U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 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.)
101-260 W. Esplanade
N. Vancouver, British Columbia V7M3G7
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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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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 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 CyPost shares valued at $0.07
per share. Communication Exchange Management Inc. remains a wholly owned
subsidiary of CyPost. Unless otherwise stated herein, all dollar amounts refer
to U.S. Dollars ("USD$")--not Canadian Dollars ("CDN$). 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. The company
conducts no business on its own independent of CyPost USA or ePost Canada. To
date, the Issuer, through its operating subsidiaries, has been largely involved
in two 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"), and (ii) providing internet connection
services to subscribers. (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 six versions of its
"Navaho" software encryption programs which are more specifically described
below. 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 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.
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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 200,000 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
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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
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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
<TABLE>
<CAPTION>
FEATURE NAVAHO LOCK 2.4 PGP 6.5 RPK INVISIMAIL Deluxe MAILSECURE 2.4
<S> <C> <C> <C> <C>
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
</TABLE>
Key Lengths With Similar Resistance to Brute-Force Attacks
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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
Comparison of Competitor Companies
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 pro
forma 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
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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.
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
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only 37 percent growth among traditional ISPs (including AOL, MSN,
Mindspring, Earthlink, Prodigy, and Flashnet).
The Company fully anticipates over the next several years
consolidation within the ISP market leading to two or three well-known,
large national ISP's. 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
ISPs, and as ISPs 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.
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.
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Dependence on Key Customers
The Company broadly markets its software products and seeks to avoid
reliance on a limited number of customers. Nonetheless, the Company has
had a relatively brief period of actually selling its Software Products to
customers. The Company has been designated as a "preferred vendor and
provider" by the Canadian Bar Association, British Columbia branch and
under an agreement with them reached in March 1999 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
software to [describe status of Japanese greeting card project and other
new ideas]. 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.
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 purchase price of
$510,204 USD. The consideration for this purchase consisted of cash of
$435,374 USD and an assumption of a deferred cash payment of $74,830
USD. Also effective June 30, 1999, the Company purchased all the issued
and outstanding shares of Intouch.Internet Inc. for a purchase price of
$304,081 USD. The consideration for this purchase consisted of cash of
$275,510 USD and the issuance of 6,750 pre-split, or 10,125 post-split,
common shares valued at $28,571 USD. Both acquisitions have been accounted
for by the purchase method of
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accounting. In both acquisitions, the net assets acquired consisted
primarily of goodwill which will be amortized over five 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 $2,717,826
USD. The purchase price of $2,717,826 USD was satisfied by a cash payment
of $2,000,000 USD, the issue of 146,000 post-split common shares valued at
$4.46 USD per share, and an assumption of a deferred cash payment of
$68,027 USD which, subject to certain adjustments, is due on December 4,
1999. These purchases have been accounted for under the purchase method of
accounting.
Acquisition of Connect Northwest Internet Services, LLC and Internet
Arena, Inc.: On October 26, 1999, the Company purchased all the issued and
outstanding member interests of Connect Northwest Internet Services, LLC
for a net purchase price of $1,320,000 USD. The purchase price was
satisfied by a cash payment of $660,000 USD and the issuance of 98,655 of
the Company's common shares valued at $6.69 USD per share. On November 9,
1999, the Company purchased all the issued and outstanding shares of
Internet Arena, Inc. for a purchase price of $600,000 USD. The purchase
price was satisfied by a cash payment of $172,500 USD, the issuance of
67,132 of the Company's post-split common shares valued at $4.50 USD per
share, and a deferred cash payment of $57,500 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 it is hoped
will provide 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.
To date, with the exception of the NetRover acquisition, the bulk of
the Company's customer base is located in the Pacific Northwest region of
Canada and the United States. Thus, the Company is relatively
non-diversified geographically and may be adversely affected if a regional
slowdown or recession occurs.
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 to be paid in
shares. CyPost will file an 8-K for the YABUMI acquisition presently.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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Forward-Looking Statements
The statements contained in this Report on Form 10-SB that are not
historical facts are forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) that involve
risks and uncertainties. Such forward-looking statements may be identified
by, among other things, the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. From time
to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in various filings made by the Company with the
Securities and Exchange Commission (the "SEC"), or press releases or oral
statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements
regarding anticipated future revenues, capital expenditures, Year 2000
compliance and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements.
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 is accounted for
by the operations during the three 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 net sales of approximately $185,670 for the
three months ended September 30, 1999 and approximately $197,068
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for the nine months ended on that date. It had no revenues for the
corresponding periods of the prior year.
Direct costs of approximately $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. Losses 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.
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 $423,505 for the three month period ending
September 30, 1999 and net losses of $1,180,730 for the nine month period
ending September 30, 1999. These factors indicate that the Company's
continuation as a going concern is dependent upon 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, 1999 and
$308,040 at June 30, 1999, the entire 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
into Common Stock of the Company at prices ranging, at present, from $1.00
to $4.00 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 Sublease dated February 1, 1998 for
approximately 5000 square feet of office space at 101-260 W. Esplanade,
North Vancouver, British Columbia (the "Premises"). The term of the
sublease was for 23 months and ended on December 30, 1999.
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The Company has continued to occupy its previous premises under a
three-month lease which expires March 31, 2000. The monthly rent under
this lease is $8,000 CDN$ or $4,800 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.
<TABLE>
<CAPTION>
Name and Amount and
Title of Address of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class*
<S> <C> <C> <C>
Common Stock, par value Kelly Shane Montalban 6,062,550 Million shares 29.9%
$0.001 per share P.O Box 700, direct and indirect beneficial
British Columbia VON 2EO ownership
</TABLE>
* Based on 20,446,512 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. 4,559,032 shares or
22.30% 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.
(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:
12
<PAGE>
<TABLE>
<CAPTION>
Name and Amount and
Title of Address of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class*
<S> <C> <C> <C>
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 3.21%
</TABLE>
-------------------------
* Based on 20,446,512 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.
13
<PAGE>
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. Prior to that
time, Carl Whitehead exercised primary executive responsibilities. Neither
Mr. Whitehead nor any other executive officer received cash compensation
in excess of $100,000 for the years 1997 and 1998. For the year ending
December 31, 1998, Mr. Whitehead received cash compensation and expense
reimbursement of $10,000.
Mr. Robert Sendoh currently serves without pay as Chief Executive
Officer of the CyPost. In addition, 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., a corporation organized, controlled, and operated by Mr.
Whitehead. At the time of the negotiation and the actual purchase of these
shares, Mr. Whitehead was not affiliated with CyPost and was neither an
officer, director, nor a shareholder of CyPost. As a result of that
transaction, Mr. Whitehead became a substantial shareholder in CyPost, and
subsequent to that transaction became an officer and a Director of CyPost.
On October 29, 1998, CyPost acquired, through a stock purchase,
Communications Exchange Management, Inc., a corporation indirectly
14
<PAGE>
controlled by Mr. Whitehead. At the time of this transaction, Mr.
Whitehead was an officer, Director and large shareholder of CyPost. The
transaction was approved by a disinterested majority of CyPost's
Directors. Further information relating to these two transaction and the
earlier transaction with ePost Canada may be found in footnote c. 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.
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 20,246,692 shares have been
issued as of the 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
15
<PAGE>
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.
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
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
16
<PAGE>
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.
Item 2. Legal Proceedings.
On June 11, 1999 the Canadian Postal Service filed a civil
proceeding in the Federal Court of Canada in which it sought injunctive
relief against alleged unlawful use of certain proprietary trademarks and
tradenames which contain the word "POST" belonging to the Canadian Postal
Service. A summary judgement motion filed on behalf was rejected on
September 14, 1999, and on October 18, 1999 the Company filed its
Statement of Defense and Counterclaim. Pretrial discovery is currently
being conducted at this time and no date for trial has been scheduled. The
Company is unable to predict at this time the outcome of this suit or
whether the litigation would have a material impact on it, even if an
adverse decision were to be issued.
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 & Co., a "Big Six" 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 private placement 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 Common Stock. The
Company sold an aggregate 400,000 pre-split, or 600,000 post-split, shares
of common stock for an aggregate
17
<PAGE>
consideration of $20,000. For the period of January through April 30,
1998, the Company sold an additional 1,600,000 Units 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.
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.
On April 30, 1998, the Company sold 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 at $0.40 per share for an aggregate consideration of $244,000.
On June 30, 1999, the Company issued 6,750 pre-split, or 10,125
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 146,000 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 valued at $6.69 per share 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.
18
<PAGE>
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 67,312 shares of its common
stock valued at $4.46 per share 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 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
19
<PAGE>
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 F13 of this Form 10-SB. The Registrant's consolidated
unaudited Financial Statements and related footnotes for the 9 months and
3 months ending September 30, 1999 appear on page F14-F18. Financial
Statements for Mushroom Innovations Inc., a predecessor corporation,
appear on page F19-F43.
20
<PAGE>
PART III
Item 1. Index to Exhibits.
Exhibit No. Description
----------- -----------
2 Certificate of Incorporation of Registrant
(previously filed)
2.1 Certificate of Amendment to Certificate of
Incorporation of Registrant (previously
filed)
2.2 Amended and Restated Certificate of
Incorporation
2.3 ByLaws (previously filed)
6.1 Preferred Supplier Agreement with Canadian
Bar Association
6.2 Lease re: CyPost headquarters
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
8.4 Share Purchase Agreement dated as of June
30, 1999 regarding acquisition of
InTouch.Internet Inc. shares
10 Consent of Thomas P. Monahan, Certified
Public Accountant
21 List of Subsidiaries
27 Financial Statement Schedule
21
<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: March 9, 2000 By: /s/ Robert Sendoh
----------------------------
Robert Sendoh
Chief Executive Officer
22
<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. 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 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 535,037
Accumulated deficit during development stage (428,773)
--------
Total stockholders equity 115,107
--------
Total liabilities and stockholders equity $126,197
========
<PAGE>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
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
--------------- ----------- -----------------
<S> <C> <C> <C>
Cost of goods sold -0- -0- -0-
-------- ----------- -----------
Gross profit -0- -0- -0-
Operations:
General and administration -0- 235,263 235,263
Non cash compensation
Paid with shares of stock 189,200 189,200
Depreciation and amortization -0- 6,233 6,233
-------- ----------- -----------
total operating expense -0- 430,696 430,696
Loss from operations -0- (430,696) (430,696)
Other income
Gain on sale of assets 1,923 1,923
----------- -----------
Total other income 1,923 1,923
Net Profit (Loss) from operations $ -0- $ (428,773) $(428773)
======== =========== ===========
Net income per share-
Basic and Diluted $ -0- $ (0.09) $ (0.09)
======== =========== ===========
Weighted average
number of shares
outstanding Basic and Diluted 583,333 4,987,833 4,987,833
======== =========== ===========
</TABLE>
F-3
<PAGE>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
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
--------------- --------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net profit (loss) $ -0- $(428,773) $(428,773)
Depreciation and
amortization -0- 6,233 6,233
Non cash expenses 189,200 189,200
Prepaid expenses (27,998) (27,998)
Accounts payable and
accrued expenses 1,965 9,125 11,090
--------- --------- ---------
TOTAL CASH FLOWS FROM
OPERATIONS 1,965 (252,213) (250,248)
CASH FLOWS FROM FINANCING
ACTIVITIES
Sale of stock-net of
offering costs 20,000 330,500 350,500
--------- --------- ---------
TOTAL CASH FLOWS
FROM FINANCING 20,000 330,500 350,500
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
========= ========= =========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
CYPOST CORPORATION
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Additional Deficit
Preferred Common paid in accumulated during
Date Stock Stock capital development stage Total
- ------------- --------- --------- --------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
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 $ 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)
09-18-1998(6) 4,180,000 4,180 167,200 171,380
09-18-1998(8) 20,000 20,000
12-31-1998(7) 610,000 610 243,390 244,000
12-31-1998 Net loss (428,773) (428,773)
--------- --------- --------- --------- ---------
12-31-1998-0- $-0- 8,843,000 $ 8,843 $ 535,037 $(428,773) $ 115,107
</TABLE>
(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 $0.04 per share
(7) Sale of shares pursuant to warrant exercise at $0.40 per share.
(8) To reflect the personal transfer of shares in consideration for the
contribution of consulting services valued at $.001 per share
F-4
<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 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 and charged operations with an additional $167,200 as
compensation in a related party transaction to Mushroom Innovations, Inc. for
the acquisition of Communication Exchange Management, Inc.("CEM") British
Columbia company.
On September 18, 1998, Robert Sendoh and Carl Whitehead 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 payment for an aggregate of
$20,000 in services performed valued at $0.036 per share. A valuation for the
shares of common stock representing one half the market price of the on the date
of the transaction was used in consideration for the holding period for the
restricted shares transferred.
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.
Shares used in calculating basic and diluted net income per share were as
follows:
December 31, December 31,
1997 1998
-----------------------------
583,333 4,987,833
=============================
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. Selling and Marketing Costs
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 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.
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 U.S. dollar amounts presented have been translated from the Canadian
currency amounts as applicable to the accounts and transactions of a company
operating in the currency of a country with a non-highly inflationary economy.
As the reporting currency is the U.S. dollar, the following criteria for the
translation of Canadian dollars to U.S. dollars was applied to the local
currency basis financial statements.
Assets and liabilities were translated by using the exchange rate at the
balance sheet date;
Revenues, expenses, gains, losses were translated by using the weighted
average exchange rate for all of the periods presented.
The translation loss for the period from January 1, September 30, 1999 was
reported separately as a component pf shareholder's Equity (as a CTA -cumulative
translation adjustment);
The capital account in Shareholder's equity was translated by using the
historical exchange rate.
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 of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The adoption of this statement will not have any
impact on the consolidated financial position and results of operations.
F-8
<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-9
<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 an
aggregate consideration of $100,000 less offering expenses of $20,000.
As of April 30, 1998, the Board of Directors of the Company amended
the offering to reduce the warrant exercise price to $0.40 per share of common
stock.
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.
Pursuant to an acquisition agreement dated September 17, 1997, the
Company issued 2,000,000 shares of common stock at $0.0001 per share for an
aggregate consideration of $2,000 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.
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.
F-10
<PAGE>
Carl Whitehead, Bill Kaleta and Robert Sendoh are officers and
directors of the Company and Mushroom.
The Company acquired all the rights, title and interest to all the assets
owned by ePost Canada. Those assets consisted of proprietary knowledge of
various computer software products under development by ePost Canada.
b. Acquisition of Communication Exchange Management, Inc.
On September 18, 1998, the Company acquired an additional subsidiary of
Mushroom's, Communication Exchange Management, Inc.("CEM"), British Columbia
company. The Company issued 4,180,000 shares of common stock valued at $0.04 per
share for an aggregate consideration of $4,180 in assets costs and has charged
operations with an additional $167,200 as compensation expense in a related
party transaction to Mushroom Innovations, Inc. for all of the issued and
outstanding stock of CEM 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.
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
Pursuant to an acquisition agreement dated September 17, 1997, the
Company issued 2,000,000 shares of common stock to Mushroom in consideration for
all of the issued and outstanding shares of common stock of Mushroom's wholly
owned subsidiary ePost Canada. The shares of common stock were valued at $.001
per share for an aggregate consideration of $2,000.
Mushroom made a further distribution of the shares of common stock as
follows: 1,020,000 to Robert Sendoh, 600,000 shares of common stock to Carl
Whitehead, 200,000 shares of common stock to William Kaleta and 180,000 shares
of common stock to Chiyoko Asanuma. On September 18, 1998, the Company issued an
additional 4,180,000 shares of common stock to Mushroom for the acquisition of
CEM for an aggregate consideration of $4,180 or $0.001 value each share.
Mushroom made a further distribution of the shares of common stock
as follows: 480,000 to Robert Sendoh, 900,000 shares of common stock to Carl
Whitehead, 1,300,000 shares of common stock to William Kaleta and 1,500,000
shares of common stock to Kelly Shane Montalban.
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
F-11
<PAGE>
For the period from inception, September 5, 1997, to December 31, 1998, the
Company has not paid any officer in excess of $100,000.
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 $261,573. 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 $ 82,328
Valuation allowance $ (82,328)
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.
F-12
<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.
Note 11 - Non Cash Transactions
For the year ending December 31, 1998, the Company issued shares of
common stock as follows:
<TABLE>
<CAPTION>
<S> <C>
Acquisition of ePOST 2,000,000 shares of common stock $ 2,000
Issuance of 15,000 shares at $0.50 per share for legal expenses 7,500
Acquisition of CEM 4,180,000 shares at $0.001 4,180
Transfer of personal shares 20,000
-------
Total non cash expenditures $33,680
</TABLE>
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-13
<PAGE>
CYPOST CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET - - SEPTEMBER 30, 1999
(Unaudited)
(U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,414,094
Accounts receivable 121,019
Prepaid expenses 49,144
-----------
2,584,257
CAPITAL ASSETS, at cost:
Furniture and equipment $ 13,817
Leasehold improvements 3,237
Computer hardware and software 136,576
-----------
153,630
Less- Accumulated amortization (5,474) 148,156
-----------
DEPOSITS AND OTHER ASSETS 97,204
GOODWILL 751,208
-----------
$ 3,580,825
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 330,656
Loans 2,670,450
Deferred revenue 75,283
-----------
3,076,389
STOCKHOLDERS' EQUITY:
Share capital
- Preferred stock - 5,000,000 authorized shares;
nil issued and outstanding
- Common stock - 20,000,000 authorized shares;
11,239,570 issued and outstanding $ 11,240
Additional paid in capital 2,117,165
Deficit (1,609,503)
Cumulative translation adjustment (14,466) 504,436
----------- -----------
$ 3,580,825
===========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
<PAGE>
CYPOST CORPORATION
(A Development Stage Company)
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>
From Inception
Three Months Ended Nine Months Ended of September 5,
September 30, September 30, 1997 to
--------------------------- ---------------------------- September 30,
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE $ 185,670 $ -- $ 197,068 $ -- $ 198,991
DIRECT COSTS 49,275 -- 49,275 -- 49,275
----------- ----------- ----------- ----------- -----------
136,395 -- 147,793 -- 149,716
----------- ----------- ----------- ----------- -----------
EXPENSES:
General and administrative 41,848 34,840 500,156 320,204 924,619
Salaries and benefits 381,083 406,193 406,193
Sales and marketing 9,590 -- 261,093 -- 261,093
Development 114,339 142,010 142,010
Amortization 13,040 -- 19,071 2,852 25,304
----------- ----------- ----------- ----------- -----------
559,900 34,840 1,328,523 323,056 1,759,219
----------- ----------- ----------- ----------- -----------
Net loss (423,505) (34,840) (1,180,730) (323,056) (1,609,503)
DEFICIT, beginning of period (1,018,798) (131,033) (261,573) (10,017) --
----------- ----------- ----------- ----------- -----------
DEFICIT, end of period $(1,442,303) $ (165,873) $(1,442,303) $ (333,073) $(1,609,503)
=========== =========== =========== =========== ===========
LOSS PER SHARE $ (0.04) $ (0.01) $ (0.12) $ (0.07)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,957,851 4,156,839 9,957,851 4,156,839
=========== =========== =========== ===========
</TABLE>
<PAGE>
CYPOST CORPORATION
(A Development Stage Company)
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>
From Inception
Three Months Ended Nine Months Ended of September 5,
September 30, September 30, 1997 to
---------------------------- ---------------------------- September 30,
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES
Net loss for the period $ (423,505) $ (34,840) $(1,180,730) $ (323,056) $(1,609,503)
Add item not affecting cash-
Amortization 13,040 -- 19,071 2,852 25,304
Non-cash Expenses 167,200 167,200
----------- ----------- ----------- ----------- -----------
(410,465) (34,840) (1,161,659) (153,004) (1,416,999)
Change in non-cash operating accounts (68,978) 2,298 69,000 387 85,772
----------- ----------- ----------- ----------- -----------
(479,443) (32,542) (1,092,659) (152,617) (1,331,227)
----------- ----------- ----------- ----------- -----------
CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Proceeds (purchase) of capital assets (34,169) 644 (55,194) (18,360) (66,879)
Acquisition of Hermes Net Solutions, Inc. -- -- (445,112) -- (445,112)
Acquisition of Intouch.Internet Inc. -- -- (197,917) -- (197,917)
Purchase of other assets (69,477) -- (54,220) -- (99,755)
----------- ----------- ----------- ----------- -----------
(103,646) 644 (752,443) (18,360) (809,663)
----------- ----------- ----------- ----------- -----------
CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Loan repayment (66,841) -- -- -- --
Loan proceeds 2,770,450 -- 3,670,450 -- 3,670,450
Issuance of shares -- 44,000 556,000 185,000 899,000
Change in cumulative translation adjustment (14,466) (2,162) (14,466) (2,847) (14,466)
----------- ----------- ----------- ----------- -----------
2,689,143 41,838 4,211,984 182,153 4,554,984
----------- ----------- ----------- ----------- -----------
Increase in cash 2,106,054 9,940 2,366,882 11,176 2,414,094
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 $ 2,414,094
=========== =========== =========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE:
(a) For the nine months ended September 30, 1999, the Company converted
$1,000,000 of loans to shares.
<PAGE>
CYPOST CORPORATION
(A Development Stage Company)
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.
The Company is a development stage company and has incurred net losses of
$1,442,303 for the period from inception of September 5, 1997 to September
30, 1999. The Company's ability to continue as a going concern is
dependent upon its ability to obtain additional financing and attain
profitable operations.
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.
2. ACQUISITIONS
Effective June 30, 1999, the Company purchased all the issued and
outstanding shares of Hermes Net Solutions, Inc. for a purchase price of
$750,000 Cdn. The consideration for this purchase consisted of cash of
$640,000 Cdn. and a loan payable of $110,000 Cdn.
Also effective June 30, 1999, the Company purchased all the issued and
outstanding shares of Intouch.Internet Inc. for a purchase price of
$447,000 Cdn. The consideration for this purchase consisted of cash of
$405,000 Cdn. and the issuance of 6,750 common shares valued at $42,000
Cdn.
<PAGE>
-2-
2. ACQUISITIONS (Cont'd)
Both acquisitions have been accounted for by the purchase method of
accounting. In both acquisitions, the net assets acquired consisted
primarily of goodwill which will be amortized over five years on the
straight line basis. 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 issued and outstanding
shares of NetRover Inc. and NetRover Office Inc. for a net purchase price
of $4,000,000 Cdn. The net purchase price of $3,000,000 Cdn. was satisfied
by a cash payment of $1,000,000 Cdn., the issue of 146,000 common shares
valued at $6.85 Cdn. per share, and a loan payable of $100,000 Cdn. which,
subject to certain adjustments, is due on December 4, 1999. These
purchases will be accounted for under the purchase method of accounting.
Acquisition of Connect Northwest Internet Services and Internet Arena,
Inc.
On October 26, 1999, the Company purchased all the issued and outstanding
shares of Connect Northwest Internet Services for a net purchase price of
$1,320,000 US. The purchase price was satisfied by a cash payment of
$660,000 US and the issuance of 98,655 of the Company's common shares.
On November 9, 1999, the Company purchased all the issued and outstanding
shares of Internet Arena, Inc. for a net purchase price of $230,000 US.
The purchase price was satisfied by a cash payment of $172,500 US, the
issuance of 67,132 of the Company's common shares, and a loan payable of
$57,500 US due on January 4, 2000.
These purchases will be accounted for under the purchase method of
accounting.
4. LOANS
The loans are unsecured, bear interest at 8% per annum and are payable on
demand in the form of cash or convertible into the Company's common shares
at $1.50 per share.
<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 Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation (a development stage
company)
I have audited the accompanying consolidated balance sheet of Mushroom
Innovations Inc. (a development stage company) as of August 31, 1997 and the
related consolidated 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 Mushroom
Innovations Inc. (a development stage company) as of August 31, 1997 and the
results of consolidated 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 consolidated 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 Mushroom
Innovations Inc. (a development stage company) to continue as a going concern.
Thomas P. Monahan, CPA
January 18, 1998
Paterson, New Jersey
F-19
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED BALANCE SHEET
August 31, 1997
Assets
Current assets
Cash and cash equivalents 18,477
GST tax receivable 545
--------
Total current assets 19,022
Property and equipment-net 4,354
Other assets
Software development costs 5,274
--------
Total other assets 5,274
--------
Total assets $ 28,650
========
Liabilities and Stockholders' Equity
Current liabilities
Officer loan payable $ 21,898
--------
Total current liabilities 21,898
Stockholders' equity
Common Stock authorized 10,000,000 shares, no par value each 7,299
At August 31, 1997, there are 95,000 shares outstanding .
Retained earnings deficit (547)
--------
Total stockholders' equity 6,752
--------
Total liabilities and stockholders' equity $ 28,650
========
See accompanying notes to financial statements.
F-20
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED 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 59
Depreciation and amortization 488
-----
Total expense 547
Net income (loss) $(547)
=====
See accompanying notes to financial statements.
F-21
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, FEBRUARY 11, 1997 TO AUGUST 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (547)
Adjustments to reconcile net loss to cash used in operating
activities
Depreciation 488
GST tax receivable (545)
--------
TOTAL CASH FLOWS FROM OPERATIONS (604)
CASH FLOWS FROM FINANCING ACTIVITIES
Officer Loan payable 21,898
Sale of common stock 7,299
--------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 29,197
CASH FLOWS FROM INVESTING ACTIVITIES
Software development costs (5,274)
Purchase of fixed assets (4,842)
--------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (10,116)
NET INCREASE (DECREASE) IN CASH 18,477
CASH BALANCE BEGINNING OF PERIOD -0-
--------
CASH BALANCE END OF PERIOD $ 18,477
========
See accompanying notes to financial statements
F-22
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Retained
Common Common earnings
Date Stock Stock deficit Total
- ---- ----- ----- ------- -----
Sale of initial shares 95,000 $ 7,299 $ 7,299
Net loss (547) (547)
------- ------- ------- -------
Balances August 31, 1997 95,000 $ 7,299 $ (547) $ 6,752
======= ======= ======= =======
See accompanying notes to financial statements
F-23
<PAGE>
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
Mushroom Innovations Inc. (the "Company"), was formed under the name
536445 B.C. LTD as a Victoria, British Columbia, Canadian corporation February
11, 1997 and authorized to issue to 100,000 shares of common stock, no par
value. On March 14, 1997, the a certificate of name change was filed amending
the corporate name to Mushroom Innovations Inc.
b. Description of Company
The Company is a development stage company that was organized as a holding
company for two subsidiaries ePOST Innovations, Inc. ("ePOST") and Communication
Exchange Management, Inc. ("CEM"). CEM is involved with the development of data
encryption software. ePOST assets consisted of proprietary knowledge of various
computer software products under development.
c. Issuance of Shares of Common Stock
On May 28, 1997 the Company sold an aggregate of 95,000 shares as follows:
60,000 shares to Robert Sendoh; 30,000 shares to Carl Whitehead and 5,000 shares
to Bill Kaleta for an aggregate consideration of $7,299..
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 $547 for the period from inception, February 11, 1997, August 31, 1997. These
factors indicate that the Company's continuation as a going concern is dependent
upon its ability to obtain adequate financing. The Company has been financed to
date through an officer's loan of $28,467 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.
F-24
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
The consolidated financial statements presented at August 31, 1997 consist
of the consolidated balance sheet as at August 31, 1997 of the Company, CEM and
ePOST and the consolidated statements of operations, cash flows and stockholders
equity for the period from inception, February 11, 1997, to August 31, 1997.
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. 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 effects of potential common shares such as
warrants as the effect would be antidilutive.
The weighted average number of shares used in calculating basic and
diluted net income per share were 47,500.
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.
F-25
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
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. 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-.
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 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.
A summary of software development costs at August 31, 1997 is as follows:
CEM ePost
Cost incurred for product development
and licensing $3,274 $2,000
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-26
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
i. Foreign Currency Translation
Balance sheet accounts of international subsidiaries are translated at the
current exchange rate as of the end of the accounting period. Income statement
items are translated at average exchange rates. The resulting translation
adjustment is recorded as a separate component of stockholders' equity.
j. Significant Concentration of Credit Risk
At August 31, 1997, 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. Research and Development Expenses
Research and development expenses are charged to operations when incurred.
l. Patent Costs
Costs incurred to acquire exclusive licenses of patentable technology or
costs incurred to patent technologies are capitalized and amortized over the
shorter of a five year period or the term of the license or patent. The portion
of these amounts determined to be attributable to patents is amortized over
their remaining lives and the remainder is amortized over the estimated period
of benefit but not more than 40 years on a straight line basis.
m. Asset Impairment
The Company adopted the provisions of SFAS No. 121, Accounting for the
impairment of long lived assets and for long-lived assets to be disposed of
effective January 1, 1996. SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. There was no effect of such adoption on the
Company's financial position or results of operations.
F-27
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
Note 3 - Transfer of Assets
Pursuant to an acquisition agreement dated September 17, 1997, Cypost
Corporation issued 2,000,000 shares of common stock at $0.0001 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 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.
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 ePost Canada. 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 occupies office space at 1812 Boatlift Lane, Vancouver,
British Columbia V6H 3Y2. Rent is payable on a month to month basis at $200 per
month.
b. Officer Salaries
No officer has received a salary in excess of $100,000.
c. Loan Payable-Shareholder
The Company is obligated to repay moneys advanced by Robert Sendoh
aggregating $28,467 with interest at 6% and is payable on demand.
F-28
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
Note 5 - Property Plant and Equipment
Property Plant and Equipment consists of the following at August 31, 1997:
Furniture and fixtures $4,842
Less accumulated depreciation 488
------
Property Plant and Equipment -net $4,354
======
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 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.
At August 31, 1997, the Company has net operating loss carry forwards for
income tax purposes of $547. These carry forward losses are available to offset
future taxable income, if any, and expire in the year 2010. 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 components of the net deferred tax asset as of August 31, 1997 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 186
Valuation allowance $ (186)
------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit from the loss generated 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
F-29
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
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.
Note 8 - 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-30
<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 Mushroom Innovations Inc.
a Victoria, British Columbia, Canadian corporation (a development stage
company)
I have audited the accompanying consolidated balance sheet of Mushroom
Innovations Inc. (a development stage company) as of December 31, 1997 and the
related consolidated statements of operations, cash flows and shareholders'
equity for the period from inception, February 11, 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 consolidated its operations, shareholders equity and cash flows for
period from inception, February 11, 1997, to December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated 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 Mushroom
Innovations Inc. (a development stage company) to continue as a going concern.
Thomas P. Monahan, CPA
January 18, 1998
Paterson, New Jersey
F-31
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED BALANCE SHEET
December 31, 1997
June 30,
December 31, 1998
1997 Unaudited
---- ---------
Assets
Current assets
Cash and cash equivalents 813 $-0-
GST tax receivable 1,260 1,271
------- -------
Total current assets 2,073 1,271
Property and equipment-net 5,834 5,346
Other assets
Software development costs 9,843 9,844
Investment in affiliated company 2,000 2,000
-------
Total other assets 11,843 11,844
------- -------
Total assets $19,750 $18,461
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Officer loan payable $ 22,336 $ 22,993
-------- --------
Total current liabilities 22,336 22,993
Stockholders' equity
Common Stock authorized 10,000,000 shares, no par 7,299 7,299
value each. At December 31, 1997 and June 30,
1998, there are 95,000 shares outstanding
Retained earnings deficit (9,885) (11,991)
-------- --------
Total stockholders' equity (2,586) (4,692)
-------- --------
Total liabilities and stockholders' equity $ 19,750 $ 18,301
======== ========
See accompanying notes to financial statements.
F-32
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
period from For the For the period
inception, six months from inception,
February 11, ended February 11, 1997 to
1997 to June 30, 1998 December 31, 1997
December 31, 1997 Unaudited Unaudited
----------------- --------- ---------
<S> <C> <C> <C>
Revenue $ -0- $ -0- $ -0-
Costs of goods sold -0- -0- -0-
-------- -------- --------
Gross profit -0- -0- -0-
Operations:
General and administrative 8,799 803 9,602
Depreciation and amortization 648 648 1,296
-------- -------- --------
Total expense 9,447 1,451 10,898
Other expenses
Interest expense 438 657 1,095
-------- -------- --------
Total other expense 438 657 1,095
Net income (loss) $ (9,885) $ (2,108) $(11,993)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, FEBRUARY 11, 1997 TO AUGUST 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (547)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation 488
GST tax receivable (545)
--------
TOTAL CASH FLOWS FROM OPERATIONS (604)
CASH FLOWS FROM FINANCING ACTIVITIES
Officer Loan payable 21,898
Sale of common stock 7,299
--------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 29,197
CASH FLOWS FROM INVESTING ACTIVITIES
Software development costs (5,274)
Purchase of fixed assets (4,842)
--------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (10,116)
NET INCREASE (DECREASE) IN CASH 18,477
CASH BALANCE BEGINNING OF PERIOD -0-
--------
CASH BALANCE END OF PERIOD $ 18,477
========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Deficit
Common Common during accumulated
Stock Stock development stage Total
----- ----- ------------------ -----
Sale of initial shares 95,000 $ 7,299 $ 7,299
Net loss (9,885) (9,885)
-------- --------
Balances December 31, 1997 95,000 $ 7,299 $ (9,885) $ (2,586)
Unaudited
Net loss (2,106) (2,106)
-------- --------
Balance June 30, 1998 95,000 $ 7,299 $(11,991) $ (4,692)
====== ======== ======== ========
See accompanying notes to financial statements.
F-35
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Note 1 - Formation of Company and Issuance of Common Stock
a. Formation and Description of the Company
Mushroom Innovations Inc. (the "Company"), was formed under the name
536445 B.C. LTD as a Victoria, British Columbia, Canadian corporation February
11, 1997 and authorized to issue to 100,000 shares of common stock, no par
value. On March 14, 1997, the a certificate of name change was filed amending
the corporate name to Mushroom Innovations Inc.
b. Description of Company
The Company is a development stage company that was organized as a holding
company for two subsidiaries ePOST Innovations, Inc. ("ePOST") and Communication
Exchange Management, Inc. ("CEM"). CEM is involved with the development of data
encryption software. ePOST assets consisted of proprietary knowledge of various
computer software products under development.
c. Issuance of Shares of Common Stock
On May 28, 1997 the Company sold an aggregate of 95,000 shares as follows:
60,000 shares to Robert Sendoh; 30,000 shares to Carl Whitehead and 5,000 shares
to Bill Kaleta.
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 $11,991 for the period from inception, February 11, 1997, June 30, 1998.
These factors indicate that the Company's continuation as a going concern is
dependent upon its ability to obtain adequate financing. The Company has been
financed to date through an officer's loan of $22,993 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.
F-36
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
The consolidated financial statements presented at December 31, 1997
consist of the consolidated balance sheet as at December 31, 1997 of the Company
and CEM and the consolidated statements of operations, cash flows and
stockholders equity for the period from inception, February 11, 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 of the
Company and CEM and the unaudited consolidated statements of operations, cash
flows and stockholders equity for the six months ended June 30, 1998 and for the
period from inception, February 11, 1997, to June 30, 1998.
b. Cash and Cash Equivalents
Cash and Cash Equivalents - Temporary investments with a maturity of less
than three months when purchased are treated as cash.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight line
methods over a period of five years. Maintenance and repairs are charged against
operations and betterment's are capitalized.
d. 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 effects of potential common shares such as
warrants as the effect would be antidilutive.
The weighted average number of shares used in calculating basic and
diluted net income per share were 47,500 and 95,000.
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
F-37
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(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. Selling and Marketing Costs
Selling and Marketing costs, which are generally expensed as incurred for
the period from inception, February 11, 1997, to December 31, 1997 and for the
six months ended June 30, 1998 was $-0- and $-0- respectively.
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 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.
A summary of software development costs at December 31, 1997 is as
follows:
F-38
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
December 31, June 30,
1997 1998
Cost incurred for product development
and licensing for CEM $4,180 $4,180
Other projects 5,663 5,663
------ ------
Total software development $9,843 9,844
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
Balance sheet accounts of international subsidiaries are translated at the
current exchange rate as of the end of the accounting period. Income statement
items are translated at average exchange rates. The resulting translation
adjustment is recorded as a separate component of stockholders' equity.
j. Significant Concentration of Credit Risk
At December 31, 1997, 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. Research and Development Expenses
Research and development expenses are charged to operations when incurred.
l. Patent Costs
Costs incurred to acquire exclusive licenses of patentable technology or
costs incurred to patent technologies are capitalized and amortized over the
shorter of a five year period or the term of the license or patent. The portion
of these amounts determined to be attributable to patents is amortized over
their remaining lives and the remainder is amortized over the estimated period
of benefit but not more than 40 years on a straight line basis.
F-39
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
m. Asset Impairment
The Company adopted the provisions of SFAS No. 121, Accounting for the
impairment of long lived assets and for long-lived assets to be disposed of
effective January 1, 1996. SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. There was no effect of such adoption on the
Company's financial position or results of operations.
g. 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. 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 - Transfer of Assets
Pursuant to an acquisition agreement dated September 17, 1997, Cypost
Corporation issued 2,000,000 shares of common stock at $0.0001 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 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.
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.
F-40
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
The Company sold all the rights, title and interest to all the assets
owned by ePost Canada. Those assets consisted of proprietary knowledge of
various computer software products under development by ePost Canada.
b. Acquisition of Communication Exchange Management, Inc.
On September 18, 1998, the Company sold an additional subsidiary, CEM to
Cypost Corporation, The Company received 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 to Cypost for all of the issued and outstanding stock of CEM 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.
Note 4 - Related Party transactions
a. Leased Office Space
The Company occupies office space at 1812 Boatlift Lane, Vancouver,
British Columbia V6H 3Y2. Rent is payable on a month to month basis at $200 per
month.
b. Officer Salaries
No officer has received a salary in excess of $100,000.
c. Loan Payable-Shareholder
The Company is obligated to repay moneys advanced by Robert Sendoh
aggregating $28,467 with interest at 6% and is payable on demand.
Note 5 - Property Plant and Equipment
Property Plant and Equipment consists of the following at December 31,
1997:
Furniture and fixtures $6,482 $6,482
Less accumulated depreciation 648 1,296
------ ------
Property Plant and Equipment -net $5,834 $5,346
====== ======
F-41
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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 June 30, 1998, the Company had no
material current tax liability, deferred tax assets, or liabilities to impact on
the Company's financial position because the deferred tax asset related to the
Company's net operating loss carry forward and was fully offset by a valuation
allowance.
At June 30, 1998, the Company has net operating loss carry forwards for
income tax purposes of $11,991. These carry forward losses are available to
offset future taxable income, if any, and expire in the year 2010. 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 components of the net deferred tax asset as of June 30, 1998 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 4,077
Valuation allowance $ (4,077)
--------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit from the loss generated for
the period from inception, February 11, 1997, to June 30, 1998. . SFAS No. 109
requires that a valuation allowance be provided if it is more likely than not
that some portion or all of a deferred tax asset will not be realized. The
Company's ability to realize benefit of its deferred tax asset will depend on
the generation of future taxable income. Because the Company has yet to
recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 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.
F-42
<PAGE>
MUSHROOM INNOVATIONS INC.
a Victoria, British Columbia, Canadian corporation
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Note 8 - 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-43
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CyPost Corporation
------------
The undersigned, Carl Whitehead, under penalty of perjury, hereby
certifies that:
1. I am the duly elected Secretary of CyPost Corporation, f.n.a. Epost
Corporation (hereinafter referred to as the "Corporation");
2. The Certificate of Incorporation of the Corporation was duly filed with
the Secretary of State of the State of Delaware on September 5, 1997 under the
name of Epost Corporation and was amended on September 17, 1997; and
3. Following is a correct and complete copy of the Amended and Restated
Certificate of Incorporation of the Corporation, which was duly adopted in
accordance with Section 245, Section 242 and by a majority of the shares
entitled to vote thereon pursuant to consent of the shareholders under Section
228 of Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof
and supplemental thereto (hereinafter referred to as the "General Corporation
Law of the State of Delaware"):
------------------
FIRST:The name of the corporation (hereinafter called the "Corporation")
is:
CyPost Corporation
SECOND: The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is 9 East
Loockerman, City of Dover 19901, County of Kent; and the name of the registered
agent of the Corporation in the State of Delaware at such address is National
Corporate Research, Ltd.
THIRD: The nature of the business and the purpose to be conducted and
promoted by the Corporation, which shall be in addition to the authority of the
Corporation to conduct any lawful business, to promote any lawful purpose, and
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
1
<PAGE>
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 35,000,000 shares of which 30,000,000 shares are
designated as common stock, par value $.001 per share and 5,000,000 shares of
which are designated as blank check preferred stock, par value $.001 per share.
The increase in the number of authorized shares of common stock shall be
effectuated by a forward stock split in the ratio of 2:3 which shall apply to
both issued and unissued shares of common stock alike. The par value of both
common and preferred stock shall be unaffected by such forward stock splits and
shall remain at $.001 per share.
The Board of Directors of the Corporation is hereby authorized to, by any
resolution or resolutions duly adopted in accordance with the provisions of the
General Corporation Law of the State of Delaware and the By-Laws of the
Corporation, authorize the issuance of any or all of the preferred stock in any
number of classes or series within such classes and in the resolution or
resolutions authorizing such issuance, to set all terms of such preferred stock
of any class or series, including, without limitation:
(a) the designation of such class or series, the number of shares to
constitute such class or series, whether the shares shall be of a stated
par value or no par value, and the stated value thereof if different from
the par value thereof;
(b) whether the shares of such class or series shall have voting rights,
in addition to any voting rights provided by law, and, if so, the term of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such class or series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other class or
series of preferred stock;
(d) whether the shares of such class or series shall be subject to
redemption by the Corporation, and, if so, the times, prices and other
conditions of such redemption;
(e) the amount or amounts payable upon shares of such class or series
upon, and the rights of the holders of such class or series in, the
voluntary or involuntary liquidation, dissolution or winding up, or upon
any distribution of the assets, of the Corporation;
(f) whether the shares of such class or series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such class or series for
retirement or other Corporation purposes and the terms and provisions
relating to the operation thereof;
(g) whether the shares of such class or series shall be convertible into,
or exchangeable
2
<PAGE>
for, shares of stock of any other class or any other series of preferred
stock or any other securities and, if so, the price or prices or the rate
or rates of conversion or exchange and the method, if any, of adjusting
the same, and any other terms and conditions of conversion or exchange;
(h) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such class or series or of any other class
or series of Preferred Stock or of any other class; and
(i) any other powers, preferences and relative, participating, options and
other special rights, and any qualifications, limitations and
restrictions, thereof.
The powers, preferences and relative, participating optional and other
special rights of each class or series of preferred stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding. All shares of any one
series of preferred stock shall be identical in all respects with all other
shares of such series, except that shares of any one series issued at different
times may differ as to the dates from which dividends thereof shall be
cumulative.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of ss.291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of ss.279 of Title 8 of the Delaware Code order
a meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation, and
regulation of the powers of the Corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management for the business and the conduct of
3
<PAGE>
the affairs of the Corporation shall be vested in its Board of
Directors. The number of directors which shall constitute the whole
Board of Directors shall be fixed by, or in the manner provided in,
the Bylaws. The phrase "whole Board" and the phrase "total number of
directors" shall be deemed to have the same meaning, to wit, the
total number of directors which the Corporation would have if there
were no vacancies. No election of directors need be by written
ballot.
2. After the original or other Bylaws of the Corporation have
been adopted, amended, or repealed, as the case may be, in
accordance with the provisions of ss.109 of the General Corporation
Law of the State of Delaware, and, after the Corporation has
received any payment for any of its stock, the power to adopt,
amend, or repeal the Bylaws of the Corporation may be exercised by
the Board of Directors of the Corporation; provided, however, that
any provision for the classification of directors of the Corporation
for staggered terms pursuant to the provisions of subsection (d) of
ss.141 of the General Corporation Law of the State of Delaware shall
be set forth in an initial Bylaw or in a Bylaw adopted by the
stockholders entitled to vote of the Corporation unless provisions
for such classification shall be set forth in this certificate of
incorporation.
3. Whenever the Corporation shall be authorized to issue only
one class of stock, each outstanding share shall entitle the holder
thereof to notice of, and the right to vote at, any meeting of
stockholders. Whenever the Corporation shall be authorized to issue
more than one class of stock, no outstanding share of any class of
stock which is denied voting power under the provisions of the
certificate of incorporation shall entitle the holder thereof to the
right to vote at any meeting of stockholders except as the
provisions of paragraph (2) of subsection (b) of ss.242 of the
General Corporation Law of the State of Delaware shall otherwise
require; provided, that no share of any such class which is
otherwise denied voting power shall entitle the holder thereof to
vote upon the increase or decrease in the number of authorized
shares of said class.
EIGHTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of ss.102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented.
NINTH: The Corporation shall, to the fullest extent permitted by the
provisions of ss.145 of the General Corporation Law of the State of Delaware, as
the same may be amended and
4
<PAGE>
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any Bylaw, agreement,
vote of stockholders or disinterested directors or otherwise both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
TENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
certificate of incorporation are granted subject to the provisions of this
Article TENTH.
Signed on Sept. 13, 1999
/s/Carl Whitehead
----------------------------
Carl Whitehead
5
B.C. Branch
The Canadian Bar Association
PREFERRED SUPPLIER
AGREEMENT
MEMORANDUM OF AGREEMENT, dated March 15, 1999.
BETWEEN:
CyPost Corporation
having an office at Suite 101-260 West Esplanade
North Vancouver, British Columbia V7M 3G7
hereinafter referred to as "Supplier"
- and -
The Canadian Bar Association, B.C. Branch
having an office at 10th Floor, 845 Cambie Street,
Vancouver, British Columbia, V6B 5T3
hereinafter referred to as "CBABC"
WHEREAS CyPost Corporation (The "Supplier") is desirous of receiving the
approval of the CBA, BC Branch, ("CBABC") as a preferred supplier and
recommended vendor Navaho Lock and Navaho ZipSafe (software program designed to
meet the growing needs of insuring safe, secure and private correspondence when
sending e-mail and attachments over the Internet) to CBABC Mernbers;
AND WHEREAS having reviewed the product and services offered by the Supplier,
and having agreed on preferential discounts to be provided by the Supplier,
CBABC is prepared to grant its preferred supplier status to the Supplier;
NOW THEREFORE this Agreement witnesseth that, in consideration of the mutual
covenants contained in this Agreement and after good and valuable consideration,
the receipt and sufficient of which is hereby acknowledged, the parties agree as
follows:
1. TERM
1.1 The term (the "Term") of this Agreement will be for one year, commencing
on the date this Agreement is signed by CBABC.
1.2 Notwithstanding paragraph 1.1, either party may terminate this Agreement
by giving to the
<PAGE>
other party 90 days' written notice of termination.
1.3 Either party may terminate this Agreement by giving written notice of
termination in the event of any default under this Agreement by the other
party that is not remedied within 30 days of receipt of written notice of
the default.
2. THE PROGRAM
2.1 On execution of this Agreement by CBABC, the Supplier will, during the
Term, offer CBABC members a minimum discount of 25% from the prevailing
retail price of Navaho Personal Edition and Navaho ZipSafe. In addition
the Supplier is committed to structuring multiple-seat licensing
arrangements for the legal community at or below any agreement that maybe
entered into with any other organization and/or corporation during the
fiscal year of 1999.
2.2 In addition to the "in House" implementation of the Supplier's software,
CBABC members may also purchase additional licenses for the purpose of
distribution to their clientele. These purchases may be structured on a
deferred inventory basis, i.e. Individual firm would be allocated 1 00
CD's and be asked to submit a usage report on a monthly or quarterly
basis. These purchases will of course be at the preferred discount rate,
as outlined above.
2.3 CBABC will not, during the Term, offer a program of similar or directly
competitive nature, subject to any programs already in place.
3. PREFERRED SUPPLIER STATUS
3.1 CBABC hereby approves the Supplier as a preferred supplier, and as such:
a) authorises the Supplier to represent that it is a preferred supplier to
CBABC rnembers, approved by CBABC;
b) will promote the Supplier to Members during the Term;
c) will permit the Supplier to use trademarks or logos of CBABC, in any
marketing or promotion initiative of the Supplier relating to the Program,
subject to prior CBABC written approval, which approval is in the sole
discretion of CBABC through its Executive Director or designate.
4. PROMOTION BY SUPPLIER
4.1 CBABC agrees to provide advertising space within it's various 1999
publications and to provide mailing labels for marketing purposes and in
return the Supplier will provide CBABC with 250 each of Navaho Lock and
Navaho ZipSafe licenses for the purpose of distribution to various members
throughout the Province of British Columbia.
<PAGE>
4.2 The Supplier agrees that any advertising and promotional material will be
in English and will be, at the request of CBABC, in combined or separate
English and French versions, and will be submitted before use to OBABC for
its review and written approval, which approval is in the sole discretion
of CBABC, through its Executive Director or designate.
5. REMUNERATION
5.1 In consideration of the granting of preferred supplier status, the
Supplier will pay to CBABC, 20% of the billing amount from CBABC members
for licenses sold to the legal community in the Province of British
Columbia.
5.2 The Supplier will make available quarterly management accounts to CBABC to
verify the fee payable. CBABC will have the right to inspect the
Supplier's books and accounts as they relate to this Agreement, to request
a copy of the audited annual financial statements of the Supplier and/or
to perform audits to confirm compliance with this Agreement.
6. MAILING LISTS
6.1 The Supplier acknowledges that this Agreement does not contemplate that
the Supplier will receive access to CBABC mailing labels. If such access
is given, the Supplier agrees that the mailing labels, and all rights and
interests in the mailing labels, will in all circumstances remain the
property of CBABC.
6.2 The Supplier will only use such rnailing labels: a) with the express
written permission of the Executive Director, or designate, which
permission may be withheld in that person's sole discretion; b) for
mailings pursuant to the Program; or c) to provide information to the
Supplier staff or sales representatives about the recipients of a mailout
to CBABC members in the territory or region of the staff member or sales
representative.
6.3 The Supplier acknowledges that CBABC mailing labels are confidential, and
agrees that such mailing labels, when utilized, will be held in strict
confidence and will not be disclosed to third parties.
7. REPORTS
7.1 The Supplier agrees, upon the request of CBABC, to provide CBABC with a
report respecting:
a) the number of agreements entered into between the Supplier and Members
and the volume of use of the products or services in the Program by Members;
b) a geographic and quarterly breakdown of such sales contracts and
volumes;
<PAGE>
c) the total value of sales for any period specified by CBABC.
8. REPRESENTATIONS AND WARRANTIES
8.1 The Supplier agrees to advise its staff members and sales representatives
that they may not make representations that the products or services
offered in the Program are endorsed as to value or suitability by CBABC,
and the Supplier will make no such representations in its advertising.
9. RELATION OF PARTIES
9.1 The Supplier and CBABC acknowledge that CBABC is not a guarantor of any
contract executed between a member of CBABC and the Supplier. This
Agreement will not constitute a joint venture between the parties nor will
it authorise a party to act as an agent or representative of the other
party. Each party undertakes not to make representations and not to incur
any liabilities of any nature for or on behalf of the other party.
10. COMPLAINTS
10.1 The Supplier acknowledges and agrees that effective and responsive
customer service is essential to the success of the program. The Supplier
agrees to designate a Supplier staff member who will ensure that the
requests or complaints of CBABC members are responded to in a courteous
manner and on a timely basis. The Supplier will keep a record of such
complaints and will make the record available to CBABC upon request.
11. NOTICES
11.1 Notice given by one party to the other pursuant to this Agreement will be
made in writing and will be delivered by hand, by fax or by registered
mail, to the following persons at the following addresses:
B.C. BRANCH, CANADIAN BAR ASSOCIATION
1Oth Floor, 845 Cambie Street Vancouver, B.C., V6B 5T3
Attention: Barry Cavanaugh, Executive Director
Telephone: (604) 687-3404 Fax: (604) 669-9601
CyPost Corporation
Suite 101-260 West Esplanade North Vancouver, BC V7M 3G7
Attention: Steven Berry
Telephone: (604) 904-4-422 Fax: (604) 904-4433
Notice given by hand or fax is deerned to be delivered on the day the notice is
hand delivered or the day after it is sent by fax. A notice given by registered
mail will be deemed to be delivered on the fifth day after posting of the
notice.
<PAGE>
12. ENUREMENT
12.1 This Agreement will enure to the benefit of and be binding upon the
respective successors and permitted assignees of the parties.
13. CONSENT
13.1 This Agreement may be amended, in writing, only with the mutual consent of
the parties, and no amendment will be effective unless in writing, signed
by both parties.
14. GOVERNING LAW
14.1 This Agreement is subject to and will be interpreted and construed in
accordance with the laws of British Columbia.
15. ASSIGNMENT
15.1 This Agreement may not be assigned by the Supplier.
IN WITNESS WHEREOF the parties have executed this Agreement on the date(s), and
at the place(s) indicated below:
DATED AT Vancouver, British Columbia this 15th day of March, 1999.
CANADIAN BAR ASSOCIATION, B.C. Branch
per: /s/ Barry Cavanaugh
-------------------
Barry Cavanaugh, Executive Director
CyPost Corporation
per: /s/ Steven Berry
-------------------
Steven Berry, C.E.O, C.O.O.
SUBLEASE
THIS SUBLEASE made as of the First (1st) day of February, 1998.
BETWEEN
HER MAJESTY THE QUEEN
in Right of Canada as represented by the
Minister of Public Works and Government Services
641 - 800 Burrard Street
Vancouver, British Columbia
V6Z 2V8
(the "Sublessor")
AND
ePOST INNOVATIONS INC.
1812 Boatlift Lane
Vancouver, British Columbia
V6H 3Y2
(the "Sublessee")
WHEREAS:
The Sublessor has leased certain premises from Novo Esplanade Limited (the
"Headlessor") in the building at 260 West Esplanade, North Vancouver, British
Columbia (the "Building") on the terms and conditions contained in a lease
agreement (the "Headlease") made as s of the First (1st) day of January, 1995;
The Sublessor has agreed to sublease to the Sublessee the premises on the terms
and conditions set forth below.
NOW THEREFORE in consideration of the premises and the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby respectively acknowledged:
The Sublessor hereby demises and subleases to the Sublessee that portion of the
First (1st) floor of the Building, shown outlined in heavy black lines on the
plan attached hereto as Schedule "A", constituting, for the purposes of this
Sublease 408.1 square metres of rentable area, (the "Premises").
<PAGE>
TO HOLD the Premises for a term of One (1) Year and Eleven (11) Months less One
(1) Day commencing on the First (1st) day of February, 1998 and terminating on
the Thirtieth (30th) day of December, 1999.
AND PAYING therefor, to the Sublessor the sum of FORTY-EIGHT THOUSAND DOLLARS
(48,000.00) per annum, plus the Goods and Services Tax thereon, payable in
monthly installments of FOUR THOUSAND DOLLARS ($4,000.00) each, plus the Goods
and Services Tax thereon, commencing on the 1st day of February,1998 and
continuing on the first day of each and every month thereafter to and including
the 1st day of December, 1999.
Rent is payable to the "Receiver General for Canada" in care of
Public Works and Government Services Canada
641 - 800 Burrard Street
Vancouver, B.C.
V6Z 2V8
1. The Sublessee hereby covenants with the Sublessor as follows:
(a) to pay the rent hereby reserved in the manner and on the days
specified herein;
(b) to observe and perform all the covenants on the part of the
Sublessor, as lessee, to be observed and performed under the
provisions of the Headlease, insofar as they are applicable to the
Premises, except for the covenants to pay rent and any increases in
operating costs and taxes thereunder, and to keep the Sublessor
indemnified against all actions, expenses, claims and demands in
respect of such covenants except as aforesaid;
(c) To keep indemnified the Sublessor against all claims, damages, costs
and expenses in any want relating to the acts or omissions of the
Sublessee regarding the Headlease;
(d) not to assign this Sublease or sublet or part with possession of the
Premises or any part thereof or grant any license or concession
within or relating to the Premises;
(e) not to undertake any leasehold improvements or fixtures in the
Premises without the prior written consent of the Sublessor (and of
the Headlessor, if so required by the provisions of the Headlease);
(f) to use the Premises only for offices for a computer programming
company and for general administrative office purposes for the
operations of the Sublessee and for no other purpose whatsoever. The
Sublessee shall be permitted to sublease part of the Premises to an
associated company or individual(s) provided that they obtain the
prior approval of both the Sublessor and the Headlessor. It is
understood and agreed that either the Sublessor or the Headlessor
may arbitrarily withhold such
<PAGE>
approval for any reason whatsoever.
(g) to keep the Premises clean and in good and tenantable repair,
reasonable wear and tear excepted;
(h) to permit the Headlessor, the Sublessor or their authorized agents
at all times to enter the Premises for the purpose of examining the
state of repair of the Premises;
(i) to yield up the Premises at the expiration of the term of this
Sublease or whenever sooner determined, in good and tenantable
repair, reasonable wear and tear excepted;
(j) that the Premises are accepted by the Sublessee on an "as is" basis.
(k) if the Premises are used by the Sublessee over and above the hours
of operation as defined in Clause 14 of Part 1 of Schedule "E"
attached to the Headlease, then the Sublessee shall, if so requested
by the Headlessor, pay the Headlessor directly for such additional
usage of electricity and fuel for heating, air conditioning and hot
water.
2. The Sublessor hereby covenants with the Sublessee as follows:
(a) to pay the rent reserved by and to perform and observe the covenants
on her part contained in the Headlease with respect to the Premises
as far as the same are not hereby required to be performed and
observed by the Sublessee; and
(b) to permit the Sublessee to peaceably and quietly enjoy the Premises
as long as the Sublessee pays the rent and performs the covenants
provided in this Sublease.
3. The Sublessor and the Sublessee hereby covenant and agree as follows:
(a) if the rent or any other payment hereby reserved or any part of it
is in arrears, or if the Sublessee does not fulfill any of its
covenants for 15 days the Sublessor may give to the Sublessee a
notice in writing requiring the Sublessee to remedy such default
within a period of 15 days from the date of service of such notice,
provided that if such default cannot reasonably be cured within 15
days, and if the Sublessee commences the remedy of such default
within a period of 15 days from the date of service of such notice
and thereafter diligently continues to prosecute the remedy of such
default and there does not appear, in the sole opinion of the
Sublessor, any risk of a forfeiture of the Headlease as a result of
such default, then the period for curing such default shall be the
period reasonably required to do so and if the Sublessee shall fail
to remedy such default within such time, then the current months
rent together with the rent for the last six (6) months shall
<PAGE>
immediately become due and payable and the Sublessor may enter upon
and take possession of the Premises or any part thereof in the name
of the whole and the same repossess and enjoy as of its former
estate, and the term hereby granted shall thereupon cease and
determine;
(b) the Sublessor and the Sublessee shall well and truly observe and
fulfill the provisions and requirements of all Statutes,
Regulations, Bylaws, rules, Orders and Instructions, including those
of the Canada Labour Code and the Canadian Environmental Protection
Act, relating to the Premises and for greater certainty, but not so
as to restrict the generality of the foregoing, the Sublessee
covenants to faithfully observe all such requirements as may apply
with respect to electrical wiring and apparatus and fire protection
devices now installed or to be installed in and for the Premises;
(c) a waiver by the Sublessor of any breach of the Sublessee's covenants
hereunder shall not affect or prejudice Her respective rights in
respect of any future or other breach of covenant by the Sublessee;
(d) the Sublessee will indemnify the Sublessor and save Her harmless
from and against any and all claims, demands, actions, damages and
liabilities in connection with any personal injury, loss of life, or
damage to property arising out of the occupancy or use by the
Sublessee of the Premises, occasioned wholly or in part by any
negligent act or omission of the Sublessee;
(e) the Sublessee agrees not to suffer or permit any Builder's Lien to
attach to the Premises during the term for work, labour, services or
materials ordered by it or for the cost of which it may ob obligated
and that if any such lien shall attach or claim therefor shall be
filed, the Sublessee shall, within 20 days after receiving notice of
such lien or claim for lien procure the discharge thereof from the
title to the lands on which the Building is situated;
(f) the Sublessee shall at the Sublessee's expense, secure and maintain
through the term of this Sublease insurance contracts in a form, in
the amounts, and containing the terms and conditions, if any, set
out in Schedule "B" hereto, and to promptly furnish to the Sublessor
evidence, in a form satisfactory to the Sublessor, that the said
insurance contracts are in force and in compliance with the
provisions of Schedule "B" and in the event that the Sublessee fails
to insure as herein required, the Sublessor may, but shall not be
obligated to, effect such insurance for the benefit of the Sublessor
or the Sublessee, or both of them, for a period not exceeding one
year, and any premium paid by the Sublessor shall be recoverable
from the Sublessee on demand.
4. The Sublessee acknowledges and agrees that all obligations of the
Headlessor under the Headlease, including the obligation to supply
services shall continue to be the obligations
<PAGE>
of the Headlessor in respect of the Premises. The Sublessee agrees that
the Sublessor shall not be responsible or obligated in respect thereof,
and that the Sublessor shall not be liable to the Sublessee for any
default or breach by the Headlessor in respect thereof, but the Sublessor
will, unless this Sublease is terminated, at the written request and the
sole expense of the Sublessee, take all steps necessary to enforce for the
benefit of the Sublessee the obligations of the Headlessor as aforesaid.
5. If the consent of the Headlessor must be obtained or the satisfaction or
waiver of any conditions must be met before the Sublessor may sublease the
Premises to the Sublessee, this sublease shall not be effective and shall
be deemed not to have been granted until all such consents have been
obtained and such conditions have been satisfied or waived.
6. The Sublessee shall not register this Sublease in any Land title Office
and the Sublessor shall not be obligated to deliver this sublease to the
Sublessee in registrable form.
7. The Sublessee acknowledges to and with the Sublessor that it has received
a copy of the executed Headlease and is familiar with the terms, covenants
and conditions contained therein.
8. This sublease may be modified only by a subsequent agreement in writing of
equal formality executed by the parties.
9. If any dispute or question shall arise between the parties hereto during
the term hereof, and any extension, as to any matter arising hereunder
which the parties are unable to resolve by agreement, the same shall be
determined by a Court of competent jurisdiction.
10. Time shall in all respects be of the essence in each and every of the
terms, covenants and conditions in this Sublease.
11. Whenever in this Sublease the context so requires or permits, the singular
number shall be read as if the plural was expressed and the masculine
gender as if the feminine or neuter, as the case may be, were expressed.
12. This Sublease shall enure to the benefit of and be binding upon the
parties hereto, their lawful heirs, executors, administrators, successors
and assigns.
13. As required by the Parliament of Canada Act it is an express condition of
this Sublease that no member of the House of Commons shall be admitted to
any share or part of this Sublease or to any benefit arising therefrom.
14. The Sublessor considers that the leasing information listed hereunder is
the type of government information that is normally available to the
general public and therefore, the Sublessor reserves the right to make
this information available to the general public, that is,
<PAGE>
- the address of the Building
- the name and address of the Sublessee
- the commencement date of this Sublease
- the termination date
- the area of the Premises.
and the Sublessee agrees to the disclosure to the public of such information and
agrees not to object in any way whatsoever to the disclosure of such
information.
15. Any notice required to be given to any party shall be sufficiently given,
(a) in the case of the Sublessee, if personally served on the Sublessee
or if the Sublessee is a incorporated then on any officer or
executive of the Sublessee, or, if forwarded by registered mail,
addressed to:
ePost Innovations Inc.
c/o Mr. Carl Whitehead
P.O. Box 633
Lions Bay, British Columbia
V0N 2E0
or to such other address as the Sublessee may from time to time
advise by notice in writing.
(b) in the case of the Sublessor, if personally served on the Regional
Manager of Property & Facilities Management Services or, if
forwarded by registered mail, addressed to:
Regional Manager of Property & Facilities Management Services
Public works and Government Services, Pacific Region
641 - 800 Burrard Street
Vancouver, British Columbia
V6Z 2V8
or to such other address as the Sublessee may from time to time
advise by notice in writing.
and any such notice, if forwarded by mail, whenever mailed, shall be deemed to
be served on the fifth business day next following the date it is so mailed.
16. The Sublessee shall deliver to the Sublessor Two (2) Letters of Credit in
forms acceptable to the Sublessor for a total amount of TWENTY-FOUR
THOUSAND DOLLARS ($24,000.00) as follows: firstly, a Letter of Credit in
the amount of TWELVE THOUSAND DOLLARS ($12,000.00) shall be deli vered
prior to possesiion of the
<PAGE>
premises being granted to the Sublessee and secondly, a Letter of Credit
in the amount of TWELVE THOUSAND DOLLARS ($12,000.00) shall be delivered
to the Sublessor on or before February 28, 1998, with such Letters of
Credit to be applied against the last six (6) months rent due hereunder
being the period July 1, 1999 to December 30, 1999, or any rent becoming
due and payable as a result of the Sublessee's default hereunder.
IN WITNESS WHEREOF the parties hereto have executed this Sublease as of the day,
month and year first above written.
The Corporate Seal of
ePOST INNOVATIONS INC.
was hereunto affixed in the
presence of:
- ------------------------------
Authorized Signatory
(SEAL)
- ------------------------------
Authorized Signatory
HER MAJESTY THE QUEEN, in right
Canada as represented by the
Minister of Public Works and
Government Services:
-----------------------------------
Authorized Signatory
-----------------------------------
Authorized Signatory
<PAGE>
8
SCHEDULE "B"
1. INSURANCE CONTRACTS
(1) This schedule describes the insurance contractrs which the Sublessee
shall secure and maintain at the Sublessee's expense throughout the
term of this Sublease.
(2) Each of the following insurance contracts to be provided by the
Sublessee shall
(a) be placed with a company approved by the Sublessor and
licensed under the laws of the Province or Territory of Canada
in which the lands upon which the Building is situated are
located and ordinarily engaged in the business of insuring
against the risks described, and
(b) include a provision requiring the insurer to give thirty days
prior written ntoice to the Sublessor before making any
material change in such insurance or termination or
cancellation thereof.
2. GENERAL LIABILITY POLICY
(1) The Sublessee shall at the Sublessee's expense, throughout the term
of this Sublease, secure and maintain public liability insurance
protecting and indemnifying the Sublessor and the Sublessee against
any claims for
(a) Personal injury,
(b) Bodily injury,
(c) Property damage on an "occurrence" basis, including loss of
use of property,
(d) Contingent Employer's Liability,
(e) Owner's Protective Liability,
(f) Contractual Liability assumed under this Lease,
(g) Cross Liability,
arising from any accident or occurrence in or upon the Premises, the
building or the lands upon which the Building is situated.
(2) The limit of liability shall be not less than $2,000,000 for
Personal Injury, Bodily Injury and Property Damage in any one
occurrence or series of occurrences arising out of one cause.
SHARE PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 30th day of June, 1999,
BETWEEN:
STEPHEN S.W. CHOI, Businessperson, with an address at 7520 First Street,
Burnaby, British Columbia V3N 3T2
("Choi")
OF THE FIRST PART
AND:
EVE LONG, Businessperson, with an address at 209 - 1450 Pennyfarthing
Drive, Vancouver, British Columbia V6J 4X8
("Long")
OF THE SECOND PART
AND:
JASON XU (also known as JIE XU), Businessperson, with an address at 209 -
1450 Pennyfarthing Drive, Vancouver, British Columbia V6J 4X8
("Xu")
OF THE THIRD PART
(Choi, Long and Xu are herein collectively called the "Vendors")
AND:
CyPOST CORPORATION, a company incorporated under the laws of British
Columbia and having an office at Suite 101-260 West Esplanade, North
Vancouver, British Columbia V7M 3G7
(the "Purchaser")
OF THE FOURTH PART
WITNESSES THAT WHEREAS:
A. The Vendors are the legal and beneficial owners of the Vendors' Shares;
<PAGE>
-2-
B. The Vendors have agreed to sell and assign to the Purchaser, and the
Purchaser has agreed to purchase from the Vendors, the Vendors' 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:
1.0 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) "Business" means the internet service provider business carried on
by the Company;
(c) "Closing" means the completion of the purchase and sale of the
Vendors' Shares on the Closing Date;
(d) "Closing Date" means the 30th day of June, 1999 or such other date
as the parties may agree to in writing;
(e) "Closing Receivables" has the meaning given to in Section 2.4;
(f) "Company" means Hermes Net Solutions Inc., a British Columbia
company (incorporation no. 0534672) having its registered office at
209 - 1450 Pennyfarthing Drive, Vancouver, B.C. V6J 4X8;
(g) "Computer Hardware" means the computer hardware equipment listed in
Schedule "B";
(h) "Consents" means the consents, waivers and approvals set forth in
Schedule "C";
(i) "Employment Agreements" means the employment agreements for each of
the Vendors in the form of the agreement attached hereto as Schedule
"D";
(j) "Financial Statements" means the unaudited financial statements for
the Company for the year ended February 28, 1999 prepared by Michael
Ly, Chartered Accountant, 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 "E";
<PAGE>
-3-
(k) "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;
(l) "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 "F";
(m) "Interim Period" means the period from and including the date of
this Agreement to and including the Closing Date;
(n) "June 30 Statements" means the financial statements of the Company
as at June 30, 1999 to be prepared by the Vendors as agreed to by
the Purchaser as provided in Section 2.4;
(o) "Licensed Technology" has the meaning given to it in Subsection
4.1(ccc);
(p) "Licences" means the licences and permits required for the operation
of the Business by the Company all of which are described in
Schedule "G";
(q) "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;
(r) "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;
(s) "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;
<PAGE>
-4-
(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 concerned 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 "H".
(t) "Non-Competition Agreement" means an agreement in the form of the
agreement attached hereto as Schedule "I";
(u) "Owned Technology" has the meaning given to it in Subsection
4.1(vv);
(v) "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;
(w) "Premises" has the meaning given to it in Subsection 4.1(ggg)
(x) "Purchase Price" means the sum of $750,000.00;
(y) "Purchaser's Solicitors" means Alexander, Holburn, Beaudin & Lang,
Barristers & Solicitors, 2700-700 West Georgia Street, Vancouver,
B.C. V7Y 1B8;
(z) "Statement Date" means May 31, 1999;
(aa) "Vendors' Shares" means the issued and outstanding shares in the
capital of the Company owned by the Vendors described in Schedule
"J";
(bb) "Vendors' Solicitors" means Gowling, Strathy & Henderson, 2300-1055
Dunsmuir Street, Box 49122, Vancouver, B.C., V7X 1J1;
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;
<PAGE>
-5-
(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;
(c) 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;
(d) 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;
(e) the singular of any term includes the plural, and vice versa, the
use of any term is equally 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);
(f) any accounting term not otherwise defined has the meanings assigned
to it in accordance with generally accepted accounting principles
applicable in Canada;
(g) any reference to a statute includes and is a reference to that
statute and to the regulations made pursuant thereto, with all
amendments made thereto and in 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;
(h) except as otherwise provided, any dollar amount referred to in this
Agreement is in Canadian Funds; and
(i) any other term defined within the text of this Agreement has the
meanings so ascribed.
1.3 The following are the Schedules to this Agreement:
--------------------------------------------------------------
SCHEDULE DESCRIPTION
-------- -----------
--------------------------------------------------------------
A Assets
--------------------------------------------------------------
B Computer Hardware
--------------------------------------------------------------
C Consents
--------------------------------------------------------------
D Employment Agreements
--------------------------------------------------------------
E Financial Statements
--------------------------------------------------------------
<PAGE>
-6-
--------------------------------------------------------------
SCHEDULE DESCRIPTION
-------- -----------
--------------------------------------------------------------
F Intellectual Property
--------------------------------------------------------------
G Licences
--------------------------------------------------------------
H Material Contracts
--------------------------------------------------------------
I Non-Competition Agreement
--------------------------------------------------------------
J Authorized and issued capital of the Company
--------------------------------------------------------------
K Directors and Officers of the Company
--------------------------------------------------------------
L Insurance
--------------------------------------------------------------
M Licensed Technology
--------------------------------------------------------------
2.0 PURCHASE AND SALE
2.1 On the basis of the warranties, representations and covenants of the Vendors
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 Vendors will sell to the Purchaser the Vendors'
Shares on the Closing Date on the terms and conditions herein set forth.
2.2 The Purchase Price less $110,000.00 (the "Holdback") shall be paid by the
Purchaser by certified cheque, bank draft or solicitors trust cheque payable to
the Vendors' Solicitors "in trust" upon Closing.
2.3 The Purchaser shall pay the Holdback in trust to the Purchaser's solicitors
on the Closing Date.
2.4 The Vendors and the Purchasers shall jointly, within 60 days of the Closing,
cause a mutually acceptable, Chartered Accountant, 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 trade accounts receivable (the "Closing Receivables") of the
Company as at June 30, 1999. If the Vendors and the Purchaser cannot agree on
the appointment of a Chartered Accountant and/or on the June 30 Statements, the
Vendors 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.
<PAGE>
-7-
2.5 The Closing Receivables of the Company not collected in full within sixty
(60) days of the Closing Date shall be purchased by the Vendors at their net
book value as set forth in the June 30 Statements. The Purchaser shall use
commercially reasonable efforts to collect the Closing Receivables.
2.6 The Purchaser shall direct the Purchaser's Solicitor to pay the Holdback to
the Vendors on the 60th day next following Closing less:
(a) if the retained earnings on the June 30 Statements are less than
$110,000.00 (after all applicable tax provisions), an amount equal
to the difference between the retained earnings set forth on the
June 30 Statements and $110,000.00; and
(b) an amount equal to the Closing Receivables not collected in full
within sixty (60) days of the Closing Date; and
(c) any amount payable by the Vendor to the Purchaser pursuant to the
provisions of Section 11.1.
2.7 Any amounts payable by the Vendors to the Purchaser in respect of the
Closing Receivables to be purchased by the Vendors pursuant to Section 2.5 or
any amounts payable by the Vendors to the Purchaser pursuant to Section 11.1, if
not deducted from the Holdback may be set off by the Purchaser against amounts
payable by the Purchaser to the Vendors under their Employment Agreements.
3.0 CLOSING
3.1 The Closing shall take place at 4:00 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 VENDORS' WARRANTIES AND REPRESENTATIONS
4.1 The Vendors warrant and represent to, and covenant 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 Company is as described in
Schedule "J" and the Vendors' Shares are validly issued and
outstanding as fully paid and non-assessable;
(b) he/she is the registered holder and beneficial owner of that portion
of the Vendors' Shares set opposite his/her name in Schedule "J",
free and clear of all Liens and he/she has no interest, legal or
beneficial, direct or indirect, in any shares of, or
<PAGE>
-8-
the assets or business of, the Company other than as set out in
Schedule "J" or by virtue of the Vendors' Shares;
(c) neither he/she nor any officer, director, employee or other
shareholder 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;
(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) he/she 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 his/her portion of the Vendors' Shares, as described
herein, to the Purchaser;
(g) he/she 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 "K";
(j) there have been no alterations to the Memorandum and Articles of the
Company other than as are filed with the Registrar of Companies for
British Columbia;
<PAGE>
-9-
(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 "G" 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;
(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 Vendors or any of them are subject or
constitute or result in a default under any agreement,
contract or commitment to which the Company or the Vendors or
any of them are a party;
(iii) subject to obtaining the Consents, give 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
<PAGE>
-10-
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;
(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
February 28, 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'
<PAGE>
-11-
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 Vendors, 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 887977064RT;
(y) the Company's income tax registration No. is 887977064;
(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 property from a Party with whom
the Company was not dealing at arm's length;
(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
<PAGE>
-12-
(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 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 to 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
Vendors, 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 a 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 Vendors, 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 have 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 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
Vendors, threatened, labour disputes, grievances, controversies or
other labour troubles affecting the Company or the Business;
<PAGE>
-13-
(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;
(ll) Schedule "L" attached hereto contains a true and 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 Vendors 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 Vendors have any knowledge of any
misleading or similar names to the Company's name in use in any area
where the Business has
<PAGE>
-14-
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 by 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 any 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 Vendors, there are no latent defects;
(rr) since the Statement Date in the case of the Company:
(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 the 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;
<PAGE>
-15-
(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 enhancements 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
<PAGE>
-16-
been considered for all purposes the owner of all rights in the
Owned Technology, including copyright.
(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 source 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 Vendors,
fallen into the public domain, or been published by the Company.
(bbb) the Owned Technology and the Licensed Technology, is Millennium
Compliant. In this Subsection "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 shared data sources include
complete dates only;
(iii) hardware that fails to correctly switch or change dates
is not used; and
<PAGE>
-17-
(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 in 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 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 "M" sets forth a complete description of intellectual
property which 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 "M" 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 of any personal
property;
(ggg) the Company is leasing its office premise located at 120-890 West
Pender Street, Vancouver, B.C. (the "Premises") under a written
lease dated April 12, 1999 for a term of one (1) year ending on
January 31, 2000 which is in good standing in every respect; the
transfer of the Vendors' 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
<PAGE>
-18-
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;
(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; and
(jjj) the retained earnings of the Company set forth in the June 30
Statements shall not be less than $110,000.00 (after all applicable
tax provisions).
5.0 COVENANTS
5.1 During the Interim Period, the Vendors 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 Vendors 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 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 4.0 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;
<PAGE>
-19-
(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 Vendors hereunder, which shall continue in
full force and effect.
5.2 Each of the Vendors 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, 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 Vendors will not,
and will not permit the Company to, without the prior consent in writing of the
Purchaser:
(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;
<PAGE>
-20-
(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 Vendors, they 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 Vendors shall deliver to the Purchaser each of the
documents required to be delivered pursuant to Article 10.
5.5 The Vendors and the Purchaser shall co-operate to prepare a final tax return
for the Company forthwith after the Closing Date for the period ending on the
day before the Closing Date and the Vendors shall be responsible for all tax
assessments or reassessments in connection therewith.
6.0 SALE AND LEASEBACK OF COMPUTER HARDWARE
6.1 The Purchaser shall have the option to conduct a valuation of the Computer
Hardware (the "Purchaser's Valuation") and to notify the Vendors within 3 weeks
of the Closing Date should the Purchaser's Valuation indicate that the fair
market value of the Computer Hardware is less than $75,000.00. In the event the
Purchaser has notified the Vendors that the fair market value of the Computer
Hardware is less than $75,000.00, the Vendors shall have the option to either:
(a) conduct their own independent valuation of the Computer Hardware
(the "Vendors' Valuation"), and the Purchaser shall provide the
Vendors or their agents with access to the Computer Hardware to
facilitate the preparation of such valuation; or
<PAGE>
-21-
(b) purchase the Computer Hardware from the Purchaser for and in
consideration of $75,000.00.
If the Vendors and the Purchaser cannot agree upon the valuation of the Computer
Hardware, the Vendors 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 pursuant to the Commercial Arbitration Act of British
Columbia.
7.0 NON-MERGER
7.1 The representations, warranties, covenants and agreements of the Vendors
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 Vendors from such
representation, warranty, covenant or agreement), or any investigation by the
Purchaser, the same will remain in full force and effect.
8.0 CONDITIONS PRECEDENT OF THE PURCHASER REGARDING CLOSING
8.1 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 Vendors 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 Vendors to be performed or complied with at or prior to the
Closing, including the Vendors' 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;
(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
Vendors' 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
<PAGE>
-22-
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;
(f) on or before the Closing Date the Purchaser will have entered into
the Employment Agreements with each of the Vendors on terms and
conditions satisfactory to the Purchaser substantially in the form
attached hereto as Schedule "D";
(g) 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.
8.2 The conditions set forth in Section 8.1 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.
9.0 CONDITIONS PRECEDENT OF THE VENDORS REGARDING CLOSING
9.1 The obligations of the Vendors to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions
at the times stipulated:
(a) 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.
9.2 The conditions set forth in Section 9.1 are for the exclusive benefit of the
Vendors and may be waived by the Vendors in writing in whole or in part at any
time.
10.0 TRANSACTIONS OF THE VENDORS AT THE CLOSING
10.1 At the Closing, each individual 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 Vendors'
Shares to the Purchaser, free and clear of all Liens, including:
(a) certified copies of resolutions of the directors of the Company
authorizing the transfer of the Vendors' Shares and the registration
of the Vendors' Shares in the name of the Purchaser and authorizing
the issuance of new share certificates representing the Vendors'
Shares in the name of the Purchaser;
<PAGE>
-23-
(b) waivers in writing in a form satisfactory to the Purchaser's Counsel
signed by all the shareholders of the Company of any rights they may
have, whether pursuant to the provisions of the Articles of the
Company or otherwise, in respect of the transfer to the Purchaser of
the Vendors' Shares;
(c) share certificates representing the Vendors' Shares in the name of
the Vendors, duly endorsed for transfer to the Purchaser;
(d) duly issued share certificates in the name of the Purchaser
representing the Vendors' 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 Vendors 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 respective Vendors are not
non-residents of Canada for purposes of the Income Tax Act (Canada);
(l) a release of all claims in favour of the Company in form
satisfactory to the Purchaser, duly executed by each respective
Vendor;
(m) a Non-Competition Agreement signed by each of the Vendors
separately;
(n) the Employment Agreements; and
(o) such other documents and instruments as the Purchaser's Counsel may
reasonably require.
<PAGE>
-24-
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 Directors of the Purchaser
authorizing the purchase of the Vendor's Shares and the execution
and delivery of this Agreement and all related documents;
(b) the Non-Competition Agreements;
(c) the Employment Agreements;
(d) a certified cheque, bank draft or solicitor's trust cheque payable
to the Vendor's Solicitors (in trust) in the amount of $640,000.
12.0 INDEMNITY BY VENDORS
12.1 The Vendors 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 that Vendor contained in this Agreement or in any
document given to the Purchaser in order to carry out the
transactions contemplated hereby;
(b) any misrepresentation, inaccuracy, incorrectness or breach of any
representation or warranty made by the Vendors 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 return 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
<PAGE>
-25-
(e) all costs and expenses including, without limitation, legal fees on
a solicitor-and-client basis, incidental to or in respect of the
foregoing.
12.2 Notwithstanding the provisions of Section 12.1:
(a) no Claims as set out in subsections 12.1(a), (b) or (d) (the
"General Claims") shall be made or brought against the vendors after
the second anniversary of the Closing Date and any General Clams
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 12.1(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.
13.0 ANNOUNCEMENTS
13.1 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.
14.0 CONFIDENTIALITY
14.1 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 Vendors;
<PAGE>
-26-
(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 Vendors acknowledge that the Purchaser may issue a
press release disclosing the existence of this Agreement.
15.0 EXCLUSIVITY
15.1 The Vendors will not, and will not authorize or permit 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 Business or any of
the Assets unless this Agreement is terminated.
16.0 ASSIGNMENT
16.1 This Agreement shall not be assigned by the Vendors 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.
19.0 ENUREMENT
19.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns. The Vendors shall be jointly and severally liable in respect
of each and every representation, warranty, covenant and agreement of the
Vendors set forth in this Agreement.
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.
<PAGE>
-27-
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 Vendors:
(i) Stephen Choi
7520 First Street
Burnaby, B.C. V3N 3T2
(ii) Eve Long
209 - 1450 Pennyfarthing Drive
Vancouver, B.C. V6J 4X8
(iii) Jason Xu
209 - 1450 Pennyfarthing Drive
Vancouver, B.C. V6J 4X8
with a copy to the Vendors' Solicitors as follows:
Gowling, Strathy & Henderson
Barristers and Solicitors
2300 - 1055 Dunsmuir Street
Box 49122
Vancouver, B.C. V7X 1J1
Attention: Brett Kagetsu
Fax No. (604) 683-3558
(b) If to the Purchaser:
CyPost Corporation
Suite #101, 260 West Esplanade
North Vancouver, B.C. V7M 3G7
Fax No. (604) 904-4433
with a copy to the Purchaser's Solicitors as follows:
<PAGE>
-28-
Alexander, Holburn, Beaudin & Lang
Barristers and Solicitors
2700 - 700 West Georgia Street
Vancouver, B.C., V7Y 1B8
Attention: Michael V. Roche
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 Vendors warrant to the Purchaser that no agent or other intermediary
has been engaged by the Vendors in connection with the purchase and sale herein
contemplated.
23.0 TENDER
23.1 Tender may be made upon the Vendors or Purchaser or upon the Vendors'
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
<PAGE>
-29-
hereto including the Letter of Intent dated May 14, 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.
SIGNED, SEALED AND DELIVERED )
by STEPHEN CHOI )
in the presence of: )
)
)
- ---------------------------- ) --------------------------------------
Witness ) STEPHEN CHOI
)
- ---------------------------- )
Address )
)
- ---------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED )
by EVE LONG )
in the presence of: )
)
)
- ---------------------------- ) --------------------------------------
Witness ) EVE LONG
)
- ---------------------------- )
Address )
)
- ---------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED )
by JASON XU )
in the presence of: )
)
)
- ---------------------------- ) --------------------------------------
Witness ) JASON XU
)
- ---------------------------- )
Address )
)
- ---------------------------- )
Occupation )
CYPOST CORPORATION
Per:
-------------------------
Authorized Signatory
<PAGE>
SCHEDULE "A"
ASSETS
<PAGE>
SCHEDULE "B"
COMPUTER HARDWARE
<PAGE>
SCHEDULE "C"
CONSENTS
(Re transfer of Equipment Leases, permits, etc., if required)
<PAGE>
SCHEDULE "D"
EMPLOYMENT AGREEMENTS
<PAGE>
SCHEDULE "E"
FINANCIAL STATEMENTS
(attached)
<PAGE>
SCHEDULE "F"
INTELLECTUAL PROPERTY
1. Domain name: ihermes.com
2. InControl Intranet system: custom designed program for account management
3. Various CGI programs to assist webhosting clients
<PAGE>
SCHEDULE "G"
LICENCES
None
<PAGE>
SCHEDULE "H"
MATERIAL CONTRACTS
<PAGE>
SCHEDULE "I"
NON-COMPETITION AGREEMENT
(Attached)
<PAGE>
SCHEDULE "J"
AUTHORIZED AND ISSUED CAPITAL OF THE COMPANY
1. The authorized capital of the Company consists of 20,000,000 Common shares
without par value of which 2,000,000 shares are issued and outstanding as
follows:
===================================================
HOLDER NUMBER OF CERTIFICATE
COMMON NUMBER
SHARES
---------------------------------------------------
Stephen Choi 800,000 2
---------------------------------------------------
Eve Long 200,000 3
---------------------------------------------------
Jason Xu 1,000,000 1
---------------------------------------------------
TOTAL 2,000,000
===================================================
<PAGE>
SCHEDULE "K"
DIRECTORS AND OFFICERS
1. The directors and officers of the Company are as follows:
(a) Directors: Jason Xu
Stephen S.W. Choi
Eve Long
(b) Officers: Jason Xu - President
Stephen S.W. Choi - Secretary
<PAGE>
SCHEDULE "L"
INSURANCE
None
<PAGE>
SCHEDULE "M"
LICENSED TECHNOLOGY
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement"), is made and entered into as
of the 9th day of November, 2000 (the "Effective Date") by and between (i)
Cypost Corporation, a Delaware corporation ("Buyer"); (ii) Internet Arena, Inc.,
an Oregon corporation ("Seller"); and (iii) David Neff, Jerrold Lively, John B.
Anderson, Clarence and Neva Neff Living Trust, Stephen Dentel, Mike Stupak,
Heidi Stupak, and Matt Campbell (individually a "Selling Shareholder";
collectively, "Selling Shareholders"); and Clarence Neff, individually.
RECITALS:
A. Seller operates a business under the trade name "Internet Arena," which
business includes, but is not necessarily limited to, the following services:
(i) 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); (ii) custom
Internet research services; (iii) Internet/computer education services; (iv)
on-site computer/Internet rental services; and (v) web site design services
(collectively, the "Business"). Seller's principal place of business is at 1016
SW Taylor, Portland, Oregon 97205. Seller owns equipment, inventories, contract
rights, leasehold interests, intellectual property rights, domain name
registrations, and other assets used in connection with the operation of the
Business.
B. Buyer desires to acquire substantially all the assets used or useful in
the operation of the Business, and Seller desires to sell such assets to Buyer.
C. Selling Shareholders are the sole shareholders of Seller.
AGREEMENT:
SECTION 1. ASSETS PURCHASED; EXCLUDED ASSETS
1.1. Assets Purchased. Seller agrees to sell to Buyer and Buyer agrees to
purchase from Seller, on the terms and conditions set forth in this
Agreement, the following assets used or useful in the Business
("Assets"), excluding, however, any and all "Excluded Liabilities"
as such term is defined in Section 2.2 below:
1.1.1. All fixed assets, including, without limitation, furniture,
equipment, machinery, motor vehicles, leasehold improvements,
and supplies and tools, including without limitation those
items described in Exhibit 1.1.1 attached hereto and by this
reference incorporated herein (collectively, the "Fixed
Assets").
1.1.2. All of Seller's interest in any agreements or contracts
relating to the Business that Buyer elects to assume,
including, but not necessarily limited to, the agreements and
contracts listed by Seller in Exhibit 1.1.2 attached hereto
and by this reference incorporated herein (collectively, the
"Assumed Contracts").
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 1
<PAGE>
1.1.3. All customer lists, including those listed in Exhibit 1.1.3
attached hereto and by this reference incorporated herein
(collectively, the "Customer Lists").
1.1.4. All "Intellectual Property", as such term is defined below in
Section 6.6, including, but not limited to those trade names
(including the name "Internet Arena"), trademarks, copyrights,
and patents listed in Exhibit 1.1.4 attached hereto and by
this reference incorporated herein.
1.1.5. The ownership of all Internet domain names and associated
registrations owned by Seller, including, but not limited to,
the domain names: (i) "internetarena.com", (ii)
"inetarena.com", (iii) "gotdsl.com", (iv) "maxconnect.net",
and (v) "geobuilder.com", but excluding those domain names
enumerated in the Excluded Assets, as such term is defined in
Section 1.2.
1.1.6. All of: (i) Seller's goodwill; (ii) manuals, catalogs, sales
literature, files, books and records (excluding Seller's
corporate and business records, copies of which shall be
provided to Buyer); and (iii) Seller's rights to use Seller's
telephone numbers, but excluding legal correspondence between
Robert Rosenthal and Seller in connection with this Agreement.
1.1.7. All inventory owned by Seller, together with any replacements
or additions to the inventory made prior to the Closing Date
(as defined in Section 10.1).
1.1.8. All licenses, permits, and registrations, to the extent
transferable, used in any way in the operation of the
Business.
1.2. Excluded Assets. Excluded from this sale and purchase are those
assets set forth on Exhibit 1.2 attached hereto and by this
reference incorporated herein (hereinafter, "Excluded Assets").
SECTION 2. ASSUMED LIABILITIES AND EXCLUDED LIABILITIES
2.1. Assumed Liabilities. Buyer shall accept the assignment of, and
assume duty for Seller's performance under, only the following: (a)
only those accounts payable of Seller listed in Exhibit 2.1 attached
hereto and by this reference incorporated herein ("Accounts
Payable"); (b) the "Assumed Contracts" (as such term is defined in
Section 1.1.2 above and as listed on Exhibit 1.1.2) which Buyer has
elected to assume in its sole discretion and listed in Exhibit
1.1.2; and (c) only those other liabilities or obligations of Seller
specifically listed in Exhibit 2.1 (the items listed in (a), (b),
and (c) of this section shall collectively be referred to as
"Permitted Assumed Liabilities"). Without limiting the generality of
the foregoing sentence, the Permitted Assumed Liabilities shall not
include any amounts owed by Seller to U.S. Bank pursuant to any
financing arrangements with said bank.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 2
<PAGE>
2.2. Excluded Liabilities. All liabilities (which includes all types of
debts or obligations) of Seller or the Business that are not
expressly assumed by Buyer pursuant to, and as specifically set
forth in Section 2.1 above, shall remain the sole and exclusive
obligation and duty of Seller ("Excluded Liabilities"). "Excluded
Liabilities" specifically include, but are not limited to, the
following: (i) any indebtedness for borrowed money; (ii) any claims
or potential claims by third parties, together with all related
losses, expenses, damages, amounts, attorneys' fees and court costs
(collectively "Claims"), including, but not limited to, any Claims
relating in any way to: (a) products or services sold and delivered
or performed by Seller or Seller's agents; (b) actions taken by, or
omissions of, Seller or Seller's agents; and (c) actions taken, or
omissions of, any of Seller's customers; (iii) any Claims for
federal, state, local, or foreign income taxes, or any other taxes,
or related interest or penalties of Seller; (iv) any Claims under
any employee benefit or welfare plan or regarding any compensation,
withholding taxes, or payroll taxes owed to or with respect to any
employee or agent of Seller; (v) any Claim of any past or present
employee of Seller (including, without limitation, claims for
accrued vacation, sick leave, or other benefits); (vi) any Claims
regarding compliance with any applicable federal, state, or local
law, ordinance, regulation, order, or decree in connection with any
activity or omission of Seller at any time; and (vii) any legal
proceedings against Seller.
2.3. Shareholder Debt. Without in any way limiting the generality of
Section 2.2 and the meaning of Excluded Liabilities, the parties
hereby agree to the terms and conditions of this Section 2.3. The
Seller and Selling Shareholders hereby acknowledge that one or more
Selling Shareholders may have lent funds to Seller, and Seller may
have borrowed funds from one or more Selling Shareholders,
including, but not limited to, that certain loan in the amount of
$130,000 evidenced by that certain promissory note, dated June 1,
1999, payable to the Seller and executed by David Neff (hereinafter
collectively referred to as "Shareholder Debts"). All Selling
Shareholders and the Seller hereby agree that any and all
indebtedness and other obligations of Seller pursuant to any
Shareholder Debts are solely and exclusively the responsibility of
the Seller, any Shareholder Debts are owed to any Selling
Shareholder solely by Seller, and that Buyer has no liability or
obligations whatever arising out of any Shareholder Debts. All
Selling Shareholders and Seller further agree that Seller and
Selling Shareholders (including their successors and assigns) shall
not seek any recourse whatsoever against Buyer or the Acquired
Assets with regard to the Shareholder Debts, including any amounts
not repaid to Selling Shareholders. Without limiting the generality
of the foregoing, it is hereby further agreed by all parties that
Buyer does not assume any of Seller's obligations under any of the
Shareholder Debt.
2.4. Employee Matters. Notwithstanding any provision to the contrary
herein, and notwithstanding the representations and warranties
relating to employee matters contained in Section 6.12 hereof, Buyer
assumes no obligation whatsoever to hire any employee of Seller on
or after Closing. Any hiring by Buyer of employees after Closing
shall be in Buyer's complete and sole discretion. This provision
shall
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 3
<PAGE>
not effect Buyer's and Seller's duties under Section 5, Section
10.2.9. and Section 10.3.2 of this Agreement with regard to the Neff
Employment Agreement.
SECTION 3. PURCHASE PRICE; PAYMENT OF PURCHASE PRICE
3.1. Purchase Price; Payment of Purchase Price. The purchase price for
the Assets shall be United States Six Hundred Thousand Dollars
(US$600,000) (the "Purchase Price"), such Purchase Price to be paid
in accordance with the following terms and conditions:
3.1.1. Buyer shall transfer to those Selling Shareholders
identified, and as set forth, in Exhibit 3.1.1 attached hereto
and by this reference incorporated herein, , from the treasury
of CyPost Corporation, a Delaware corporation, that number of
shares of common stock of CyPost Corporation (hereinafter, the
"CyPost Shares") which equals the number obtained by dividing
$300,000 by the trading price for such CyPost Shares on the
NASD OTC bulletin board as of the close of market on the date
the Letter of Intent between the Buyer and Seller was signed
by the President of the Buyer (namely, July 12, 1999, with a
price per share of that date being US$4.4688), adjusted to
reflect the September 24, 1999 record date three-for-two stock
split of CyPost stock ;the exact number of such shares of
CyPost common stock being issued being described in the middle
column of Exhibit 3.1.1 (hereinafter, the "CyPost Share
Payment"). The parties acknowledge and agree that the second
column of Exhibit 3.1.1 contains the true value of such CyPost
Shares pursuant to the NASD OTC valuation of such CyPost
Shares as of the close of business on the immediately
preceding business day prior to the Closing Date (hereinafter
referred to as the "Closing Date Valuation of CyPost Shares").
The transfer of such CyPost Shares shall be subject to, and
governed by, all applicable regulatory approvals, consents and
terms and conditions, and all other terms and conditions
imposed on holders of the common stock of CyPost Corporation.
All certificates of CyPost Shares delivered by Buyer pursuant
to this Agreement shall bear the following legend: "These
securities have not been registered under the U.S. Securities
Act of 1933, as amended (the "Act") and no sale, offer to
sell, or transfer of the securities represented by this
certificate may be made unless a registration statement under
the Act with respect to such shares is then in effect or an
exemption from the registration requirements of such Act is
then, in fact, applicable to such shares, and an opinion of
counsel, acceptable to the company's counsel, as to the
availability of such exemption has previously been delivered
to the company."
3.1.2. Buyer and Seller Agree that the CyPost Shares, as calculated
in accordance with Section 3.1.1 above, shall be delivered to
Seller as follows:
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 4
<PAGE>
3.1.2.1. twenty percent (20%)of the CyPost Shares (the "Closing Date
CyPost Shares") which a Selling Shareholder is entitled to
received pursuant to Exhibit 3.1.1 shall be delivered to such
Selling Shareholder by Buyer at the Closing. The parties
acknowledge and agree that the aggregate real consideration
for the Closing Date CyPost Shares will be equal to twenty
percent of the Closing Date Valuation of CyPost Shares
described in the far right column of Exhibit 3.1.1; and
3.1.2.2. the remaining eighty percent (80%) of the CyPost Shares
(the "Remaining CyPost Shares") shall be issued to the Selling
Shareholders entitled to receive such shares in accordance
with Exhibit 3.1.1 as of the later of the forty-second (42)
day after the Closing Date or January 4, 2000 (the "Remaining
Shares Issuance Date"), and such Remaining CyPost Shares shall
be delivered to such Selling Shareholders within three (3)
business days after the Remaining Shares Issuance Date. The
parties acknowledge and agree that the aggregate real
consideration for the Remaining CyPost Shares will be equal to
eighty percent of the Closing Date Valuation of CyPost Shares
described in the second column of Exhibit 3.1.1 (such fifty
percent amount may hereinafter be referred to as the "Closing
Date Valuation of the Remaining CyPost Shares").
3.1.3. Buyer and Seller shall agree on the valuation of the Permitted
Assumed Liabilities (such Permitted Assumed Liabilities being set
forth in Exhibit 2.1), on or before September 29, 1999 and shall set
forth such valuation in Exhibit 2.1 (hereinafter, the "Permitted
Assumed Liabilities Value").
3.1.4. Buyer shall pay, in accordance with the terms and conditions of
this Section 3.1.3, the amount equal to the difference between
United States Six Thousand Dollars (US$600,000) and the aggregate
value of: (i) the CyPost Share Payment which the parties acknowledge
and agree is valued at Three Hundred Thousand Dollars ($300,000) for
purposes of this Section 3.1.3, and (ii) the Permitted Assumed
Liabilities Value set forth in Exhibit 2.1 (such difference
hereinafter referred to as the "Balance Value"). Buyer shall pay
Seller the Balance Value in the form of two cash payments, as
follows:
3.1.4.1. Seventy-five percent of the Balance Value, which amount
shall be One Hundred Seventy Three Thousand Five Hundred
Fifteen United States Dollars and Twenty Seven Cents
(US$173,515.27) ,which payment shall be made in certified
check or by wire transfer at Closing (the "Closing Cash
Payment"); and
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3.1.4.2. Twenty-five percent of the Balance Value, which amount
shall be Fifty Seven Thousand Eight Hundred Thirty Eight
United States Dollars and Forty Two Cents (US$57,838.42),
which payment shall be made in certified check or by wire
transfer as of the later of the forty-second (42) day after
the Closing Date or January 4, 2000 (the "Remaining Cash
Payment").In order to evidence and secure Buyer's obligation
to pay Seller the Remaining Cash Payment and to issue the
Remaining CyPost Shares to those Selling Shareholders entitled
to receive the same pursuant to Exhibit 3.1.1, the parties
agree that the Buyer will execute and deliver at the Closing a
promissory note in favor of the Seller only, dated as of the
Closing Date, in an amount equal to (i) the Remaining Cash
Payment (as such term is defined above in Section 3.1.4.2);
and (ii) an amount equal to the Closing Date Valuation of the
Remaining CyPost Shares (as such term is defined in Section
3.1.2.2) (hereinafter, the "Promissory Note"), such Promissory
Note to be substantially in the form of Exhibit 3.1.5 attached
hereto and by this reference incorporated herein. Such
Promissory Note shall (a) bear no interest; (b) will be due
and payable on the later of the forty-second (42) day after
the Closing Date or January 4, 2000 (the "Maturity Date"); and
(iii) will be deemed fully paid and satisfied by Buyer by
Buyer's payment of the Remaining Cash Payment in accordance
with the requirements of Section 3.1.4.2 and the delivery of
the Remaining CyPost Shares in accordance with Section
3.1.2.2, upon which Seller must mark such Promissory Note
"paid in full and void" and return the same to Buyer.
3.2. Allocation of Purchase Price. The true value of the Purchase Price
as of the Closing Date shall be allocated as mutually agreed by
Buyer's and Seller's tax counsel and accountants and as set forth in
Exhibit 3.2 attached hereto and by this reference incorporated
herein. The parties agree to comply with IRC ss. 1060 and to use the
allocation of the Purchase Price as so agreed on their income tax
returns and other returns.
SECTION 4. PRORATES AND ADJUSTMENTS
The operation of the Business and related income and expenses up to the
close of business on Tuesday November 9, 1999(hereinafter, the "Proration Date")
shall be for the account of Seller and thereafter for the account of Buyer.
Utilities, personal property taxes relating to the Assets, rent and other
obligations under any lease, and other items customarily prorated shall be
prorated between Seller and Buyer as of the close of business on the Proration
Date, the proration to be made and paid, insofar as reasonably possible, on the
Closing Date, with settlement of any remaining items to be made within thirty
(30) days following the Closing Date. Seller shall receive an adjustment credit
in an amount equal to all lease deposits transferred under the
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Assumed Contracts including, but not limited to, the real property premises
lease being assumed by Buyer; provided, however, that in the event any lessor
delivers any lease deposit directly to the Seller, Seller will not be entitled
to any adjustment credit under this Agreement by Buyer for said refunded lease
deposit.
SECTION 5. OTHER AGREEMENTS
The following additional agreements shall be executed by the Closing Date
and delivered at the Closing : (i) that certain Employment Agreement by and
between Buyer and David Neff substantially in the form attached hereto as
Exhibit 5.1 (hereinafter referred to as the "Neff Employment Agreement"); and
(ii) that certain Non-Competition Agreement by and between the Buyer, Seller,
David Neff and Clarence Neff, substantially in the form attached hereto as
Exhibit 5.2 (hereinafter referred to as the "Non-Competition Agreement").
SECTION 6. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller, David Neff, Clarence Neff, and the Clarence and Neva Neff Living
Trust (hereinafter David Neff, Clarence Neff and the Clarence and Neva Neff
Living Trust may be collectively referred to as the "Seller's Active
Businessmen") jointly and severally, hereby represent and warrant to the Buyer
as follows:
6.1. Corporate Existence. Seller is now and on the Closing Date will be a
corporation duly organized, validly existing, and in good standing
under the laws of the state of Oregon and is duly qualified to
conduct business, and is in corporate and tax good standing, under
the laws of each jurisdiction in which the nature of its business or
the ownership or leasing of its properties requires such
qualification. Seller has all requisite corporate power and
authority to own, operate, and/or lease its properties and assets,
as the case may be, and to carry on its Business as now being
conducted.
6.2. Capitalization of Seller. As of the Closing Date, the authorized
capital stock of the Seller consists of 35,000 shares of common
stock, 26,680 shares of which are issued and outstanding in the
amounts, and to the Selling Shareholders, as listed in Exhibit 6.2
attached hereto and by this reference incorporated herein. The
26,680 shares represent 100% of the equity interest of the Seller,
and therefore there will be no rights of appraisal, nor any other
remedy, generally available to non-consenting shareholders in
connection with the purchase of the Assets. All issued and
outstanding shares of Seller's common stock have been duly
authorized, validly issued, fully paid and nonassessable. There are
no outstanding options, warrants, or other rights to purchase from
the Seller any of its securities.
6.3. Authorization; Binding Obligation. The execution, delivery, and
performance of this Agreement have been duly authorized and approved
by the board of directors and shareholders of Seller. Each of the
Selling Shareholders has the absolute and unrestricted right, power,
and capacity to enter into and to perform his/her obligations under
this Agreement. This Agreement constitutes a legal,
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valid, and binding obligation of the Seller and each of the Selling
Shareholders, enforceable against the Seller and each of the Selling
Shareholders in accordance with its terms.
6.4. Title to Assets; Condition of Assets. Seller holds, or will at
Closing hold, good and marketable title to all of the Assets, free
and clear of restrictions on or conditions to transfer or
assignment, and free and clear of liens, pledges, charges, or
encumbrances of any kind. All leases pursuant to which Seller or
Selling Shareholders leases real or personal property are in good
standing and are valid and effective in accordance with their
respective terms and, to the knowledge of Seller and Seller's Active
Businessmen, there exists no default thereunder or occurrence or
condition which could result in a default thereunder or termination
thereof. Seller's equipment and other tangible assets are in good
operating condition and are usable in the ordinary course of
business, and Seller owns, or has a valid leasehold interest in, all
assets necessary for the conduct of its business as presently
conducted.
6.5. Transfer Not Subject to Encumbrances or Third-Party Approval. Except
as disclosed in Exhibit 6.5 attached hereto and by this reference
incorporated herein, the execution and delivery of this Agreement by
Seller and Selling Shareholders, and the consummation of the
contemplated transactions, will not result in the creation or
imposition, by or through Seller, of any valid lien, charge, or
encumbrance on any of the Assets, and will not require the
authorization, consent, or approval of any third party, including
any governmental subdivision or regulatory agency, which will not
have been obtained at or prior to Closing.
6.6. Intellectual Property and Other Proprietary Rights; Invention
Agreements.
6.6.1. Neither Seller nor Seller's Active Businessmen have received
any communications alleging that Seller has violated or, by
conducting its business as proposed would violate, any
intellectual property or other proprietary rights of any other
person, nor is the Seller or Seller's Active Businessmen aware
of any basis for the foregoing.
6.6.2. Neither Seller nor Seller's Active Businessmen have received
any communications alleging that Seller has violated or, by
conducting its business as proposed would violate, any
intellectual property or other proprietary rights of any other
person, nor is the Seller or Seller's Active Businessmen aware
of any basis for the foregoing.
6.6.3. The term "Intellectual Property" shall mean: (i) patents,
patent applications, registrations, and applications for the
registration thereof; (ii) trademarks, trade names, service
marks, and registrations, and applications for the
registration thereof; (iii) copyrights and registrations, and
applications for the registration thereof; (iv) mask works and
registrations, and applications for the registration thereof;
(v) software, data, and
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documentation; (vi) trade secrets and confidential
business information, know-how, research and development
information, copyrightable works, financial, marketing and
business data, pricing and cost information, marketing plans
and customer lists and information; and (vii) other
proprietary rights relating to the Business, including, but
not necessarily limited to, the Intellectual Property listed
in Exhibit 1.1.4 attached hereto and by this reference
incorporated herein.
6.6.4. Seller owns or licenses all Intellectual Property (as such
term is defined below) used by Seller in the operation of its
Business, such ownership or licenses being free and clear of
any liens, encumbrances or other claims of any kind.
6.6.5. All current and former employees and consultants of Seller
have executed an agreement regarding (i) the transfer to
Seller of all Intellectual Property (as such term is defined
above) in any work(s) performed or produced by such person(s);
and (ii) the maintenance of confidentiality regarding Seller's
Intellectual Property. Seller and Seller's Active Businessmen
are not aware of any employees or consultants of Seller who
are in violation thereof. It will not be necessary for Buyer
in the operation of the Business to utilize any Intellectual
Property (as such term is defined above) of any of Seller's
employees that was made prior to their employment by Seller or
any Intellectual Property of consultants of Seller which
Intellectual Property is not covered by the above mentioned
agreement with all such consultants.
6.6.6. Seller has conducted its business without infringement or
claim of infringement of any license, patent, copyright,
service mark, trademark, trade name, trade secret or other
intellectual property right of others that would have a
material adverse effect on the Business or assets of Seller.
There are no claims of infringement by others of any license,
patent, copyright, service mark, trademark, trade name, trade
secret or other Intellectual Property right of Seller.
6.7. Contracts. Seller has furnished to Buyer true and complete lists and
copies of all contracts, agreements, commitments, and undertakings
of any nature, written or oral, of the Seller, and all amendments,
supplements, modifications and waivers thereof, which relate in any
way to the operation of the Business, including, but not limited to,
all Assumed Contracts, as such term is defined in Section 1.1.2
above (collectively referred to as "Material Contracts"). All
Material Contracts are in full force and effect and are binding upon
the Seller and the other parties thereto, and the Seller has fully
performed all of its obligations thereunder. No party to a Material
Contract has made a claim to the effect that the Seller has failed
to perform an obligation thereunder. There is no known plan,
intention or indication of any contracting party to a Material
Contract to cause the termination, cancellation or modification of
such Material Contract or to reduce or otherwise
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change its activity thereunder so as to adversely affect the
benefits derived or expected to be derived therefrom by the Seller.
On the Closing Date, there will be no Material Contracts existing or
relating to the operation of the Business that will be binding on
Buyer upon Closing except for the Assumed Contracts.
6.8. Litigation. There is no action, suit, claim, litigation, proceeding,
or investigation pending, or, to the knowledge of the Seller and the
Seller's Active Businessmen, threatened against the Seller, or
Seller's properties or rights, before any court, or by or before any
governmental body or arbitration board or tribunal.
6.9. Compliance With Laws, Regulations and Others
6.9.1. Seller has at all times conducted its Business in compliance
with its articles of incorporation and its bylaws.
6.9.2. Exhibit 6.9 attached hereto and by this reference
incorporated herein, contains a list of every current material
governmental license, permit, approval, order, directive and
agreement, pending, issued, or given to Seller with respect to
its conduct of the Business and its operations. Exhibit 6.9
also contains a list of all notices, reports and other
documents filed by the Seller with any government agency or
department. The Seller possesses all material licenses,
permits, and governmental approvals and authorizations which
are required in order to operate its business as presently
conducted, and the Seller is in compliance in all material
respects with all such licenses, permits, approvals, and
authorizations.
6.9.3. The Seller has complied with all applicable laws and
regulations material to its Business, including, without
limitation, all federal and state laws relating to the
employment of labor, including the provisions thereof relating
to wages, hours, collective bargaining and the payment of
social security taxes.
6.9.4. There are no investigations, proceedings, or actions of any
kind or nature pending or, to the knowledge of Seller and
Seller's Active Businessmen, threatened against the Seller by
any federal, state or local governmental or administrative
authority or agency, nor are there any outstanding orders of
such authorities and agencies limiting the Seller in the
operation of its Business.
6.10. Governmental Action. No authorization, consent or approval of, or
filing with, any court or any federal, state or local governmental
authority or agency is required in connection with the execution and
delivery of this Agreement.
6.11. No Conflict. Neither the execution and delivery of this Agreement by
the Seller and the Selling Shareholders nor the consummation by the
Seller and the Selling Shareholders of the transactions contemplated
by this Agreement will (i) conflict
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with or result in any breach of any provision of its articles of
incorporation or bylaws; (ii) contravene or conflict with any
resolution adopted by the Seller or directors of the Seller; (iii)
result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, or other evidence
of indebtedness related to the Seller or any material license
agreement, lease, or other material contract, instrument, or
obligation related to the Seller to which it is a party or by which
it may be bound; (iv) violate any statute, rule, regulations, order,
writ, injunction, decree or arbitration award applicable to the
Seller; (v) result in the loss of, or in a violation or breach of
any of the terms, conditions or provisions of, any license, permit,
approval, or authorization related to the Seller; (vi) result in the
creation or imposition of, or subject Buyer to any liability for,
any conveyance or transfer tax or any similar tax; or (vii) result
in the creation of any material (individually or in the aggregate)
lien, including any claims, mortgages, pledges, liens, security
interests, encumbrances, or charges of any kind on any of the assets
owned or used by the Seller.
6.12. Employment Matters
6.12.1. Labor Matters
6.12.1.1. Seller has no collective bargaining agreements with
any of its employees. There is no labor union organizing
activity pending or threatened with respect to Seller.
6.12.1.2. There is no (1) unfair labor practice complaint
against Seller pending before the National Labor
Relations Board or any other local, state, or federal
governmental authority; (2) labor strike, slowdown, or
work stoppage actually occurring or, to the knowledge of
Seller and the Shareholders, threatened against Seller;
(3) representation petition respecting Seller's
employees pending before the National Labor Relations
Board; or (4) grievance or any arbitration proceeding
pending arising out of or under collective bargaining
agreements applicable to Seller.
6.12.1.3. Seller has not experienced any primary work stoppage
or other organized work stoppage involving its employees
in the past two years.
6.12.2. Employment Claims. There are no pending claims and, to
Seller and Seller's Active Businessmen's knowledge, no
threatened claims, by or on behalf of any of Seller's
employees under any federal, state, or local labor or
employment laws or regulations.
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6.12.3. Employee Benefits. Exhibit 6.12.3 (attached hereto and by
this reference incorporated herein) lists all pension,
retirement, profit-sharing, deferred compensation, bonus,
commission, incentive, life insurance, health and disability
insurance, hospitalization, and all other employee benefit
plans or arrangements (including, without limitation, any
contracts or agreements with trustees, insurance companies, or
others relating to any such employee benefit plans or
arrangements) established or maintained by Seller (the
"Plans"), and complete and accurate copies of all of the Plans
have been provided to Buyer.
6.12.4. Employment or other Agreements. Except as disclosed on
Exhibit 6.12.4 (attached hereto and by this reference
incorporated herein), each of Seller's employees is an
"at-will" employee and there are no written or oral
employment, commission, or compensation agreements of any kind
between Seller and any of its employees. Exhibit 6.12.4 lists
all written or oral employment, commission, or compensation
agreements of any kind between Seller and any independent
contractor. There are no pending claims and, to Seller's and
Seller's Active Businessmen's knowledge, no threatened claims
by or on behalf of any of its employees or independent
contractor alleging any violation of any agreement or contract
between Seller and any such employee or independent
contractor. Exhibit 6.12.4 lists all of Seller's current
employment or supervisory manuals, employment or supervisory
policies, and written information generally provided to
employees (such as applications or notices), and true and
complete copies of those manuals, policies, and written
information have been provided to Buyer.
6.12.5. List of All Employees and Independent Contractors;
Compensation. Exhibit 6.12.5 (attached hereto and by this
reference incorporated herein) contains a complete and
accurate list of the following, specifying all full names and
applicable job titles or other titles: (i) all employees of
Seller; (ii) all individuals who are currently performing
services for Seller related to its Business and are classified
as "consultants" or "independent contractors"; and (iii) all
officers of Seller. Exhibit 6.12.5 also completely and
accurately specifies the total amount paid or payable as
compensation to each employee and independent contractor of
Seller, and the basis of such compensation, whether fixed or
commission or a combination thereof, and accrued benefits for
such persons as of the date of this Agreement.
6.12.6. Severance. Seller has no severance pay plan, policy,
practice, or agreement with any of its employees.
6.13. Financial Position
6.13.1. Seller has delivered to Purchaser the financial statements
(the "Financial Statements") attached hereto as Exhibit 6.13.1
and by this reference
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incorporated herein. The Financial Statements (i) present
fairly the financial condition and results of operations of
Seller as of the dates and for the periods specified therein,
(ii) are in accordance with the books and records of Seller,
and (iii) are prepared in accordance with consistently applied
accounting principles.
6.13.2. Seller does not have any liability or obligation (whether
absolute, accrued, contingent, or other, and whether due or to
become due) that is not accrued, reserved against, or
disclosed in the most recent balance sheet (the "Balance
Sheet") contained in the Financial Statements other than
liabilities incurred in the ordinary course of business
consistent with past practice since the date of such Balance
Sheet and the items set forth in Exhibit 6.13.2 attached
hereto, and by this reference incorporated herein.
6.13.3. Since the date of the Balance Sheet:
6.13.3.1. Seller has not entered into any transaction, which
was not in the ordinary course of its business;
6.13.3.2. Other than the Seller's Brokerage Fee as defined in
Section 6.16 below, there has been no material adverse
change in the condition (financial or otherwise) of
Seller;
6.13.3.3. there has been no damage to, or destruction or loss
of, physical property (whether or not covered by
insurance) which may have a material adverse effect on
the business or operations of Seller;
6.13.3.4. Seller has not declared or paid any dividend or made
any distribution on its securities, redeemed, purchased
or otherwise acquired any of its securities, granted any
options to purchase any securities, or issued any
securities;
6.13.3.5. Seller has not increased the compensation of any of
its officers or the rate of pay of its employees as a
group, except as part of regular compensation increases
in the ordinary course of its business;
6.13.3.6. Seller has not received notice that there has been a
loss of, or cancellation of a material order by, any
customer of Seller;
6.13.3.7. there has been no resignation or termination of
employment of any officer or key employee of Seller;
6.13.3.8. there has been no borrowing or agreement to borrow
by Seller or change in the contingent obligations of
Seller by way of guaranty, endorsement, indemnity,
warranty or otherwise or
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grant of a mortgage or security interest in any
property of Seller;
6.13.3.9. there have been no loans made by Seller to its
stockholders, employees, officers and directors other
than travel advances and office advances made in the
ordinary course of business;
6.13.3.10. there has not been any payment of any obligation or
liability of Seller other than current liabilities paid
in the ordinary course of business;
6.13.3.11. there has been no sale, assignment or transfer of
any tangible asset of Seller, except in the ordinary
course of business and no sale, assignment or transfer
of any patent, trademark, trade secret or other
intangible asset of Seller;
6.13.3.12. other than the Seller's Brokerage Fee as defined in
Section 6.16 below, Seller has not incurred any
liabilities that in the aggregate exceed $5,000; and
6.13.3.13. Seller has not been a party to any transaction with
any officer, director, shareholder, or any entity with
whom the foregoing are associated whether through
control, common control, contractual, or other legal
relationship.
6.14. Tax Matters. All federal, state, foreign, county, local and other
tax returns required to be filed by or on behalf of Seller have been
timely filed and when filed were true and correct in all material
respects, and the taxes shown as due thereon were paid or adequately
accrued. Seller has duly withheld and paid all taxes which it is
required to withhold and pay relating to salaries, wages and other
compensation, remuneration or benefits paid to the employees of
Seller, and Seller shall be entitled to all tax refunds attributable
to its filings for the periods for which it is responsible. Seller
is not engaged in any dispute with any state or local jurisdiction
in respect of sales, use, real property or personal property taxes.
6.15. Insurance.
6.15.1. Seller has delivered to Purchaser (i) true and complete
copies of all policies of insurance to which Seller is a party
or under which it is or has been covered at any time within
the two (2) years preceding the date of this Agreement and
(ii) true and complete copies of all pending applications for
policies of insurance.
6.15.2. Seller has paid all premiums due, and has otherwise
performed all of its obligations, under each policy to which
it is a party or that provides coverage to it or any of its
directors or officers in connection with their performance of
services to Seller.
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6.16. Finders and Brokers. Seller will indemnify Buyer and hold it
harmless from any liability or expense arising from any claim for
brokerage commissions, finder's fees or other similar compensation
based upon any agreement, arrangement or understanding made by or on
behalf of Seller, including, but not limited to, any claim by David
Marlin or the Marlin Group, Inc. (the "Seller's Brokerage Fee").
6.17. Books and Records. The books and records of Seller with respect to
its business are in all material respects complete and correct and
have been maintained in accordance with good business practices.
6.18. Investment Representation. The CyPost shares issued to each Selling
Shareholder have not been registered under the Securities Act of
1933, as amended, and each the Seller is acquiring such shares for
investment purposes only and not with a view to any further
distribution thereof or public offering thereof, within the meaning
of the Securities Act of 1933, as amended, and that each such
Selling Shareholder may be required to bear the risks of holding the
shares indefinitely, or until such time as they may be disposed of
in accordance with Rule 144 which contains a number of conditions to
be met such as (i) the availability of then current public
information about CyPost, (ii) restrictions on the manner of sale,
(iii) a one year holding period, and (iv) applicable volume
limitations on the number of securities that may be sold. In
addition, each such Selling Shareholder is aware that Rule 144
restricts more severely the resale of securities of "affiliates" of
an insurer and that each such Selling Shareholder's ability to
resell such securities, may depend, in part upon such status. Each
such Selling Shareholder has also been afforded the opportunity to
meet with and discuss the business condition, management, prospects,
and financial condition of CyPost, and has been afforded the
opportunity to question CyPost's chief executive officer as to these
matters, and while CyPost has described to you its business and
prospects, in material respects, such description does not purport
to be exhaustive in nature or scope. Each such Selling Shareholder
has been advised that the current version of CyPost's Registration
Statement on Form 10-SB under the Securities and Exchange Act of
1934, as amended, is publicly available for inspection on the SEC's
website found at www.sec.gov, and has been provided copies of
CyPost's five (5) most recent Form 8-K filings with the SEC, and has
had a chance to review such documents, and that either by each such
Selling Shareholder, or together with an investment representative
that each such Selling Shareholder has retained, each such Selling
Shareholder has the knowledge and experience in financial matters to
evaluate the risks and merits of the prospective investment.
6.19. Truth and Completeness of Representations and Warranties. Neither
this Agreement nor any exhibit or schedule hereto nor any other
document furnished by Seller or its officers in connection with the
transactions contemplated herein contains any untrue statement of
any material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading; and
there is no fact which materially and adversely affects the
business, prospects, affairs,
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operations, condition, financial or otherwise, of Seller, which has
not been disclosed to Buyer by Seller. The representations and
warranties of Seller and Seller's Active Businessmen and such other
materials are accurate and complete in all material respects.
SECTION 7. REPRESENTATIONS OF BUYER
Buyer represents and warrants to Seller as follows:
7.1. Corporate Existence. Buyer is a corporation duly organized and
validly existing under the laws of the state of Delaware. Buyer has
all requisite corporate power and authority to enter into this
Agreement and perform its obligations hereunder.
7.2. Binding Effect. This Agreement constitutes the valid and binding
agreement of Buyer, as applicable, enforceable in accordance with
their respective terms, except as enforceability may be limited by
bankruptcy, reorganization, insolvency, or similar laws affecting
the enforcement of creditors' rights or by the application of
general principles of equity.
7.3. Transfer Not Subject to Third-Party Approval. Except as disclosed in
Exhibit 7.3, attached hereto and by this reference incorporated
herein, the execution and delivery of this Agreement by Buyer and
the consummation of the contemplated transactions will not require
the authorization, consent, or approval of any third party,
including any governmental subdivision or regulatory agency, which
will not have been obtained at or prior to Closing.
SECTION 8. COVENANTS OF SELLER
8.1. Seller's Operation of Business Prior to Closing. Seller agrees that
between the date of this Agreement and the Closing Date, Seller will
use its best efforts to conduct the Business in a reasonable and
prudent manner in accordance with past practices; will engage in no
transaction out of the ordinary course of business; will enter into
no agreement extending beyond the Closing Date except with respect
to transactions entered into in the ordinary course of business; and
will use its best efforts to preserve its existing business
organization and relations with its employees, customers, suppliers,
and others with whom it has a business relationship.
8.2. Access to Business and Information. Until the Closing Date, Seller
will provide Buyer and its representatives with reasonable access
during business hours (or at other times with Seller's approval) to
the Assets, titles, contracts, and records of Seller and furnish
such additional information concerning the Business as Buyer from
time to time may reasonably request.
8.3. Employee Matters.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 16
<PAGE>
8.3.1. Before Closing, Seller will deliver to Buyer a list of the
names of all persons on the payroll of Seller, together with a
statement of amounts paid to each during Seller's most recent
fiscal year and amounts paid for services from the beginning
of the current fiscal year to the Closing date. Seller will
also provide Buyer with a schedule of all employee bonus
arrangements and a schedule of other material compensation or
personnel benefits or policies in effect.
8.3.2. Before the Closing Date, Seller will not, without Buyer's
prior written consent, except for the terminations described
below, enter into any material agreement with its employees,
materially increase the rate of compensation or bonus payable
to or to become payable to any employee, or effect any
material changes in the management, personnel policies, or
employee benefits, except in accordance with existing
employment practices.
8.3.3. Seller and Seller's Active Businessmen will undertake, at
Buyer's expense, all reasonable action necessary or
appropriate to permit Buyer, if Buyer so desires, to take over
Seller's pension and profit-sharing plan, if any, as a
successor employer, and will cooperate with Buyer with respect
to this undertaking.
8.3.4. As of the Closing Date, Seller will terminate all of its
employees and will pay each employee all wages, commissions,
and accrued vacation pay earned up to the time of termination,
including overtime pay, as required by law or contract.
8.4. Change of Name. On or before the Closing Date, Seller will take all
action necessary or appropriate to permit Buyer to legally commence
use of Seller's name on the Closing Date.
8.5. Removal of Chat Site Promotion from Web Site. On or before the
Closing Date, Seller will remove from its web sites any reference to
third party chat room-related web sites, including, but not limited
to, the following: (i) gottachat.com; (ii) gottalearn.com; (iii)
biblecamp.com; and (iv) amphipolis.com.
8.6. Conditions and Best Efforts. Seller will use its best efforts to
effectuate the transactions contemplated by this Agreement, and will
do all acts and things as may be required to carry out its
obligations under this Agreement and to consummate this Agreement.
8.7. Broker. Seller has retained David Marlin and/or Marlin Group, Inc.
as its broker, and Seller shall be solely responsible for payment of
all amounts due Marlin Group, Inc. in connection with the sale of
the Assets and shall hold Buyer harmless therefrom.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 17
<PAGE>
8.8. Confidentiality. Seller and all Selling Shareholders acknowledge the
confidential and proprietary nature of the Confidential Information
(as defined below) and agree that, absent the prior written consent
of Buyer, none of them shall reveal or disclose any Confidential
Information for any purpose to any other person, firm, corporation
or other entity, or use any Confidential Information for their
direct or indirect benefit or for any other purpose. Seller or
Selling Members may disclose Confidential Information to their
attorney or accountants, but only if such persons agree to be bound
by the terms of this Section 8.8. Seller and the Selling
Shareholders acknowledge and agree that in the event of their breach
of this Section 8.8, Buyer will suffer irreparable injuries not
compensated by money damages and therefore shall not have an
adequate remedy at law. Accordingly, Buyer shall be entitled to a
preliminary and final injunction to prevent any further breach of
this Section 8.8 or further unauthorized use of Confidential
Information. This remedy is separate and apart from any other remedy
Buyer may have. As used herein, "Confidential Information" means (i)
any and all proprietary memos, research, forms, databases, other
data, drawings, specifications, computer programs, customer lists,
customer files, marketing plans, and other records and documentation
related to the Seller's Business, operations, financial status,
technology and/or Intellectual Property; (ii) any other information
marked or designated as confidential; (iii) all information, whether
or not in written form and whether or not designated as
confidential, which is known to the covenanting party as being
treated by Seller as confidential; and (iv) all information provided
to Seller by third parties which Seller is obligated to keep
confidential. This provision shall survive the Closing of this
Agreement indefinitely.
SECTION 9. CONDITIONS PRECEDENT TO CLOSING
9.1. Buyer's Conditions. The obligation of Buyer to purchase the Assets
and otherwise close the transactions contemplated by this Agreement
are subject to the fulfillment, before or on the Closing Date, of
each of the following conditions, any one or a portion of which may
be waived in writing by Buyer:
9.1.1. All representations and warranties made in this Agreement by
Seller and Seller's Active Businessmen shall be true in all
material respects as of the Closing Date as fully as though
such representations and warranties had been made on and as of
the Closing Date, and, as of the Closing Date, neither Seller
nor any Selling Shareholder or Clarence Neff shall have failed
in any material respect to perform any covenant contained in
this Agreement.
9.1.2. There shall have been no material adverse change in the
manner of the operation of the Business between the date of
this Agreement and the Closing Date.
9.1.3. At the Closing Date no suit, action, or other proceeding
shall have been threatened or instituted against the Seller or
any Selling Shareholder
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 18
<PAGE>
affecting in any way the Business or the Assets, or which
attempts to, restrain, enjoin, or otherwise prevent the
consummation of this Agreement or its contemplated
transactions.
9.1.4. All obligations of each of the Seller, Selling Shareholders
and Clarence Neff set forth in Section 10.2 below shall have
been fully performed to the sole satisfaction of Buyer.
9.2. Seller's Conditions. The obligation of Seller to sell the Assets is
subject to the fulfillment, before or on the Closing Date, of each
of the following conditions, any one or portion of which may be
waived in writing by Seller:
9.2.1. All representations and warranties made in this Agreement by
Buyer shall be true in all material respects as of the Closing
Date as fully as though such representations and warranties
had been made on and as of the Closing Date, and, as of the
Closing Date, Buyer shall not have failed in any material
respect to perform any covenant contained in this Agreement.
9.2.2. At the Closing Date no suit, action, or other proceeding
shall have been threatened or instituted against the Seller to
restrain, enjoin, or otherwise prevent the consummation of
this Agreement or the contemplated transactions.
9.2.3. All obligations of Buyer set forth in Section 10.3 below
shall have been fully performed to the sole satisfaction of
Seller.
SECTION 10. CLOSING
10.1. Time and Place. The transactions contemplated by this Agreement
shall be closed ("Closing") at the offices of Preston Gates & Ellis
LLP at 222 S.W. Columbia Street, Suite 1400, Portland, Oregon, on a
date mutually agreed to by Buyer and Seller, but in no event later
than November 9, 1999 ("Closing Date").
10.2. Obligations of Seller at Closing. At Closing, Seller shall execute
(where applicable) and deliver to Buyer the following:
10.2.1. A Bill of Sale substantially in the form of Exhibit 10.2.1
attached hereto, , properly endorsed certificates of title,
and other instruments of transfer, in form and substance
satisfactory to Buyer, necessary to transfer and convey all of
the Assets to Buyer.
10.2.2. Assignment of the lease, as amended, on the premises at 1016
S.W. Taylor Avenue, Portland, Oregon (the "Premises Lease"),
executed by David Neff, in form and substance satisfactory to
Buyer, along with the lessor's consent to the same, and all
consents to all assignments of all other Assumed Contract.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 19
<PAGE>
10.2.3. Possession of the leased premises described in the Premises
Lease.
10.2.4. Properly executed assignments of all intellectual property
rights associated with the Business, including, but not
limited to: (i) all federal and state registered trademarks,
including the goodwill associated therewith; (ii) copyrights,
including, but not limited to, rights in software and rights
in the visual, textual, and/or audio elements of any web site
or chat site associated with the Business, with the exception
of those certain web sites or chat sites specified in the
Excluded Assets; (iii) domain names owned by Seller and/or
used in association with the Business, with the exception of
those certain domain names specified in the Excluded Assets;
and (iv) any other proprietary or intellectual property rights
owned by or used in association with the Business, all in form
and substance satisfactory to Buyer. Without limiting the
generality of the foregoing, Seller shall execute and deliver
the Trademark/Service Mark Assignment substantially in the
form of Exhibit 10.2.4 attached hereto.
10.2.5. Properly executed Articles of Amendment changing Seller's
corporate name from "Internet Arena, Inc" to "Neffco, Inc."
10.2.6. All licenses and permits necessary to the operation of the
Business.
10.2.7. An officer's certificate from Seller's corporate secretary
affirming the authority of Seller's President to validly
execute this Agreement and all other necessary documentation
in connection with this Agreement on behalf of Seller.
10.2.8. An officer's certificate from Seller's corporate secretary
certifying the genuineness and completeness of corporate
resolutions of Seller's Board of Directors and shareholders
approving all transactions contemplated by this Agreement.
10.2.9. Delivery of a fully executed Neff Employment Agreement
contemplated by Section 5(i) and Exhibit 5.1 of this Agreement
in form and substance satisfactory to Buyer.
10.2.10. Delivery of a fully executed Non-Competition Agreement
contemplated by Section 5(ii) and Exhibit 5.2 of this
Agreement in form and substance satisfactory to Buyer.
10.2.11. Such other certificates and documents as may be called for
by the provisions of this Agreement.
10.3. Obligations of Buyer at Closing. At Closing (or on such other date
as indicated below), Buyer shall execute (where applicable) and
deliver to Seller the following:
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 20
<PAGE>
10.3.1. Delivery of the Closing Cash Payment and Promissory Note as
contemplated by Section 3.1.
10.3.2. Delivery of a fully executed Neff Employment Agreement
contemplated by Section 5 and Exhibit 5.1 of this Agreement in
form and substance satisfactory to Seller.
10.3.3. Delivery of the Closing Date CyPost Shares within ten (10)
full business days after the Closing Date.
10.4. Other Closing Documentation.
10.4.1. The parties shall prorate all expenses as set forth in
Section 4 within the time period mandated by Section 4..
10.4.2. Exhibit 10.4(a) shall set forth any wiring instructions for
payments to be made at Closing.
SECTION 11. INDEMNIFICATION AND SURVIVAL
11.1. Survival of Representations and Warranties and Certain Covenants.
All representations and warranties made in this Agreement shall
survive the Closing of this Agreement. All covenants which, in
accordance with a provision of this Agreement, shall be performed
after the Closing Date and all other covenants which by their nature
shall or will be performed after the Closing, shall all survive the
Closing of this Agreement, including, but not limited to, Sections
3.1.2, 3.1.4, 3.2, and 4 of this Agreement. After the Closing,
Seller and Selling Shareholders agree to take such actions as
reasonably requested by Buyer to complete any obligations of Seller
or Selling Shareholders in this Agreement that have not been fully
performed by the Closing Date.
11.2. Seller's and Seller's Active Businessmen's Indemnification. Seller
and Selling Shareholder each hereby agree jointly and severally to
indemnify and hold Buyer, its successors and assigns, harmless from
and against (a) claims, demands, causes of action, liabilities,
costs (including attorney fees), damages, and all other obligations
of every kind and description, contingent or otherwise, arising out
of or related to the operation of the Business prior to the close of
business on the Closing Date, except for claims, liabilities, and
obligations of Seller expressly assumed by Buyer under this
Agreement; and (b) any and all claims, demands, causes of action,
liabilities, costs (including attorney fees), damages, and all other
obligations or deficiencies of every kind and description resulting
from any misrepresentation, breach of warranty or covenant, or
nonfulfillment of any agreement on the part of any Seller and
Selling Shareholder under this Agreement, including, but not limited
to, any breach of any representation and warranty in Section 7 of
this Agreement.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 21
<PAGE>
11.3. Buyer's Indemnification. Buyer agrees to defend, indemnify, and hold
harmless Seller and the Seller's Active Businessmen from and against
any and all damage or deficiency resulting from (a) any and all
claims, demands, causes of action, liabilities, costs (including
attorney fees), damages, and all other obligations of every kind and
description, contingent or otherwise, arising out of or related to
the operation of the Business after the close of ----- business on
the Closing Date, except for claims, liabilities, and obligations of
Seller existing as of the Closing Date and not assumed by Buyer
under this Agreement and claims, liabilities and obligations paid by
insurance maintained by Seller, Selling Shareholder, or Buyer; and
(b) any and all claims, demands, causes of action, liabilities,
costs (including attorney fees), damages, and all other obligations
or deficiencies of every kind and description resulting from any
misrepresentation, breach of warranty or covenant, or nonfulfillment
of any agreement on the part of Buyer under this Agreement.
11.4. Buyer's Limited Indemnification of Certain Parties. In the event
that David Neff, Clarence Neff, or John Anderson (hereinafter
"Limited Indemnitees") incurs liability arising out of personal
guarantees provided by one or more such Limited Indemnitees of any
of the Assumed Contracts, Buyer agrees to indemnify such Limited
Indemnitees for liabilities actually paid by such Limited
Indemnitees pursuant to such personal guaranty, up to, but in no
event more than, an aggregate maximum amount of Seven Hundred Thirty
Four Thousand and Two Hundred Sixty United States Dollars and Eighty
Eight Cents ($734,260.88).
11.5. Notice. If any claim is asserted against any party that would give
rise to a claim for indemnification by such party against any party
to this Agreement under the provisions of Sections 11.2 through
11.4, the party seeking indemnification shall promptly give written
notice to the other party concerning such claim.
11.6. Conflicts Between This Section 11 and Provisions of Consents to
Assignment of Assumed Contracts. The parties agree that if any
provision of any agreement pursuant to which a lessor consents to
the assignment of any Assumed Contract by Seller to Buyer
(hereinafter, "Lessor's Consent Agreement") conflicts with any
provisions of this Agreement, including, but not limited to, any
provision governing indemnifications between Buyer and Seller, that,
as between the Buyer and Seller, the terms and conditions of this
Agreement shall govern over any conflicting provisions in such
Lessor's Consent Agreement.
SECTION 12. TERMINATION OF AGREEMENT
This Agreement may be terminated by (i) mutual written consent of Buyer
and Seller; or (ii) upon Buyer's election to terminate this Agreement by notice
to Seller, or upon Seller's election to terminate this Agreement by notice to
Buyer, if any one of the following conditions occurs: (a) the terminating party
shall have discovered a material error, misstatement, or omission in the
representations and warranties made in this Agreement by the other party which
shall not have been cured by such other party within 14 days after written
notice to such other party specifying in detail such asserted error,
misstatement, or omission, or by the Closing Date,
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 22
<PAGE>
whichever first occurs; or (b) all of the conditions precedent of the
terminating party's obligations under this Agreement have not occurred and have
not been waived by the terminating party on or prior to the Closing Date. The
party with a right to terminate this Agreement pursuant to Section 12(ii) above
shall not be bound to exercise such right, and its failure to exercise such
right shall not constitute a waiver of any other right it may have under this
Agreement, including but not limited to remedies for breach of a representation,
warranty, or covenant.
SECTION 13. RISK OF LOSS
The risk of loss, damage, or destruction to any of the equipment,
inventory, or other personal property to be conveyed to Buyer under this
Agreement shall be borne by Seller to the time of Closing. In the event of such
loss, damage, or destruction, Seller, to the extent reasonable, shall replace
the lost property or repair or cause to repair the damaged property to its
condition before the damage. If replacement, repairs, or restorations are not
completed before Closing, then the Purchase Price shall be adjusted by an amount
agreed upon by Buyer and Seller that will be required to complete the
replacement, repair, or restoration following Closing. If Buyer and Seller are
unable to agree and the damage or destruction is material (i.e., exceeds $5,000
to replace or repair), then Buyer, at its sole option and notwithstanding any
other provision of this Agreement, upon notice to Seller, may rescind this
Agreement and declare it to be of no further force and effect, in which event
there shall be no closing of this Agreement and all the terms and provisions of
this Agreement shall be deemed null and void. If, before Closing, the Premises
are damaged such that is cannot reasonably be used by Buyer as contemplated in
the Premises Lease, or if the Premises are destroyed, then Buyer may rescind
this Agreement in the manner provided above unless arrangements for repair
satisfactory to all parties involved are made prior to Closing.
SECTION 14. MISCELLANEOUS
14.1. Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties and their heirs, personal representatives,
successors and assigns.
14.2. Assignment. Neither Seller nor Buyer shall assign its rights and
obligations under this Agreement without the prior written consent
of the other, except that Buyer may upon written notice to Seller
assign this Agreement to a company affiliated with Buyer ("Buyer's
Affiliate"). In the event of such assignment to Buyer's Affiliate,
Buyer shall remain secondarily liable to Seller on the obligations
contained in this Agreement.
14.3. Notices. Any notice or other communication required or permitted to
be given under this Agreement shall be in writing and shall be
mailed by certified mail, return receipt requested, postage prepaid,
or by overnight delivery service provided such service is in the
practice of keeping verifiable records of the time and date of
delivery, addressed to the parties at the addresses as set forth
below:
If to Buyer: CyPost Corporation
260 W. Esplanade
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 23
<PAGE>
North Vancouver, B.C. V7M 3G7
CANADA
with a copy to: Frank X. Curci, Esq.
Preston Gates & Ellis, LLP
222 S.W. Columbia Street, Suite 1400
Portland, Oregon 97201
If to Seller: Internet Arena, Inc.
1016 S.W. Taylor Avenue
Portland, Oregon 97205
with a copy to: Robert Rosenthal, Esq.
1001 S.W. Fifth Avenue, Suite 1901
Portland, Oregon 97204
Any notice or other communication shall be deemed to be given at the
expiration of the seventh (7th) day after the date of deposit in the
United States or Canadian mail, or, in the case of overnight
delivery service, immediately on receipt. The addresses to which
notices or other communications shall be mailed may be changed from
time to time by giving written notice to the other party as provided
in this section.
14.4. Attorney Fees. If any suit or action is filed by any party to
enforce this Agreement or otherwise with respect to the subject
matter of this Agreement, the prevailing party shall be entitled to
recover reasonable attorney fees incurred in preparation or in
prosecution or defense of such suit or action as fixed by the trial
court, and if any appeal is taken from the decision of the trial
court, reasonable attorney fees as fixed by the appellate court.
14.5. Amendments. This Agreement may be amended only by an instrument in
writing executed by all the parties.
14.6. Headings. The headings used in this Agreement are solely for
convenience of reference, are not part of this Agreement, and are
not to be considered in construing or interpreting this Agreement.
14.7. Entire Agreement. This Agreement (including the exhibits) sets forth
the entire understanding of the parties with respect to the subject
matter of this Agreement and supersedes any and all prior
understandings and agreements, whether written or oral, between the
parties with respect to such subject matter.
14.8. Counterparts. This Agreement may be executed by the parties in
separate counterparts, each of which when executed and delivered
shall be an original, but all of which together shall constitute one
and the same instrument.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 24
<PAGE>
14.9. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any respect for any reason, the validity and
enforceability of any such provision in any other respect and of the
remaining provisions of this Agreement shall not be in any way
impaired.
14.10. Waiver. A provision of this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No
waiver of any provision of this Agreement shall constitute a waiver
of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. Failure to enforce any provision of
this Agreement shall not operate as a waiver of such provision or
any other provision.
14.11. Further Assurances. From time to time, each of the parties shall
execute, acknowledge, and deliver any instruments or documents
necessary to carry out the purposes of this Agreement.
14.12. Time of Essence. Time is of the essence for each and every
provision of this Agreement.
14.13. No Third-Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties
to this Agreement, any right or remedy of any nature whatsoever.
14.14. Expenses. Each party shall bear its own expenses in connection with
this Agreement and the transactions contemplated by this Agreement.
14.15. Governing Law; Venue. This Agreement has been made entirely within
the state of Oregon, and shall be governed by and construed in
accordance with the laws of the state of Oregon. If any suit or
action is filed by any party to enforce this Agreement or otherwise
with respect to the subject matter of this Agreement, venue shall be
in the federal or state courts in Multnomah County, Oregon.
14.16. Representation. Preston Gates & Ellis LLP represents only Buyer in
this transaction, and Seller acknowledges it has been advised to
have this Agreement reviewed by its own independent counsel.
14.17. Robert Rosenthal, PC represents Seller only; Selling Shareholders
acknowledge that they have been advised to have this Agreement
reviewed by their own independent counsel.
The remainder of this page intentionally left blank.
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 25
<PAGE>
The parties have executed this Agreement as of the date set forth above.
BUYER SELLER:
CYPOST CORPORATION INTERNET ARENA, INC.
By: By:
------------------------------ -------------------------------
Its: Its:
------------------------------ -------------------------------
SELLING SHAREHOLDERS:
-----------------------------------
David Neff
-----------------------------------
Jerrold Lively
-----------------------------------
John B. Anderson
-----------------------------------
Clarence and Neva Neff Living Trust,
by ____________________, Trustee
-----------------------------------
Steve Dentel
-----------------------------------
Mike Stupak
-----------------------------------
Heidi Stupak
-----------------------------------
Matt Campbell
-----------------------------------
CLARENCE NEFF:
Clarence Neff, individually
CyPost/Internet Arena -- Asset Purchase Agreement -- Page 26
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.
I hereby consent to the use of my report, dated January 18, 1998 on the
balance sheet of Mushroom Innovations, Inc. dated as of December 31, 1997 and
the related consolidated statements of operations, cash flows and shareholders'
equity for the period from inception, February 11, 1997 to December 31, 1997.
I hereby consent to the use of my report, dated January 18, 1998 on the
balance sheet of Mushroom Innovations, Inc. dated as of August 31, 1997 and
the related consolidated statements of operations, cash flows and shareholders'
equity for the period from inception, February 11, 1997 to August 31, 1997.
Thomas P. Monahan
March __, 2000
Exhibit 21
Subsidiaries
(All Wholly-Owned)
Name Jurisdiction of
---- Incorporation
-------------
ePost Innovations, 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
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