U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 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 $.001 per share
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<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Item 1. Description of Business.
(a) Business Development.
CyPost Corporation (hereinafter referred to as the "Registrant", the
"Issuer", or as "CyPost"), a Delaware corporation, was formed on September 5,
1997 under the name "E Post Corporation" to operate as the parent company of two
wholly-owned, sister subsidiaries: ePost Innovations, Inc., a corporation
organized under the laws of British Columbia, Canada ("ePost Canada") and CyPost
USA, Inc., a Delaware corporation formed on September 5, 1997 by the Company
("CyPost USA"). Shortly after its formation, ePost Corporation changed its name
to "CyPost Corporation" to minimize potential trademark difficulties with third
parties. ePost Canada was formed on March 27, 1997 and was acquired by the
Issuer on September 15, 1997 (the "Acquisition"). Prior to the Acquisition,
ePost Canada was a wholly owned subsidiary of Mushroom Innovations, Inc. a
corporation organized under the laws of British Columbia ("MII"). Under the
terms of the Acquisition, the Issuer acquired from MII all of the issued and
outstanding shares of ePost Canada, as well as all intellectual property rights
then owned by ePost Canada, in exchange for 2,000,000 pre-split or 3,000,000
post-split shares of CyPost's Common Stock. On October 29, 1998, CyPost acquired
all of the issued and outstanding capital stock of Communication Exchange
Management Inc., a British Columbia corporation, from MII in exchange for
4,180,000 pre-split or 6,270,000 CyPost shares. Communication Exchange
Management Inc. remains a wholly owned subsidiary of CyPost. Unless otherwise
stated herein, all dollar amounts refer to U.S. Dollars ("USD$")--not Canadian
Dollars ("CDN$).
Prior to the first quarter of 1999, CyPost was a development stage company. It
began offering the first of its six versions of encryption software for sale
during March 1999. On June 30, 1999, it completed the first of its acquisitions
of Internet Service Providers ("ISP's"). Since that time, it has acquired
several more ISP's whose revenues account for substantially all of the Company's
operations. 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 CyPost USA, the capital stock of ePost Canada and the
capital stock of the other subsidiaries listed on Exhibit 21. To date, the
Issuer, through its operating subsidiaries, has been largely involved in three
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 electonic greeting card
services. (Unless otherwise qualified herein, the term "Company" shall be used
to refer to the business operations of the Registrant and its consolidated
subsidiaries.) The Company is currently selling three versions of its "Navaho"
software encryption programs (Navaho Lock 2.4, Navaho Zipsafe and Navaho Lock
with Voice) which encompasses the first three business model described below,
the remaining business model is in the initial planning stages and should be
rolled out by year ending December 31, 2000. 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
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
The Company currently offers six (6) different security encryption
software products each of which bear the name "Navaho". (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 both digitally over
the Internet and through distributors who sell shrink-wrapped versions. CyPost's
website, www.cyost.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, www.egghead.com, www.cdw.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 an additional 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 Express (a promotional version of Navaho Lock with Voice) to the 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.
This relationship will 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.
Navaho Lock: Navaho Lock software enables consumers to send and receive
secure email and attachments such as documents, spreadsheets, digital sound
files, and business presentation. The program 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 is available for purchase at www.cypost.com and over 1000
secure distribution sites on the Internet. This product has received favorable
product reviews from PC Magazine, Portable Computing, Secure Computing Magazine,
CNN Interactive, and PC World Online.
Navaho Lock version 2.4 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 Lock with Voice: Currently in the final stages of beta testing,
Navaho Lock with Voice software is the successor to Navaho Lock v2.4.
Incorporating all the features 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. It is expected
to be released in the 1st quarter of 2000.
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 Viewer: Navaho Viewer provides an alternative for those consumers
not wanting to purchase the full working copy of Navaho Lock, but who require
the ability to read encrypted files sent to them by friends or colleagues.
Navaho Viewer is available for download free at CyPost's web site and numerous
web sites on the Internet.
Navaho ZipSafe: The third product in CyPost's Navaho family of security
and encryption software, Navaho ZipSafe, was released in March 1999. The
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.
Navaho Express: The promotional version of the single user Navaho product,
Navaho Express 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.
Competition-Encryption Software
CyPost's Navaho line of privacy and protection solutions face competition
from a number of rival products. The largest and most noteworthy competitors
are: Network Associates Inc., InvisiMail International Ltd., and OpenSoft
Corporation. The following table compares these products to Navaho Lock, version
2.4. Based on Navaho Lock's superior functionality and easy-to-use features
(including its file compression capability, "drag-and-drop" routine, and
user-friendly interface), CyPost believes that Navaho Lock is well positioned to
compete successfully in the marketplace.
Competitive Comparisons
Product Comparison Table
FEATURE NAVAHO LOCK 2.4 PGP 6.5 RPK INVISIMAIL Deluxe MAILSECURE 2.4
Company CyPost Corp. Network InvisiMail Baltimore
Associates Intl. Technologies
Price $39.95 $39.95 $49.95 $49.95
Key
Strength 40/168 bit 1024-4906 bit 607-1279 bit 128/2048 bit
secret key public key public key public key
Target
user Single, Multi Single, Multi Single, Multi Single
Exportable
outside U.S. Y Y N N
Encryption
Method Symmetric Asymmetric Asymmetric Asymmetric
File
Compression Y N Y N
Drag & Drop
Encryption Y Y N N
Evaluation
Version
Available Y Y Y Y
Attachment
Feature Y Y Y Y
Key Lengths With Similar Resistance to Brute-Force Attacks
Symmetric Key Length Public Key Length
56 bits 384 bits
64 bits 512 bits
80 bits 768 bits
112 bits 1792 bits
128 bits 2304 bits
168 bits 3840+ bits
Competition - Encryption Software
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 tenth largest independent software company
with more than 30 million users worldwide, $612 million in revenue in fiscal
1997, and over 1,500 employees worldwide.
Network Associates has the largest market share of email encryption
software. Its PGP Personal Privacy software program is the most well known email
encryption software program currently on the market. PGP Personal Privacy's
unique selling proposition is they use the strongest encryption available in the
United States using PGP's strong public/private key technology with at least 128
bit keys. It was voted as the easiest email encryption program to use in the
September 1998 issue of PC World Magazine. PGP Personal Privacy ($39.95) is
available for purchase at the Network Associates web site as well as most
Internet shareware download sites.
Notable differences between PGP Personal Privacy and Navaho Lock with
Voiceare encrypted voice email, document shredding, a Drop area which allows for
one-step drag and drop file encryption, built in file compression, and use of
symmetric key encryption which is faster and less cumbersome to set up than
public/private key.
Baltimore Technologies (London Stock Exchange: BLM), a public company
headquartered in Dublin, Ireland 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.
The company was formed in December 1998 by the merger of two companies,
Baltimore Technologies and Zergo Holdings plc. BALTIMORE now employs over 500
people across over twenty global locations, and reported Unaudited proforma
group revenues for the 12 months to 31 December 1998 of $30 million Baltimore's
email encryption software, named MailSecure is an S/MIME plugin for Microsoft
email clients, Lotus Notes and Eudora. Unlike Navaho Lock, MailSecure is based
on public key infrastructure technology. 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(tm), 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.
Based on Navaho Lock with Voice's superior functionality and easy-to-use
features (including encrypted voice email, document shredding, file compression
capability, one-step "drag-and-drop" encryption, and user-friendly interface),
CyPost believes that Navaho Lock with Voice is well positioned to compete
successfully in the marketplace.
Market - ISP Division
CyPost Network of Service Providers: Through ISP acquisitions, CyPost has
established approximately 20,000 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 web hosting, connectivity, custom
programming, roaming services, web design and e-commerce solutions. 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 testing and solution consulting services for network security
issues, such as testing the integrity of client networks. The company has
negotiated an arrangement with UUNet Canada to provide connectivity across the
country and plans to enter into a similar arrangement in the U.S. These
agreements allow the CyPost Network of Service Providers to offer subscribers
the convenience that larger Service Providers can offer while maintaining focus
on excellent customer service and solutions to protect their privacy 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 both extra hand- holding (which
larger telecommunication companies may not provide under high- volume, low-cost
service structures) and 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, but rather the smaller
companies with specific security needs, may be overlooked. The company also
believes that its range of products due to its 'focus' on security will be
greater than those of the larger ISPs who are under more pressure to obtain
larger quantities of subscribers, rather than CyPost's focus on fewer clients
but offering more services to each.
Competition - ISP Division
The CyPost Network of Service providers operates in the extremely
competitive Internet services market. The fragmented U.S. consumer ISP market
has been dominated to date by approximately seven companies. According to a July
1999 report by Cahners In-Stat Group however, the market share of the dominant
players in the U.S. consumer ISP market is being threatened by new business
models. The report cites despite the enormous marketing dollars allocated to
advertising, AOL's market share slipped 2.8% between the final quarter of 1997
and the first quarter of 1999, while MSN saw its marketshare drop by more than
half during the same period.
Moreover, the report notes that during 1998 the combined subscriber base
for non-traditional service providers grew 137 percent, compared to only 37
percent growth among traditional ISPs (including AOL, MSN, Mindspring,
Earthlink, Prodigy, and Flashnet).
Despite the fact that non-traditional ISP's are growing more quickly than
traditional ISP's, many observers anticipate over the next several years further
consolidation within the ISP market. Recent merger activity has seen business
combinations between AOL and Netscape; MCI Worldcom and Spring and Earthlink and
Mindspring. It is not CyPost's intent to compete head to head with these large
ISP's but to compete in the growing security niche markets by providing
value-added privacy and protection solutions in addition to providing
connectivity to business and individuals.
Our competitors 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 other 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.
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 has
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 six (6) 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 cash consideration of $528,000 USD.
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 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 (listservs 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. A brief survey of the various members of
the CyPost Network of Service Providers is provided below:
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 through a partnership with UUNet in Canada, 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.
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.
CyPost is also actively seeking further opportunities to ally with ISP's
and other cyber-businesses both within North America and abroad. 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 785,455 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 woman who are a
demographically important group for marketing purposes. 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 technolgicy. 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)
publicly marketed six (6) software encryption products under its "Navaho"
trademark, (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 nine months ended September 30, 1999 and for
the three months ended September 30, 1999
Substantially all of the Company's revenue to date, approximately 99%, is
accounted for by the ISP operations during the three months and nine months
ended September 30, 1999. These revenues are attributable virtually entirely to
the operations of the two Internet service providers which the Company acquired
during 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 on that
date. It had no revenues for the corresponding periods of the prior year.
Direct costs of $49,275 were incurred in the quarter ending September 30,
1999 resulting in a gross margin of $136,395 (73%) for the three months and
$147,793(75%) for the nine months ended September 30, 1999. Legal and
professional fees are reported as selling, general and administrative expenses
on the statement of operations. Net losses before interest expense of $423,505
for the three months and $1,180,730 for the nine months reflect primarily the
effect of a small revenue base which was insufficient to cover administrative
expenses, salaries and benefits and development expenses. The Company hopes to
achieve profitable operations through a combination of adding additional ISPs
through acquisition and through the addition of value added services in its
ISPs, as well as through the addition of new products in its encryption-related
operations.
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 to the beneficial
conversion features on convertible promissory notes between the Company and a
lender. A beneficial conversion feature arises when at the commitment date of
the promissory note, the convertible promissory note is "in-the-money". 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 (intrinsic value) at the
commitment date of the loan.
Liquidity and capital resources
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 $1,801,505 for the three month period ending September 30, 1999 and net
losses of $3,099,750 for the nine month period ending September 30, 1999. These
factors indicate that the Company's continuation as a going concern is dependent
upon, among other things, its ability to obtain adequate financing.
Although the Company's cash position at September 30, 1999 had improved to
$2,414,094, as compared to $47,212 at December 31, 1998, the improvement in cash
position was attributable to loans made to the Company by Blue Heron Venture
Fund, Ltd. 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 at prices ranging, at present,
from $0.50 to $1.17 per share. If all loans outstanding as of September 30, 1999
were converted, the lender would be entitled to an aggregate of 5 million shares
of such Common Stock. The lender is free to withdraw this line of credit 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 its lender will continue to
refrain from demanding payment 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 seek financing from other sources. It does not
believe that bank borrowing would be available to it under present
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.
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 thelease 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.
(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, 47, Director and Chief Executive Officer
Mr.Sendoh acted as a Director throughout 1999 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 now
has franchises located in Singapore and Japan. He is currently an
Instructor/Director, and Evaluator with the International Sail and Power
Association, a non-profit organization.
Rounding out his business expertise, Bob is also a co-owner of EPPE
Sportswear, which manufactures and markets their high quality snowboarding
apparel internationally.
Carl Whitehead, 28, Director and Head of Strategic Acquisitions and
Partnerships
During the period 1996-99, Carl was a corporate officer and director in
Mushroom Innovations, Inc. and ePost Innovations, Inc., two technology-oriented
companies the latter of which was acquired by CyPost.
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. 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
Inc. 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 Mr. 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
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 such terms as may be agreed upon by the holder and the obligor. 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.
These Demand Notes were later converted into common shares with $ 1 Million of
principal and associated accrued interest being converted at a price of $1 per
share. Between July and November of 1999, the Company executed various further
demand notes with similar terms and in November 1999, an aggregate principal
amount of $3 Million together with associated accrued interest was converted at
a price of $1 per share. Each borrowing and the execution of the associated
Demand Note was approved by a disinterested majority of Directors.
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 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 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
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 June 30, 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 13, 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 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 that entity. These shares were issued under the Section
4(2) Securities Act exemption for transactions by an issuer not involving a
public offering.
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 alleges claims of conversion, fraud, wrongful
cancellation, breach of contract and breach of fiduciary duty and names CyPost
and Continental Stock Transfer & Trust Company as defendants, and seeks damages
of $3 Million per claim. It also sought injunctive relief via an Order to Show
Cause which has been denied by the court. The suit arises out of the Company's
cancellation of stock awarded to Mr. Berry in contemplation, and upon the
condition, of his remaining in the employ of the Company. Mr. Berry resigned
from the Company on January 17, 2000 citing personal reasons for his departure.
The Company believes his claims to be without merit and intends to contest them
vigorously.
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 LLC, 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 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.
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 June 30, 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 13, 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.
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 fiancial statements as of June 30,
1999, and for the year ending December 31, 1999, appear on pages F107 to F111 of
this Form 10-SB.
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 (Exhibits will be submitted upon request)
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.
10 Consent of Thomas P. Monahan, Certified Public Accountant
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 shareholders'
equity for period from inception, September 5, 1997, to December 31, 1997 and
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 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 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 shareholders'
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 2, 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 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 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>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEET
December 31, 1998
Assets
Current assets
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 expenses $ 11,090
--------
Total liabilities 11,090
Stockholders equity
Preferred stock- $.001 par value authorized
5,000,000 shares The number of
shares outstanding at December 31, 1998 was -0-
Common stock-$.001 par value, authorized
20,000,000 shares. The number of shares
outstanding at December 31, 1998 was
8,843,000 8,843
Additional paid in capital 347,837
Accumulated deficit during development stage (275,539)
Currency translation adjustment 33,966
--------
Total stockholders equity 115,107
--------
Total liabilities and stockholders equity $126,197
========
F-2
<PAGE>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period For the period
from inception For the from inception
September 5, to year ended September 5,
December 31, December 31, 1997,to
1997 1998 December 31,
1998
--------------- ----------- ------------
Cost of goods sold -0- -0- -0-
-------- ----------- -----------
Gross profit -0- -0- -0-
Operations:
General and administration -0- 177,469 177,469
Non cash legal fees
Paid with shares of stock 7,500 7,500
Research and development 86,260 86,260
Depreciation and amortization -0- 6,233 6,233
-------- ----------- -----------
total operating expense -0- 277,462 277,462
Loss from operations -0- (277,462) (277,462)
Other income
Gain on sale of assets 1,923 1,923
----------- -----------
Total other income 1,923 1,923
Net Profit (Loss) from operations $ -0- $ (275,539) $(275,539)
======== =========== ===========
Net income per share-
Basic and Diluted $ -0- $ (0.06) $ (0.07)
======== =========== ===========
Weighted average
number of shares
outstanding Basic and Diluted 583,333 4,331,999 3,870,580
======== =========== ===========
F-3
<PAGE>
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, to year ended September 5,
December 31, December 31, 1997,to
1997 1998 December 31,
1998
--------------- --------- ---------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net profit (loss) $ -0- $(275,539) $(275,539)
Non cash compensation-legal fees 7,500 7,500
Depreciation and
amortization -0- 6,233 6,233
Currency translation adjustment 33,966 33,966
Software costs expense paid with
shares of common stock 2,000 2,000
Prepaid expenses (27,998) (27,998)
Accounts payable and
accrued expenses 1,965 9,125 11,090
--------- --------- ---------
TOTAL CASH FLOWS FROM
OPERATIONS 1,965 (242,713) (242,748)
CASH FLOWS FROM FINANCING
ACTIVITIES
Sale of stock-net of
offering costs 20,000 323,000 343,000
--------- --------- ---------
TOTAL CASH FLOWS
FROM FINANCING 20,000 323,000 343,000
ACTIVITIES
CASH FLOWS FROM INVESTING
ACTIVITIES
Security deposit (24,000) (24,000)
Capital asset purchases (852) (27,711) (28,563)
Organization expense (477) (477)
Capitalized software cost (16,878) 16,878
--------- --------- ---------
TOTAL CASH FLOWS
FROM INVESTING (17,730) (35,310) (53,040)
ACTIVITIES
NET INCREASE
(DECREASE) 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
========= ========= =========
See accompanying notes to financial statements
F-4
<PAGE>
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
development
stage
- ------------- --------- --------- ------- ---------- --------- ------
09-17-1997(1) 2,000,000 $2,000 $2,000
12-31-1997(2) 400,000 400 19,600 20,000
--------- ------ ------ ------ -------- ------
- -
12-31-1997 2,400,000 $2,400 19,600 $-0- $-0- $22,000
03-31-1998(2) 1,600,000 1,600 78,400 80,000
04-30-1998(3) 38,000 38 18,962 19,000
04-30-1998(4) 15,000 15 7,485 7,500
04-30-1998(5) (20,000) (20,000)
10-29-1998(6) 4,180,000 4,180 4,180
12-31-1998(7) 610,000 610 243,390 244,000
12-31-1998 33,966 33,966
12-31-1998 Net loss (275,539)
(275,539)
--------- ----- --------- --------- -------- -------
12-31-1998 $-0- 8,843,000 $8,843 $ 347,837 $(275,539) $33,966 $115,107
(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 $.05 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 $0.50 per share.
(4) Sale of common shares pursuant to Rule 504 in consideration for $7,500 in
legal fees valued at $0.50 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 $0.40 per share.
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
20,000,000 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
The Company develops and markets Internet privacy and protection systems.
CyPost specializes in making state-of-the-art encryption solutions accessible
for both business and personal use. CyPost's flagship product, Navaho Lock
HYPERLINK http://www.navaholock.com www.navaholock.com, is an easy to use
application using strong encryption. Navaho Lock permits both individual and
business clients to keep their electronic information, whether stored on a
personal computer, used on a network, or sent across the Internet, completely
private and protected.
c. Issuance of Capital Stock
Pursuant to an acquisition agreement dated September 17, 1997, the Company
issued, in a related party transaction, 2,000,000 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, 2,000,000 Units at $0.05 per Unit. As of December 31, 1997,
through the sale of these Units, the Company sold an aggregate 400,000 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 1,600,000 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, 38,000 shares of common stock at $0.50 per
share. As of April 30, 1998, the Company sold an aggregate 38,000 shares of
common stock for an aggregate consideration of $19,000. On April 30, 1998, the
Company sold 15,000 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 $0.50 per share.
On September 18, 1998, the Company issued 4,180,000 shares of common
stock, valued at $0.001 or $4,180
For the year ended December 31, 1998, the Company issued 610,000 shares of
common stock through warrants exercise at $0.40 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 $261,573 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 years ending December 31, 1997 and 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
1,390,000 warrants outstanding.
Shares used in calculating basic and diluted net income per share were as
follows:
December 31, December 31,
1997 1998
-----------------------------
583,333 4,331,999
=============================
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
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 are capitalized and amortized to direct costs 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. Research
and development costs for the year ended December 31, 1998, $16,878.
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.
Computer software costs that are incurred in the preliminary project stage are
expensed as incurred to direct costs. 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.
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 2,000,000 Units at $0.05 per Unit. Each Unit consists of one
shares of the Company's common stock and one warrant to purchase one share of
common stock at $0.40 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 $0.10 per warrant.
The Company sold through a private placement 2,000,000 Units for
anaggregate consideration of $100,000 less offering expenses of $20,000.
As of April 30, 1998, the Board of Directors of the Company amendedthe
offering to reduce the warrant exercise price to $0.40 per share of commonstock
from $.45.
As of December 31, 1998, the Company has sold 610,000 shares respectively
of common stock through the exercise of 610,000 warrants respectively for an
aggregate consideration of $244,000.
As of December 31, 1998, the Company has reserved 1,390,000 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 38,000 shares of common stock at $0.50 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 2,000,000 shares of common stock to Mushroom in
conideration 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 and is
accounted for using historic costs (as if the entities had always been
F - 11
<PAGE>
together) with the recording of the net assets acquired at their historical book
value. Operating results prior to the date of acquisition were not significant.
The Company sold 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 ePost Canada with an accumulated
capitalized cost of $2,000.
b. Acquisition of Communication Exchange Management, Inc.
On September 18, 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 4,180,000 shares of common stock to Mushroom in
conideration 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, 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 and is
accounted for using historic costs (as if the entities had always been together)
with the recording of the net assets acquired at their historical book value.
Operating results prior to the date of acquisition were not significant.
The Company sold 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 CEM Canada with an accumulated
capitalized cost of $4,180.
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 Canada
Inc. 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 Mr. Asanuma became a 9%
shareholder 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
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".
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 562,000 shares of common
stock as follows: 400,000 shares to Steve Berry, 12,000 shares to Pezhman
Sharifi and 150,000 shares to Miulet Technologies, Ltd. The transfer was in
consideration and in lieu of the payment for an aggregate of $20,000 in services
performed valued at $0.036 per share. The value of the shares was determined
based upon the risk of the holding period and represents 1/2 the market price of
the shares.
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 $241,573. 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 $ 82,134
Valuation allowance $ (82,134)
-------
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 2,000,000 warrants to purchase an additional
2,000,000 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
1,390,000. 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 though its wholly owned subsidiary ePost Innovations, Inc. for the
development of the Company proposed 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 has paid to Marian Miulet $32,834.
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
For the year ending December 31, 1998, the Company issued 15,000 shares of
common stock for an aggregate consideration of $7,500 or $.50 per share and
includes software expense paid with shares of common stock aggregating $2,000
which was charged to research and development.
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>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 2,414,094
Accounts receivable 121,019
Prepaid expenses 49,144
OTHER 97,204
-------------
2,681,461
PROPERTY AND EQUIPMENT, net 148,156
GOODWILL AND OTHER INTANGIBLES 751,208
-------------
$ 3,580,825
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 3,832,346
Deficit (3,364,269)
CUMULATIVE TRANSLATION ADJUSTMENT 19,500 504,436
------------- -------------
$ 3,580,825
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F - 16
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 185,670 $ - $ 197,068 $ -
DIRECT COSTS 49,275 - 49,275 -
------------- ------------- ------------- -------------
136,395 - 147,793 -
------------- ------------- ------------- -------------
EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 432,521 34,840 1,167,442 153,004
DEVELOPMENT 114,339 - 142,010 -
AMORTIZATION AND DEPRECIATION 13,040 - 19,071 2,852
------------- ------------- ------------- -------------
559,900 34,840 1,328,523 155,856
------------- ------------- ------------- -------------
(423,505) (34,840) (1,180,730) (155,856)
INTEREST EXPENSE 1,378,000 - 1,908,000 -
------------- ------------- ------------- -------------
NET LOSS (1,801,505) (34,840) (3,088,730) (155,856)
DEFICIT, BEGINNING OF PERIOD (1,562,764) (121,016) (275,539) -
------------- ------------- ------------- -------------
DEFICIT, END OF PERIOD $ (3,364,269) $ (155,856) $ (3,364,269) $ (155,856)
============= ============= ============= =============
LOSS PER SHARE, BASIC AND DILUTED $ (0.18) $ (0.01) $ (0.31) $ (0.04)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,957,851 4,156,839 9,957,851 4,156,839
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F - 17
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
NET LOSS $ (1,801,505) $ (34,840) $ (3,088,730) $ (155,856)
Add items not affecting cash
AMORTIZATION 13,040 - 19,071 2,852
INTEREST EXPENSE 1,378,000 - 1,908,000 -
------------- ------------- ------------- -------------
(410,465) (34,840) (1,161,659) (153,004)
------------- ------------- ------------- -------------
CHANGE IN NON-CASH OPERATING ACCOUNTS (68,978) 2,298 69,000 387
------------- ------------- ------------- -------------
(479,443) (32,542) (1,092,659) (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) -
------------- ------------- ------------- -------------
(103,646) 644 (752,443) (18,360)
------------- ------------- ------------- -------------
CASH FLOWS FROM
FINANCING ACTIVITIES
LOAN REPAYMENT (66,841) - - -
LOAN PROCEEDS 2,770,450 - 3,670,450 -
ISSUANCE OF SHARES - 44,000 556,000 185,000
Change in cumulative
TRANSLATION ADJUSTMENT (14,466) (2,162) (14,466) (2,847)
------------- ------------- ------------- -------------
2,689,143 41,838 4,211,984 182,153
------------- ------------- ------------- -------------
INCREASE IN CASH 2,106,054 9,940 2,366,882 11,176
CASH, BEGINNING OF PERIOD 308,040 5,103 47,212 3,867
------------- ------------- ------------- -------------
CASH, END OF PERIOD $ 2,414,094 $ 15,043 $ 2,414,094 $ 15,043
============= ============= ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE:
(a) For the nine months ended September 30, 1999, the Company settled
$1,000,000 of loans by issuing 1,500,000 shares of common stock.
The accompanying notes are an integral part of this consolidated financial
statement.
F - 18
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in
-------------------------
NUMBER AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
Incorporation date, September 5, 1997
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 3,600,000 3,600 18,400 -- 22,000
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)
NET LOSS -- -- -- (275,539) (275,539)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 13,264,500 13,264 343,416 (275,539) 81,141
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
NET LOSS -- -- -- (3,088,730) (3,088,730)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999 16,859,355 $ 16,859 $ 3,832,346 $(3,364,269) $ 484,936
=========== =========== =========== =========== ===========
</TABLE>
F - 19
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION
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
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.
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.
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. No software development costs have been
capitalized by the Company to date.
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.
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 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.
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.
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.
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.
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 Victoria, 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, February 11, 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, February 11, 1997, to August 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Mushroom 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
Assets
Current assets
Cash and cash equivalents $-0-
----
Total current assets -0-
Other assets
Software development costs 2,000
-----
Total other assets 2,000
-----
Total assets $2,000
======
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. 657
At August 31, 1997, there
are 100 shares outstanding .
Retained earnings deficit -0-
---
Currency translation adjustment 357
---
Total stockholders' equity 1,014
-----
Total liabilities and stockholders' equity $2,000
======
F-27
See accompanying notes to financial statements
<PAGE>
ePOST Innovations, Inc.
a subsidiary of Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, FEBRUARY 11, 1997 TO AUGUST 31, 1997
Revenue$ -0-
Costs of goods sold -0-
---
Gross profit -0-
Operations:
General and administrative -0-
Depreciation and amortization -0-
---
Total expense -0-
Net income (loss) $-0-
=====
F-28
See accompanying notes to financial statements
<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, FEBRUARY 11, 1997 TO AUGUST 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $-0-
Adjustments to reconcile net loss
to cash used in operating activities
Depreciation -0-
---
TOTAL CASH FLOWS FROM OPERATIONS -0-
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES -0-
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -0-
NET INCREASE (DECREASE) IN CASH -0-
CASH BALANCE BEGINNING OF PERIOD -0-
---
CASH BALANCE END OF PERIOD $-0-
====
F-29
See accompanying notes to financial statements
<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 Retained Translation
Date Stock Stock Earnings Adjustment Total
Sale of initial shares 100 _ $657 $657
Currency translation
adjustment $357 357
Net loss -0-
-------- -------- ------ -------- ------
Balances August 31, 1997 100 $657 $-0- $357 $1,014
========================================= ========
F - 30
See accompanying notes to financial statements
<PAGE>
F- 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 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. The
Company subsequently filed a certificate of amendment to change the name to
ePost Innovations, Inc.
b. Description of Company
The Company is a development stage company that was organized as a
subsidiary to Mushroom Innovations Inc. 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.
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 lows
and stockholders equity for the period from inception, February 11, 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, February 11, 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 agreement dated September 17, 1997, Cypost
Corporation ("CyPost") issued 2,000,000 shares of common stock at $0.001 per
share for an aggregate consideration of $2,000 to the Company 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.
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
Because of common ownership by the principles of the Company, Mushroom
and Cypost, The transaction has been accounted for as a transfer and is
accounted for as if a pooling of interests had occurred using historic costs
with the recording of the net assets acquired at their historical book value
with restatement of periods prior to the reorganization on a combined basis.
Carl Whitehead, Bill Kaleta and Robert Sendoh are officers and
directors of the Company and Cypost Corporation.
The Company sold 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 ePost Canada.
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.
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, February 11, 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 Victoria, 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
December 31, 1997
December 31,1997 June 30,1998
Unaudited
Assets
Current assets
Cash and cash equivalents $-0- $-0-
---- ----
Total current assets -0- -0-
Other assets
Software development costs 4,180 4,180
----- -----
Total other assets 4,180 4,180
----- -----
Total assets $4,180 $4,180
====== ======
Liabilities and Stockholders' Equity
Current liabilities
Due to parent company $2,919 $3,180
------- ------
Total current liabilities 2,919 3,180
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
Retained earnings -0- -0-
Currency translation adjustment 582 557
---- ---
Total stockholders' equity 1,261 1,236
------ -----
Total liabilities and
stockholders' equity $4,180 $4,180
=========================
See accompanying notes to financial statements
F-37
<PAGE>
COMMUNICATION EXCHANGE MANAGEMENT, INC.
a subsidiary of Mushroom Innovations, Inc.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
STATEMENT OF OPERATIONS
For the period For the six For the period
from inception, months ended from inception,
March 18, 1997 June 30, 1998 March 18, 1997
to December 31, to December 31,
1997 1997
Unaudited Unaudited
Revenue$ -0- $-0- $-0-
Costs of goods sold -0- -0- -0-
-------------------------------------
Gross profit -0- -0- -0-
Operations:
General and administrative -0- -0- -0-
Depreciation and amortization -0- -0- -0-
-------------------------------------
Total expense -0- -0- -0-
Net income (loss) $-0- $-0- $-0-
======================================
See accompanying notes to financial statements
F-8
<PAGE>
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
FOR THE PERIOD FROM INCEPTION, MARCH 18, 1997 TO DECEMBER 31, 1997
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 December 31,
1997 1997
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $-0- $-0- $-0-
Adjustments to reconcile
net loss to cash used in
operating activities
Depreciation -0- -0- -0-
--- --- ---
TOTAL CASH FLOWS FROM OPERATIONS -0- -0- -0-
TOTAL CASH FLOWS FROM
FINANCING ACTIVITIES -0- -0- -0-
TOTAL CASH FLOWS FROM
INVESTING ACTIVITIES -0- -0- -0-
NET INCREASE (DECREASE) IN CASH -0- -0- -0-
CASH BALANCE BEGINNING OF PERIOD -0- -0- -0-
-------------------------------------
CASH BALANCE END OF PERIOD $-0- $-0- $-0-
======================================
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 Retained Translation
Date Stock Stock Earnings Adjustment Total
Sale of initial
shares 100 $ 679 $ 679
Currency translation
adjustment $ 582 582
Net loss -0- -0-
------ ----- -------- ------- -------
Balances December 31, 1997 100 $ 679 -0- $ 582 $ 1,261
Unaudited
Currency translation
adjustment(25)
Net loss -0- -0-
------ ----- -------- ------- -------
Balance June 30, 1998 100 $ 679 $ -0- $ 557 $ 1,236
================================================
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 Victoria, British Columbia, Canadian
corporation 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 to Mushroom Innovations Inc. 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.
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 at December 31, 1997 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
financialstatements 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. 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, the Company exchanged with CyPost Corporation
("CyPost") 4,180,000 shares of common stock valued at $0.001 per share for an
aggregate consideration of $4,180 in a related party transaction with Cypost for
all of the issued and outstanding stock of the Company and its assets consisting
of the source code written for data encryption software, personal information
management and electronic mail functionality along with the intellectual rights
to a number of other projects. The transaction has been accounted for as a
transfer and is accounted for as if a pooling of interests had occurred using
historic costs with the recording of the net assets acquired at their historical
book value with restatement of periods prior to the reorganization on a combined
basis.
Carl Whitehead, Bill Kaleta and Robert Sendoh are officers and
directors of the Company and Cypost Corporation.
The Company sold 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.
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, 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, 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 18, 1997, to December 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-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
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
Officer loans 53,600 4,902
------ -----
Total current liabilities 134,441 54,769
Long term liabilities
Capital leases payable-
long term portion 45,987
Officer loans payable 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>
CONNECT NORTHWEST INTERNET SERVICES, LLC
(a Washington State Limited Liability Company)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
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 153,225 238,868 205,068 262,053
Depreciation and
amortization 45,572 73,059 53,698 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
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 (20,470) $(33,706) $(28,204) $(26,133)
Net loss $(35,675) $(29,181) $(50,197) $7,418
===================================== ======
</TABLE>
See accompanying notes to financial statements
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) $(21,666)
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 OPERATIONS 35,072 (8,715) (28,620) 9,307
CASH FLOWS FROM
FINANCING ACTIVITIES
Officer loan 38,620 (8,501) (8,391) 45,963
Capital leases
payable 102,935 (24,263) (17,711) (22,152)
Membership equity 29,084
Sale of
membership units 57,500 57,500
Membership
distribution (19,633) (97) (97)
-------- --------- ---------
TOTAL CASH FLOWS FROM
FINANCING ACTIVITIES 121,922 24,639 31,301 55,259
CASH FLOWS FROM
INVESTING ACTIVITIES
Security deposit (2,717) (4,817) (544) 2,364
Purchase of
equipment (151,090) (15,608) (60,044)
--------- -------- -------
TOTAL CASH FLOWS
FROM INVESTING
ACTIVITIES (153,807) (20,425) (544) (60,044)
NET INCREASE
(DECREASE) IN CASH 3,187 (4,501) 2,137 4,522
CASH BALANCE
BEGINNING OF PERIOD 2,271 5,458 5,458 5,479
----- -------- ------- -------
CASH BALANCE END
OF PERIOD $5,458 $957 $7,595 $957
========--------
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 profit 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, 1999
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 $4,529 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, 1999
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, 1999
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.
l.. 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, 1999
Note 4 - Related Party transactions
a. Officer Salaries
No officer has received a salary in excess of $100,000.
b. Loans Payable-Shareholder
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 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% 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:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
Classification
<S> <C> <C>
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
</TABLE>
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>
<S> <C> <C>
Secured by certain equipment $78,672 $56,520
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:
1999 $31,956
2000 $40,356
2001 $39,378
2002 $36,000
2003 $38,400
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.
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 36,502
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 66,294
Other Assets
Goodwill ............................. 23,886 -- --
Due from Parent Company .............. -- 11,188 7,318
--------- --------- ---------
Total Assets .................... $ 68,400 $ 67,248 $ 101,919
========= ========= =========
F - 57
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
June 30, January 31,
--------- ----------------------
1999 1999 1998
--------- --------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
<S> <C> <C> <C>
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
Retained Deficit .............................. (115,789) (110,554) (85,050)
Currency Translation Adjustment ............... 20,223 6,702 1,927
--------- --------- ---------
Total Stockholder's Equity ............... (95,497) (103,783) (83,054)
--------- --------- ---------
Total Liabilities and Stockholder's Equity $ 68,400 $ 67,248 $ 101,919
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 58
<PAGE>
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 1999 1998
--------- --------- ---------
REVENUES
Sales ................................ $ 155,448 $ 404,163 $ 321,679
Cost of Sales ........................ 42,683 186,578 171,624
--------- --------- ---------
Gross Margin .................... 112,765 217,585 150,055
EXPENSES
Research and Development ............. -- 3,541 14,255
General and Administrative ........... 114,967 220,840 185,388
--------- --------- ---------
Total Expenses .................. 114,967 224,381 199,643
Other Income (Expense)
Loss on disposal of assets ........... -- (12,034) --
Interest Expense ..................... (3,033) (6,674) (7,855)
--------- --------- ---------
Net Other Income (Loss) ......... (3,033) (18,708) (7,855)
--------- --------- ---------
Loss Before Taxes ....................... (5,235) (25,504) (57,443)
Income Tax Expense (Benefit) ............ -- -- --
--------- --------- ---------
Net Loss ................................ $ (5,235) $ (25,504) $ (57,443)
========= ========= =========
Weighted Average Shares Outstanding ..... 200 200 200
========= ========= =========
Loss Per Share .......................... $ (26.18) $ (127.52) $ (287.22)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F - 59
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Currency
Common Stock Retained Translation
---------------------
Shares Amount Deficit Adjustment Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance February 1, 1997 200 $ 69 $ (27,607) $ 605 $ (27,538)
Net Loss ............... -- -- (57,443) 1,322 (57,443)
--------- --------- --------- --------- ---------
Balance January 31, 1998 200 69 (85,050) 1,927 (84,981)
Net Loss ............... -- -- (25,504) 4,775 (25,504)
--------- --------- --------- --------- ---------
Balance January 31, 1999 200 69 (110,554) (110,485)
Net Loss ............... -- -- (5,235) 15,448 (5,235)
--------- --------- --------- --------- ---------
Balance June 30, 1999 .. 200 $ 69 $(115,789) $ 20,223 $(115,720)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 60
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the five
months ended For the Year Ended
June 30, January 31,
-------- --------------------
1999 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Loss ........................................... $ (5,235) $(25,504) $(57,443)
Adjustments used to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 4,942 20,209 22,388
Deferred revenue ................................ 3,216 2,217 40,040
Loss from disposal of assets .................... -- 12,034 --
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable ...... 412 11,766 (6,744)
(Increase) Decrease in inventory ................ 2,759 2,686 (5,153)
(Increase) Decrease in Prepaid expenses ......... (573) (887) (304)
Increase (Decrease) in Accounts payable ......... (27,417) 22,001 13,732
-------- -------- --------
Net cash provided by operating activities .......... (21,896) 44,522 6,516
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment .............. (10,168) (4,147) (24,647)
Expenditures for software development .............. (6,781) (22,110) (49,481)
Proceeds from government grant for
software development ............................ -- 29,684 35,704
Proceeds from sale of software ..................... 23,881 -- --
Goodwill from purchase of ISP accounts ............. (23,886) -- --
-------- -------- --------
Net cash used by investing activities .............. (16,954) 3,427 (38,424)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Parent company loan advance ........................ 11,188 (3,870) (43,037)
Obligation under capital lease (repayment) proceeds (4,025) (20,401) 7,027
Long-term debt (repayment) proceeds ................ 21,091 (17,759) 63,450
-------- -------- --------
Net cash provided by (used in) financing activities 28,254 (42,030) 27,440
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (10,596) 5,919 (4,468)
Cash and cash equivalents at beginning of the year . 12,355 6,436 10,904
-------- -------- --------
Cash and cash equivalents at end of the year ....... $ 1,759 $ 12,355 $ 6,436
======== ======== ========
</TABLE>
F - 61
<PAGE>
INTOUCH.INTERNET INC.
(A WHOLLY OWNED SUBSIDIARY OF COYOTENET INC.)
STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the five
months ended For the Year Ended
June 30, January 31,
-------- --------------------
1999 1999 1998
-------- -------- --------
<S> <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 $ 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
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
(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.
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.
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
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of the purchase price over the fair
values assigned to identifiable net assets of acquired internet service provider
accounts and is being amortized on the straight-line basis over a period of
three years. The purchase was a cash transaction.
The Company identifies and records impairment losses on goodwill when
events and circumstances indicate that such goodwill 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
goodwill exceeds its fair value.
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
(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 1999 1998
--------------- -------------- ---------------
NUMERATOR
<S> <C> <C> <C>
Net Income (Loss) To Common Stockholder $ (5,235) $ (25,504) $ (57,443)
=============== ============== ===============
DENOMINATOR
Weighted Average Number of Common Shares 200 200 200
=============== ============== ===============
EPS
Basic & Diluted Earnings (Loss) Per Share $ (26.18) $ (127.52) $ (287.22)
=============== ============== ===============
</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
(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
1,000,000Class 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
(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
--------------- --------------- ----------------
Deferred Tax Asset:
<S> <C> <C> <C>
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 - LOAN TO PARENT COMPANY
The loan is payable from the parent company, is unsecured without
interest and has no fixed terms of repayment.
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
(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 - LOSS ON DISPOSAL OF ASSETS
The loss of $12,034 during the January 31, 1999 fiscal year was the
result of the abandonment of obsolete equipment.
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>
INTERNET ARENA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
(unaudited) December 31,
--------- ----------------------
1999 1998 1997
--------- --------- ---------
ASSETS
Current Assets
<S> <C> <C> <C>
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
--------- --------- ---------
Total Current Liabilities ................ 116,927 117,318 50,342
--------- --------- ---------
Long Term and Other Liabilities
Shareholder - Advances ........................ 146,000 242,860 162,438
Notes Payable ................................. 29,377 40,829 48,348
--------- --------- ---------
Total Long Term and Other Liabilities .... 175,377 283,689 210,786
--------- --------- ---------
Total Liabilities ........................ 292,304 401,007 261,128
--------- --------- ---------
Stockholder's Equity
Common Stock .................................. 316,079 190,575 148,875
Retained Deficit .............................. (556,012) (510,739) (289,536)
--------- --------- ---------
Total Stockholder's Equity (Deficit) ..... (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>
INTERNET ARENA, INC.
STATEMENTS OF OPERATIONS
(unaudited)
For the nine
months ended For the year ended
September 30, December 31,
--------- ----------------------
1999 1998 1997
--------- --------- ---------
REVENUES
Sales ................................ $ 466,360 $ 342,089 $ 194,457
Cost of Sales ........................ 245,839 204,166 75,323
--------- --------- ---------
Gross Margin .................... 220,521 137,923 119,134
--------- --------- ---------
EXPENSES
Selling .............................. 10,363 37,618 24,736
General and Administrative ........... 240,973 295,356 274,745
--------- --------- ---------
Total Expenses .................. 251,336 332,974 299,481
--------- --------- ---------
Other Income (Expense)
Interest Income ...................... -- 34 --
Loss on Sale of Assets ............... -- (4,307)
Interest Expense ..................... (14,458) (21,879) (15,995)
--------- --------- ---------
Net Other Income (Loss) ......... (14,458) (26,152) (15,995)
--------- --------- ---------
Loss Before Taxes ....................... (45,273) (221,203) (196,342)
Income Tax Expense (Benefit) ............ -- -- --
--------- --------- ---------
Net Loss ................................ $ (45,273) $(221,203) $(196,342)
========= ========= =========
Weighted Average Shares Outstanding ..... 15,963 14,971 11,077
========= ========= =========
Loss Per Share .......................... $ (2.84) $ (14.78) $ (17.73)
========= ========= =========
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 Retained
-----------------------
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 28,137 --
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>
INTERNET ARENA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited)
For the nine
months ended For the Year Ended
September 30, December 31,
--------- ----------------------
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Loss ........................................... $ (45,273) $(221,203) $(196,342)
Adjustments used to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 23,028 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 (592) 1,873
--------- --------- ---------
Net cash provided by operating activities .......... (20,000) (116,386) (148,675)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment .............. -- (2,805) (48,434)
Increase in Other Assets - Deposits ................ -- -- (2,921)
Proceeds from disposal of assets ................... -- 2,975 --
--------- --------- ---------
Net cash used by investing activities .............. -- 170 (51,355)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock ................. 125,504 41,700 8,325
Advances from Stockholder .......................... (96,860) 80,422 162,438
Short term debt (repayment) proceeds ............... (2,859) 2,859 --
Increase (decrease) note payable credit line ....... 223 3,383 20,816
Long-term debt (repayment) proceeds ................ (11,452) (7,519) (12,396)
--------- --------- ---------
Net cash provided by (used in) financing activities 14,556 120,845 179,183
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (5,444) 4,629 (20,847)
Cash and cash equivalents at beginning of the year . 9,129 4,500 25,347
--------- --------- ---------
Cash and cash equivalents at end of the year ....... $ 3,685 $ 9,129 $ 4,500
========= ========= =========
</TABLE>
F - 74
<PAGE>
INTERNET ARENA, INC.
STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
(unaudited)
For the nine
months ended For the Year Ended
September 30, December 31,
--------- ----------------------
1999 1998 1997
--------- --------- ---------
<S> <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 $ 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 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 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 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.
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 1999 1998
------------------- -------------- ---------------
NUMERATOR
<S> <C> <C> <C>
Net Income (Loss) To Common Stockholder $ (45,273) $ (221,203) $ (196,342)
=================== ============== ===============
DENOMINATOR
Weighted Average Number of Common Shares 15,963 14,971 11,077
=================== ============== ===============
EPS
Basic & Diluted Earnings (Loss) Per Share $ (2.84) $ (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 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 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 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.
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 16,680 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
(Unaudited)
September 30, July 31,
-----------------------
1999 1999 1998
--------- --------- ---------
ASSETS
Current Assets
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 --
Leasehold Improvements ............. 12,007 48,194 --
--------- --------- ---------
601,084 839,464
Less Accumulated Depreciation ...... (347,356) (399,128) --
--------- --------- ---------
Net Property & Equipment ...... 253,728 440,336 556,956
Other Assets
Intangibles, Net ...................... 42,534 43,212 --
--------- --------- ---------
Total Assets .................. $ 409,808 $ 621,457 $ 656,395
========= ========= =========
F - 83
<PAGE>
NETROVER INC.
COMBINED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
(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
Retained Deficit .............................. (887,550) (859,752) (915,437)
Currency Translation Adjustment ............... (11,529) 4,883 2,785
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY ............... (899,005) (854,795) (912,578)
===========
----------- ----------- -----------
Total Liabilities and Stockholder's Equity $ 409,808 $ 621,457 $ 656,395
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F - 84
<PAGE>
NETROVER INC.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the two
months ended For the year ended
September 30, July 31,
----------- --------------------------
1999 1999 1998
----------- ----------- -----------
REVENUES
Sales .......................... $ 321,929 $ 1,850,655 $ 1,700,274
Cost of Sales .................. 162,905 1,045,821 991,575
----------- ----------- -----------
Gross Margin .............. 159,024 804,834 708,699
EXPENSES
General and Administrative ..... 93,431 643,044 703,179
----------- ----------- -----------
Total Expenses ............ 93,431 643,044 703,179
Other Income (Expense)
Loss on disposal of assets ..... (85,468) (45,353) (905)
Interest Expense ............... (7,923) (60,752) (73,578)
----------- ----------- -----------
Net Other Income (Loss) ... (93,391) (106,105) (74,483)
----------- ----------- -----------
Loss Before Taxes ................. (27,798) 55,685 (68,963)
Income Tax Expense (Benefit) ...... -- -- --
----------- ----------- -----------
Net Income (Loss) ................. $ (27,798) $ 55,685 $ (68,963)
=========== =========== ===========
Weighted Average Shares Outstanding 200 200 200
=========== =========== ===========
Loss Per Share .................... $ (138.99) $ 278.43 $ (344.82)
=========== =========== ===========
The accompanying notes are an integral part of these combined financial
statements.
F - 85
<PAGE>
NETROVER INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Currency
Preferred Stock Common Stock Retained Translation
--------------------- ---------------------
Shares Amount Shares Amount Deficit Adjustment Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance August 1, 1997 ... -- $ -- 200 $ 74 $(846,474) -- $(846,400)
Net Loss ................. -- -- -- -- (68,963) 2,785 (66,178)
--------- --------- --------- --------- --------- --------- ---------
BALANCE JULY 31, 1998 .... -- -- 200 74 (915,437) 2,785 (912,578)
=========
Net Income ............... -- -- -- -- 55,685 2,098 57,783
--------- --------- --------- --------- --------- --------- ---------
Balance July 31, 1999 .... -- -- 200 74 (859,752) 4,883 (854,795)
Net Loss ................. -- -- -- -- (27,798) (16,412) (44,210)
--------- --------- --------- --------- --------- --------- ---------
Balance September 30, 1999
(Unaudited) ........... -- $ -- 200 $ 74 $(887,550) $ (11,529) $(899,005)
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F - 86
<PAGE>
NETROVER INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited)
For the two
months ended For the Year Ended
September 30, July 31,
--------- ----------------------
1999 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net Loss ..................................... $ (27,798) $ 55,685 $ (68,963)
Adjustments used to reconcile net income
to net cash
provided by (used in) operating activities:
Depreciation and amortization ............. 26,917 178,751 154,009
Deferred revenue .......................... 2,394 22,008 79,958
Loss from disposal of assets .............. 85,468 45,353 905
Currency translation adjustment ........... (16,412) 2,098 2,785
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (4,480) (16,132) (6,681)
(Increase) Decrease in Prepaid expenses ... 41,150 (21,424) (13,059)
Increase (Decrease) in Accounts payable ... (75,950) 87,576 (168,340)
--------- --------- ---------
Net cash provided by operating activities .... 31,289 353,915 (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) (51,042) (37,730)
Repayment of Shareholder Loan ................ (7,138) (73,928) (88,905)
Repayment of Capital Lease Obligation ........ -- (144,426) (109,796)
Proceeds of Long-Term Debt ................... 532 74,074 299,242
--------- --------- ---------
Net cash used in financing activities ........ (20,581) (195,322) 62,811
--------- --------- ---------
Net increase in cash and cash equivalents .... 9,802 17,595 3,130
Cash and cash equivalents at beginning of year 20,725 3,130 --
--------- --------- ---------
Cash and cash equivalents at end of the year . $ 30,527 $ 20,725 $ 3,130
========= ========= =========
</TABLE>
F - 87
<PAGE>
NETROVER INC.
COMBINED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
(unaudited)
For the two
months ended For the Year Ended
September 30, July 31,
--------- ----------------------
1999 1999 1998
--------- --------- ---------
<S> <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 $ 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 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 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 programing.
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 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 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 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 1999 1998
------------------ --------------- ----------------
<S> <C> <C> <C>
NUMERATOR
Net Income (Loss) To Common Stockholder $ (27,798) $ 55,685 $ (68,963)
================== =============== ================
DENOMINATOR
Weighted Average Number of Common Shares 200 200 200
================== =============== ================
EPS
Basic & Diluted Earnings (Loss) Per Share $ (138.99) $ 278.43 $ (344.82)
================== =============== ================
</TABLE>
The effects of potential common shares such as warrants would be anti-dilutive
in each of the periods presented and 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.
F - 92
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 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 are unaudited
(Continued)
NOTE 5 - LONG-TERM DEBT
Long-Term Debt consists of the following.
<TABLE>
<CAPTION>
September 30, July 31,
1999 1999 1998
--------------- --------------- ---------------
Loan payable in monthly installments of $4,175
A 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. 4,931 4,361 -
Small business bank term loan repayable
C in monthly principal installments of $1,189
to December 1999; interest at bank prime rate
plus 2.75%. - 5,946 20,245
Small business bank term loan repayable
D in monthly principal installments of $1,824
to September 1999; interest at bank prime rate
plus 1.5%. - 3,647 25,569
Non-interest bearing loan payable from shareholders
E payable on demand, secured by general security
agreement 391,470 401,234 486,321
10% promissory note payable to a relative of a
F 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.
F - 94
<PAGE>
NETROVER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
July 31, 1999 and 1998
references to September 30, 1999 are unaudited
(Continued)
NOTE 6 - OBLIGATION UNDER CAPITAL LEASE
Computer equipment under capital lease:
<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>
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
===============
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>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
BALANCE SHEET
(IN US DOLLARS)
<TABLE>
<CAPTION>
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
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>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
STATEMENT OF OPERATIONS
(IN US DOLLARS)
<TABLE>
<CAPTION>
For the four
For the For the months ended
year ended year ended June 30,
February 28, February 28, 1999
1998 1999 UNAUDITED
---- ---- ---------
<S> <C> <C> <C>
Revenue $143,598 $196,141 $153,930
DIRECT COSTS 54,324 80,250 56,680
------- ------- ------
Gross profit 89,274 115,891 97,250
Operations:
Selling, general and administrative 94,322 101,272 93,606
DEPRECIATION AND AMORTIZATION 3,611 14,497 3,000
------ ------- -----
Total expense 97,933 115,769 96,606
Profit (Loss) from operations (3,344) 122 644
Other income
Interest income 273 1,025 1,290
INTEREST EXPENSE (1,156) (1,393) (1,990)
------ ------ -------
Total other income (883) $(368) $(700)
NET LOSS $(4,227) $(246) $(56)
======== ====== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 2,000,000 2,000,000 2,000,000
========== ========== =========
LOSS PER SHARE $(0.00) $(0.00) $(0.00)
======= ======= =======
</TABLE>
F - 98
<PAGE>
HERMES NET SOLUTIONS, INC.
A BRITISH COLUMBIA, CANADIAN CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the four
For the For the months ended June
year ended year ended 30,
February 28, February 28, 1999
1998 1999 UNAUDITED
---- ---- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $(4,227) $(246) $(56)
Depreciation and amortization 3,611 14,497 3,000
Deferred revenue 56,342 13,646 832
Write off of fixed asset 11,358
Currency translation 19,322 260 (827)
Changes in operating assets and liabilities
Accounts receivable (62,911) 14,440 (25,785)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 20,293 61,894 (14,825)
------ ------ --------
TOTAL CASH FLOWS FROM OPERATIONS 32,430 104,491 (26,303)
CASH FLOWS FROM FINANCING ACTIVITIES
OFFICERS LOANS 9,543 5,341 11,846
------ ------ ------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 9,543 5,341 11,846
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASES FIXED ASSETS (24,180) (41,741)
-
INCORPORATION COST (203)
----
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (24,383) (41,741)
NET INCREASE (DECREASE) IN CASH 17,590 68,091 (14,457)
CASH BALANCE BEGINNING OF PERIOD 11,580 29,170 97,261
------ ------ ------
CASH BALANCE END OF PERIOD $29,170 $97,261 $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 issue
20,000,000 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.
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
was $5,493, $16 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, 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. 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. LOANS PAYABLE-SHAREHOLDER
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.
F - 106
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On June 30, 1999, CyPost Corporation ("CyPost") and Intouch.Internet
Inc. ("Intouch") executed the Share Purchase Agreement that provides for the
acquisition of Intouch as a wholly owned subsidiary of CyPost. See "The Merger."
The following unaudited pro forma condensed combined financial statements are
based on the June 30, 1999 historical consolidated financial statements of
CyPost and the financial statements of Intouch contained elsewhere herein,
giving effect to the transaction under the purchase method of accounting, with
CyPost treated as the acquiring entity for financial reporting purposes. The
unaudited pro forma condensed combined balance sheet presenting the financial
position of the Surviving Corporation assumes the purchase occurred as of June
30, 1999. The unaudited pro forma condensed combined statement of operations
presents the results of operations of the Surviving Corporation, assuming the
merger was completed on January 1, 1998.
On November 9, 1999, CyPost Corporation ("CyPost") and Internet Arena
Inc. ("Arena") executed the Share Purchase Agreement that provides for the
acquisition of Arena as a wholly owned subsidiary of CyPost. See "The Merger."
The following unaudited pro forma condensed combined financial statements are
based on the June 30, 1999 historical consolidated financial statements of
CyPost and the financial statements of Arena contained elsewhere herein, giving
effect to the transaction under the purchase method of accounting, with CyPost
treated as the acquiring entity for financial reporting purposes. The unaudited
pro forma condensed combined balance sheet presenting the financial position of
the Surviving Corporation assumes the purchase occurred as of June 30, 1999. The
unaudited pro forma condensed combined statement of operations presents the
results of operations of the Surviving Corporation, assuming the merger was
completed on January 1, 1998.
On October 4, 1999, CyPost Corporation ("CyPost") and NetRover Inc. and
NetRover Office Inc. (combined "Netrover") executed the Share Purchase Agreement
that provides for the acquisition of Netrover as a wholly owned subsidiary of
CyPost. See "The Merger." The following unaudited pro forma condensed combined
financial statements are based on the June 30, 1999 historical consolidated
financial statements of CyPost and the financial statements of NetRover
contained elsewhere herein, giving effect to the transaction under the purchase
method of accounting, with CyPost treated as the acquiring entity for financial
reporting purposes. The unaudited pro forma condensed combined balance sheet
presenting the financial position of the Surviving Corporation assumes the
purchase occurred as of June 30, 1999. The unaudited pro forma condensed
combined statement of operations presents the results of operations of the
Surviving Corporation, assuming the merger was completed on January 1, 1998.
On September 17, 1999, CyPost Corporation ("CyPost") and Hermes Net
Solutions, Inc. ("Hermes") executed the Share Purchase Agreement that provides
for the acquisition of Hermes as a wholly owned subsidiary of CyPost. See "The
Merger." The following unaudited pro forma condensed combined financial
statements are based on the June 30, 1999 historical consolidated financial
statements of CyPost and the financial statements of Hermes contained elsewhere
herein, giving effect to the transaction under the purchase method of
accounting, with CyPost treated as the acquiring entity for financial reporting
purposes. The unaudited pro forma condensed combined
F - 107
<PAGE>
balance sheet presenting the financial position of the Surviving Corporation
assumes the purchase occurred as of June 30, 1999. The unaudited pro forma
condensed combined statement of operations presents the results of operations of
the Surviving Corporation, assuming the merger was completed on January 1, 1998.
On October 27, 1999, CyPost Corporation ("CyPost") and Connect
Northwest Internet Services, LLC ("Connect") executed the Share Purchase
Agreement that provides for the acquisition of Connect as a wholly owned
subsidiary of CyPost. See "The Merger." The following unaudited pro forma
condensed combined financial statements are based on the June 30, 1999
historical consolidated financial statements of CyPost and the financial
statements of Connect contained elsewhere herein, giving effect to the
transaction under the purchase method of accounting, with CyPost treated as the
acquiring entity for financial reporting purposes. The unaudited pro forma
condensed combined balance sheet presenting the financial position of the
Surviving Corporation assumes the purchase occurred as of June 30, 1999. The
unaudited pro forma condensed combined statement of operations presents the
results of operations of the Surviving Corporation, assuming the merger was
completed on January 1, 1998.
The unaudited pro forma condensed combined financial statements have
been prepared by management of CyPost, Intouch, Arena, Netrover, Hermes and
Connect based on the financial statements included elsewhere herein. The pro
forma adjustments include certain assumptions and preliminary estimates as
discussed in the accompanying notes and are subject to change. These pro forma
statements may not be indicative of the results that actually would have
occurred if the combination had been in effect on the dates indicated or which
may be obtained in the future. These pro forma financial statements should be
read in conjunction with the accompanying notes and the historical financial
information of both CyPost and Intouch (including the notes thereto) included in
this Form 10-SB General Form for Registration of Securities of Small Business
Issuers. See "FINANCIAL STATEMENTS."
F - 108
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma
CyPost Acquired Pro Forma Combined
Corporation Entities Adjustments Balance
----------- ----------- ----------- - -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets ................................ $ 998,717 $ 327,011 $(1,325,728) A $ --
Fixed Assets (net) ............................ 48,595 516,812 -- 565,407
Intangible and Other Assets ................... 6,652 78,350 5,495,000 A 5,580,002
----------- ----------- ----------- - -----------
Total Assets ............................. $ 1,053,964 $ 922,173 $ 4,169,272 $ 6,145,409
=========== =========== =========== = ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts Payable & Accrued Expenses ........... 250,320 337,352 (626) A 587,046
Long Term and Other Liabilities ............... 900,000 1,824,521 1,691,935 A 4,416,456
----------- ----------- ----------- - -----------
Total Liabilities ......................... 1,150,320 2,161,873 1,691,309 5,003,502
----------- ----------- ----------- - -----------
Stockholders' Equity:
Common Stock ................................ 10,230 296,731 478 B 307,439
(296,731) C (296,731)
Additional Paid in Capital .................. 922,450 -- 1,237,785 B 2,160,235
Retained Deficit and Currency Translation ... (1,029,036) (1,536,431) 1,536,431 C (1,029,036)
----------- ----------- ----------- - -----------
Total Stockholders' Equity (Deficit) ..... (96,356) (1,239,700) 2,477,963 1,141,907
----------- ----------- ----------- - -----------
Total Liabilities and Stockholders' Equity $ 1,053,964 $ 922,173 $ 4,169,272 $ 6,145,409
=========== =========== =========== = ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F - 109
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Pro Forma
CyPost Acquired Pro Forma Combined
Corporation Entities Adjustments Balance
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Sales .......................... $ -- $ 3,328,681 $ -- $ 3,328,681
Cost of Sales .................. -- 1,735,996 -- 1,735,996
------------ ------------ ------------ ------------
Gross Margin .............. -- 1,652,685 1,652,685
Expenses:
Operating Expenses ............. -- (1,618,095) -- (1,618,095)
Other Income (Expense), Net .... -- (185,039) -- (185,039)
------------ ------------ ------------ ------------
Net Loss .......................... $ -- $ (220,449) $ -- $ (220,449)
============ ============ ============ ============
Loss per share .................... $ -- $ (0.46) $ -- $ (0.02)
============ ============ ============ ============
Weighted average shares outstanding 10,230,000 478,000 -- 10,708,000
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F - 110
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
(1) GENERAL
In the acquisition, the acquired entities will become a wholly owned subsidiary
of CyPost. The aggregate purchase price was approximately $5,521,000 payable by
cash of approximately $3,705,000, the payment of certain liabilities and the
issuance of approximately 478,000 shares of CyPost common stock. CyPost has not
yet performed a detailed evaluation and appraisal of the fair market value of
the net assets sold in order to allocate the purchase price among the assets
sold. For purposes of preparing these pro forma financial statements, certain
assumptions as set forth in the notes to the pro forma adjustments have been
made in allocating the sales price to the net assets sold. As such, the pro
forma adjustments discussed below are subject to change based on final
appraisals and determination of the fair market value of the assets and
liabilities of Intouch.
(2) FISCAL YEAR ENDS
The unaudited pro forma condensed combined statements of operations
include CyPost's, Intouch's, Arena's, Netrover's, Hermes, and Connect's
operations from their respective most recent fiscal year.
(3) PRO FORMA ADJUSTMENTS
The adjustments to the accompanying unaudited pro forma condensed
combined balance sheet are described below:
(A) Record payment of cash for the purchase of assets and payment
of liabilities.
(B) Adjustment to reflect issuance of approximately 478,000 shares
of common stock.
(C) Eliminate intercompany investment.
The adjustments to the accompanying unaudited pro forma condensed
combined statements of operations are described below:
There are no anticipated adjustments to the statements of operations as
a result of the merger.
F - 111
THIS AGREEMENT dated for reference the 30th day of June, 1999,
BETWEEN:
COYOTENET INC., a company incorporated under th Canada
Business Corporations Act and having an office at 8271 Laurel
Street, Vancouver, British Columbia V6P 3V2
(the "Vendor")
AND:
CyPOST CORPORATION, a company incorporated unde the laws of
Delaware, USA and having an office at Suite 101-260 West
Esplanade, North Vancouver, British Columbia V7M 3G7
(the "Purchaser")
OF THE SECOND PART WITNESSES THAT WHEREAS:
A. The Vendor is the legal and beneficial owner of the Vendor's Shares;
B. The Vendor has agreed to sell and assign to the Purchaser, and the
Purchaser has agreed to purchase from the Vendor, the Vendor's Shares.
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties hereto covenant and agree each with the
other as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement:
(a) "Assets" means the assets described in the balance sheet set forth
in the Financial Statements (except those disposed of since the date
of the Financial Statements in the ordinary course of business) and
the assets described in the June 30 Statements, including the
personal property, choses in action, intangible or intellectual
property listed in Schedule "A";
(b) "Asset Transfer Agreement" means an agreement between the Vendor and
the Company in the form of agreement attached hereto as Schedule
"O";
(c) "Balance" has the meaning given to it in paragraph 2.2(b);
(d) "Business" means the internet service provider business carried on
by the Company;
<PAGE>
(a) "Closing" means the completion of the purchase and sale of the
Vendor's Shares on the Closing Date;
(b) "Closing Date" means the 30th day of June, 1999 or such other
date as the parties may agree to in writing;
(c) "Closing Receivables" has the meaning given to it in Section
2.4;
(d) "Company" means Intouch.Internet Inc., a British Columbia
company (incorporation no. 509721) having its registered
office at 3448 Cambie Street, Vancouver, British Columbia, V5Z
2W8;
(e) "Computer Hardware" means the computer hardware equipment
listed in Schedule AB";
(f) "Consents" means the consents, waivers and approvals set forth
in Schedule "C";
(g) "Customer List" means the list of approximately 200
subscribers which were formerly covered under the Maximum
Internet business (943 Sand Ltd.) attached hereto as Schedule
"D" and all goodwill related thereto which shall be
transferred to the Company by the Vendor prior to Closing in
accordance with the provisions of Section 5.5;
(h) "Deficit" means the aggregate of amounts payable to officers,
directors, shareholders, related parties and other creditors
of the Company as set forth in the June 30th Statements
(excluding the unearned income of approximately $69,000.00
representing the prepaid revenues from prepaid internet
subscribers and including the software license deficiencies of
approximately $7,189.75 plus taxes listed in Schedule N
attached hereto, which amounts will be shown as liabilities on
the June 30 Statements);
(i) "Escrow Agreement" means an agreement in the form of agreement
attached hereto as Schedule "E";
(j) "Financial Statements" means the unaudited financial
statements for the Company for the year ended January 31, 1999
prepared by Hay & Watson, Chartered Accountants, and the
unaudited balance sheet for the Company as at May 31, 1999,
which were prepared by the Company internally, all of which
are attached hereto as Schedule "F";
"Indebtedness" means any and all advances, debts, duties,
endorsements, guarantees, liabilities, obligations,
responsibilities and undertakings of a Party assumed, created,
incurred or made whether voluntary or involuntary, however
arising, whether due or not due, absolute, inchoate or
contingent, liquidated or unliquidated, determined or
undetermined, direct or indirect, express or implied, and
whether such Party may be liable individually or jointly with
others;
(k) "Intellectual Property" means all of the intellectual property
(including computer software), proprietary computer hardware
and firmware, patents, trade marks, trade secrets, inventions,
designs, customer lists, trade names, copyrights and other
intellectual property rights whether registered or not, both
domestic and foreign owned by the Company or in which the
Company has an interest including the items described in
Schedule "G";
(l) "Interim Period" means the period from and including the date
of this
<PAGE>
Agreement to and including the Closing Date;
(m) "June 30 Statements" means the unaudited financial statments
of the Company as at June 30, 1999 to be prepared by Hay &
Watson, Chartered Accountants as provided in Section 2.4;
(n) "Licensed Technology" has the meaning given to it in
Subsection 4.1(ccc);
(o) "Licences" means the licences and permits required for the
operation of the Business by the Company all of which are
described in Schedule "H";
(p) "Lien" means any mortgage, debenture, charge, hypothecation,
pledge, lien, leasehold interest or other security interest or
encumbrance of whatever kind or nature, regardless of form and
whether consensual or arising by laws, statutory or otherwise
that secures the payment of any Indebtedness or the
performance of any obligation or creates in favour of or
grants to any Party a proprietary right;
(q) "Material Adverse Effect" means a materially adverse effect on
the financial condition, results of operations, business or
prospects of the Company or on the rights and interest of the
Purchaser under this Agreement;
(r) "Material Contracts" means all contracts to which the Company
is a party which are material to the business and operations
of the Company, including all contracts which:
(i) are out of the ordinary course of business of the
Company;
(ii) involve expenditures by the Company in excess of
$5,000 in total;
(iii) are longer than one year in duration;
(iv) are concerned in any way with real property or
with Intellectual Property; (v) are concerne with
employment, profit- sharing, pensions and like
matters; or (vi) cannot be terminated on less than
one month's notice,
including the contracts described in Schedule "I".
(s) "Non-Competition Agreement" means an agreement in
the form of the agreement attached hereto as
Schedule "J";
(b) "Owned Technology" has the meaning given to it in Subsection
4.1(vv);
(c) "Party" means an individual, corporation, body corporate,
partnership, joint venture, society, association, trust or
unincorporated organization or any trustee, executor, administrator,
or other legal representative;
(d) "Premises" has the meaning given to it in Subsection 4.1(ggg)
(e) "Purchase Price" means the sum of $447,000.00 less the Deficit;
(f) "Purchaser's Solicitors" means Alexander, Holburn, Beaudin & Lang,
Barristers & Solicitors, 2700-700 West Georgia Street, Vancouver
B.C. V7Y 1B8;
<PAGE>
(g) "Statement Date" means May 31, 1999;
(h) "Vendor's Shares" means the issued and outstanding shares in the
capital of the Company owned by the Vendor described in Schedule K";
and
(i) "Vendor's Solicitors" means Ballem MacInnes, 1800 First Canadian
Centre, 350 7th Avenue S.W., Calgary, Alberta T2P 3N9.
1.2 In this Agreement, except as otherwise expressly provided:
(a) "Agreement" means this agreement, including the preamble and
the Schedules hereto, as it may from time to time be
supplemented or amended and in effect;
(b) all references in this Agreement to a designated "Article",
"Section", "subsection" or other subdivision or to a Schedule
is to the designated Article, Section, subsection or other
subdivision of, or Schedule to, this Agreement;
(j) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Article, Section, subsection or other subdivision or
Schedule;
(k) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define or limit the
scope, extent or intent of this Agreement or any provision hereof;
(l) the singular of any term includes the plural, and vice versa, the
use of any term is equall applicable to any gender and, where
applicable, a body corporate, the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto);
(m) any accounting term not otherwise defined has the meanings assigned
to it in accordance with generally accepted accounting principles
applicable in Canada;
(n) any reference to a statute includes and is a reference t that
statute and to the regulation made pursuant thereto, with all
amendments made thereto and i force from time to time, and to any
statute or regulations that may be passed which has the effect of
supplementing or superseding that statute or regulations;
(o) except as otherwise provided, any dollar amount referred to in this
Agreement is in Canadian Funds; and
(p) any other term defined within the text of this Agreement ha the
meanings so ascribed.
1.3 The following are the Schedules to this Agreement:
SCHEDULE DESCRIPTION
A Assets
<PAGE>
B Computer Hardware
C Consents
D Customer List
E Escrow Agreement
F Financial Statements
G Intellectual Property
H Licences
I Material Contracts
J Non-Competition Agreement
K Authorized and issued capital of the Company
L Directors and Officers of the Company
M Insurance
N Licensed Technology
O Asset Transfer Agreement
2. PURCHASE AND SALE
1.1 On the basis of the warranties, representations and covenants of the
Vendor herein set forth and subject to the fulfilment of any condition herein
provided that has not been waived by the party entitled to the benefit thereof
the Purchaser will purchase and the Vendor will sell to the Purchaser the
Vendor's Shares on the Closing Date on the terms and conditions herein set
forth.
2.2 The Purchase Price shall be paid by the Purchaser as follows:
(a) the sum of $153,500 by certified cheque or solicitor's trust cheque
on the Closing Date;
(b) the sum of $293,500 less an amount equal to the sum of the Deficit
(excluding the unearned income of approximately $69,000 representing
the prepaid revenues from prepaid internet subscribers, which
amounts will be shown as liabilities on the June 30 Statements) and
the then uncollected Closing Receivables (the result of which is
hereinafter called the "Balance") on the 42nd day next following the
Closing Date subject to Section 2.5:
(i) by the Purchaser issuing that number o its common shares as is equal
to the number obtained by dividing the Balance (up to but not
exceeding $42,000) by the trading price of such shares of the
Purchaser converted to Canadian funds on the NASD OTC Bulletin Board
at the close of the market on May 24, 1999;
(ii) the remainder of the Balance, if any, by certified cheque or
solicitor's trust cheque;
2.3 On the Closing Date the Purchaser shall provide funds to the Vendor's
Counsel in trust who shall on July 5, 1999 pay the following amounts,
which amounts shall be included in the determination of the Deficit:
(a) the sum of $13,646.65 which was advanced by loa to the Company by
Glen D.E. Ninow by paying for and on behalf of Glenn D.E. Ninow his
indebtedness to the Royal Bank of Canada directly to such bank to
satisfy the outstanding balance of the Royal Bank Line of Credit
Small Business Visa, account number 4516 0480 9189 7023 in the name
of Glenn D.E. Ninow;
<PAGE>
(b) the sum of $17,816.14 which was advanced by loa to the Company by
Glen Ninow and Susan Ninow by paying for and on behalf of Glenn
Ninow and Susan Ninow their indebtedness to the Royal Bank of Canada
directly to such bank as full payment of the outstanding balance of
the CIBC Line of Credit, account number 02800-13-77639 in the name
of Glenn Ninow and Susan Ninow; and
(c) the sum of $69,000.00 as full payment of the Company's additional
indebtedness to Glenn Ninow and Susan Ninow, directly to Glenn Ninow
and Susan Ninow.
2.4 The Vendor and the Purchasers shall jointly, within 42 days of the Closing,
cause Hay & Watson, Chartered Accountants, to prepare in accordance with
generally accepted accounting principles consistent with prior years and at the
expense of the Company, financial statements (the "June 30 Statements") for the
Company for the period ending June 30, 1999, including a balance sheet as at
June 30, 1999. The June 30 Statements shall include by way of separate note a
statement of the Deficit and a statement of the trade accounts receivable (the
"Closing Receivables") of the Company as at June 30, 1999. If the Vendor and the
Purchaser cannot agree on the June 30 Statements, the Vendor and the Purchaser
shall negotiate in good faith to settle the issue and failing resolution by such
good faith efforts, it shall be settled by a single arbitrator, who shall be a
Chartered Accountant, pursuant to the Commercial Arbitration Act of British
Columbia.
2.5 If the June 30 Statements are not settled by the 42nd day next following the
Closing Date, payment the date of the Balance shall be extended to the day next
following the date of settlement of the June 30 Statement pursuant to Section
2.4.
2.6 The Purchaser agrees to pay 50% of the third party sales commission,
established as 6.5% of the Purchase Price and payable to Matfam Holdings Ltd. up
to but not exceeding $15,000.00 plus GST.
2. CLOSING
3.1 The Closing shall take place at 1:00 p.m. local time, on the Closing Date at
the offices of the Purchaser's Solicitors at 2700-700 W. Georgia Street, British
Columbia, or at such other place, date and time as may be mutually agreed upon
by the parties hereto.
4.0 VENDOR'S WARRANTIES AND REPRESENTATIONS
4.1 The Vendor warrants and represents to, and covenants with, the Purchaser,
with the intent that the Purchaser will rely thereon in entering into this
Agreement and in concluding the purchase and sale contemplated herein, that:
(a) the authorized and issued capital of the Compan is as described in
Schedule "K" and the Vendor's Shares are validly issued and
outstanding as fully paid and non-assessable;
(b) the Vendor is the registered holder and beneficial owner of the
Vendor's Shares set in Schedule "K", free and clear of all Liens and
the Vendor has no interest, legal or beneficial, direct or indirect,
in any shares of, or the assets or business of, the Company other
than as set out in Schedule "K" or by virtue of the Vendor's Shares;
(c) neither the Vendor nor any officer, director or employee of the
Company is indebted to the Company;
(d) no Party has any agreement, right or option, consensual or arising
by law, present or future, contingent or absolute, or capable of
becoming an agreement, right or option;
<PAGE>
(i) to require the Company to issue any further or other shares in
its capital or any other security convertible or exchangeable
into shares in its capital or to convert or exchange any
securities into or for shares in the capital of the Company;
(ii) for the issue or allotment of any of the authorized but
unissued shares in the capital of the Company;
(iii) to require the Company to purchase, redeem or otherwise
acquire any of the issued and outstanding shares in the
capital of the Company; or
(iv) to purchase or otherwise acquire any shares in the capital of
the Company;
(e) there are no shareholders' agreements, pooling agreements, voting
trusts or other similar agreements with respect to the ownership or
voting of the shares of the Company;
(f) the Vendor has the power and capacity and good and sufficient right
and authority to enter into this Agreement on the terms and
conditions herein set forth and to transfer the legal and beneficial
title and ownership of the Vendor's Shares, as described herein, to
the Purchaser;
(g) the Vendor is not a non-resident of Canada within the meaning of
Section 116 of the Income Tax Act (Canada);
(h) the Company is duly incorporated, validly existing and in good
standing under the laws of British Columbia and is and always has
been since its date of incorporation a "private issuer" as that term
is defined in the Securities Act (B.C.);
(i) the directors and officers of the Company are as described in
Schedule "L";
(j) there have been no alterations to the Memorandu and Articles of the
Company other than as are filed with the Registrar of Companies for
British Columbia;
(k) the Company is now and has been since its date of incorporation a
"Canadian controlled private corporation" within the meaning of the
Income Tax Act (Canada);
(l) the Company had the power, authority and capacity to carry on the
Business;
(m) the Company has the power, authority and capacity to own and use all
of the Assets;
(n) on the Closing Date the Company will own and possesses and have good
and marketable title to and possession of all the Assets free and
clear of all Liens;
(o) on the Closing Date the Company will not own or possess any asset
other than the Assets and will not have any interest in the assets
or business of any other Party;
(p) the Licences described in Schedule "H" are held by the Company and
are the only licences and permits required for the conduct in the
ordinary course of the Business. The Company is in compliance with
all laws, zoning and other bylaws, building and other restrictions,
rules, regulations and ordinances applicable to the Company, the
Business or the Assets;
<PAGE>
(q) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof does not and will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions or provisions of the Memorandum or Articles
of the Company;
(ii) conflict with or result in a breach of or violate any of the
terms, conditions or provisions of any law, judgment, order,
injunction, decree, resolution or ruling of any court of
governmental authority, domestic or foreign, to which the
Company or the Vendor are subject or constitute or result in a
default under any agreement, contract or commitment to which
the Company or the Vendor are a party;
(iii) subject to obtaining the Consents, giv to any Party any
remedy, cause of action, right of termination, cancellation or
acceleration in or with respect to any agreement, contract, or
commitment to which the Company is party including the
Material Contracts;
(iv) give to any government or governmental authority of Canada or
any Province of Canada or any regional district, district or
municipality or any subdivision thereof, including any
governmental department, commission, bureau, board or
administrative agency any right of termination, cancellation,
or suspension of, or constitute a breach of or result in a
default under any permit, license, control, or authority
issued to the Company and which is necessary or desirable in
connection with the ownership, or use of the Assets; or
(v) subject to obtaining the Consents, constitute a default by the
Company or an event which, with the given of notice or lapse
of time or both, might constitute an event of default or
non-observance under any agreement, contract, indenture or
other instrument relating to any Indebtedness of the company
which would give any Party the right to accelerate the
maturity for the payment of any amount payable under that
agreement, contract, indenture, or other instrument including
the Material Contracts;
(r) the Financial Statements were prepared in accordance with generally
accepted accounting principles applied on a basis consistent with
prior years, and are true and correct in every material respect and
present fairly the financial condition and position of the Company
respectively as at the date thereof and the results of the Company's
operations for the period then ended;
(s) there is no Indebtedness of the Company of any kind whatsoever, and
there is no basis for assertion against the Company of any
Indebtedness of any kind, other than:
(i) liabilities disclosed or reflected in or provided for in the
Financial Statements;
(ii) liabilities incurred by the Company since the Statement Date
which were incurred in the ordinary course of the routine
daily affairs of the Company; and
(iii) other liabilities disclosed in this Agreement or in the
Schedules attached hereto, and all of such indebtedness shall
be described in the June 30, 1999 Statements;
<PAGE>
(t) the Company has been assessed for federal and provincial income tax
for all years to and including the fiscal year of the Company ended
January 31, 1999 and the Company has withheld and remitted to
Revenue Canada or other applicable tax collecting authority all
amounts required to be remitted to Revenue Canada or other tax
collecting authority respecting payments to employees or to
non-residents, or otherwise and have or will have paid all corporate
income or other taxes due and payable on or before the Closing Date;
(u) all tax returns and reports of the Company required by law to be
filed prior to the date hereof including all federal and provincial
income tax returns, Workers' Compensation Board returns, GST returns
under the Excise Tax Act (Canada), and corporation capital tax
returns have been filed and are true, complete and correct, and all
taxes and other government charges including all income, excise,
sales, business and property taxes and other rates, charges,
assessment, levies, duties, taxes, contributions, fees and licenses
required to be paid have been paid, and if not required to be paid
as at the date hereof, have been accrued in the Financial
Statements;
(v) adequate provision has been made for taxes payable by the Company
for which tax returns are not yet required to be filed and there are
no agreements, waivers or other arrangements providing for an
extension of time with respect to the filing of any tax return by or
payment of any tax, governmental charge or deficiency by the
Company, and to the knowledge of the Vendor, the Company and its
officers, directors or employees, there are no contingent tax
liabilities or any grounds which would prompt a re-assessment,
including aggressive treatment of income and expenses in filing
earlier tax returns;
(w) the Company has made all elections required to be made under the
Income Tax Act (Canada) or other tax legislation in connection with
any distributions by the Company and all such elections were true
and correct and in the prescribed forms and were made within the
prescribed time periods;
(x) the Company is a "GST registrant" for the purpose of the Excise Tax
Act (Canada), and its GST registration No. is 891462855 RT0001;
(y) the Company's income tax registration No. is 891462855;
(z) the Company has not prior to the date hereof:
(i) made any election under Section 85 of the Income Tax Act
(Canada) with respect to the acquisition or disposition of any
property;
(ii) made any election under Section 83 or 196 of the Income Tax
Act (Canada) with respect to payment out of the capital
dividend accounts or life insurance capital dividend accounts
of the Company;
(iii) acquired or had the use of any propert from a Party with whom
the Company was not dealing at arm's length save and except
for the assets as described in the Asset Transfer Agreement
dated June 30, 1999 attached hereto as Schedule "O";
(iv) disposed of anything to a Party with whom the Company was not
dealing at arm's length for proceeds less than or greater than
the fair market value thereof; or
(v) discontinued carrying on any business in respect of which
non-capital losses were incurred;
(aa) the corporate records and minute books of the Company contain
complete and
<PAGE>
accurate minutes of all meetings of the directors and
shareholders of the Company held since its date of
incorporation, and original signed copies of all resolutions
and by-laws duly passed or confirmed by the directors or
shareholders of the Company other than at a meeting. All such
meetings were duly called and held. The share certificate
books, register of security holders, register of transfers and
register of directors and any similar corporate records of the
Company are complete and accurate;
(bb) all material financial transactions of the Company have been
recorded in the financial books and records of the Company in
accordance with good business practice, and such financial
books and records:
(cc) no information, records or systems pertaining t the operation
or administration of the Business are in the possession of,
recorded, stored, maintained by or otherwise dependent upon
any other person;
(dd) the Company has not experienced nor, to the knowledge of the
Vendor, has there been any occurrence or event which has had,
or might reasonably be expected to have, a Material Adverse
Effect;
(ee) as of the Closing Date the Company will not be party to any
written or oral employment, service or consulting agreement
relating to any one or more Parties;
(ff) the Company is not subject to any collective or other
agreement with any labour union or employee association and
has not made any commitment to or conducted negotiations with
any labour union or employee association with respect to any
future agreement and, to the best of the knowledge of the
Vendor, during the period of five years preceding the date of
this Agreement there has been no attempt to organize, certify
or establish any labour union or employee association in
relation to any of the employees of the Company;
(gg) the Company as at the Closing Date will not hav any employees
and on the Closing Date the full amounts of salaries, bonuses,
commissions and other remuneration of any nature, including
accrued vacation pay, severance pay (if any) and unpaid earned
wages of the former officers, directors, employees, salesmen,
consultants and agents of the Company, will have been paid;
(hh) there are no existing or, to the best of the knowledge of the
Vendor, threatened, labour disputes, grievances, controversies
or other labour troubles affecting the Company or the
Business;
(ii) the Company has complied with all laws, rules, regulations and
orders applicable to them relating to employment, including
those relating to wages, hours, collective bargaining,
occupational health and safety, workers' hazardous materials,
employment standards, pay equity and workers' compensation.
There are no outstanding charges or complaints against the
Company relating to unfair labour practices, harassment or
discrimination or under any legislation relating to employees.
The Company has paid in full all amounts owing under the
Workers' Compensation Act (B.C.) or comparable provincial
legislation, and the workers' compensation claims experience
of the Company would not permit a penalty reassessment under
such legislation;
(jj) there are no pension, profit sharing, incentive bonus, group
insurance or similar plans or other compensation plans
affecting the Company and the Company has no unfunded or
unpaid liability in respect of any such plan;
(kk) the Company has no material contract, agreement undertaking or
arrangement, whether oral, written or implied, other than the
Material Contracts;
<PAGE>
(ll) Schedule "M" attached hereto contains a true an complete list
of all insurance policies maintained by the Company or under
which the Company is covered in respect of its properties,
assets, business or personnel as of the date hereof. Complete
and correct copies of all such insurance policies have been
provided to the Purchaser. Such insurance policies are in full
force and effect and the Company is not in default with
respect to the payment of any premium or compliance with any
of the provisions contained in any such insurance policy.
There are no circumstances under which the Company would be
required to, or in order to maintain their coverage should,
give any notice to its insurers under any such insurance
policies which has not been given. The Company has not
received notice from any of its insurers regarding
cancellation of such insurance policies. The Company has not
failed to present any claim under any such insurance policy in
due and timely fashion. The Company has not received notice
from any of the insurers denying any claims;
(mm) there is no basis for and there are no actions, suits,
judgments, investigations or proceedings outstanding or
pending or to the knowledge of the Vendor threatened against
or affecting the Company at law or in equity or before or by
any court or federal, provincial, state, municipal or other
governmental authority, department, commission, board,
tribunal, bureau or agency and the Company is not a party to
or threatened with any litigation;
(nn) neither the Company nor the Vendor have any knowledge of any
misleading or similar names to the Company's name in use in
any area where the Business has been conducted, or of any
infringement by the Company of any patent, trademark, trade or
brand name or copyright, whether registered or unregistered;
(oo) the Company:
(i) is not in breach of any of the terms, covenants
conditions, or provisions of, are not in default under,
and has not done or omitted to do anything which, with
the giving of notice or lapse of time or both, would
constitute a breach of or a default under any Material
Contract or Licence;
(ii) is not in violation of nor is any present use b the
Company of any Assets in violation of or contravention
of any applicable law, statute, order, rule or
regulation of Canada or any Province of Canada or any
regional district, district or municipality or any
subdivision thereof; or
(iii) is not in breach or default under any judgment,
injunction or other order or aware of any judicial,
administration, governmental, or other authority or
arbitrator by which the Company is bound or to which the
Company or any Asset are subject, and the Company has
not received notice that an default, breach, or
violation is being alleged;
(pp) the Company has not guaranteed, or agreed to guarantee, any
Indebtedness or other obligation of any Party;
(qq) reasonable wear and tear excepted, the Assets are in
reasonable working order and in a functional state of repair
and to the knowledge of the Vendor, there are no latent
defects;
(rr) since the Statement Date in the case of the Company:
<PAGE>
(i) no dividends of any kind or other distribution on any
shares of the Company has been declared or paid by the
Company;
(ii) no capital expenditure or commitment therefor has been
made by the Company in the aggregate in excess of
$2,000.00;
(iii) there has been no material adverse change in th
financial condition or position of the Company and there
has been no damage, loss or destruction materially
affecting the Assets;
(ss) all right, title and interest in and to the Intellectual
Property is vested in the Company free and clear of all Liens;
(tt) the Company does not infringe upon any other Party's right
relating to, or unlawfully or wrongfully use, nor has the
Company received any notice of any claim of infringement or
any other claim or proceeding relating to, any of the
Intellectual Property;
(uu) no person has infringed or breached or is infringing or
breaching any rights of the Company to the Intellectual
Property. Except as disclosed elsewhere in this Agreement, the
Company is not party to any confidentiality or non- disclosure
agreements relating to the Intellectual Property. The Company
has taken all reasonable steps (including, where appropriate,
entering into confidentiality, non-disclosure and
non-competition agreements, copies of which have been
delivered to the Purchaser's solicitors, with all third
parties, including licensees, subcontractors and other
entities, who have knowledge of the products and services of
the Company or who transact business with the Company) to
safeguard and maintain the secrecy and confidentiality of and
the proprietary rights of the Company in all of the
Intellectual Property;
(vv) the information technology (including computer software) owned
by the Company included in the Intellectual Property (the
"Owned Technology") substantially performs in accordance with
the documentation or other written material delivered to
customers in connection with the Owned Technology;
(ww) the Owned Technology and any client enhancement which comprise
the software programs which are licensed to customers of the
Company meet the specifications of any such clients as
contained or referred to in the software licence or other
agreement between the Company and such clients. With regard to
each licence made to a customer of the Company of the Owned
Technology, no representation, warranty or condition, written
or oral, has been made by the Company as to its quality or
fitness for any particular purpose or the accuracy thereof;
(xx) no employee of the Company is in default under any term of any
employment contract or non-competition arrangement with the
Company, or any other contract or any restrictive covenant of
a similar nature between the Company and the employees
relating in any way to the Owned Technology. The Owned
Technology was developed by either independent contractors
hired by the Company or by employees of the Company during the
time they were employees of the Company and all such
independent contracts and employees have waived their
respective "moral rights" of authors as that term is commonly
understood, to the full extent permitted by applicable law.
Owned Technology developed by the Company's employees does not
include any inventions of the employees made prior to the time
such employees became employees of the Company nor any
intellectual property of any previous employer of such
employee and the Company is and always has been considered for
all purposes the owner of all rights in the Owned Technology,
including copyright;
<PAGE>
(yy) the Company does not have any obligation to compensate any
Party for the development, use, sale or exploitation of the
Owned Technology nor has the Company granted any other person
or entity any license, option or other rights to develop, use,
sell or exploit in any manner the Owned Technology, whether
requiring the payment of royalties or not;
(zz) the Company maintains the security of the sourc codes for, and
other information about, the Owned Technology in such a manner
as to protect the Company's proprietary trade secret rights.
The source codes for the Owned Technology is afforded limited
access by authorized personnel only. In addition, a copy of
each source code is kept off-site for security. No customer
has possession of, access to, or the right to use the source
codes for any of the Owned Technology;
(aaa) there have been no patents applied for and no copyright
registrations made by the Company for any of the Owned
Technology. None of the Owned Technology has been included in
a published patent specification, or has, to the best of the
knowledge of the Vendor, fallen into the public domain, or
been published by the Company.
(bbb) the Owned Technology and the Licensed Technology, is to the
best of the Vendor's knowledge and to their best efforts
"Substantially Millennium Compliant". In this Subsection
"Substantially Millennium Compliant" is the quality of a
system to provide all of the following functions:
(a) handle date information before, during and after January
1, 2000, including but not limited to accepting date
input, providing date output, and performing
calculations on dates or portions of dates;
(b) function accurately and without interruption before,
during, and after January 1, 2000, without any change in
operations or degradation associated with the advent of
the new century, provided that:
(i) all information imported from other data sources
includes complete dates only;
(ii) linked tables and other share data sources include
complete dates only;
(iii) hardware that fails to correctly switch or change
dates is not used; and
(iv) no other source of date inconsistency is entered
in the Owned Technology or the Licensed
Technology;
(c) respond to two-digit year-date input i a way that
resolves the ambiguity as to century in a disclosed,
defined, and predetermined manner; and
(d) store and provide output of date information in ways
that are unambiguous as to century; and the Owned
Technology does not to the best of th Vendor's knowledge
contain any wilfully introduced undisclosed features or
programming devices (e.g., viruses, key locks, drop-dead
devices, etc.) which would disrupt the use of the Owned
Technology, or modify, delete, destroy or damage data or
make data inaccessible;
(ccc) Schedule "N" sets forth a complete description of intellectual
property which
<PAGE>
is licensed by the Company from third Parties for use by the
Company and used in whole or in part in or required for the
proper carrying on of the Business (the "Licensed
Technology"). The Licensed Technology is in machine-readable
form, contains current revisions of such technology as
delivered to the Company by the licensor thereof and includes
all object codes, computer programs, magnetic media and
documentation related to such technology which is used or
required by the Company for use in its business. Copies of the
source codes to the Licensed Software are in escrow for the
benefit of the Company in the event of the occurrence of
certain triggering events. None of the licensing agreements
described in Schedule "N" will be adversely affected by a
change of ownership of shares in the capital of the Company or
requires prior approval of any transfer or assignment to
remain in force or effect;
(ddd) the Company's development, use, sale or exploitation of the
Licensed Technology complies in all material respects with the
licensing agreements by which the Company is afforded use of
the Licensed Technology;
(eee) the Intellectual Property together with the Licensed
Technology constitutes all of the intellectual property which
is used or proposed to be used in the Business;
(fff) the Company is not the lessee under any lease o any personal
property;
(ggg) the Company is leasing its office premise located at 3448
Cambie Street, Vancouver, B.C. (the "Premises") under a
written lease dated November 19, 1995 as renewed and modified
by a Lease Renewal and Modification Agreement dated September
4, 1998 and as assigned to the Company from 469506 B.C. Ltd.
with the consent of the landlord in an Assignment and
Assumption of Lease Agreement dated February 17, 1999 for a
term ending on December 31, 2001 which lease is in good
standing in every respect; the transfer of the Vendor's Shares
to the Purchaser will not cause any default thereunder or
otherwise entitle the landlord thereunder to terminate or
cancel such lease; a copy of such lease has been delivered to
the Purchaser; and the Premises and the use and occupation
thereof by the Company are not in violation of and have not
been in violation of any applicable laws, regulations or
orders of any governmental authority relating to environmental
matters;
(hhh) the Company does not have any subsidiaries or own any
securities issued by, or any equity or ownership interest in,
any other Party. The Company is not subject to any obligation
to make any investment in or to provide funds by way of loan,
capital contribution or otherwise to any Party; and
(iii) the Company is not a partner or participant in any
partnership, joint venture, profit-sharing arrangement or
other association of any kind and is not party to any
agreement under which the Company agrees to carry on any part
of the Business or any other activity in such manner or by
which the Company agrees to share any revenue or profit with
any other Party.
5.0 COVENANTS
5.1 During the Interim Period, the Vendor will provide and will cause the
Company to provide access to, and will permit the Purchaser, through its
representatives, to make such investigation of the operations, properties,
assets and records of the Company and of its financial and legal condition as
the Purchaser deems necessary or advisable to familiarize itself with such
operations, properties, assets, records and other matters. Without limiting the
generality of the foregoing, during the Interim Period the Vendor will sign such
consents as may be requested by the Purchaser in order for the Purchaser to
conduct due diligence searches at the relevant regulatory or statutory offices
and will permit the Purchaser and its representatives to have access to the
premises leased by the
<PAGE>
Company and to the Assets and will produce for inspection and provide copies to
the Purchaser of:
(a) all agreements and other documents referred to in Article 5.0 hereof
or in any of the schedules attached hereto and all other contracts,
leases, licenses, title documents, title opinions, insurance
policies, pension plans, information relating to employees of the
Company, customer lists, information relating to customers and
suppliers of the Company, documents relating to all indebtedness and
credit facilities of the Company, documents relating to legal or
administrative proceedings and all other documents of or in the
possession of the Company or relating to the Business;
(b) all minute books, share certificate books, registers of security
holders, registers of transfers of securities, registers of
directors and other corporate documents of the Company;
(c) all books, journals records, accounts, tax returns and financial
statements of the Company; and
(d) all other information which, in the reasonable opinion of the
Purchaser's representatives, is required in order to make an
examination of the Company and the Business.
Such investigations and inspections shall not mitigate or affect the
representations and warranties of the Vendor hereunder, which shall continue in
full force and effect.
5.2 The Vendor will:
(a) do all reasonable acts and things to assist the Purchaser and the
officers and directors of the Company in continuing and furthering
the business and goodwill of the Company;
(b) both before and after the Closing Date, use all commercially
reasonable efforts to assist the Purchaser in obtaining the
Consents;
(c) from the date of this Agreement to the Closing Date, cause the
Company to:
(i) carry on its business in the ordinary and normal course in a
prudent, businesslike, and efficient manner and substantially
in accordance with the procedures and practices in effect on
the Statement Date;
(ii) maintain insurance on its assets as they are insured on the
date hereof;
(iii) use its best efforts to preserve and maintain the goodwill of
its business;
(iv) do all necessary repairs and maintenance to its assets and
take reasonable care to protect and safeguard those assets;
and
(d) pay all wages and salaries and all amounts due in lieu of holiday
pay to and including the Closing Date to all of the employees of the
Company and shall terminate the employment of all the employees of
the Company as of the day before the Closing Date and shall satisfy
all severance, vacation, benefits and other obligations (if any),
statutory and under the common law relating to such employees as a
result of such termination of employment.
5.3 From the date of this Agreement to the Closing Date, the Vendor will not,
and will not permit the Company to, without the prior consent in writing of the
Purchaser:
<PAGE>
(a) purchase or sell, consume or otherwise dispose of any of its
assets in connection with its business except in the ordinary
course of its business;
(b) enter into any contract or assume or incur any liability
except in the ordinary course of its business;
(c) make any capital expenditures or commitment therefor;
(d) settle any accounts receivable of a material nature at less
than face value net of the reserve for that account;
(e) waive or surrender any material right;
(f) discharge, satisfy or pay any Lien, obligation or liability
other than current liabilities in the ordinary course of
business;
(g) issue any shares in its capital;
(h) as for the Vendor, it will not lend any more money or extend
credit to the Company;
(i) pay or declare any dividends or make any distributions; or
(j) alter the Memorandum or Articles of the Company
5.4 On the Closing Date, the Vendor shall deliver to the Purchaser each of the
documents required to be delivered pursuant to Article 10.
5.5 The Vendor shall cause the Company to transfer to the Vendor all of the
intellectual property specific to Vstore, QuarterMaster and related URL sites in
exchange for the Vendor transferring the Customer List to the Company all prior
to the Closing Date which shall be consented to in writing by the Purchaser at
the Closing Date.
6.0 NON-MERGER
6.1 The representations, warranties, covenants and agreements of the Vendor
contained herein and those contained in the documents and instruments delivered
pursuant hereto will be true at and as of the Closing Date as though made on the
Closing Date and will survive the Closing, and notwithstanding the completion of
the transactions herein contemplated, the waiver of any condition contained
herein (unless such waiver expressly releases the Vendor from such
representation, warranty, covenant or agreement), or any investigation by the
Purchaser, the same will remain in full force and effect.
7.0 CONDITIONS PRECEDENT OF THE PURCHASER REGARDING CLOSING
7.1 The obligations of the Purchaser to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions
at the times stipulated:
(a) the representations and warranties of the Vendo contained herein
shall be true and correct in all respects at and as of the Closing
Date except as may be in writing disclosed to and approved by the
Purchaser in writing;
(b) all covenants, agreements and obligations hereunder on the part of
the Vendor to be performed or complied with at or prior to the
Closing, including the Vendor's obligation to deliver the documents
and instruments herein provided for in this Agreement and in
particular, but without limitation, under Article 10, shall have
been performed and complied with at and as of the Closing Date;
<PAGE>
(c) between the date hereof and the Closing Date, the Company will not
have experienced any event, circumstance or condition or have taken
any action or become subject to any action of any character
adversely affecting the Company or the Business or as would
materially reduce the value of the Company, the Business or the
Vendor's Shares to the Purchaser;
(d) no uninsured damage by fire, negligence or otherwise to the Assets
will have occurred since the date hereof and prior to the Closing
Date which, in the reasonable opinion of the Purchaser, will have a
Material Adverse Affect on the Assets or the Business;
(e) that the Purchaser shall have conducted its due diligence review of
the Company and shall be satisfied, in its sole discretion, with
respect thereto with the results thereof; and
(f) on or before the Closing Date no federal, provincial, regional or
municipal government or any agency thereof will have enacted any
statute or regulation, announced any policy or taken any action that
will have a Material Adverse Affect on the Assets or the right of
the Purchaser to the full enjoyment thereof.
7.2 The conditions set forth in Section 7.1 are for the exclusive benefit of the
Purchaser and may be waived by the Purchaser in writing in whole or in part at
any time.
8.0 PURCHASER'S WARRANTIES AND REPRESENTATIONS
8.1 The Purchaser represents and warrants to and covenants with, the Vendor,
with intent that the Vendor will rely thereon in entering into this Agreement
and in concluding the purchase and sale contemplated herein, that:
(a) the Purchaser has the power and capacity and good and sufficient
right and authority to enter into this Agreement on the terms and
conditions herein set forth;
(b) the Purchaser is duly incorporated, validly existing and in good
standing under the laws of Delaware, USA;
(c) the Purchaser has the authority to issue that number of its common
shares pursuant to section 2.2(b)(i) of this Agreement to the Vendor
and that the common shares issuable to the Vendor will be subject to
a minimum 12 month hold period and thereafter can be sold in
accordance with Rule 144 issued under the Securities Act of 1933, as
amended;
(d) the Purchaser will deliver to the Vendor on the Closing Date, a
legal opinion from its British Columbia solicitors or its U.S.
solicitors that the common shares to be issued to the Vendor subject
to a minimum hold period of 12 months and thereafter will be subject
to the limitations, including but not limited to, the volume
limitations set forth in subsection K of Rule 144 issued under the
Securities Act of 1933 as amended and that the legend on the share
certificate for said common shares will read as follows:
"These shares have not been registered under th Securities Act
of 1933, as amended, and may not be sold or transferred unless
an effective registration statement with respect to such
shares is in effect or pursuant to a then applicable
exemption."
(e) the Purchaser has the requisite U.S. regulatory approval to issue
the common shares to the Vendor pursuant to section 2.2(b)(i);
(f) the Purchaser shall continue to operate the business of the Company
without
<PAGE>
any material changes whatsoever included but not limited to changes
to the network system, the service providers, the web page, the
pricing policies, the accounting systems and all other general
administrative and operating standards of the Company until the 42nd
day next following the Closing Date or such earlier time as is
mutually agreed upon by the parties hereto;
(g) the execution and delivery of this Agreement by the Pruchaser and
the consummation of the transactions herein provided for has not and
will not result in the breach or violation of any provisions of, or
constitute a default under, or conflict with or cause the
acceleration of any obligation under:
(i) any agreement, commitment or other instrument to which the
Purchaser is a party or by which it is or its properties are
bound;
(ii) any provision of the constating documents or by-laws or
resolutions of the board of directors (or any committee
thereof) or shareholders of the Purchaser;
(iii) any judgement, decree, order or award of any court, government
body or arbitrator having jurisdiction over the Purchaser;
(iv) any license, permit, approval, consent or authorization held
by the Purchaser; or
(v) any applicable law, statute, ordinance regulation or rule.
9.0 CONDITIONS PRECEDENT OF THE VENDOR REGARDING CLOSING
9.1 The obligations of the Vendor to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions
at the times stipulated:
(a) the representations and warranties of the Purchaser contained herein
shall be true and correct in all respects at and as of the Closing
Date, except as may be in writing disclosed to and approved by the
Vendor;
(b) all covenants, agreements and obligations hereunder on the part of
the Purchaser to be performed or complied with at or prior to the
Closing Date, including in particular the Purchaser's obligations to
deliver the documents and instruments herein provided for, have been
performed and complied with as at the Closing Date; and
(c) on or before the Closing Date no federal, provincial, state,
regional or municipal government or regulatory agency thereof will
have enacted any statute or regulation, announced any policy or
taken any action that will have a Material Adverse Affect on the
right of the Vendor to the full enjoyment thereof.
9.2 The conditions set forth in Section 9.1 are for the exclusive benefit of the
Vendor and may be waived by the Vendor in writing in whole or in part at any
time.
10.0 TRANSACTIONS OF THE VENDOR AT THE CLOSING
10.1 At the Closing, the Vendor will execute and deliver or cause to be executed
and delivered all documents, instruments, resolutions and share certificates as
are necessary to effectively transfer and assign the Vendor's Shares to the
Purchaser, free and clear of all Liens, including:
(a) certified copies of resolutions of the director of the Company
authorizing
<PAGE>
the transfer of the Vendor's Shares and the registration of the
Vendor's Shares in the name of the Purchaser and authorizing the
issuance of new share certificates representing the Vendor's Shares
in the name of the Purchaser;
(b) certified copies of resolutions of the director of the Vendor
authorizing the sale of the Vendor's Shares and the execution and
delivery of this Agreement and all related documents;
(c) share certificates representing the Vendor's Shares in the name of
the Vendor, duly endorsed for transfer to the Purchaser which shall
be dealt with in accordance with the Escrow Agreement;
(d) duly issued share certificates in the name of the Purchaser
representing the Vendor's Shares;
(e) resignations in writing of all of the directors officers and/or
signing officers of the Company;
(f) confirmation in writing of the termination of the employment of all
of the employees of the Company;
(g) all corporate records and books of account of the Company including,
without limiting the generality of the foregoing, minute books,
share register books, share certificate books, banking records and
annual reports;
(h) every common seal of the Company;
(i) the Consents;
(j) a closing warranty and certificate confirming that all
representations and warranties of the Vendor contained in this
Agreement are true at and as of the Closing;
(k) a statutory declaration or affidavit in a form satisfactory to the
Purchaser's Counsel, confirming that the Vendor is not a
non-resident of Canada for purposes of the Income Tax Act (Canada);
(l) a release of all claims in favour of the Compan in form satisfactory
to the Purchaser, duly executed by the Vendor;
(m) a Non-Competition Agreement signed by the Vendo and each of Glenn
Ninow and Susan Ninow;
(n) a legal opinion of the Vendor's Solicitors in a form satisfactory to
the Purchaser's Solicitors;
(o) the Escrow Agreement; and
(q) such other documents and instruments as the Purchaser's Counsel may
reasonably require.
11.0 TRANSACTIONS OF THE PURCHASER AT THE CLOSING
11.1 At the Closing, the Purchaser will execute and deliver or cause to be
executed and delivered the following:
(a) certified copies of resolutions of the Director of the Purchaser
authorizing the purchase of the Vendor's Shares and the execution
and delivery of this Agreement and all related documents;
<PAGE>
(b) the Escrow Agreement;
(c) the Non-Competition Agreements; and
(d) a legal opinion of the Purchaser's Solicitors i a form satisfactory
to the Vendor's Solicitors;
(e) a legal opinion of the Purchaser's U.S. counsel regarding the
securities law representations and warranties of the Purchaser's
common shares (which currently trade on the NASD OTC Bulletin
Board), and the tradability restrictions contained thereon, all in a
form satisfactory to the Vendor's Solicitors; and
(f) a certified cheque, bank draft or solicitor's trust cheque payable
to the Vendor's Solicitors (in trust) in the amount of. $253,962.79.
12.0 CONFIDENTIALITY
12.1 The Purchaser agrees that all information provided to it pursuant to this
Agreement, including the existence of this Agreement (collectively "Confidential
Information") shall be held in complete confidence by the Purchaser and by its
advisors and representatives and shall not, without the prior written consent of
the Company, be disclosed to any other person, nor used for any other purpose,
other than in connection with the evaluation and negotiation of the proposed
transactions. However, the Purchaser's obligation does not apply to Confidential
Information:
(a) which is generally available to third parties (unless available as a
result of a breach of this undertaking);
(b) which is lawfully in the possession of the Purchaser and which was
not acquired directly or indirectly from the Company or the Vendor;
(c) which relates to the Company and has become the Purchaser's property
following completion of the transactions contemplated herein on the
Closing Date;
(d) the disclosure of which is required by any applicable law or by any
supervisory or regulatory body to whose rules the Purchaser is
subject or with whose rules it is necessary for the Purchaser to
comply, and the Vendor acknowledges that the Purchaser may issue a
press release disclosing the existence of this Agreement.
13.0 EXCLUSIVITY
13.1 The Vendor will not, and will not authorize or permit the Company or any of
the Company's directors, employees or agents to initiate contact with, solicit
or enter into negotiations with any other party regarding the sale of the
Vendor's Shares, the Business or any of the Assets unless this Agreement is
terminated.
14.0 INDEMNITY BY VENDOR
14.1 The Vendor shall indemnify and save the Purchaser and the Company harmless
from and against any claims, demands, actions, causes of action, damage, loss,
deficiency, cost, liability and expense (collectively "Claims") which may be
made or brought against the Purchaser or the Company or which the Purchaser or
the Company may suffer or incur as a result of, in respect of or arising out of:
(a) any non-performance or non-fulfilment of any covenant or agreement
on the part of the Vendor contained in this Agreement or in any
document given to
<PAGE>
the Purchaser in order to carry out the transactions contemplated
hereby;
(b) any misrepresentation, inaccuracy, incorrectnes or breach of any
representation or warranty made by the Vendor contained in this
Agreement or contained in any document or certificate given to the
Purchaser in order to carry out the transactions contemplated
hereby;
(c) any assessment or reassessment of any tax retur of the Company
relating to any period ending prior to but not on the Closing Date
to the extent that such assessment or reassessment increases the tax
payable for that particular period over the amount thereof either
paid or recorded on the books of the Company as payable for that
period prior to the Closing Date;
(d) any Indebtedness of the Company assumed, created, incurred, made or
otherwise arising prior to completion of the Closing including
without limitation all Indebtedness of the Company set forth in the
June 30 Statements; and
(e) all costs and expenses including, without limitation, legal fees on
a solicitor-and-client basis, incidental to or in respect of the
foregoing.
14.2 Notwithstanding the provisions of Section 14.1:
(a) no Claims as set out in subsections 14.1(a), (b or (d) (the "General
Claims") shall be made or brought against the Vendors after the
first anniversary of the Closing Date and any General Claims made or
brought after such date shall be barred and the Vendors shall have
no liability to the Purchaser in respect thereof; and
(b) no Claims as set out in subsection 14.1(c) (the "Tax Claims") shall
be made or brought by the Purchaser except within the period
commencing on the Closing Date and ending 60 days after the date on
which the last applicable limitation period under the applicable
income tax or other tax legislation with respect to such tax matters
expires with respect to any fiscal year which is relevant in
determining any tax liability under this Agreement, and any claim
not made within such time will thereafter be barred. The Purchaser
shall, and shall procure that the Company shall, not take any step
or proceeding to waive or extend any applicable limitation period;
15.0 ANNOUNCEMENTS
15.1 No announcement with respect to this Agreement or the transactions
described herein will be made by any party hereto without the prior approval of
the other party. The foregoing will not apply to any announcement by any party
required in order to comply with laws pertaining to timely disclosure.
16.0 ASSIGNMENT
16.1 This Agreement shall not be assigned by the Vendor without the prior
written consent of the Purchaser, which consent may be arbitrarily withheld.
17.0 TIME OF THE ESSENCE
17.1 Time is of the essence of this Agreement.
18.0 FURTHER ASSURANCES
18.1 The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement.
<PAGE>
19.0 ENUREMENT
19.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns.
20.0 COUNTERPARTS AND FACSIMILE
20.1 This Agreement may be executed in several counterparts or by facsimile,
each of which will be deemed to be an original and all of which will together
constitute one and the same instrument.
21.0 NOTICES
21.1 All notices, requests, demands, directions, and other communications
provided for hereunder shall be deemed to have been given, delivered or made if
they are in writing (including telex, telefax or telegraphic communication) and
either mailed by certified mail, return receipt requested (postage prepaid),
telegraphed, telexed (with answerback confirmation), telefaxed (with answerback
confirmation), or actually delivered to the applicable party at the following
address:
(a) If to the Vendor:
Coyotenet Inc.
8271 Laurel Street
Vancouver, British Columbia
V6P 3V2
Attention: Glenn Ninow
Fax No. (604)
with a copy to the Vendor's Solicitors as follows:
Ballem MacInnes
1800 First Canadian Centre
350 7th Avenue S.W.
Calgary, Alberta
T2P 3N9
Attention: Mr. Greg P. Shannon, L.L.M.
Fax No.: (403) 233-8979
(b) If to the Purchaser:
CyPost Corporation
Suite #101
260 West Esplanade
North Vancouver, B.C. V7M 3G7
Attention: Mr. Steve Berry
Fax No. (604) 904-4433
with a copy to the Purchaser's Solicitors as follows:
Alexander, Holburn, Beaudin & Lang
Barristers and Solicitors
2700 - 700 West Georgia Street
Vancouver, B.C., V7Y 1B8
Attention: Michael V. Roche
<PAGE>
Fax No. (604) 669-7642
or to such other address as any Party may specify by notice in writing to the
other.
21.2 All notices, requests, demands, directions and other communications shall
be deemed to have been received: when telexed or telefaxed, on transmission;
when mailed, on the twelfth (12) calendar day after being deposited in the
mails, addressed as described above; and when telegraphed or delivered, when
actually received.
22.0 AGENTS
22.1 The Vendor warrants to the Purchaser that no agent or other intermediary
has been engaged by the Vendor in connection with the purchase and sale herein
contemplated.
23.0 TENDER
23.1 Tender may be made upon the Vendor or Purchaser or upon the Vendor's
Solicitor or Purchaser's Solicitor and money may be tendered by solicitor's
trust cheque or by negotiable cheque certified by a chartered bank or trust
company.
24.0 PROPER LAW
24.1 This Agreement will be governed by and construed in accordance with the
laws of British Columbia and the parties will attorn to the Courts thereof.
25.0 ENTIRE AGREEMENT
25.1 This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, express
or implied, statutory or otherwise between the parties hereto including the
Letter of Intent dated May 24, 1999 between the parties, and there are no
warranties or representations, expressed or implied, statutory or otherwise, and
no agreement collected hereto other than expressly set forth or referred to
herein.
IN WITNESS WHEREOF the parties have caused this Agreement to
be executed effective the 30th day of June, 1999.
COYOTENET INC.
Per:
-------------------------
Glenn Ninow, President
CYPOST CORPORATION
Per:
-------------------------
Authorized Signatory
PURCHASE AGREEMENT
BETWEEN:
CyPost Corporation, a corporation organized under the laws of the State
of Delaware, in the United States of America
("CyPost")
AND:
Playa Corporation, a corporation organized under the laws of Japan and
commonly known as "Playa"
("Playa")
AND:
Mr. Hirofumi Watanabe
a businessman resident in Japan and a shareholder of Playa
(representing himself and the other shareholders of Playa;
collectively, the "Playa Shareholders")
WHEREAS:
A. CyPost wishes to become sole owner of Playa
B. The Playa Shareholders agree to sell CyPost all their shares and ownership
interests in Playa
C. Playa and the Playa Shareholders may reorganize themselves in a tax
efficient manner before the completion of the sale of all of the shares in Playa
to CyPost.
1. CyPost will purchase from the Playa Shareholders all their shares in Playa.
2. The purchase price is US$3,000,000.00 to be paid as follows:
A. US$300,000.00 cash and
/s/ Hirofumi Watanabe /s/ Robert Sendoh
<PAGE>
-2-
B. US$2,700,000.00 in the form of CyPost shares, the number of those shares
being that which when multiplied by their closing trading value on the NASD -OTC
BB on the trading day before the day the purchase is completed, equals
US$2,700,000.00.
3. The parties will complete the purchase by February 29, 2000 or such other
date as the parties agree upon. Before the completion of the purchase, Mr.
Watanabe and Playa Shareholders will present to CyPost the list of all Playa
Shareholders and represent that the list identifies completely all persons who
have shares, options to purchase shares or any other legal instrument evidencing
or convertible into ownership interests in Playa.
4. The CyPost shares will be subject to all applicable legal and regulatory
restrictions, which will be not less than a resale restriction for one year
after the completion of the purchase.
5. For each calendar half year starting on July 1, 2000 and ending on December
31, 2002, the Board of Directors of CyPost will evaluate the technical and
business performance of Playa and will, in its sole good faith judgment based on
such evaluation, reward persons who contributed to such performance, in the form
of CyPost shares and in the quantities thereof up to a maximum number of shares
per half year being that number whose cumulative value as of the closing trading
day therein is US$400,000.00.
The parties have executed this Agreement on January 26, 2000 in Tokyo Japan
/s/ Robert Sendoh
- ------------------------------
CyPost Corporation
by its Chairman, Robert Sendoh
/s/ Hirofumi Watanabe
- ------------------------------
Playa Corporation
by its President, Mr. Hirofumi Watanabe
/s/ Hirofumi Watanabe
- ------------------------------
Mr. Hirofumu Watanabe, for himself
on behalf of all the shareholders of Playa Corporation
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANT
I hereby consent to the use of my report, dated May 12, 1999, on the
balance sheet of Cypost Corporation as of December 31, 1998 and for the related
statements of operations, cash flows and shareholders' equity for the year ended
December 31, 1998 and for the period from inception, September 5, 1997, to
December 31, 1998.
Thomas P. Monahan
March __, 2000
Exhibit 21
Subsidiaries
(All Wholly-Owned)
Name Jurisdiction of
---- Incorporation
-------------
ePost Innovations, Inc. BC, Canada
Communications Exchange
Management, Inc. BC, Canada
CyPost USA, Inc. Delaware
Hermes Net Solutions, Inc. BC, Canada
Net Rover Inc. Ontario, Canada
Net Rover Office Inc. Ontario, Canada
Connect Northwest Internet Services, LLC Washington state
Internet Arena, Inc. Oregon
Playa Corporation Japan
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2414
<SECURITIES> 0
<RECEIVABLES> 121
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2681
<PP&E> 148
<DEPRECIATION> 0
<TOTAL-ASSETS> 3580
<CURRENT-LIABILITIES> 3076
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 487
<TOTAL-LIABILITY-AND-EQUITY> 3580
<SALES> 197
<TOTAL-REVENUES> 197
<CGS> 49
<TOTAL-COSTS> 49
<OTHER-EXPENSES> 1329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1908
<INCOME-PRETAX> (3089)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3089)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
