175,000 and year ended December 31, 1998 is
$233,000.
3. Pro Forma Loss Per Share
Pro forma loss per share has been computed in accordance with SFAS 128 by
dividing net loss attributable to common shareholders by the weighted average
number of common shares outstanding during the respective periods. Diluted loss
per share is computed Similarly, but also gives effect to the impact that
convertible securities, such as warrants, if dilutive, would have on net loss
and average common shares outstanding if converted at the beginning of the year.
The effects of potential common shares such as warrants would be antidilutive in
each of the periods presented in these financial statements.
The pro forma weighted average number of common shares outstanding during the
nine months ended September 30, 1999 and year ended December 31, 1998 assume
that the shares to be issued in respect of the acquisition of NetRover (219,000
shares), Internet Arena (100,698 shares) and Connect Northwest (147,985 share
were issued on January 1, 1999 and January 1, 1998, respectively. Hence, the
pro forma computations of loss per share give effect to the issuance of these
shares as if they were issued at the beginning of the periods described above.
<TABLE>
<CAPTION>
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
INTERNET CONNECT PRO-FORMA TOTAL
CYPOST NETROVER ARENA NORTHWEST ADJUST. NOTE 2 PRO FORMA
----------- ----------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS 2,584,257 113,546 3,685 45,253 100,000 (G) 2,846,741
PROPERTY AND EQUIPMENT,NET 148,156 253,728 41,926 150,453 464,000 (D) 1,058,263
GOODWILL AND OTHER INTANGIBLES 751,208 0 0 0 4,736,000 (B) 5,487,208
OTHER ASSETS 225,074 42,534 6,760 5,170 279,538
----------- ----------- --------- ---------- ----------- -----------
TOTAL ASSETS 3,708,695 409,808 52,371 200,876 5,300,000 9,671,750
=========== =========== ========= ========== =========== ===========
CURRENT LIABILITIES (3,076,389) (1,308,813) (262,927) (134,441) (728,000) (F),(H) (5,510,570)
LONG TERM LIABILITIES 0 0 (29,377) (86,605) (2,912,000) (A) (3,027,982)
SHAREHOLDERS EQUITY (632,306) 899,005 239,933 20,170 (1,660,000) (I) (1,133,198)
----------- ----------- --------- ---------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS (3,708,695) (409,808) (52,371) (200,876) (5,300,000) (9,671,750)
=========== =========== ========= ========== =========== ===========
EQUITY
</TABLE>
<TABLE>
<CAPTION>
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
INTERNET CONNECT PRO-FORMA TOTAL
CYPOST HERMES INTOUCH NETROVER ARENA NORTHWEST ADJUSTMENTS NOTE 2 PRO FORMA
----------- ------- -------- --------- -------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE 197,000 187,000 189,000 1,402,000 466,000 563,000 0 3,004,000
DIRECT COSTS 49,000 70,000 58,000 773,000 246,000 220,000 0 1,416,000
----------- ------- -------- --------- -------- --------- ------------ ----------
148,000 117,000 131,000 629,000 220,000 343,000 0 1,588,000
EXPENSES 1,201,000 115,000 135,000 496,000 251,000 310,000 1,427,000 (C),(E) 3,935,000
----------- ------- -------- --------- -------- --------- ------------ ----------
INCOME (LOSS)
BEFORE INTEREST EXPENSE (1,053,000) 2,000 (4,000) 133,000 (31,000) 33,000 (1,427,000) (2,347,000)
INTEREST EXPENSE 1,908,000 2,000 3,000 43,000 14,000 26,000 175,000 (J) 2,171,000
----------- ------- -------- --------- -------- --------- ------------ ----------
NET INCOME (LOSS) (2,961,000) 0 (7,000) 90,000 (45,000) 7,000 (1,602,000) (4,518,000)
============ ======= ======== ========= ======== ========= ============ ==========
LOSS PER SHARE,
BASIC AND DILUTED (0.29)
==========
(15,420,909 WEIGHTED AVE.
# OF SHARES).
</TABLE>
<TABLE>
<CAPTION>
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INTERNET CONNECT PRO-FORMA TOTAL
1998 (US DOLLARS) CYPOST HERMES INTOUCH NETROVER ARENA NORTHWEST ADJUST. PRO FORMA
---------- ------- -------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE 0 196,000 404,000 1,775,000 342,000 536,000 0 3,253,000
DIRECT COSTS 0 80,000 186,000 1,019,000 204,000 219,000 0 1,708,000
---------- ------- -------- ---------- --------- ---------- ----------- -----------
0 116,000 218,000 756,000 138,000 317,000 0 1,545,000
EXPENSES 540,000 115,000 227,000 712,000 337,000 310,000 1,987,000 (C)(E) 4,228,000
---------- ------- -------- ---------- --------- ---------- ----------- -----------
INCOME (LOSS)
BEFORE INTEREST EXPENSE (540,000) 1,000 (9,000) 44,000 (199,000) 7,000 (1,987,000) (2,683,000)
INTEREST EXPENSE 0 1,000 7,000 67,000 22,000 36,000 233,000 (J) 366,000
---------- ------- -------- ---------- --------- ---------- ----------- -----------
NET INCOME (LOSS) (540,000) 0 (16,000) (23,000) (221,000) (29,000) (2,220,000) (3,049,000)
========== ======= ======== ========== ========= ========== =========== ===========
LOSS PER SHARE,
BASIC AND DILUTED (0.41)
===========
(7,501,162 WEIGHTED AVE.
# OF SHARES)
</TABLE>
F-25
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
Fax (973) 790-8845
To The Board of Directors and Shareholders Of ePOST Innovations, Inc. a
subsidiary of Mushroom Innovations Inc.,a British Columbia, Canadian
corporation (a development stage company).
I have audited the accompanying balance sheet of ePOST Innovations, Inc.
(a development stage company) as of August 31, 1997 and the related statements
of operations, cash flows and shareholders' equity for the period from
inception, March 27, 1997 to August 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ePOST
Innovations, Inc. (a development stage company) as of August 31, 1997 and the
results of its operations, shareholders equity and cash flows for period from
inception, March 27, 1997, to August 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
ePOST Innovations Inc. (a development stage company) will continue as a going
concern. As more fully described in Note 2, the Company has incurred operating
losses since the date of reorganization and requires additional capital to
continue operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are described in Note 2. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the possible inability of ePOST Innovations, Inc. (a development
stage company) to continue as a going concern.
Thomas P. Monahan, CPA
January 18, 1998
Paterson, New Jersey
F-26
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
BALANCE SHEET
August 31, 1997
(US Dollars)
Assets
Current assets
Total assets $ -0-
Liabilities and Stockholders' Equity
Current liabilities
Due to parent company $986
----
Total current liabilities 986
Stockholders' equity
Common Stock authorized
100,000 shares, no par value each.
At August 31, 1997, there
are 100 shares outstanding. 657
Deficit (2,000)
----
Currency translation adjustment 357
----
Total stockholders' equity (986)
----
Total liabilities and stockholders' equity $ -0-
----
See accompanying notes to financial statements
F-27
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, MARCH 27, 1997 TO AUGUST 31, 1997
(US Dollars)
Revenue $ -0-
Costs of goods sold -0-
------
Gross profit -0-
Operations:
Development 2,000
------
Total expense 2,000
Net income (loss) $(2,000)
======
See accompanying notes to financial statements
F-28
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, MARCH 27, 1997 TO AUGUST 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,000)
Adjustments to reconcile net loss
to cash used in operating activities
Depreciation -0-
-------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES -0-
CASH FLOWS FROM FINANCING ACTIVITIES
Advance from Parent 986
Sale of Common Stock 657
-------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 1,643
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -0-
CURRENCY TRANSLATION ADJUSTMENT 357
NET INCREASE (DECREASE) IN CASH -0-
-------
CASH BALANCE BEGINNING OF PERIOD -0-
-------
CASH BALANCE END OF PERIOD $-0-
=======
See accompanying notes to financial statements
F-29
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF STOCKHOLDERS EQUITY
Currency
Common Common Translation
Date Stock Stock Deficit Adjustment Total
Sale of initial shares 100 $657 $ 657
Currency translation
adjustment $ 357 357
Net loss $(2,000) (2,000)
-------- -------- ------ -------- --------
Balances August 31, 1997 100 $657 $(2,000) $ 357 $ (986)
==================================================
See accompanying notes to financial statements
F-30
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
Note 1 - Formation of Company and Issuance of Common Stock
a. Formation and Description of the Company
ePOST Innovations, Inc. (the "Company"), was formed under the name
539625 B.C. LTD as a Victoria, British Columbia, Canadian corporation on March
27, 1997 and authorized to issue to 100,000 shares of capital stock, no par
value with the following designated classes: 20,000 Class "A" Common shares;
20,000 Class "B" common shares; 20,000 Class "C" common shares; 20,000 Class "D"
common shares; and 20,000 Class "E" common shares, Cdn $1.00 par value each
share. 539625 BC Ltd. subsequently filed a certificate of amendment to
change its name to ePost Innovations, Inc.
b. Description of Company
The Company is a development stage company that was organized as a
subsidiary of Mushroom Innovations Inc.("Mushroom") and is involved with the
development of data encryption software.
c. Issuance of Shares of Common Stock
On March 27, 1997, the Company sold an aggregate of 100 shares of common
stock for $657 to Mushroom and became a wholly owned subsidiary of Mushroom.
Note 2-Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has no operations
except for the development of computer software for its parent company. These
factors indicate that the Company's continuation as a going concern is dependent
upon the parent company ability to obtain adequate financing and fund the day-
to-day operations of the Company. The Company has been financed to date
through intercompany advances of resources and is dependent upon the resources
of management to fund the ongoing operations of the Company until profitability
is achieved. The Company will require substantial additional funds to finance
its business activities on an ongoing basis and will have a continuing long-term
need to obtain additional financing. The Company's future capital requirements
will depend on numerous factors including, but not limited to, continued
progress developing its source code, continued research and development and
initiating marketing penetration. The Company plans to engage in such ongoing
financing efforts on a continuing basis.
The financial statements presented at August 31, 1997 consist of the
balance sheet as at August 31, 1997 and the statements of operations, cash flows
and stockholders equity for the period from inception, March 27, 1997, to
August 31, 1997.
F-31
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
b. Revenue recognition
Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software or system has been shipped (or software has been electronically
delivered), remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Maintenance revenue for providing
product updates and customer support is deferred and recognized ratably over the
service period. For subscription sales that have the maintenance fee included
with the licensing fee, maintenance revenue is derived based upon the amount
charged for such services when they are sold separately. Revenue from hardware
products is recognized upon shipment subject to a reserve for returns. Revenues
on rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period.
Revenue generated from products sold through traditional channels where
the right of return exists is reduced by reserves for estimated sales returns.
Such reserves are based on estimates developed by management. As unsold products
in these distribution channels are exposed to rapid changes in consumer
preferences or technological obsolescence due to new operating environments,
product updates or competing products, it is reasonably possible that these
estimates will change in the near term.
c. Selling and Marketing Costs
Selling and Marketing costs, which are generally expensed as incurred
for the period from inception, March 27, 1997, to August 31, 1997 was $-0-.
d. Software Development
The Company develops and tests software code to produce software
masters, which becomes the core products sold to customers. The Company also
purchases and licenses software code contractually to include with the software
masters. The cost of software developed, licensed, and purchased for inclusion
with the software masters is amortized using the straight line method over the
products' estimated useful lives, which is typically two years. Periodic royalty
fees for license software are expensed in the related period.
The costs to establish the technological feasibility of software
products, including the designing, coding and testing activities that are
necessary to establish that a software product is both feasible and can be
produced, are treated as research and development costs and are expensed as
incurred.
F-32
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
A summary of software development costs at August 31, 1997 is as
follows:
ePost
Cost incurred for product development and licensing
$2,000
e. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
f. Foreign Currency Translation
The functional currency of the Company is Canadian dollars. Balance
sheet accounts are translated to U.S. dollars at the current exchange rate of
the balance sheet date. Income statement items are translated at average
exchange rates during the period. The resulting translation adjustment is
recorded as a separate component of stockholder' equity.
g. Research and Development Expenses
Research and development expenses are charged to operations when
incurred.
Note 3 - Transfer of Assets
Pursuant to an acquisition share purchase agreement dated September 17,
1997, Cypost Corporation ("CyPost") issued 3,000,000 shares of common stock to
Mushroom Innovations Inc. at $0.001 per share for an aggregate consideration of
$2,000 to Mushroom in consideration for all of the issued and outstanding shares
of common stock of the Company. The shares of common stock were valued at $.001
per share for an aggregate consideration of $2,000. With completion of the
transfer of shares, ePost Innovations, Inc. became a wholly owned subsidiary of
CyPost Corporation.
F-33
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
The transaction has been accounted for by CyPost Corporation as a related
party transfer between companies under common control as one of the shareholders
of both CyPost and Mushroom has a majority interest in both of theses entities.
As a result of the transaction, ePost became a wholly owned subsidiary of CyPost
Corporation.
CyPost Corporation acquired all the rights, title and interest to all
the assets owned by the Company. Those assets consisted of proprietary knowledge
of various computer software products under development by the Company.
Note 4 - Related Party transactions
a. Leased Office Space
The Company shares office space with the parent company at 1812
Boatlift Lane, Vancouver, British Columbia V6H 3Y2.
b. Officer Salaries
No officer has received a salary in excess of $100,000.
c. Borrowing from Parent Company
The amounts due to parent company are non-interest bearing and due on
demand.
Note 5 - Income Taxes
The Company provides for the tax effects of transactions reported in
the financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets
and liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of August 31, 1997, the Company had no
material current tax liability, deferred tax assets, or liabilities to impact on
the Company's financial position because the deferred tax asset related to the
Company's net operating loss carry forward and was fully offset by a valuation
allowance.
F-34
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
At August 31, 1997, the Company has net no operating loss carry
forwards for income tax purposes. Any carry forward losses if any would be
available to offset future taxable income. The Company's utilization of this
carry forward against future taxable income may become subject to an annual
limitation due to a cumulative change in ownership of the Company of more than
50 percent.
The Company recognized no income tax benefit for the period from
inception, March 27, 1997, to August 31, 1997. SFAS No. 109 requires that a
valuation allowance be provided if it is more likely than not that some portion
or all of a deferred tax asset will not be realized. The Company's ability to
realize benefit of its deferred tax asset will depend on the generation of
future taxable income. Because the Company has yet to recognize significant
revenue from the sale of its products, the Company believes that a full
valuation allowance should be provided.
Note 6 - Development Stage Company
The Company is considered to be a development stage company with little
operating history. The Company is dependent upon the financial resources of the
Company's management for its continued existence. The Company will also be
dependent upon its ability to raise additional capital to complete is research
and development, programming development, production of masters scheduling and
its marketing program, acquire additional equipment, management talent,
inventory and working capital to engage in any profitable business activity.
Since its organization, the Company's activities have been limited to the
preliminary development of its new products, hiring personnel and acquiring
equipment and office space, conducting research and development of its
technology and preparation of marketing documentation.
F-35
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
Fax (973) 790-8845
To The Board of Directors and Shareholders of Communication Exchange Management,
Inc. a subsidiary of Mushroom Innovations Inc., a British Columbia,
Canadian corporation (a development stage company)
I have audited the accompanying balance sheet of Communication Exchange
Management, Inc. (a development stage company) as of December 31, 1997 and the
related statements of operations, cash flows and shareholders' equity for the
period from inception, March 18, 1997, to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mushroom
Innovations Inc. (a development stage company) as of December 31, 1997 and the
results of its operations, shareholders equity and cash flows for period from
inception, March 18, 1997, to December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Communication Exchange Management, Inc. (a development stage
company) will continue as a going concern. As more fully described in Note 2,
the Company has no operations and is dependent upon the resources of the parent
Company to fund product development and requires additional capital to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans as to these matters are
described in Note 2. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of Communication Exchange Management, Inc. (a development
stage company) to continue as a going concern
/s/Thomas P. Monahan, CPA
January 18, 1998
Paterson, New Jersey
F-36
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
BALANCE SHEET
(US Dollars)
December 31,1997 June 30,1998
Audited Unaudited
Assets
Total assets $ -0- $ -0-
====== ======
Liabilities and Stockholders' Equity
Current liabilities
Due to parent company $2,919 $2,944
------- ------
Total current liabilities 2,919 2,944
Stockholders' equity
Common Stock authorized 100,000 shares, no par value each.
At December 31, 1997 and June 30, 1998,
there are 100 shares outstanding 679 679
Deficit (4,180) (4,180)
Currency translation adjustment 582 557
-------- -------
Total stockholders' equity (2,919) (2,944)
-------- -------
Total liabilities and
stockholders' equity $ -0- $ -0-
======== =======
See accompanying notes to financial statements
F-37
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF OPERATIONS
(US Dollars)
For the period For the six For the period
from inception, months ended from inception,
March 18, 1997 June 30, 1998 March 18, 1997
to December 31, to June 30
1997 1998
Audited Unaudited Unaudited
--------------- ------------ ----------------
Revenue$ -0- $-0- $-0-
Costs of goods sold -0- -0- -0-
--------------- ------------- -----------------
Gross profit -0- -0- -0-
Operations:
Development 4,180 -0- -0-
--------------- ------------- -----------------
Total expense 4,180 -0- -0-
Net income (loss) (4,180) $-0- $-0-
=============== ============= =================
See accompanying notes to financial statements
F-38
<PAGE>
<TABLE>
<CAPTION>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
A SUBSIDIARY OF MUSHROOM INNOVATIONS, INC.
A VICTORIA, BRITISH COLUMBIA, CANADIAN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(US DOLLARS)
FOR THE PERIOD FOR THE SIX FOR THE PERIOD
FROM INCEPTION, MONTHS ENDED FROM INCEPTION,
MARCH 18, 1997 JUNE 30, 1998 MARCH 18, 1997
TO DECEMBER 31, TO JUNE 30,
1997 1998
AUDITED UNAUDITED UNAUDITED
----------------- --------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
NET INCOME (LOSS) $ (4,180) $ -0- $ (4,180)
----------------- --------------- -----------------
TOTAL CASH FLOWS FROM OPERATING
ACTIVITIES (4,180) -0- (4,180)
CASH FLOWS FROM FINANCING ACTIVITIES
DUE TO PARENT COMPANY 2,919 25 2,944
SALE OF SHARES OF COMMON STOCK 679 -0- 679
----------------- --------------- -----------------
TOTAL CASH FLOWS FROM
FINANCING ACTIVITIES 3,598 25 3,623
----------------- --------------- -----------------
TOTAL CASH FLOWS FROM -0- -0- -0-
INVESTING ACTIVITIES
CURRENCY TRANSLATION ADJUSTMENT 582 (25) 557
NET INCREASE (DECREASE) IN CASH -0- -0- -0-
----------------- --------------- -----------------
CASH BALANCE BEGINNING OF PERIOD -0- -0- -0-
----------------- --------------- -----------------
CASH BALANCE END OF PERIOD -0- $ -0- $ -0-
----------------- --------------- -----------------
</TABLE>
See accompanying notes to financial statements
F-39
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF STOCKHOLDERS EQUITY
Currency
Common Common Translation
Date Stock Stock Deficit Adjustment Total
Sale of initial
shares 100 $ 679 $ 679
Currency translation
adjustment $ 582 582
Net loss (4,180) (4,180)
------ ----- -------- ------- -------
Balances December 31, 1997 100 $ 679 (4,180) $ 582 $(2,919)
Unaudited
Currency translation
Adjustment (25) (25)
Net loss -0- -0-
------ ----- -------- ------- -------
Balance June 30, 1998 100 $ 679 $(4,180) $ 557 $(2,944)
====== ===== ======== ======= =======
See accompanying notes to financial statements
F-40
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Note 1 - Formation of Company and Issuance of Common Stock
a. Formation and Description of the Company
Communication Exchange Management, Inc. (the "Company"), was formed under
the name 524357 B.C. LTD as a British Columbia, Canadian corporation on March
18, 1997 and authorized to issue to 100,000 shares of common stock, no par
value. The a certificate of name was subsequently filed amending the corporate
name to Communication Exchange Management, Inc.
b. Description of Company
The Company is a development stage company that was organized as a
subsidiary of Mushroom Innovations Inc. ("Mushroom") and is involved with the
development of data encryption software. The Company's assets consisted of
proprietary knowledge of various computer software products under development.
c. Issuance of Shares of Common Stock
On March 18, 1997, the Company sold an aggregate of 100 shares of common
stock for $679 to Mushroom and became a wholly owned subsidiary of Mushroom.
Note 2-Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has no operations
except for the development of computer software for its parent company. These
factors indicate that the Company's continuation as a going concern is dependent
upon the parent company ability to obtain adequate financing and fund the day to
day operations of the Company. The Company has been financed to date through
intercompany advances of resources and is dependent upon the resources of
management to fund the ongoing operations of the Company until profitability is
achieved. The Company will require substantial additional funds to finance its
business activities on an ongoing basis and will have a continuing long-term
need to obtain additional financing. The Company's future capital requirements
will depend on numerous factors including, but not limited to, continued
progress developing its source code, continued research and development and
initiating marketing penetration. The Company plans to engage in such ongoing
financing efforts on a continuing basis.
The financial statements presented at December 31, 1997 consist of the
balance sheet as at December 31, 1997 and the related statements of operations,
cash flows and stockholders equity for the period from inception, March 18,
1997, to December 31, 1997.
The unaudited consolidated financial statements presented at June 30,
1998 consist of the unaudited consolidated balance sheet as at June 30, 1998 and
the unaudited statements of operations, cash flows and stockholders equity for
the six months ended June 30, 1998 and for the period from inception, March 18,
1997, to June 30, 1998 .
F-41
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
b. Revenue recognition
Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software or system has been shipped (or software has been electronically
delivered), remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Maintenance revenue for providing
product updates and customer support is deferred and recognized ratably over the
service period. For subscription sales that have the maintenance fee included
with the licensing fee, maintenance revenue is derived based upon the amount
charged for such services when they are sold separately. Revenue from hardware
products is recognized upon shipment subject to a reserve for returns. Revenues
on rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period.
Revenue generated from products sold through traditional channels where
the right of return exists is reduced by reserves for estimated sales returns.
Such reserves are based on estimates developed by management. As unsold products
in these distribution channels are exposed to rapid changes in consumer
preferences or technological obsolescence due to new operating environments,
product updates or competing products, it is reasonably possible that these
estimates will change in the near term.
c. Selling and Marketing Costs
Selling and Marketing costs, which are generally expensed as incurred
for the period from inception, March 18, 1997, to December 31, 1997 was $-0-.
d. Software Development
The Company develops and tests software code to produce software
masters which becomes the core products sold to customers. The Company also
purchases and licenses software code contractually to include with the software
masters. The cost of software developed, licensed, and purchased for inclusion
with the software masters is amortized using the straight line method over the
products' estimated useful lives, which is typically two years. Periodic royalty
fees for license software are expensed in the related period.
The costs to establish the technological feasibility of software
products, including the designing, coding and testing activities that are
necessary to establish that a software product is both feasible and can be
produced, are treated as research and development costs and are expensed as
incurred.
F-42
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
A summary of software development costs is as follows:
December 31, June 30,
1997 1998
Cost incurred for product
development
and licensing for CEM $4,180 $4,180
e. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
f. Foreign Currency Translation
The functional currency of the Company is Canadian dollars. Balance
sheet accounts are translated to U.S. dollars at the current exchange rate of
the balance sheet date. Income statement items are translated at average
exchange rates during the period. The resulting translation adjustment is
recorded as a separate component of stockholder' equity.
g. Research and Development Expenses
Research and development expenses are charged to operations when
incurred.
h. Unaudited Financial Information
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of June 30,
1998 and the results of its operations and its cash flows for the six months
ended June 30, 1998 and for the period from, inception March 18, 1997 to June
30, 1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC's rules and
regulations of the Securities and Exchange Commission. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
F-43
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Note 3 - Transfer of Assets
On October 29, 1998, CyPost Corporation ("CyPost") issued 6,270,000 shares
of common stock valued at $0.001 per share for an aggregate consideration of
$4,180 to Mushroom and acquired all of the issued and outstanding stock of the
Company. The transaction has been accounted for by CyPost under the purchase
method of accounting.
Cypost acquired all the rights, title and interest to all the assets
owned by the Company. Those assets consisted of proprietary knowledge of various
computer software products under development by the Company.
Note 4 - Related Party transactions
a. Leased Office Space
The Company shares office space with the parent company at 1812
Boatlift Lane, Vancouver, British Columbia V6H 3Y2.
b. Officer Salaries
No officer has received a salary in excess of $100,000.
c. Due to Parent Company
At December 31, 1997 and June 30, 1998, the Company is obligated to
repay monies advanced on its behalf by Mushroom aggregating of $2,919 and $2,944
respectively. The loan is due on demand without interest.
F-44
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Note 5 - Income Taxes
The Company provides for the tax effects of transactions reported in
the financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets
and liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 1997 and June 30,
1998, the Company had no material current tax liability, deferred tax assets, or
liabilities to impact on the Company's financial position because the
deferred tax asset related to the Company's net operating loss carry
forward and was fully offset by a valuation allowance.
At December 31, 1997 and June 30, 1998, the Company has net no
operating loss carry forwards for income tax purposes. Any carryforward
losses if any would be available to offset future taxable income. The
Company's utilization of this carry forward against future taxable income
may become subject to an annual limitation due to a cumulative change in
ownership of the Company of more than 50 percent.
The Company recognized no income tax benefit for the period from
inception, March 18, 1997, to June 30, 1998 SFAS No. 109 requires that a
valuation allowance be provided if it is more likely than not that some portion
or all of a deferred tax asset will not be realized. The Company's ability to
realize benefit of its deferred tax asset will depend on the generation of
future taxable income. Because the Company has yet to recognize significant
revenue from the sale of its products, the Company believes that a full
valuation allowance should be provided.
Note 6 - Development Stage Company
The Company is considered to be a development stage company with little
operating history. The Company is dependent upon the financial resources of the
Company's management for its continued existence. The Company will also be
dependent upon its ability to raise additional capital to complete its
research and development, programming development, production of masters
scheduling and its marketing program, acquire additional equipment,
management talent, inventory and working capital to engage in any profitable
business activity. Since its organization, the Company's activities have
been limited to the preliminary development of its new products, hiring
personnel and acquiring equipment and office space, conducting research
and development of its technology and preparation of marketing documentation.
F-45
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
Fax (973) 790-8845
To The Board of Directors and Shareholders of Connect Northwest Internet
Services, LLC (a Washington State Limited Liability Company)
I have audited the accompanying balance sheet of Connect Northwest
Internet Services, LLC as of December 31, 1998 and the related statements of
operations, cash flows and members' equity for the years ended December 31, 1997
and 1998. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connect Northwest Internet
Services, LLC as of December 31, 1998 and the results of its operations,
members' equity and cash flows for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Connect Northwest Internet Services, LLC will continue as a going concern. As
more fully described in Note 2, the Company has suffered recurring losses from
operations and requires additional capital to continue operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans as to these matters are described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
s/Thomas P. Monahan
------------------------
Thomas P. Monahan, CPA
March 31, 2000
Paterson, New Jersey
F-46
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
BALANCE SHEET
(US Dollar)
September 30,
1999 December 31,
Unaudited 1998
------------- -----------
Assets
Current assets
Cash and cash equivalents $5,479 $957
Accounts receivable 39,774 16,484
------------- -----------
Total current assets 45,253 17,441
Property and equipment
Furniture fixtures and
computer equipment 330,158 270,114
Less accumulated depreciation (179,705) (132,581)
------------- -----------
Total property and equipment-net 150,453 137,533
Other assets
Security deposits 5,170 7,534
------------- -----------
Total other assets 5,170 7,534
------------- -----------
Total assets $200,876 $162,508
------------- -----------
Liabilities and Members' Equity
Current liabilities
Accounts payable and
accrued expenses $24,321 $17,182
Capital leases payable-
current portion 56,520 32,685
Officers' loans -current portion 53,600 4,902
------------- -----------
Total current liabilities 134,441 54,769
Long term liabilities
Capital leases payable-
long term portion 0 45,987
Officers' loans 86,605 89,340
------------- -----------
Total liabilities 221,046 190,096
Members' equity (20,170) (27,588)
------------- -----------
Total liabilities and
stockholders' equity $200,876 $162,508
============= ===========
See accompanying notes to financial statements
F-47
<PAGE>
<TABLE>
<CAPTION>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
STATEMENT OF OPERATIONS
(US Dollars)
For the nine For the nine
For the For the months ended months ended
year ended year ended September 30, September 30,
December 31, December 31, 1998 1999
1997 1998 Unaudited Unaudited
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenue $382,384 $535,633 $382,636 $562,910
Direct costs 198,792 219,181 145,863 220,182
------ ------ ------ ------
Gross profit 183,592 316,452 236,773 342,728
Operations:
Selling, general
and administrative 153,225 252,845 207,408 262,053
Depreciation and
amortization 45,572 59,082 51,358 47,124
------ ------ ------ ------
Total expense 198,797 311,927 258,766 309,177
------ ------ ------ ------
Profit (Loss)
from operations (15,205) 4,525 (21,993) 33,551
Other income (expense)
Interest income 237
Gain (loss) on
sale of equipment (5,789) 2,056 (1,284) (107)
Interest expense (14,681) (35,999) (26,920) (26,026)
-------- ------- -------- --------
Total other income
(expense) (20,470) (29,181) (28,204) (26,133)
------ ------ ------ ------
Net income (loss) $(35,675) $(29,181) $(50,197) $7,418
=========== =========== =========== =========
See accompanying notes to financial statements
</TABLE>
F-48
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
a Washington State Limited Liability Company)
STATEMENT OF CASH FLOWS
For the nine For the nine
For the For the months ended months ended
year ended year ended September 30, September 30,
December 31, December 31, 1998 1999
1997 1998 Unaudited Unaudited
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) $(35,675) $(29,181) $(50,197) $ 7,418
Adjustments to
reconcile net loss
to cash used in
operating activities
Depreciation 45,572 59,082 51,358 47,124
Accounts receivable (8,277) (11,819) (4,294) (23,290)
Prepaid expenses (3,181) 3,181 (4,796)
Accounts payable and
accrued expenses 36,633 (29,978) (20,691) 7,139
------ ------- -------- -----
TOTAL CASH FLOWS
FROM OPERATING
ACTIVITIES 35,072 (8,715) (28,620) 38,391
CASH FLOWS FROM
FINANCING ACTIVITIES
Officer loan 38,620 (8,501) (8,391) 45,963
Sale of
membership units 57,500 57,500
Membership
distribution (19,633) (97) (97)
Lease payments -0- (24,263) (17,711) (22,152)
-------- --------- --------- -------
TOTAL CASH FLOWS FROM
FINANCING ACTIVITIES 18,987 24,639 31,301 23,811
CASH FLOWS FROM
INVESTING ACTIVITIES
Security deposit (2,717) (4,817) (544) 2,364
Purchase of
equipment (48,155) (15,608) (60,044)
--------- -------- ------- --------
TOTAL CASH FLOWS
FROM INVESTING
ACTIVITIES (50,872) (20,425) (544) (57,680)
NET INCREASE
(DECREASE) IN CASH 3,187 (4,501) 2,137 4,522
CASH BALANCE
BEGINNING OF PERIOD 2,271 5,458 5,458 957
------- -------- ------- -------
CASH BALANCE END
OF PERIOD $5,458 $957 $7,595 $5,479
======== ======== ======== =======
See accompanying notes to financial statements
F-49
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
STATEMENT OF MEMBERS' EQUITY
Members' Members'
Date Shares Equity
---- -------- ------
Balance December 31, 1996 1,000,000 $ (501)
Distributions (19,633)
Net loss (35,675)
---------- --------
Balance December 31, 1997 1,000,000 (55,809)
Sale of Members' Units at
$1.00 per Unit 57,500 57,500
Distributions (97)
Net loss (29,191)
---------- ---------
Balance December 31, 1998 1,057,500 (27,588)
Unaudited
Net income 7,418
----------- --------
Balance September 30, 1999 1,057,500 $(20,170)
==============================
See accompanying notes to financial statements
F-50
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1 - Formation of Company and Issuance of Common Stock
a. Formation and Description of the Company
Connect Northwest Internet Services, LLC. (the "Company"), was
formed on January 1, 1996 and will expire on December 31, 2035 in the State of
Washington under the Washington Limited Liability Company Act as a and is
authorized to issue 20,000,000 shares of common stock, without par value.
b. Description of Company
The Company conducts its business primarily in the State of Washington
and is engaged providing Internet services.
c. Issuance of Membership Units
Between March 1, 1998 and June 30, 1998, the Company offered and sold
57,500 membership units to 7 individuals for an aggregate consideration of
$57,500 or $1.00 per unit.
Note 2-Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred net
losses of $57,438 from inception to September 30, 1999. These factors
indicate that the Company's continuation as a going concern is dependent upon
its ability to obtain adequate financing. The Company will be relying upon the
resources of management to provide the necessary working capital to sustain
the Company's continued operations until adequate financing can be located
or the company achieves profitability. The Company will require substantial
additional funds to finance its business activities on an ongoing basis and
will have a continuing long-term need to obtain additional financing.
The financial statements presented at December 31, 1998 consist of the
balance sheet as at December 31, 1998 and the statements of operations, cash
flows and members equity for the years ending December 31, 1997 and 1998.
The unaudited financial statements presented at September 30, 1999
consist of the balance sheet as at September 30, 1999 and the statements of
operations, cash flows and members equity for the nine months ended September
30, 1998 and 1999.
F-51
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
b. Cash and Cash Equivalents
Cash and Cash Equivalents - Temporary investments with a maturity
of less than three months when purchased are treated as cash
c. Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed over the estimated useful lives using the
straight line methods over a period of five years. Maintenance and repairs are
charged against operations and betterment's are capitalized.
d. Revenue recognition
The Company's primary source of revenue is earned from Internet
connection services. For contracts which exceed one month, revenue is recognized
on a straight-line basis over the term of the contract as services are provided.
Revenue applicable to future periods are classified as deferred revenue.
e. Selling and Marketing Costs
Selling and Marketing costs, are expensed as incurred. For the
years ending December 31, 1997 and 1998 and for the nine months ended September
30, 1998 and 1999 was $18,177, $26,097, $22,305 and $19,730 respectively.
f. Direct Costs
The "direct costs" to provide services consist of the costs incurred
to lease and rent telephone communications lines and services from
communications companies.
g. Software Development
Under the criteria set forth in SFAS No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
capitalization of software development costs begins upon the establishment of
technological feasibility of the product, which the Company has defined as the
completion of beta testing of a working product. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in software and hardware
technology. No software development costs have been capitalized by the Company
to date.
h. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-52
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
i. Significant Concentration of Credit Risk
At December 30, 1998 and September 30, 1999, the Company has
concentrated its credit risk by maintaining deposits in one banks. The maximum
loss that could have resulted from this risk totaled $-0- which represents the
excess of the deposit liabilities reported by the banks over the amounts that
would have been covered by the federal insurance.
j. Income Taxes
The Company is treated as a partnership for Federal income tax
purposes.
k. Recent Accounting Pronouncements
In March, 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 does not have a
material impact on the Company's financial position or results of operations.
Computer software costs that are incurred in the preliminary project stage are
expensed as incurred. Once the capitalization criteria of the SOP have been met,
costs incurred when developing computer software for internal are capitalized.
No software development costs have been capitalized by the Company to date.
Unaudited financial information
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of
September 30, 1999 and the results of its operations and its cash flows for the
nine months ended September 30, 1998 and 1999. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the SEC's rules and regulations of the Securities and Exchange
Commission. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
Note 3 - Sale of Company
On October 27, 1999, the Company entered into an Asset Purchase
Agreement (the "Agreement") to sell to Cypost Corporation ("Cypost") the
operating assets including property and equipment, leases and agreements
relating to the Company's business including customer lists, and intellectual
property for $1,400,000.
F-53
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 4 - Related Party transactions
a. Officer Salaries
No officer has received a salary in excess of $100,000.
b. Officers' Loans
The Company is obligated to repay Jim Fick a loan dated June 16, 1994
in the principal amount of $10,000 payable in 180 monthly installments of
$108.50 including interest at 10.250% over a 15 year period. The principal
balance due at December 31, 1998 and September 30, 1999 is $8,242 and $7,907
respectively.
The Company is obligated to Charles Fick III to repay $20,000 advanced
on August 30, 1999 payable on demand with interest at 12%. The principal balance
at September 30, 1999 is $20,000.
The Company is obligated to Charles Fick III to repay $50,000 advanced
on January 2, 1999 payable in 18 monthly installments of $3,002 including
interest at 10%. The principal balance at September 30, 1999 is $28,697.
The Company is obligated to Jim Fick to repay moneys advanced in 1996
aggregating $86,000 payable in monthly installments of $300 principal and
interest at 1% per month or 12% per annum of the unpaid balance. At December
31, 1998 and September 30, 1999, the principal balances are $86,000 and $83,600
respectively.
Note 6 - Business and Credit Concentrations
The amount reported in the financial statements for cash approximates
fair market value. Because the difference between cost and the lower of cost or
market is immaterial, no adjustment has been recognized and investments are
recorded at cost.
Financial instruments that potentially subject the company to credit
risk consist principally of trade receivables. Collateral is generally not
required.
Note 7 - Capital Lease Obligations
Property held under capital leases, included with owned property on the
balance sheets at December 31, 1998 and September 30, 1999, consists of the
following:
December 31, September 30,
1998 1999
Classification
Communications equipment and computers $ 113,244 $ 116,899
Less: accumulated depreciation (53,408) (71,240)
------------ ------------
Property and equipment under
capital leases, net $ (59,836) $ (45,659)
Capital lease obligations at December 31, 1998 and September 30, 1999,
consist of the following:
F - 54
<PAGE>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
Non-cancelable equipment leases expiring through August, 2001, payable
in monthly installments aggregating $4,523 including imputed interest at various
rates ranging from 16.9% to 35.3%,
<TABLE>
<CAPTION>
Secured by certain equipment $78,672 $56,520
<S> <C> <C>
Less: current portion of capital lease
obligations (32,685) (56,520)
-------- -------
Long-term capital lease obligations, net $ 45,987 $ -0-
</TABLE>
The following is a schedule of future lease payments under capital leases
for years ending December 31,:
1999 $52,325
2000 46,046
2001 11,312
Total minimum lease payments 109,683
Less: interest imputed at various rates (31,011)
---------
Present value of minimum lease payments $78,672
Note 8 - Commitments
Lease of office space
The Company leases office space under various leases expiring through
December 31, 2003
Future minimum lease payments will aggregate approximately $196,090 over
the next five years:
Rent expense for the years ended December 31, 1998 and 1999 and for the
nine months ended September 30, 1998 and 1999 was $22,698, $40,897, $18,010 and
$36,543 respectively.
Note 9 - Non cash Financing Activities
In 1997 the Company purchased $113,244 in equipment and financed the
purchase with a capital leases from various unrelated parties in the aggregate
amount of $102,935 payable over a five year period.
F-55
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors Intouch.Internet Inc. (a wholly owned subsidiary of
CoyoteNet Inc.)
We have audited the accompanying balance sheets of Intouch.Internet
Inc. (a wholly owned subsidiary of CoyoteNet Inc.) as of June 30, 1999 and
January 31, 1999 and 1998 and the related statements of operations, changes in
stockholder's equity and cash flows for the five months ended June 30, 1999 and
two years ended January 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intouch.Internet
Inc. (a wholly owned subsidiary of CoyoteNet Inc.), as of June 30, 1999 January
31, 1999 and 1998, and the results of its operations and its cash flows for the
five months ended June 30, 1999 and two years ended January 31, 1999 and 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully submitted,
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
March 29, 2000
F-56
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
BALANCE SHEETS
June 30, January 31,
--------- ----------------------
1999 1999 1998
--------- --------- ---------
ASSETS
Current Assets
Cash ................................. $ 1,759 $ 12,355 $ 6,436
Accounts Receivable .................. 592 1,004 12,770
Inventory ............................ 923 3,682 6,368
Prepaid Expenses ..................... 4,193 3,620 2,733
--------- --------- ---------
Total Current Assets ............ 7,467 20,661 28,307
Property & Equipment
Computer Equipment ................... 38,110 36,502 27,476
Computer Software .................... 12,284 6,971 6,923
Furniture and Fixtures ............... 4,509 4,361 4,249
Leasehold Improvements ............... 10,574 10,228 10,784
Computer Equipment under Capital Lease 18,374 17,772 46,759
Less Accumulated Depreciation ........ (46,804) (40,435) (38,923)
--------- --------- ---------
Net Property & Equipment ........ 37,047 35,399 57,268
Other Assets
Intangible Assets..................... 23,886 -- --
Due from Parent Company .............. -- 11,188 7,318
--------- --------- ---------
Total Assets .................... $ 68,400 $ 67,248 $ 92,893
========= ========= =========
F-57
<PAGE>
<TABLE>
<CAPTION>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
BALANCE SHEETS
(Continued)
June 30, January 31,
--------- ----------------------
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities ...... $ 49,679 $ 77,096 $ 55,095
Obligation Under Capital Lease ................ 1,771 5,796 9,628
--------- --------- ---------
Total Current Liabilities ................ 51,450 82,892 64,723
--------- --------- ---------
Long Term and Other Liabilities
Deferred Revenue .............................. 45,474 42,257 40,040
Obligation Under Capital Leases ............... -- -- 16,569
Long term Loan 66,973 45,882 63,641
--------- --------- ---------
TOTAL LONG TERM AND OTHER LIABILITIES .... 112,447 88,139 120,250
--------- --------- ---------
Total Liabilities ........................ 163,897 171,031 184,973
--------- --------- ---------
Stockholder's Equity
Common Stock .................................. 69 69 69
Deficit .............................. (115,789) (110,554) (94,076)
Currency Translation Adjustment ............... 20,223 6,702 1,927
--------- --------- ----------
Total Stockholder's Equity ............... (95,497) (103,783) (92,080)
--------- --------- ----------
Total Liabilities and Stockholder's Equity $ 68,400 $ 67,248 $ 92,893
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 58
<PAGE>
<TABLE>
<CAPTION>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENTS OF OPERATIONS
For the five
months ended For the year ended
June 30, January 31,
----------------------- ------------------------
1999 1998 1999 1998
--------- -------- --------- ----------
REVENUES
<S> <C> <C> <C> <C>
Sales ................................ $ 155,448 $186,921 $ 404,163 $ 321,679
Cost of Sales ........................ 42,683 81,440 186,578 171,624
--------- --------- --------- ---------
Gross Margin .................... 112,765 105,481 217,585 150,055
EXPENSES
Research and Development ............. -- -- 3,541 14,255
General and Administrative ........... 114,967 105,628 223,848 188,397
--------- ---------- --------- ----------
Total Expenses .................. 114,967 105,628 227,389 202,652
Other Income (Expense)
Interest Expense ..................... (3,033) (4,572) (6,674) (7,855)
--------- ---------- --------- ----------
Net Other Income (Loss) ......... (3,033) (4,572) ( 6,674) (7,855)
--------- ---------- --------- ----------
Loss Before Taxes ....................... (5,235) (4,773) (16,478) (60,452)
Income Tax Expense (Benefit) ............ -- -- -- --
--------- ---------- --------- ---------
Net Loss ................................ $ (5,235) $ (4,773) $ (16,478) $ (60,452)
========= =========== ========= ========
Weighted Average Shares Outstanding ..... 200 200 200 200
========= =========== ========= ========
Loss Per Share .......................... $ (26.18) $ (23.87) $ ( 82.39) $ (302.26)
========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
<TABLE>
<CAPTION>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Currency
Common Stock Retained Translation
---------------------
Shares Amount Deficit Adjustment Total
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance February 1, 1997 200 $ 69 $ (33,624) $ 605 $ (32,950)
Currency translation
Adjustment 1,322 1,322
Net Loss ............... -- -- (60,452) (60,452)
--------- --------- --------- --------- ---------
Balance January 31, 1998 200 69 (94,076) 1,927 (92,080)
Currency translation
Adjustment 4,775 4,775
Net Loss ............... -- -- (16,478) (16,478)
--------- --------- --------- --------- ----------
Balance January 31, 1999 200 69 (110,554) 6,702 (103,783)
Currency translation
Adjustment 13,521 13,521
Net Loss ............... -- -- (5,235) (5,235)
--------- --------- --------- --------- ---------
Balance June 30, 1999 .. 200 $ 69 $(115,789) $ 20,223 $ (95,497)
========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
<TABLE>
<CAPTION>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENTS OF CASH FLOWS
For the five
months ended For the Year Ended
June 30, January 31,
------------------ --------------------
(unaudited)
1999 1998 1999 1998
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net Loss ........................................... $ (5,235) $ (4,773) $(16,478) $(60,452)
Adjustments used to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 4,942 10,716 23,217 25,397
Deferred revenue ................................ 3,216 575 2,217 40,040
Currency translation adjustment 13,521 4,775
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable ...... 412 (394) 11,766 (6,744)
(Increase) Decrease in inventory ................ 2,759 (180) 2,686 (5,153)
(Increase) Decrease in Prepaid expenses ......... (573) 699 (887) (304)
Increase (Decrease) in Accounts payable ......... (27,417) 16,355 22,001 20,759
-------- --------- -------- --------
Net cash provided by (used in) operating activities . (8,375) 22,998 49,297 13,543
-------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment .............. ( 6,589) (3,544) (1,348) (38,424)
Intangible Assets - purchase of ISP accounts (23,886) -- -- --
Net Cash used in investing activities (30,475) (3,544) (1,348) (43,037)
--------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Parent company loan advance ........................ 11,188 (107) (3,870) (43,037)
Obligation under capital lease (repayment) proceeds (4,025) (8,575) (20,401) 0
Long-term debt (repayment) proceeds ................ 21,091 (7,659) (17,759) 63,450
-------- -------- -------- --------
Net cash provided by (used in) financing activities 28,254 (16,341) (42,030) 20,413
-------- --------- -------- --------
Net increase (decrease) in cash and cash equivalents (10,596) 3,113 5,919 (4,468)
Cash and cash equivalents at beginning of the year . 12,355 6,436 6,436 10,904
-------- ------- -------- --------
Cash and cash equivalents at end of the year ....... $ 1,759 $9,549 $ 12,355 $ 6,436
======== ========= ======== ========
</TABLE>
F-61
<PAGE>
<TABLE>
<CAPTION>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENT OF CASH FLOWS
(Continued)
For the five
months ended For the Year Ended
June 30, January 31,
--------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for taxes ................ $ -- $ -- $ -- $ --
Cash paid during the year for interest ............. $ 3,033 $ 4,572 $ 6,674 $ 7,855
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
None
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying consolidated financial statements have been prepared
on the basis of accounting principles applicable to a "going concern", which
assume that the Company will continue in operation for at least one year and
will be able to realize its assets and discharge its liabilities in the normal
course of operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $116,000 for the period from inception December 11, 1995 to June
30, 1999, has a liquidity problem, and requires additional financing in order to
finance its business activities on an ongoing basis. The Company is actively
pursuing alternative financing through it's Parent Company and has had
discussions with various third parties, although no firm commitments have been
obtained.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
software products, and market penetration and profitable operations from its
internet connection services.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the Company Act (British Columbia)
on December 11, 1995. At the close of business on June 30, 1999 CyPost
Corporation acquired 100% of the outstanding shares of the Company from
CoyoteNet Inc. The Company's executive offices are in Vancouver, B.C., Canada.
There are no allocated expenses from the Parent (CoyoteNet Inc.). Because the
companies operate separately and have no shared expenses, it is management's
belief that the allocation methods used are reasonable.
F-63
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (CONTINUED)
-----------------------------------------------------------
NATURE OF BUSINESS
The Company was formed for the purpose of engaging in internet services
and any other activity within the purposes for which corporations may be formed
under the Company Act of British Columbia. Present operations include internet
access service provider, website hosting and consulting, website development,
sale of computer stations and custom programing.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Intouch.Internet Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's primary source of revenue is earned from internet
connection services. For contracts which exceed one month, revenue is recognized
on a straight-line basis over the term of the contract as services are provided.
Revenue applicable to future periods are classified as deferred revenue.
Cost of Sales
The direct cost to provide services consist of the costs incurred to lease
and rent telephone communications lines and services from communications
companies. Cost of sales also include the cost of purchasing computer equipment
that is held for sale.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed', capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgement by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in software and hardware
technology. No software development costs have been capitalized by the Company
to date. Software development costs include the cost of materials, services,
and salaries consumed in the development of software products. Government
assistance, in the form of an IRAP subsidy for the development of a Vstore
product, has been accounted for as a reduction of related costs. The subsidies
for the five months ended June 30, 1999 and 1998 are nil and $41,087,
respectively, and for the years ended January 31, 1999 and 1998 are $55,421 and
$43,584 respectively.
Intangible Assets
------------------
Intangible assets consist of internet service provider accounts and is
being amortized on the straight-line basis over a period of three years. The
internet service provider accounts (intangible assets) were purchased for CDN
$35,100 (USD $23,886) cash.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such intangible assets might be
impaired. The Company considers factors of such as significant changes in the
regulatory or business climate and projected future cash flows from the
respective asset. Impairment losses are measured as the amount by which the
carrying amount of intangible assets exceeds its fair value.
F-64
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is Canadian dollars. Balance
sheet accounts are translated to U.S. dollars at the current exchange rate as of
the balance sheet date. Income statement items are translated at average
exchange rates during the period. The resulting translation adjustment is
recorded as a separate component of stockholders' equity.
RECLASSIFICATION
Certain reclassifications have been made in the 1999 and 1998 financial
statements to conform with the June 30, 1999 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY
Inventory consists of computer equipment held for sale. Inventory is
valued at the lower of first-in, first-out and net realizable value.
F-65
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
EARNINGS (LOSS) PER SHARE
The reconciliations of the numerators and denominators of the basic
earnings per share ("EPS") computations are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
NUMERATOR
Net Income (Loss) To Common Stockholder $ (5,235) $ (4,773) $ (16,478) $ (60,452)
=========== ============= ============ ===============
DENOMINATOR
Weighted Average Number of Common Shares 200 200 200 200
============ ============== ============ ===============
EPS
Basic & Diluted Earnings (Loss) Per Share $ (26.18) $ (23.87) $ (82.39) $ (302.26)
============ ============= ============= ===============
</TABLE>
The effects of potential common shares such as warrants would be antidilutive in
each of the periods presented and are thus not considered.
F-66
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PROPERTY & EQUIPMENT
Fixed assets are stated at cost. Depreciation and amortization are
computed using the declining balance and straight-line method over the estimated
economic useful lives of the related assets as follows:
Computer equipment Declining balance method 30%
Computer software Straight-line method 100%
Office furniture and fixtures Declining balance method 20%
Leasehold improvements Straight-line method 20%
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
NOTE 3 - SHARE CAPITAL
Authorized:
100,000 Class A common voting non-participating shares without par value
100,000 Class B common non-voting participating shares without par value
100,000 Class C common non-voting participating shares without par value
100,000 Class D common non-voting participating shares without par value
1,000,000 Class E preferred shares with a par value of $.01 each, redeemable at
$1,000 per share 1,000,000 Class F preferred shares with a par value of
$1.00 each redeemable at a price to be determined by the directors at
the time of issue
1,000,000Class G preferred shares with a par value of $.01 each, redeemable at
a price to be determined by the directors at the time of issue
1,000,000Class H preferred shares with a par value of $10.00 each, redeemable at
$10.00 per share
Issued and outstanding for each of the periods presented 100 Class A, 40 Class
B, 40 Class C and 20 Class D shares. Total issued 200 common shares.
F-67
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 4 - INCOME TAXES
In accordance with SFAS 109, the Company accounts for income taxes
under the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial statement
reporting and the tax bases of the assets and liabilities, and are measured at
the enacted tax rates that will be in effect when the differences are expected
to reverse. Such differences principally arise from the timing of income and
expense recognition for accounting and tax purposes.
The application of SFAS 109 does not have any material effect on the
assets, liabilities, or operations for the periods presented in these financial
statements. Deferred tax assets arising from the Company's net operating loss
carryforwards have been fully offset by a valuation allowance.
At June 30, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $115,000 which are available to offset
future taxable income. The Company's utilization of these carryforwards may be
restricted due to changes in ownership during the year. The components of the
deferred tax asset as of June 30, 1999 and January 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
June 30, January 31,
--------------- ----------------------------------
1999 1999 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
Deferred Tax Asset:
Net operating loss carryforward $ 51,750 $ 49,500 $ 38,200
Valuation Allowance (51,750) (49,500) (38,200)
--------------- --------------- -----------------
Net Deferred Tax Asset $ - $ - $ -
================= ================== ==============
</TABLE>
NOTE 5 - DUE FROM PARENT COMPANY
The loan is payable from the parent company, is unsecured without
interest and has no fixed terms of repayment.
January 31, 1998 Balance $ 7,318
Addition 3,870
--------
January 31, 1999 Balance $11,188
Repayment (11,188)
--------
June 30, 1999 Balance $ -0-
========
Average Balance for -
a) Year-ended January 31, 1999 $9,253
b) 5 months ended June 31, 1999 $5,594
F-68
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and January 31, 1999 and 1998
References to June 30, 1998 are unaudited
(Continued)
NOTE 6 - OBLIGATION UNDER CAPITAL LEASE
Computer equipment under capital lease:
<TABLE>
<CAPTION>
June 30, January 31,
--------------- -----------------------------
1999 1999 1998
--------------- -------------- -------------
<S> <C> <C> <C>
Capital lease payable, bearing interest
At 16.5%, due August 1999 $ 1,771 $ 5,796 $ 26,197
Less current maturities (1,771) (5,796) (9,628)
--------------- -------------- -------------
Net long-term obligation $ -- $ -- $ 16,569
=============== ============== =============
</TABLE>
NOTE 7 - COMMITMENT
The Company leases office and retail store premises under a lease
expiring December 2001. Future minimum lease payments will aggregate $30,798
over the next three years:
2000 $ 11,931
2001 12,485
2002 6,381
Rent expense for June 30, 1999 was $12,997, and for January 31, 1999 and 1998
was $28, 070 and $23,562.
NOTE 8 CORRECTION OF AN ERROR
In previously issued financial statements, the Company reported loss on
disposal of assets of $12,034 for the year ended January 31, 1999 which resulted
from the company not amortizing leased assets over an appropriate period. These
financial statements have been revised to correct the amortization period of
these assets over their useful lives. The following summarizes the net loss and
loss per share amounts in the previously issued financial statements and the
corrected amounts in these financial statements.
Previous
Year Ended
January 31,
1999 1998
Net Loss $(25,504) $(57,443)
Loss Per Share $(127.52) $(287.22)
Corrected
Net Loss $(16,478) $(60,452)
Loss Per Share $( 82.39) $(302.26)
F-69
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors Internet Arena, Inc.
We have audited the accompanying balance sheets of Internet Arena,
Inc., as of December 31, 1998 and 1997 and the related statements of operations,
changes in stockholder's equity and cash flows for the two years ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Internet Arena,
Inc., as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the two years ended December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully submitted,
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
March 29, 2000
F-70
<PAGE>
<TABLE>
<CAPTION>
INTERNET ARENA, INC.
BALANCE SHEETS
September 30,
(unaudited) December 31,
--------- -----------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash .......................................... $ 3,685 $ 9,129 $ 4,500
Employee Receivable .............................. -- -- 2,800
--------- --------- ----------
Total Current Assets ..................... 3,685 9,129 7,300
--------- --------- ----------
Property & Equipment
Computers - Internet .......................... 141,249 141,249 151,669
Computers - Office Equipment .................. 4,273 4,273 3,642
Other Small Equipment ......................... 16,123 16,123 15,093
Leasehold Improvements ........................ 11,926 11,926 10,782
Less Accumulated Depreciation ................. (131,645) (108,617) (74,779)
--------- --------- ----------
Net Property & Equipment ................. 41,926 64,954 106,407
--------- --------- ----------
Other Asset - Deposit ............................ 6,760 6,760 6,760
--------- --------- ----------
Total Assets ............................. $ 52,371 $ 80,843 $ 120,467
========= ========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities ...... $ 16,905 $ 3,441 $ 4,033
Deferred Revenue .............................. 51,740 62,959 1,633
Short term Notes Payable ...................... -- 2,859 --
Note Payable Line of Credit ................... 33,986 33,763 30,380
Current Portion of Notes Payable .............. 14,296 14,296 14,296
Shareholder - Advances ........................ 146,000 242,860 162,438
--------- --------- ----------
Total Current Liabilities ................ 262,927 360,178 212,780
--------- --------- ----------
Long Term and Other Liabilities
Notes Payable ................................. 29,377 40,829 48,348
--------- --------- ----------
Total Long Term and Other Liabilities .... 29,377 40,829 48,348
--------- --------- ----------
Total Liabilities ........................ 292,304 401,007 261,128
--------- --------- ----------
Stockholder's Equity
Common Stock .................................. 316,079 190,575 148,875
Deficit ....................................... (556,012) (510,739) (289,536)
--------- --------- ----------
Total Stockholder's Equity .............. (239,933) (320,164) (140,661)
--------- --------- ----------
Total Liabilities and Stockholder's Equity $ 52,371 $ 80,843 $ 120,467
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
<TABLE>
<CAPTION>
INTERNET ARENA, INC.
STATEMENTS OF OPERATIONS
(unaudited) (unaudited)
For the nine For the nine
months ended months ended For the year ended
September 30, September 30, December 31,
------------------------ ------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
REVENUES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ................................ $ 466,360 $ 294,643 $ 342,089 $ 194,457
Cost of Sales ........................ 245,839 155,768 204,166 75,323
----------- ----------- ----------- -----------
Gross Margin .................... 220,521 138,875 137,923 119,134
----------- ----------- ----------- -----------
EXPENSES
Selling .............................. 10,363 32,633 37,618 24,736
General and Administrative ........... 240,973 199,008 295,356 274,745
----------- ----------- ----------- -----------
Total Expenses .................. 251,336 231,164 332,974 299,481
----------- ----------- ----------- -----------
Other Income (Expense)
Interest Income ...................... -- -- 34 --
Loss on Sale of Assets ............... -- -- (4,307)
Interest Expense ..................... (14,458) (7,909) (21,879) (15,995)
----------- ----------- ----------- -----------
Net Other Income (Loss) ......... (14,458) (7,909) (26,152) (15,995)
----------- ----------- ----------- -----------
Loss Before Taxes ....................... (45,273) (128,407) (221,203) (196,342)
Income Tax Expense (Benefit) ............ -- -- --
----------- ----------- ----------- -----------
Net Loss ................................ $ (45,273) $(128,407) $ (221,203) $ (196,342)
=========== =========== =========== ===========
Weighted Average Shares Outstanding ..... 15,963 12,054 14,971 11,077
=========== =========== =========== ===========
Loss Per Share .......................... $ (2.84) $ (10.65) $ (14.78) $ (17.73)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
INTERNET ARENA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock
-----------------------
Shares Amount Deficit
--------- ------------ ---------
Balance January 1, 1997 ............. 8,010 $ 140,551 $(93,194)
Sale of Common Stock for cash ....... 6,134 8,324 --
Net Loss ............................ -- -- (196,342)
--------- ------------ ---------
Balance December 31, 1997 ........... 14,144 148,875 (289,536)
Sale of Common Stock for cash ....... 1,102 41,700 --
Net Loss ............................ -- -- (221,203)
--------- ------------ ---------
Balance December 31, 1998 ........... 15,246 190,575 (510,739)
Sale of Common Stock for cash ....... 11,434 125,504 --
Net Loss ............................ -- -- (45,273)
--------- ------------ ---------
Balance September 30, 1999
(Unaudited) ...................... 26,680 $ 316,079 $(556,012)
========= ============ =========
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
<TABLE>
<CAPTION>
INTERNET ARENA, INC.
STATEMENTS OF CASH FLOWS
(unaudited) (unaudited)
For the nine For the nine
months ended months ended For the Year Ended
September 30, September 30, December 31,
---------------------------- ----------------------
1999 1998 1998 1997
--------- ------------ --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net Loss ........................................... $ (45,273) $(128,407 $(221,203) $ (196,342)
Adjustments used to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 23,028 27,732 36,976 48,594
Deferred revenue ................................ (11,219) -- 61,326 --
Loss from disposal of assets .................... -- -- 4,307 --
Changes in operating assets and liabilities:
(Increase) Decrease in employee receivable ...... -- -- 2,800 (2,800)
Increase (Decrease) in Accounts payable ......... 13,464 1,993 (592) 1,873
--------- ------------ --------- ----------
Net cash provided by operating activities .......... (20,000) (98,682) (116,386) (148,675)
--------- ------------ --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment .............. -- (3,692) (2,805) (48,434)
Increase in Other Assets - Deposits ................ -- -- -- (2,921)
Proceeds from disposal of assets ................... -- -- 2,975 --
--------- ------------ --------- ----------
Net cash used by investing activities .............. -- (3,692) 170 (51,355)
--------- ------------ --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock ................. 125,504 34,500 41,700 8,325
Advances from Stockholder .......................... (96,860) 80,422 80,422 162,438
Short term debt (repayment) proceeds ............... (2,859) -- 2,859 --
Increase (decrease) note payable credit line ....... 223 1,421 3,383 20,816
Long-term debt (repayment) proceeds ................ (11,452) (16,298) (7,519) (12,396)
--------- ------------ --------- ----------
Net cash provided by (used in) financing activities 14,556 100,045 120,845 179,183
--------- ------------ --------- ----------
Net increase (decrease) in cash and cash equivalents (5,444) (2,329) 4,629 (20,847)
Cash and cash equivalents at beginning of the year . 9,129 4,500 4,500 25,347
--------- ------------ --------- ----------
Cash and cash equivalents at end of the year ....... $ 3,685 $ 2,171 $ 9,129 $ 4,500
========= ========== ========= =========
</TABLE>
F-74
<PAGE>
<TABLE>
<CAPTION>
INTERNET ARENA, INC.
STATEMENT OF CASH FLOWS
(Continued)
(unaudited) (unaudited)
For the nine For the nine
months ended months ended For the Year Ended
September 30, September 30, December 31,
--------- ------------- ----------------------
1999 1998 1998 1997
--------- ------------- --------- ---------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for taxes ................ $ -- $ -- $ -- $ --
Cash paid during the year for interest ............. $ 14,458 $ 7,909 $ 21,879 $ 15,995
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
None
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $541,000 for the period from June 28, 1996 (inception) to
September 30, 1999, has a liquidity problem, and requires additional financing
in order to finance its business activities on an ongoing basis. The Company is
actively pursuing alternative financing and has had discussions with various
third parties, although no firm commitments have been obtained.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, and market penetration and profitable operations from its internet
connection services.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated in the State of Oregon on June 28, 1996
under the name of Inter-X, Inc. On July 18, 1996 the Company changed its name to
Internet Arena, Inc. At the close of business on November 9, 1999 CyPost
Corporation acquired substantially all the assets used or useful in the
operation of the Business of Internet Arena, Inc. CyPost's executive offices are
in Vancouver, B.C., Canada. The Company's principal place of business is at 1016
SW Taylor, Portland, Oregon.
The unaudited financial statements as of September 30, 1999 and for the
nine months then ended reflect, in the opinion of management, all adjustments
(which include only normal recurring
F-76
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (CONTINUED)
---------------------------------------------------------
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
adjustments) necessary to fairly state the financial position and results of
operations for the nine months. Operating results for interim periods are not
necessarily indicative of the results which can be expected for full years.
NATURE OF BUSINESS
The Company was formed for the purpose of engaging in internet services
and any other activity within the purposes for which corporations may be formed.
Present operations include third- party Internet connectivity-related services
(including but not limited to, dial-up Internet access services, virtual server
services, Internet routing services, and Internet server co-location services);
custom Internet research services; Internet/computer education services; on-site
computer/Internet rental services; and web site design services.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Internet Arena, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's primary source of revenue is earned from internet
connection services. For contracts which exceed one month, revenue is recognized
on a straight-line basis over the term of the contract as services are provided.
Revenue applicable to future periods are classified as deferred revenue.
RECLASSIFICATION
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform with the September 30, 1999 presentation.
F-77
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
COST OF SALES
The cost of sales consist of the telco costs incurred by the Company. The
telco companies supply the bandwidth, which is an essential part of the
operation. An Internet Service Provider must have bandwidth to serve their
client base.
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The reconciliations of the numerators and denominators of the basic
earnings per share ("EPS") computations are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR
Net Income (Loss) To Common Stockholder $ (45,273) $ (128,407) $ (221,203) $ (196,342)
============== ============ ============= ==============
DENOMINATOR
Weighted Average Number of Common Shares 15,963 12,054 14,971 11,077
=============== ============ =========== ===============
EPS
Basic & Diluted Earnings (Loss) Per Share $ (2.84) $ (10.65) $ (14.78) $ (17.73)
============= ============ ========== ================
</TABLE>
The effects of potential common shares such as warrants would be antidilutive in
each of the periods presented and are thus not considered.
F-78
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PROPERTY & EQUIPMENT
Fixed assets are stated at cost. Depreciation and amortization are
computed using the declining balance and straight-line method over the estimated
economic useful lives of the related assets as follows:
Computer equipment Declining balance method 30%
Other Small Equipment Declining balance method 29%
Leasehold improvements Straight-line method 20%
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
INCOME TAXES
No provision for income taxes has been made since the Company elected
to file an S- Corporation tax return under provisions for the federal and state
tax laws. The income is distributed to its shareholders. At December 31, 1998,
there are no net differences between the tax bases and the reported amounts of
the S-Corporation's assets and liabilities.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. No customer
accounts for more than 10% of sales.
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company maintains the majority of its cash
balances with one financial institution, in the form of demand deposits
F-79
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 3 - BANK LOAN - LINE OF CREDIT
The Company's line-of-credit agreement with a bank terminated on November 9,
1999 and these funds are due on demand, including interest at the bank's prime
rate plus 5%.
NOTE 4 - SHORT-TERM NOTES PAYABLE
Short-Term Notes Payable consist of loans from unrelated entities as
of December 31, 1998. The notes are payable one year from the date of
issuance together with interest at 9.50% A.P.R.
NOTE 5 - SHAREHOLDER - ADVANCES
The loan is payable to a shareholder, is unsecured without interest and
has no fixed terms of repayment.
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
<S> <C> <C>
Note payable with interest at 10%, payments of $1,811
monthly through October 2002 collateralized by equipment $ 55,125 $ 62,644
Less current maturities (14,296) (14,296)
------------------ ------------------
Net long-term debt $ 40,829 $ 48,348
================== ==================
</TABLE>
Annual principal payments on long-term debt are as follows:
1999 $ 14,296
2000 14,296
2001 14,296
2002 12,237
Thereafter -
---------------
$ 55,125
===============
F - 80
<PAGE>
INTERNET ARENA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 7 - RENT AND LEASE EXPENSE
The Company occupies certain sales offices under a noncancellable
lease. The lease is for thirty-six months expiring July 31, 2000, after which it
will be renewed or revert to month to month. The current lease requires minimum
rental payments of $23,775 per year.
The minimum future lease payments under these leases for the next five
years are:
<TABLE>
<CAPTION>
Year Ended December 31, Real Property Equipment
--------------------------------- ----------------- -----------------
<S> <C> <C> <C>
1999 $ 23,775 $ 47,881
2000 13,869 33,457
2001 - 20,901
2002 - 10,101
2003 - 7,668
Thereafter - -
----------------- -----------------
Total minimum future lease payments $ 37,644 $ 120,008
================= =================
</TABLE>
The leases generally provides that insurance, maintenance and tax
expenses are obligations of the Company. It is expected that in the normal
course of business, leases that expire will be renewed or replaced by leases on
other properties.
Rent expenses for September 30, 1999 & 1998 was $71,365 and $47,200
respectively, and for December 31, 1998 and 1997 was $63,847 and $62,903
respectively.
NOTE 8 - SHARE CAPITAL
Authorized:
35,000 common shares without par value
Issued and outstanding:
September 30, 1999 26,680 common shares
December 31, 1998 15,246 common shares
December 31, 1997 14,144 common shares
F - 81
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors NetRover Inc.
We have audited the accompanying combined balance sheets of NetRover
Inc .as of July 31, 1999 and 1998 and the related Combined statements of
operations, changes in stockholder's equity and cash flows for the two years
ended July 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of NetRover
Inc., as of September 30, 1999 July 31, 1999 and 1998, and the results of its
operations and its cash flows for the two years ended July 31, 1999 and 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully submitted,
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
March 29, 2000
F - 82
<PAGE>
NETROVER INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, July 31,
-----------------------
1999 1999 1998
--------- --------- ---------
ASSETS
Current Assets
<S> <C> <C> <C>
Cash ............................... $ 30,527 $ 20,725 $ 3,130
Accounts Receivable ................ 51,606 44,653 45,447
Prepaid Expenses ................... 31,413 72,531 50,862
--------- --------- ---------
Total Current Assets .......... 113,546 137,909 99,439
Property & Equipment
Furniture & Equipment .............. 589,077 791,270 887,798
Leasehold Improvements ............. 12,007 48,194 48,194
--------- --------- ---------
601,084 839,464 935,992
Less Accumulated Depreciation ...... (347,356) (480,098) (467,030)
--------- --------- ---------
Net Property & Equipment ...... 253,728 359,366 468,962
Other Assets
Intangibles, Net ...................... 42,534 43,212 --
--------- --------- ---------
Total Assets .................. $ 409,808 $ 540,487 $ 568,401
========= ========= =========
</TABLE>
F-83
<PAGE>
<TABLE>
<CAPTION>
NETROVER INC.
COMBINED BALANCE SHEETS
(Continued)
(Unaudited)
September 30, July 31,
--------------------------
1999 1999 1998
----------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
<S> <C> <C> <C>
Accounts Payable and Accrued Liabilities ...... $ 177,314 $ 248,905 $ 165,437
Deferred Revenue .............................. 395,559 393,165 371,157
Shareholder Loans - Current ................... 662,270 669,877 486,321
Current Portion Long-Term Debt ................ 73,670 87,247 63,972
Obligation Under Capital Lease ................ -- 74,685 143,807
----------- ----------- -----------
Total Current Liabilities ................ 1,308,813 1,473,879 1,230,694
----------- ----------- -----------
Long Term and Other Liabilities
Capital Lease Obligation ...................... -- 2,373 69,279
Shareholder Loans Long-Term ................... -- -- 269,000
----------- ----------- -----------
Total Long Term and Other Liabilities .... -- 2,373 338,279
----------- ----------- -----------
Total Liabilities ........................ 1,308,813 1,476,252 1,568,973
----------- ----------- -----------
Stockholder's Equity
Preferred Stock ............................... -- -- --
Common Stock .................................. 74 74 74
Deficit .............................. ........ (887,550) (940,722) (1,003,431)
Currency Translation Adjustment ............... (11,529) 4,883 2,785
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY ............... (899,005) (935,765) (1,000,572)
----------- ----------- -----------
Total Liabilities and Stockholder's Equity $ 409,808 $ 540,487 $ 568,401
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE>
<TABLE>
<CAPTION>
NETROVER INC.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
For the two For the two
months ended months ended For the year ended
September 30, September 30, July 31,
----------- ---------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Sales .......................... $ 321,929 $ 308,443 $ 1,850,655 $ 1,700,274
Cost of Sales .................. 162,905 174,304 1,045,821 991,575
----------- ---------- ----------- -----------
Gross Margin .............. 159,024 134,139 804,834 708,699
EXPENSES
General and Administrative ..... 97,929 111,672 681,373 742,412
Interest Expense ............... 7,923 10,125 60,752 73,578
----------- ------------ ----------- -----------
Total Expenses ............ 105,852 121,797 742,125 815,990
----------- ------------ ----------- -----------
Income (Loss) Before Taxes ............... 53,172 12,342 62,709 (107,291)
Income Tax Expense (Benefit) ...... -- -- -- --
----------- ------------ ----------- -----------
Net Income (Loss) ................. $ 53,172 $ 12,342 $ 62,709 $ (107,291)
=========== ============ =========== ===========
Weighted Average Shares Outstanding 200 200 200 200
=========== =========== =========== ===========
Income (Loss) Per Share ........... $ (265.86) $ 61.71 $ 313.55 $ (536.46)
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-85
<PAGE>
<TABLE>
<CAPTION>
NETROVER INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Currency
Preferred Stock Common Stock Translation
--------------------- ---------------------
Shares Amount Shares Amount Deficit Adjustment Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance August 1, 1997 -- $ -- 200 $ 74 $(896,140) -- $ (896,066)
Currency translation adjustment 2,785 2,785
Net Loss .............. -- -- -- -- (107,291) (107,291)
--------- --------- --------- --------- --------- --------- ---------
BALANCE JULY 31, 1998 .... -- -- 200 74 (1,003,431) 2,785 (1,000,572)
Currency translation adjustment 2,098 2,098
Net Income ............... -- -- -- -- 62,709 62,709
--------- --------- --------- --------- --------- --------- ---------
Balance July 31, 1999 .... -- -- 200 74 (940,722) 4,883 (935,765)
Currency translation adjustment (16,412) (16,412)
Net Loss ................. -- -- -- -- 53,172 53,172
--------- --------- --------- --------- --------- --------- ---------
Balance September 30, 1999
(Unaudited) ........... -- $ -- 200 $ 74 $(887,550) $ (11,529) $ (899,005)
========= ========= ========= ========= ========= ========= ==========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-86
<PAGE>
<TABLE>
<CAPTION>
NETROVER INC.
COMBINED STATEMENTS OF CASH FLOWS
(unaudited) (unaudited)
For the two For the two
months ended months ended For the Year Ended
September 30, September 30, July 31,
--------- -------------- -----------------------
1999 1998 1999 1998
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss ..................................... $ 53,172 $ 12,342 $ 62,709 $(107,291)
Adjustments used to reconcile net income
to net cash
provided by (used in) operating activities:
Depreciation and amortization ............. 31,415 274,290 217,080 193,242
Deferred revenue .......................... 2,394 3,668 22,008 79,958
Currency translation adjustment ........... (16,412) 350 2,098 2,785
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (4,480) (2,689) (16,132) (6,681)
(Increase) Decrease in Prepaid expenses ... 41,150 (3,570) (21,424) (13,059)
Increase (Decrease) in Accounts payable ... (75,950) 3,443 87,576 (168,340)
--------- --------- --------- ---------
Net cash provided by operating activities .... 31,289 47,834 353,915 (19,386)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of Property and Equipment ........ (906) -- (148,187) (40,295)
Proceeds from sale of fixed assets ........... -- -- 7,189 --
--------- --------- --------- ---------
Net cash used by investing activities ........ (906) -- (140,998) (40,295)
--------- ---------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of Long-Term Debt .................. (13,975) (8,507) (51,042) (37,730)
Repayment of Shareholder Loan ................ (7,138) (12,321) (73,928) (88,905)
Repayment of Capital Lease Obligation ........ -- (24,071) (144,426) (109,796)
Proceeds of Long-Term Debt ................... 532 -- 74,074 299,242
--------- --------- --------- ---------
Net cash used in financing activities ........ (20,581) (44,899) (195,322) 62,811
--------- ---------- --------- ---------
Net increase in cash and cash equivalents .... 9,802 2,935 17,595 3,130
Cash and cash equivalents at beginning of year 20,725 3,130 3,130 --
--------- ---------- --------- ---------
Cash and cash equivalents at end of the year . $ 30,527 $ 6,065 $ 20,725 $ 3,130
========= ========== ========= =========
</TABLE>
F-87
<PAGE>
<TABLE>
<CAPTION>
NETROVER INC.
COMBINED STATEMENT OF CASH FLOWS
(Continued)
(unaudited) (unaudited)
For the two For the two
months ended months ended For the Year Ended
September 30, September 30, July 31,
--------- -------------- ----------------------
1999 1998 1999 1998
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for taxes .......... $ -- $ -- $ -- $ --
Cash paid during the year for interest ....... $ 5,401 $ 5,261 $ 31,568 $ 33,351
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
None
The accompanying notes are an integral part of these combined financial
statements.
F-88
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying combined financial statements have been prepared on
the basis of accounting principles applicable to a "going concern", which assume
that the Company will continue in operation for at least one year and will be
able to realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $888,000 for the period from inception July 31, 1990 to September
30, 1999, has a liquidity problem, and requires additional financing in order to
finance its business activities on an ongoing basis. The Company is actively
pursuing alternative financing through and has had discussions with various
third parties, although no firm commitments have been obtained.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued market penetration and
profitable operations from its internet connection services.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the Province of Ontario
on July 31, 1999 under the name of Akita Systems Group, Inc. and changed its
name to Netrover, Inc. on March 24, 1995. At the close of business on October 4,
1999 CyPost Corporation acquired 100% of the outstanding shares of the Company.
The Company's executive offices are in Vancouver, B.C., Canada.
F-89
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (CONTINUED)
-----------------------------------------------------------
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The unaudited financial statements as of September 30, 1999 and for the
two months then ended reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the two months. Operating
results for interim periods are not necessarily indicative of the results which
can be expected for full years.
NATURE OF BUSINESS
The Company was formed for the purpose of engaging in internet services
and any other activity within the purposes for which corporations may be formed
under the laws of the Province of Ontario. Present operations include internet
access service provider, website hosting and consulting, website development,
sale of computer stations and custom programming.
COMBINATION POLICY - COMMON CONTROL
The accompanying combined financial statements include the accounts of
the Company and Netrover Office Inc. incorporated under the laws of the Province
of Ontario, both of which are under common control. All significant
inter-company accounts and transactions have been eliminated in combination.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for NetRover Inc. is presented to
assist in understanding the Company's financial statements. The accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's primary source of revenue is earned from internet
connection services. For contracts which exceed one month, revenue is recognized
on a straight-line basis over the term of the contract as services are provided.
Revenue applicable to future periods are classified as deferred revenue.
F-90
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
COST OF SALES
The direct costs to provide services consist of the costs incurred to lease
and rent telephone communications lines and services from communication
companies.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is Canadian dollars. Balance
sheet accounts are translated to U.S. dollars at the current exchange rate as of
the balance sheet date. Income statement items are translated at average
exchange rates during the period. The resulting translation adjustment is
recorded as a separate component of stockholders' equity.
RECLASSIFICATION
Certain reclassifications have been made in the 1999 and 1998 financial
statements to conform with the September 30, 1999 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
F-91
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The reconciliations of the numerators and denominators of the basic
earnings per share ("EPS") computations are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
NUMERATOR
Net Income (Loss) To Common Stockholder $ (27,798) $ 16,840 $ 55,685 $ (68,963)
=============== ============= =============== ================
DENOMINATOR
Weighted Average Number of Common Shares 200 200 200 200
=============== ============= =============== ================
EPS
Basic & Diluted Earnings (Loss) Per Share $ (138.99) $ 84.20 $ 278.43 $ (344.82)
=============== ============= =============== ================
</TABLE>
There are no other potential common shares. The effects of potential common
shares such as warrants would be anti-dilutive in each of the periods September
30, 1999 and December 31, 1998 are thus not considered.
PROPERTY & EQUIPMENT
Fixed assets are stated at cost. Depreciation and amortization are
computed using the declining balance and straight-line method over the estimated
economic useful lives of the related assets as follows:
Computer equipment Straight-line method 3 - 5 years
Office furniture and fixtures Straight-line method 5 years
Leasehold improvements Straight-line method 5 years
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
Intangible Assets
------------------
Intangible assets consist of internet service provider accounts and is
being amortized on the straight-line basis over a period of five years. The
internet service provider accounts (Intangible Assets) were purchased for CDN
$80,421 (USD $55,925) cash.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such intangible asset might be
impaired. The Company considers factors such as significant changes in the
regulatory or business climate and projected future cash flows from the
respective asset. Impairment losses are measured as the amount by which the
carrying amount of the intangible asset exceeds its fair value.
F-92
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 3 - SHARE CAPITAL
o Class A, non-voting, non-cumulative shares, dividends retractable at
the paid-up amount. Unlimited shares authorized, no par value, none
issued
o Class B, non-voting, non-cumulative shares, dividends redeemable at the
paid-up amount. Unlimited shares authorized, no par value, none issued
o Class C, non-voting, 10% non-cumulative shares, dividends retractable
at the paid-up amount. Unlimited shares authorized, no par value, none
issued
o Class D, non-voting, non-cumulative shares, dividends redeemable at the
paid-up amount. Unlimited shares authorized, no par value, none issued
o Common shares. Unlimited shares authorized, no par value, 200 issued
NOTE 4 - INCOME TAXES
In accordance with SFAS 109, the Company accounts for income taxes
under the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial statement
reporting and the tax bases of the assets and liabilities, and are measured at
the enacted tax rates that will be in effect when the differences are expected
to reverse. Such differences principally arise from the timing of income and
expense recognition for accounting and tax purposes.
The application of SFAS 109 does not have any material effect on the
assets, liabilities, or operations for the periods presented in these financial
statements. Deferred tax assets arising from the Company's net operating loss
carryforwards have been fully offset by a valuation allowance.
At September 30, 1999, the Company has net operating loss carryforwards
for income tax purposes of approximately $885,000 which are available to offset
future taxable income. The Company's utilization of these carryforwards may be
restricted due to changes in ownership during the year. The components of the
deferred tax asset as of September 30, 1999 and July 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
September July 31,
30,
--------------- ----------------------------------
1999 1999 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
Deferred Tax Asset:
Net operating loss carryforward $ 345,100 $ 334,600 $ 356,500
Valuation Allowance (345,100) (334,600) (356,500)
--------------- --------------- ----------------
Net Deferred Tax Asset $ -- $ -- $ --
================ ================ ================
</TABLE>
F-93
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 5 - LONG-TERM DEBT
Long-Term Debt consists of the following.
<TABLE>
<CAPTION>
September 30, July 31,
1999 1999 1998
-------------- --------------- ------------
A Loan payable in monthly installments of $4,175
until March 1, 2000, with interest at 10% to
<S> <C> <C> <C> <C>
11%, collateralized by internet computer $ 28,119 $ 33,000 $ -
equipment.
B Non-interest bearing unsecured loan payable
Due July 2000. 4,464 3,948 -
Unamortized discount based on imputed interest
Rate of 10% 467 413
C Small business bank term loan repayable
in monthly principal installments of $1,189
to December 1999; interest at bank prime rate
plus 2.75%. - 5,946 20,245
D Small business bank term loan repayable
in monthly principal installments of $1,824
to September 1999; interest at bank prime rate
plus 1.5%. - 3,647 25,569
E Non-interest bearing loan payable from shareholders
payable on demand, secured by general security
agreement 391,470 401,234 486,321
F 10% promissory note payable to a relative of a
shareholder; balance due November 2002; secured
general security agreement 270,800 268,640 269,000
G Non-interest bearing unsecured loan payable 40,620 40,296 18,158
------------ ----------- ---------------
735,940 757,124 819,293
Less: current maturities 735,940 757,124 550,293
------------ ----------- ---------------
Net long-term debt $ -- $ -- $ 269,000
=============== ============== ===============
</TABLE>
As a result of the acquisition of the company as of October 4, 1999, the Company
repaid items E, F and G in full during October 1999. This payment was financed
by the acquiring company. The loan described in B above is presented on a
discounted basis, and the loans described in E and G above have not been
discounted because these loans do not have a fixed payment date.
F-94
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 and 1998 are unaudited
(Continued)
NOTE 6 - OBLIGATION UNDER CAPITAL LEASE
Future minimum payments together with the balance of the obligation due on
computer equipment under capital lease are approximately as follows:
<TABLE>
<CAPTION>
September 30, July 31,
----------------- ---------------------------------
1999 1999 1998
----------------- --------------- ----------------
<S> <C> <C> <C>
Capital leases payable $ -- $ 77,058 $ 213,086
Less current maturities -- 74,685 143,807
--------------- ---------------- -----------------
Net long-term obligation $ -- $ 2,373 $ 69,279
================= ================== ==================
</TABLE>
The amount of assets leased under capital lease transactions at September 30,
1999, July 31, 1999 and July 31, 1998 are $Nil, $77,000 and $213,000
respectively.
The leases, which are payable in U.S. currency, expire between March and
December 2000. The interest rates implicit in the leases range from 16.0% to
20.3%. As a result of the acquisition of the company as of October 4, 1999, the
Company paid all leases in full during October 1999. This payment was financed
by the acquiring company.
NOTE 7 - COMMITMENT
The Company leases office premises under a lease expiring December
2001. Future minimum lease payments will aggregate $33,715 over the next three
years:
2000 $ 31,210
2001 2,505
---------------
Total $ 33,715
===============
Rent expense for September 30, 1999 and 1998 was $4,891 and $5,202 and for
July 31, 1999 and 1998 was $40,080 and $34,870.
NOTE 8 - CORRECTION OF AN ERROR
In previously issued financial statements, the Company reported loss on
disposal of assets of $45,353 for the year ended July 31, 1999 and $85,468 for
the two months ended September 30, 1999. The reported losses were the result of
the Company not amortizing leased assets over appropriate periods.
These financial statements have been revised to correct the amortization
period of these assets over appropriate useful lives. The following summarizes
the net income (loss) and income (loss) per share amounts in the previously
issued financial statements and the corrected amounts in these financial
statements.
<TABLE>
<CAPTION>
Two months ended Year ended
September 30, July 31,
1999 1998 1999 1998
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Previous
Net Income (loss) $( 27,798) $ 16,840 $ 55,685 $( 68,963)
Income (loss) per share $( 138.99) $ 84.20 $ 278.43 $( 344.82)
Corrected
Net Income (loss) $ 53,172 $ 12,342 $ 62,709 $(107,291)
Income (loss) per share $ 265.86 $ 61.71 $ 313.55 $( 536.46)
</TABLE>
F-95
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
FAX (973) 790-8845
To The Board of Directors and Shareholders of Hermes Net Solutions, Inc.
a British Columbia, Canadian corporation
I have audited the accompanying balance sheet of Hermes Net Solutions,
Inc. as of February 28, 1999 and the related statements of operations, cash
flows and shareholders' equity for the years ended February 28, 1998 and 1999.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hermes Net Solutions, Inc.
as of February 28, 1999 and the results of its operations, shareholders equity
and cash flows for the years ended February 28, 1998 and 1999 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Hermes Net Solutions, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has suffered recurring losses from operations
and requires additional capital to continue operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
S/THOMAS P. MONAHAN
------------------------
Thomas P. Monahan, CPA
March 31, 2000
Paterson, New Jersey
F-96
<PAGE>
<TABLE>
<CAPTION>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
BALANCE SHEET
(IN US DOLLARS)
June 30,
1999 February 28,
UNAUDITED 1999
------- ------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $82,804 $ 97,261
ACCOUNTS RECEIVABLE NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF 74,256 48,471
------- ------
Total current assets 157,060 145,732
Property and equipment
Furniture and fixtures 772 772
Computer equipment 42,192 65,149
LESS ACCUMULATED DEPRECIATION (9,306) (17,905)
------- --------
TOTAL PROPERTY AND EQUIPMENT-NET 33,658 48,016
------- ------
TOTAL ASSETS $ 190,718 $193,748
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $67,362 $82,187
Officer loans 37,631 25,785
DEFERRED INCOME 70,820 69,988
------ ------
Total current liabilities 175,813 177,960
Stockholders' equity
Common Stock authorized 20,000,000 shares, without par value
Each. At June 30, 1999, and February 28, 1999 there are 2,000,000
And 2,000,000 share outstanding respectively 679 679
Deficit (4,529) (4,473)
CURRENCY TRANSLATION ADJUSTMENT 18,755 19,582
------- -------
TOTAL STOCKHOLDERS' EQUITY 14,905 15,788
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 190,718 $193,748
========= ========
</TABLE>
F - 97
<PAGE>
<TABLE>
<CAPTION>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
STATEMENT OF OPERATIONS
(IN US DOLLARS)
For the four For the four
For the For the months ended months ended
year ended year ended June 30, June 30,
February 28, February 28, 1998 1999
1998 1999 UNAUDITED UNAUDITED
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue $143,598 $196,141 $62,367 $153,930
Direct Costs 54,324 80,250 26,419 56,680
----------- ------------ ------------- -------------
Gross profit 89,274 115,891 35,948 97,250
Operations:
Selling, general and administrative 94,322 101,272 32,671 93,606
DEPRECIATION AND AMORTIZATION 3,611 14,497 3,000 3,000
----------- ------------ ------------- -------------
Total expense 97,933 115,769 35,671 96,606
Profit (Loss) from operations (3,344) 122 277 644
Other income
Interest income 273 1,025 312 1,290
INTEREST EXPENSE (1,156) (1,393) (464) (1,990)
----------- ------------ ------------- -------------
Total other income (883) $(368) (152) $(700)
NET INCOME (LOSS) $(4,227) $(246) $125 $(56)
=========== ============ ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 2,000,000 2,000,000 2,000,000 2,000,000
=========== ============ ============= =============
LOSS PER SHARE $(0.00) $(0.00) $(0.00) $(0.00)
=========== ============ ============= =============
</TABLE>
F-98
<PAGE>
<TABLE>
<CAPTION>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
STATEMENT OF CASH FLOWS
For the four For the four
For the For the months ended months ended
year ended year ended June 30, June 30,
February 28, February 28, 1998 1999
1998 1999 UNAUDITED UNAUDITED
------------ ------------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) $ (4,227) $(246) $125 $ (56)
Depreciation and amortization 3,611 14,497 3,000 3,000
Deferred revenue 56,342 13,646 9,823 832
Write off of fixed asset 11,358
Currency translation 19,322 260 325 (827)
Changes in operating assets and liabilities
Accounts receivable (62,911) 14,440 12,761 (25,785)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 20,293 61,894 30,594 (14,825)
------------ ------------- ----------- -------------
TOTAL CASH FLOWS FROM OPERATIONS 32,430 104,491 56,628 (26,303)
CASH FLOWS FROM FINANCING ACTIVITIES
OFFICERS LOANS 9,543 5,341 2,500 11,846
------------ ------------- ----------- -------------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 9,543 5,341 2,500 11,846
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASES FIXED ASSETS (24,180) (41,741) (15,000) -
INCORPORATION COST (203)
------------ ------------- ----------- -------------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (24,383) (41,741) (15,000)
NET INCREASE (DECREASE) IN CASH 17,590 68,091 44,128 (14,457)
CASH BALANCE BEGINNING OF PERIOD 11,580 29,170 29,170 97,261
------------ ------------- ----------- -------------
CASH BALANCE END OF PERIOD $ 29,170 $ 97,261 $73,298 $82,804
============ ============= =========== ==============
</TABLE>
F-99
<PAGE>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Currency
Date Common Common translation
STOCK STOCK DEFICIT ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C>
Balance February 28, 1997 2,000,000 $679 $19,337 $20,016
Currency translation adjustment (187) (187)
NET LOSS (4,227) (4,227)
--------- ---------- ---------- ---------- ---------
Balance December 31, 1998 2,000,000 679 (4,227) 19,524 15,976
Currency translation adjustment (58) (58)
NET LOSS (246) (246)
--------- ------- ---------- ------- -------
Balance February 28, 1999 2,000,000 $679 $(4,473) $19,582 $15,788
Unaudited
Currency translation adjustment (827) (827)
NET LOSS JUNE 30, 1999 (56) (56)
--------- ------- ---------- ------- -------
BALANCE JUNE 30, 1999 2,000,000 $679 $(4,529) $18,755 14,905
========== ===== ======== ======== ======
</TABLE>
F-100
<PAGE>
NOTE 1 - FORMATION OF COMPANY AND ISSUANCE OF COMMON STOCK
A. FORMATION AND DESCRIPTION OF THE COMPANY
Hermes Net Solutions, Inc. (the "Company"), was formed on December
23,1996 under the Company Act (British Columbia) and is authorized to
issue20,000,000 shares of common stock, without par value.
B. DESCRIPTION OF COMPANY
The Company was formed for the purpose of engaging in Internet services
and any other activity within the purposes for which corporations may be formed
under the Company Act of British Columbia. Present operations include Internet
access service provider, web site hosting and consulting and custom programming.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred net
losses of $4,529 from inception to June 30, 1999. These factors indicate that
the Company's continuation as a going concern is dependent upon its ability to
obtain adequate financing. The Company will be relying upon the resources of
management to provide the necessary working capital to sustain the Company's
continued operations until adequate financing can be located or the company
achieves profitability. The Company will require substantial additional funds to
finance its business activities on an ongoing basis and will have a continuing
long-term need to obtain additional financing.
The financial statements presented at February 28, 1999 consist of the
balance sheet as at February 28, 1999 and the statements of operations, cash
flows and stockholders equity for the years ending February 28, 1998 and 1999.
The unaudited financial statements presented at June 30, 1999 consist
of the balance sheet as at June 30, 1999 and the statements of operations, cash
flows and stockholders equity for the four months ended June 30, 1999 and 1998.
B. CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents - Temporary investments with a maturity of
less than three months when purchased are treated as cash
F-101
<PAGE>
C. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed over the estimated useful lives using the
straight line methods over a period of five years. Maintenance and repairs are
charged against operations and betterment's are capitalized.
D. REVENUE RECOGNITION
The Company's primary source of revenue is earned from Internet
connection services. For contracts which exceed one month, revenue is recognized
on a straight-line basis over the term of the contract as services are provided.
Revenue applicable to future periods are classified as deferred revenue.
E. SELLING AND MARKETING COSTS
Selling and Marketing costs, are expensed as incurred. For the years
ending February 28, 1998 and 1999 and for the four months ended June 30, 1999
and 1998 was $5,493, $16 , $-0- and $-0- respectively.
F. DIRECT COSTS
The "direct costs" to provide services consist of the costs incurred to
lease and rent telephone communications lines and services from communications
companies.
G. SOFTWARE DEVELOPMENT
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed" capitalization
of software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in software and hardware
technology. No software development costs have been capitalized by the Company
to date.
F-102
<PAGE>
H. RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 does not have a
material impact on the Company's financial position or results of operations.
Computer software costs that are incurred in the preliminary project stage are
expensed as incurred. Once the capitalization criteria of the SOP have been met,
costs incurred when developing computer software for internal are capitalized.
No software development costs have been capitalized by the Company to date.
i. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. Foreign Currency Translation
The functional currency of the Company is Canadian dollars. Balance
sheet accounts are translated to U.S. dollars at the current exchange rate of
the balance sheet date. Income statement items are translated at average
exchange rates during the period. The resulting translation adjustment is
recorded as a separate component of stockholder' equity.
k. Significant Concentration of Credit Risk
At February 28, 1999 and June 30, 1999, the Company has concentrated
its credit risk by maintaining deposits in one banks. The maximum loss that
could have resulted from this risk totaled $-0- which represents the excess of
the deposit liabilities reported by the banks over the amounts that would have
been covered by the federal insurance.
F-103
<PAGE>
L. LOSS PER SHARE:
Basic loss per common share is computed by dividing the loss by the
weighted average number of common shares outstanding during the period. For the
years ended February 28, 1998 and 1999 and for the four months ended June 30,
1999 and 1998, there were no dilutive securities outstanding.
m. Unaudited financial information
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of June 30,
1999 and the results of its operations and its cash flows for the four months
ended June 30, 1999 and 1998. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations of the Securities and Exchange Commission.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
NOTE 3 - SALE OF COMPANY
On June 30, 1999, the Company entered into a Share Purchase Agreement
(the "Agreement"), with Cypost Corporation ("Cypost") pursuant to which the
Company sold all of its issued and outstanding shares of common stock for a cash
consideration of U.S. $528,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
A. OFFICER SALARIES
No officer has received a salary in excess of $100,000.
B. OFFICERS LOANS
As of February 28, 1999 and June 30, 1999, the Company is obligated to
repay monies advanced by officers of the Company aggregating $25,785 and $37,631
respectively with interest at 6% and is payable on demand.
F-104
<PAGE>
NOTE 6 - INCOME TAXES
The Company provides for the tax effects of transactions reported in
the financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets
and liabilities, if any represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of February 28, 1999 and June 30,
1999, the Company had no material current tax liability, deferred tax assets, or
liabilities to impact on the Company's financial position because the deferred
tax asset related to the Company's net operating loss carryforward and was fully
offset by a valuation allowance.
At June 30, 1999, the Company has net operating loss carry forwards for
income tax purposes of $4,529. This carryforward is available to offset future
taxable income, if any, and expires in the year 2010. The Company's utilization
of this carryforward against future taxable income may become subject to an
annual limitation due to a cumulative change in ownership of the Company of more
than 50 percent.
The components of the net deferred tax asset as of June 30, 1999 is as
follows:
Deferred tax asset:
Net operating loss carry forward $ 1,540
Valuation allowance $ (1,540)
---------
Net deferred tax asset $ -0-
=========
The Company recognized no income tax benefit for the loss generated in
the period from inception to June 30, 1999.
SFAS No. 109 requires that a valuation allowance be provided if it is
more likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income.
F-105
<PAGE>
Because the Company has yet to recognize significant revenue from the
sale of its products, the Company believes that a full valuation allowance
should be provided.
NOTE 7 - BUSINESS AND CREDIT CONCENTRATIONS
The amount reported in the financial statements for cash approximates
fair market value. Because the difference between cost and the lower of cost or
market is immaterial, no adjustment has been recognized and investments are
recorded at cost.
Financial instruments that potentially subject the company to credit
risk consist principally of trade receivables. Collateral is generally not
required.
NOTE 8 - COMMITMENTS
The Company leases office space under a year lease expiring January 31,
2000 for an aggregate rental of Cdn $9,948 (U.S. $6,756).
Rent expense for the years ended February 28, 1998 and 1999 and for the
four months ended June 30, 1999 was U.S. $5,129, $5,029 and $2,509 respectively.
NOTE 9 - Write-off of Fixed Asset
For the four months ended June 30, 1999, the Company wrote-off
obsolete equipment with a carrying value of $11,358 - This amount included in
direct costs in the statement of operations.
F-106
<PAGE>
