U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
NETNATION COMMUNICATIONS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-08034 38
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1410 - 555 West Hastings Street, Vancouver,
British Columbia, Canada V6B 4N6
(Address of principal executive offices) (Zip Code)
(604) 688-8946
(Issuer's telephone number)
Securities to be registered under to Section 12(b) of the Act): None
Securities to be registered under to Section 12(g) of the Act):
Common Stock $0.0001 Par Value
(Title of class)
<PAGE>
TABLE OF CONTENTS
Item 1 Business 4
Item 2 Financial Information 27
Item 3 Properties 34
Item 4 Security Ownership of Certain Beneficial Owners and Management 34
Item 5 Directors, Executive Officers, Promoters And Control Persons 35
Item 6 Executive Compensation 36
Item 7 Certain Relationships and Related Transactions 38
Item 8 Legal Proceedings 38
Item 9 Market Price Of And Dividends On The Registrant's Common
Equity And Related Stockholder Matters 38
Item 10 Recent Sales Of Unregistered Securities 39
Item 11 Description Of Securities to be Registered 40
Item 12 Indemnification Of Directors And Officers 41
Item 13 Financial Statements And Supplementary Data 41
Item 14 Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure 41
Item 15 Financial Statements And Exhibits 41
<PAGE>
Page 3
Do Not Rely on Forward-Looking Statements
You should not rely on forward-looking statements in this registration
statement. This registration statement contains forward-looking statements that
involve risks and uncertainties. In this registration statement words such as
"anticipates", "believes", "plans", "expects", "future", "intends" and similar
expressions are used to identify these forward-looking statements. This
registration statement also contains forward-looking statements attributed to
certain third parties relating to their estimates regarding the demand for
Internet Web site hosting, server co-location services and enhanced Internet
services, the rate of growth in the Internet generally, the rate of growth in
online commerce, and other similar forward looking information. Prospective
investors should not place undue reliance on these forward-looking statements,
which apply only as of the date of this registration statement. NetNation's
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by
NetNation described in "Business", "Financial Information" and elsewhere in this
registration statement.
Item 1 BUSINESS
- ------
Explanatory Note: Unless otherwise indicated or the context otherwise
requires, all references herein to the "NetNation" are to NetNation
Communications, Inc., a Delaware corporation, and its wholly-owned subsidiary,
NetNation Communications Inc. ("NetNation Canada"), a British Columbia
corporation.
a. General development of business:
Form and year of organization
- -----------------------------
NetNation was incorporated under the laws of the State of Delaware on May 7,
1998, under the name Collectibles Entertainment Inc. ("Collectibles") for the
purpose of operating an online sports card and other tradeable memorabilia
distribution business. Collectibles changed its name to NetNation
Communications, Inc. on April 14, 1999 in conjunction with the acquisition of a
Web site hosting business. The common shares of NetNation currently trade on
the Over-the-Counter Bulletin Board (OTC-BB) under the ticker symbol "NNCI".
NetNation has one wholly owned subsidiary, NetNation Canada. NetNation Canada
is a private company incorporated under the laws of the Province of British
Columbia, Canada on February 19, 1997. NetNation Canada became a wholly owned
subsidiary on April 7, 1999 pursuant to an agreement between the shareholders of
NetNation Canada and Collectibles (the "Share Purchase Agreement"). Pursuant to
the Share Purchase Agreement, Collectibles acquired 9,000,000 Class A common
shares and 1,000,000 Class B common shares of NetNation Canada, being all of the
issued and outstanding shares of NetNation Canada. As consideration for the
purchase of the shares of NetNation Canada, Collectibles issued 10,000,000
common shares to the shareholders of NetNation Canada. Upon conclusion of the
acquisition , Collectibles changed its name to NetNation.
NetNation Canada has one wholly owned subsidiary, NetNation Communications UK
Limited (hereinafter "NetNation UK"), a private company incorporated under the
laws of the United Kingdom on June 1, 1999. NetNation UK was incorporated to
facilitate NetNation's UK operations.
NetNation Canada commenced operations in February of 1997 as a web hosting
business. Web site hosting refers to the rental of space on a computer
infrastructure and related services, that facilitates the ability of a small or
medium sized business to post and operate their website on the Internet and to
conduct business transactions over the Internet. In addition to Web site
hosting services, NetNation offers domain name registration, and server
co-location services. A full description of the Web hosting services and
packages, and other services offered by NetNation is contained herein under the
sub-heading "Narrative description of the business". NetNation is not in the
business of creating or maintaining Web sites or of providing Internet access
directly to customers, the latter being the business of an Internet Service
Provider ("ISP").
<PAGE>
Page 4
Plan of Operation and Development Strategy
- ------------------------------------------
The following describes in general terms NetNation's plan of operation and
development strategy for the remainder of its fiscal year ending December 31,
1999 and for the first six months of its next fiscal year. For the remainder of
the 1999 fiscal year ending December 31, 1999, and the subsequent 6 month
period, the primary focus of NetNation will be to expand marketing efforts in
existing and targeted geographical markets. Marketing mediums will include
television, print, marketing agreements with other online service providers,
and online media, as well as co-marketing with creators of Web site
creation/authoring tools.
NetNation plans to significantly increase marketing efforts in the
international market for Web hosting services. As part of this geographic
expansion plan NetNation will establish satellite offices in select countries to
support direct sales efforts. As of July 1, 1999, NetNation has established a
representative sales office in London, England and is considering the
establishment of offices in Europe and the United States in the next 12 months.
For the last fiscal quarter of 1999, NetNation plans to introduce a distinctive
brand name under which it will market its services to an existing and
prospective segment of customers known as "resellers". Resellers essentially
purchase NetNation's web hosting products and services and resell them. The use
of a distinctive brand name is intended to reduce any concern amongst resellers
that their customers will deal directly with NetNation. There are two general
categories of resellers, Value Added Resellers (VARs) and Original Equipment
Manufacturers (OEMs). As at June 30, 1999 NetNation has associations with
approximately 580 VARs and consultants in over 45 countries. These VARs
purchase NetNation's web hosting solutions at a discount and resell them
directly to their customers at a profit, along with their other products and
services. In the next 12 months NetNation plans to continue to develop
distribution channels through VARs and increasingly through OEMs, using the
distinctive brand name. OEMs purchase NetNation's web hosting services in bulk
and resell those services under their own brand name.
Product Research and Development: Due to the constantly evolving nature of the
Internet and related technologies, product development over the next 12 month
period will consist of a continuous monitoring of changes in business
transactions on the Internet and customer business needs. Existing web hosting
products and services, such as online commerce packages, will be reviewed on an
ongoing basis in order to keep pace with changes in third party technologies and
generally in how business is transacted on the Internet. Examples of products
and services NetNation expects will be needed over the next 12 month period and
beyond, for its current and potential customers include:
a) enhanced electronic commerce services;
b) faxing and telephone services via the Internet;
c) unified messaging and intranets for "virtual" and distributed offices;
d) automated marketing tools; and
e) expanded multi-national data centers with full computer support
redundancy.
Existing products and services will require integration with third-party
technology and products in order to upgrade NetNation's service solutions.
Acquisitions of Property and Equipment: NetNation does not anticipate making
any material acquisitions of plant or equipment in the next 12 month period.
NetNation believes that its existing hardware and network support infrastructure
is adequate to accommodate any change in NetNation's customer base or
technological requirements over the next 12 month period, without the need for
any material investment in additional equipment.
Employees: In the next 12 month period NetNation plans to hire additional
technical, sales and administrative staff in connection with the opening of
satellite offices, and generally as required to maintain service levels to
existing and future customers. The number and classification of additional
employees is primarily dependent on the rate of growth of the business of
NetNation. As at June 30, 1999 NetNation has a hiring program in place whereby
it plans to hire an additional 13 technical, sales and administrative staff
members.
<PAGE>
Page 5
b. Financial information about industry segments
Information regarding sales, net revenues and total assets from NetNation's Web
Hosting business are available under "Selected Financial Data" and from
NetNation's financial statements attached hereto. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
c. Narrative description of business
The following discussion of the business of NetNation should be read in
conjunction with the section entitled "Risk Factors" located elsewhere herein.
The sole business of NetNation derives from its ownership of NetNation Canada.
NetNation is engaged in the business of providing Web site hosting services
("Web site hosting" or "Web hosting") to customers around the world.
The business of Web hosting, which is sometimes referred to as "Web site
outsourcing", involves the rental of space on a computer infrastructure to
customers. The infrastructure consists of computer hardware referred to as
"servers" and computer software which facilitates the connection of customers'
web sites to the Internet. In addition to the basic infrastructure, Web hosting
companies may also provide customer support services and access to additional
services such as enabling commercial transactions on the Internet. These
additional services, which are essentially software packages, may be developed
directly by the Web hosting company or obtained under license from third parties
and resold.
Typical customers of Web hosting companies consist of small and medium sized
businesses that wish to have a Web site on the Internet without incurring the
costs and time delays involved with developing, maintaining and updating a web
presence on their own. In addition to small and medium sized businesses, Web
hosting services may be purchased by entities that will resell the services in
connection with their own web related services, such as VARs and OEMs. Web site
hosting services does not include the design and creation of a Web site but
rather is a complementary service to web site creation. The Web site hosting
business should also be differentiated from that of Internet Service Providers
("ISP"), which is discussed elsewhere herein.
NetNation will host a customer's web site on NetNation's computer infrastructure
for a basic monthly fee ranging, for example purposes, from $20-$60. The fee
entitles a customer to basic services including disk storage space on
NetNation's server, the ability to receive and transmit data over the Internet
at high speed, 24 hour customer support, email access and email forwarding.
Additional services which may be either included for the monthly fee or
available for an extra charge include, for example, the ability to add security
to data transmissions, the ability to carry out financial transactions over the
Internet, the ability to track and send visitor orders and give a receipt for
purchases made through customers' web site, and audio/video capabilities. As at
June 30, 1999, NetNation has developed three packages through which these
services are offered. Additional information on the services offered by
NetNation are described under the section herein entitled "Services and Products
of the Company".
Industry Background
- -------------------
In recent years, the use of the Internet has grown rapidly. Numerous factors
have contributed to this growth, including the large and ever growing number of
personal computers, improvements in the Internet network architecture itself,
and faster, easier, and less expensive Internet access. The enormous amount of
information and growing electronic commerce uses of the Internet will continue
to fuel this growth. International Data Corporation ("IDC") projects that the
total number of Internet users worldwide will grow from 65 million in 1997 to
291 million by 2001. The end result is anticipated to be that the Internet will
become as ubiquitous as public telephones and is the precursor of the ultimate
global network.
<PAGE>
Page 6
NetNation believes that the Internet today represents a growing and substantial
opportunity for virtually any business or organization that wishes to interact
in innovative ways with offices, employees, customers, suppliers and partners
around the globe. Both small and large business enterprises are recognizing
their increasing need to take advantage of the Internet by establishing Web
sites. As a result, reliable and high-performance Web site hosting services are
becoming increasingly critical to most mainstream enterprises. Due to this
ever-growing importance, many enterprises are seeking to outsource these
functions in order to ensure reliability, high performance, scalability for
rapid growth, sophisticated performance monitoring and expert management.
According to Forrester Research Inc "the installation and operation of a Web
site or server at an outsourced service provider's point of presence - is
exploding". Their research concluded that users of external Web site hosting
services outsource these services for three main reasons:
1. to save money;
2. speed in the time to market; and
3. increased quality and service reliability
NetNation believes that paramount to the outsourcing decision for a potential
customer is saving money and that most companies are finding it too costly to
keep pace with the rapidly changing world of the Internet. The skill and
technology demands of the Internet can present a significant barrier to in-house
development for all but the largest Information Technology ("IT") departments.
It is estimated by NetNation that typically a company will save at least
two-thirds of the cost of an in-house solution due to lower communications
costs, equipment and labour.
IDC estimates that Web site hosting revenues generated from small and medium
sized businesses in the U.S. will grow from $217 million in 1997 to over $3.4
billion in 2000, a 150% compound annual growth rate. Dataquest Inc. predicts the
overall Web-hosting and server co-location (see discussion below under the
heading "Web Site Hosting Services") market will increase to $2.6 billion in the
year 2001 from $283 million in 1997. Forrester Research Inc.'s estimates are
even higher at $5.4 billion by the year 2000.
At the end of 1997, only 7% of small businesses had a Web site, according to
IDC. However, IDC and other research firms expect small and medium sized
businesses to generate the vast majority of the demand for outsourced Web site
hosting services in the future. These businesses may find an outsourced Web site
hosting solution effective where they lack internal technology expertise, IT
resources, capital or ability to bear the time-to-market risks required to
install, maintain and monitor their own Web servers and Internet connectivity.
Although currently some small and medium sized businesses may have simple Web
sites to provide basic information about their products and services, it is
anticipated by NetNation that competition for Web traffic and customers may
result in these businesses creating Web sites with greater functionality.
Examples of these enhanced Internet services include secure electronic commerce,
unified messaging and email. Business may find outsourcing these new services
to be more cost effective than internally developed solutions. IDC estimates
the market for basic Web site hosting and enhanced Internet services in the
United States, will grow from approximately $352 million in 1997 to over $7
billion in 2000.
As previously noted herein, Web site hosting is not the same business as that of
an ISP (Internet Service Provider, Internet Access Provider, or Dial-up
Service). NetNation's web hosting services do not include the provision of any
Internet connectivity or gateway access for its customers, other than their web
site. Due to the nature of most ISP operations, they tend to take a local or
regional focus unlike Web site hosting, which can be marketed, on a worldwide
basis without local offices or access points. ISPs also require a significant
infrastructure and operate on limited margins, usually only 10 to 20%. The
economies of scale enable Web hosting companies achieve much higher margin
levels.
Markets for Web Hosting Services
- --------------------------------
The primary target markets for NetNation's web hosting and related services are
as follows:
1. Small and Medium Sized businesses that are considering a web presence;
2. Small and Medium Sized businesses that already have a web presence but
wish to decrease costs associated with internal solutions by outsourcing,
or wish to increase the functionality of their website;
<PAGE>
Page 7
3. Small and Medium Sized businesses that wish to change their outsourced
web hosting service provider; and
4. Resellers (VARs and OEMs).
The geographic location of the market for Web site hosting services is
worldwide, although NetNation's marketing plan targets prospective customers in
countries with high Internet use backed by good ISP and telecommunications
support. Marketing in all geographic areas includes exposure to prospective
customers of NetNation's services through VARs. As of June 30, 1999,
NetNation's marketing efforts have been directed primarily to North American
Markets and recently to European Markets, And have included television
commercials, newspaper advertisements, direct sales and marketing agreements
with resellers.
Services and Products of NetNation
- ----------------------------------
Web hosting is a complementary service to Web site creation and development.
After registering a domain name a typical NetNation's customer has to create
their web site and then electronically place it on NetNation's infrastructure.
Since the development of Web sites is labour intensive and artistic, NetNation
has strategically chosen not to offer a Web site development service. As a
result, Web site development entities and software companies that offer software
tools for the construction of Web sites are among the best candidates for
strategic alliances with NetNation.
The basic process of having an Internet presence is as follows:
1. Create the Web site
2. Register a domain name
3. Host the web site
While this is the most logical order of events, some customers choose to follow
other routes (such as register a domain name before creating their website, or
even before having an Internet access provider).
NetNation offers a wide range of high performance and scalable Web site hosting
services to meet its customers various needs and requirements. These services
are based on a backbone provided by AT&T Canada Inc., which is redundant,
high-speed, and secure. This enables NetNation to offer its customers a greater
than 99.9% Internet connectivity. In addition, NetNation has developed various
proprietary tools to facilitate a high customer to server ratio that allows
NetNation to host over 1,000 Web sites on a single server. NetNation's
proprietary technologies also facilitate efficient back-end processing and
self-service, allowing customers to order, change and manage their Web site
hosting accounts easily and flexibly, regardless of their level of technical
expertise.
The concept behind NetNation's products and services is to enable its customers
to create, update, upgrade and expand their Web sites faster and on a
substantially more cost-effective basis than the customers could develop
internally. The services offered by NetNation can be summarized as follows:
1. Web site hosting services:
a. Shared server Web site hosting: This service permits a customer to post
their web site on the Internet using NetNation's hardware and software,
Internet access, web site management tools and support services.
b. Domain name registration/reservation: This service permits a user to
register or reserve a name on the Internet (for example, NetNation has
registered its domain name "NetNation.com").
c. Server co-location: This service permits a customer to place their
server hardware in NetNation's premises, and access NetNation's Internet
services.
2. Enhanced Internet services: These services permit a customer with a web
site to add features to that web site such as audio/video, online
commerce capabilities, email and various other features.
<PAGE>
Page 8
3. OEM Products and Services: These services consist of Web hosting and
enhanced Internet services tailored for sale to OEMs.
A description of each of the above services is set out below.
NetNation provides services to allow its customers to deploy high performance
Internet Web sites easily and with a high degree of scalability and flexibility.
All of NetNation's services have been designed to meet the specific needs of its
many customers. Customers pay a one-time set-up fee and thereafter monthly fees
for the services that they utilize. NetNation can then provide enhanced services
to these customers as their needs evolve.
Web Site Hosting Services
Shared Server Web Site Hosting. The largest component of NetNation's business is
the provision of shared Web server hosting services for individuals and
businesses that want an Internet presence at a reasonable cost. Shared server
means that a number of customers will share space on one server. NetNation's
servers are mostly used for shared Web site hosting services. NetNation offers
a number of shared server Web site hosting plans to meet the needs of a broad
range of customers. As at June 30, 1999 there are four standardized Web site
hosting options at prices ranging, for example, from US$20-$60 per month (CDN$30
to CDN$100).
NetNation's entry level shared server Web site hosting plan is called EZsite.
The EZsite package of services offers customers up to 2 gigabytes ("GB") of data
transfer per month and 50 megabytes ("MB") of disk storage on NetNation's Web
servers. Customers can store HyperText Markup Language ("HTML"- a programming
language) coded files, graphics, video and audio on their Web site. This basic
service meets the requirements of most individuals and that of relatively small
businesses.
To allow customers to make effective use of their Web presence, customers can
establish emailboxes on their Web site, have their email forwarded to another
computer, establish online chat rooms, and even have automated email messages
(Autoresponders) sent to visitors of their Web site. Support is also provided
for popular Web authoring tools such as Microsoft Front Page and its specialized
extensions.
The more advanced and costly Web site hosting services offer enhanced
functionality and resources. The following table outlines some examples of the
major features of three of NetNation's various service packages available as at
June 30, 1999. The services offered under a package described below may be
updated or changed as required to respond to changes in technology and customer
needs, and accordingly are provided herein as an example only. Information on
current packages and pricing may be obtained from NetNation's website.
In US$
Feature EZsite POWERsite NTDBsite
- ------------------------------------------------------------------------------
Monthly Fee (US$) $20 $45 $45
Customer Disk Space 50MB 100MB 100MB
Monthly Bandwidth 2,000 MB 5,000 MB 5,000 MB
POP mailboxes 10 20 20
Unlimited FTP access Yes Yes Yes
Secure Transaction Support (optiona Yes Yes Yes
Unlimited Email forwarding & aliasing Yes Yes Yes
30 day money back guarantee Yes Yes Yes
155 Mbit T3 Internet connection Yes Yes Yes
Java Chart Support (optional fee for setup) Yes Yes N/A
CGI scripts provided Yes Yes N/A
CyberCash support Yes Yes N/A
CyberCash setup fees $200 $100 N/A
Anonymous FTP support (optional fees) Yes Yes Yes
Real Audio/Video Server Yes Yes Yes
Real Audio/Video Server setup fees $200 $100 N/A
Additional MB of Disk space (monthly) $0.50/MB $0.50/MB $0.50/MB
Additional MB of bandwidth $0.04/MB $0.04/MB $0.04/MB
- -----------------------------------------------------------------------------
<PAGE>
Page 9
NetNation has implemented a variety of tools to allow its customers to use
their sites more effectively. All of the standardized Web site hosting plans
feature detailed Web statistics and access to raw log files, giving customers
the ability to track the performance and evaluate the effectiveness of their Web
sites. Customers are able to update Web sites remotely by sending files through
File Transfer Protocol ("FTP"). In addition, NetNation provides a number of
popular Common Gateway Interface ("CGI", a programming language) scripts that
allow customers to deploy Web site and Web page hit counters, guest books, mail
forms and discussion forums rapidly and easily. NetNation also supports custom
CGI scripts that enable customers to build unique functionality into their Web
sites. NetNation supports the following platforms, operating systems and
applications:
Intel based servers (Pentium Pro, Pentium II, etc.)
Slackware Linux
Window NT 4.0
Apache web server
Microsoft IIS
NetNation has developed a set of utilities called the customer's Control Panel.
The Control Panel is a proprietary account interface tool that enhances a
customer's Web site control and management capabilities. For example, customers
can use the Control Panel to change passwords, set email forwarding options and
view Web site statistics without the need to converse directly with NetNation
staff.
Domain Name Registration/Reservation. Every individual or business entity must
first reserve a domain name which will serve as the basis of their personalized
Web site address through which users of the Internet can connect to their Web
site. In May 1999, NetNation was selected as an official registrar of domain
names by the Internet Corporation for Assigned Names and Numbers ("ICANN").
Until recently, Network Solutions Inc. held sole authority to register domain
names ending in .com, .net and .org which account for between 50% - 75% of the
world's Internet addresses. With this designation, NetNation joins a select
group of accredited registrars. As at June 30, 1999, NetNation has registered
approximately 25,000 Internet domain names. The domain name registration service
fulfills a role of "business catalyst" for the web hosting activity.
Server Co-location. Server Co-location (as opposed to shared server) is the
service of providing a physical space on NetNation's premises where customers
can place their own server while sharing NetNation's Internet connectivity,
network infrastructure, and physical security. This type of service is useful
for those customers that don't want to share server resources with many other
customers in a hosted environment. A typical candidate for server co-location
would be someone that requires video/audio streaming for a busy site, a
specialized online commerce package or someone that requires full control of the
server's functionality. Co-located servers can be managed by NetNation or by the
customer using remote access software. Customers find that by outsourcing these
services they can reduce expenses and eliminate many of the headaches associated
with running Web sites, particularly large ones.
As at June 30, 1999, NetNation charged US$500 per month plus other expenses for
its server co-location service.
Enhanced Internet Services
Due to the rapid evolution of Web-based services, NetNation is continually
exploring complementary and new services targeted at the needs of its current
and prospective customers. Other industry specific web hosting activities
include audio and video streaming, Intranet/Extranet hosting for specific
products, and high-end electronic commerce solutions. These and other new
services will be developed both through internal development and from
third-party licensing agreements. Current areas of new product focus include
expanded electronic commerce products, simplified Web site development tools,
and automated marketing services.
<PAGE>
Page 10
NetNation provides several different electronic commerce solutions to allow
businesses to develop and maintain successful online storefronts. Dependent on
the level of complexity and their specific needs, merchants can choose solutions
ranging from simple online catalogues to complex full featured interactive
online stores.
With these products, NetNation's Web site hosting customers can construct highly
customized online storefronts with integrated end-to-end sales process support
and automated payment systems with connections to their legacy accounting
systems. NetNation also supports PaymentNet and Cybercash, two leading
providers of real-time credit card processing services.
NetNation offers several packages that support online commerce for an initial
setup fee and a subsequent monthly fee. The packages are available to both UNIX
and Windows NT users. The Unix packages are based on a "shopping cart" licensed
from Miva Corporation while the Windows NT packages are based on shopping carts
licensed from Inex Inc. A "shopping cart" refers to a program that allows a
business to implement an online storefront by enabling tracking and sending of
orders made through the web site and giving a customer a receipt for purchases
made through the web site.
OEM Products and Services
NetNation is beginning to offer its proprietary technology and services to
Original Equipment Manufacturers (OEMs) that want to private label their Web
site hosting services, but wish to outsource the actual service. OEMs make bulk
purchases of web hosting services and resell them under their own name. An
example of an OEM could be a traditional internet service provider (ISP) that
does not offer focused web hosting services. NetNation could sell the services
in bulk to the ISP, which would in turn resell the services to end users of the
ISP under a different brand name.
NetNation is currently negotiating with several firms that are interested in
purchasing NetNation's Web site hosting services on an OEM basis. As an example
of these OEM relationships, NetNation is currently providing private label
domain search and registration service, with its proprietary "Smart Whois"
service (http://www.swhois.com). Currently NetNation has Euroseek, HyperBanner,
Orientation and a number of smaller firms using this service on a revenue
sharing basis. Although NetNation has generated minimal revenues to date from
its OEMs, these relationships may, in the future, generate additional
opportunities for NetNation.
Billing and Working Capital Practices
- -------------------------------------
NetNation normally processes the charges to each customer's account as each
monthly payment is due. A billing statement is posted over the Internet on the
customer's web site indicating the charges which have been applied. If there are
any adjustments or amounts which the customer would like further information
about, the customer can e-mail NetNation and receive a response from the billing
department. The initial billing, which may include such charges as setup fees,
is processed by NetNation after all billing particulars have been provided by
the customer. Recurring billing charges are batched and processed each month by
third party processing applications linked to the bank. Regional differences may
exist whereby another third party application is used and the bank may be
different. Payments can be made by a variety of methods including credit cards,
debit cards, cheques, money orders and wire transfers. Payment processing
methods for Internet applications are changing and evolving to address such
issues as immediate processing, acceptance of multiple payment methods,
multicurrency handling, application integration with various banks, immediate
credit of funds to vendors and competitive pricing.
As the size of each account is very small in relation to the overall sales,
there are no concentrations of accounts that NetNation is dependent upon. As
NetNation continues to expand, the issue of concentration is further diminished.
NetNation processes each customer account online to the extent possible
<PAGE>
Page 11
Since customers are charged for the various services provided by NetNation on a
monthly basis, the cashflow is consistent with the increase in revenues.
Accordingly, the associated expenses, such as advertising, marketing, personnel
and administration are paid when rendered or within a period of up to 60 days
depending upon the established policy with the various vendors and suppliers.
All recurring and non-recurring expenses have been financed from monthly cash
flow and from funds raised when NetNation Canada was acquired by NetNation
Marketing and Public Relations
- ------------------------------
The marketing and public relations group of NetNation is responsible for product
and service planning, advertising, marketing communications and public
relations. As at June 30, 1999 the group consisted of nine employees.
NetNation relies primarily on a combination of traditional television and print
media and online advertising. NetNation has placed aggressive print advertising
in major business and technical publications to accelerate NetNation's customer
growth. NetNation has used television commercials in selected geographical
areas. NetNation has also commenced its online marketing program, which
consists of a general rotation of keyword specific Web banner advertisements.
Other marketing vehicles used by NetNation include collateral sales materials
and NetNation's Web site. The latter is the first interface point for most
prospective customers, particularly those reacting to one of NetNation's online
ads. The effectiveness of each of these marketing initiatives is being
continuously analyzed by NetNation for the purposes of developing future
marketing strategies. Future areas of marketing focus will include public
relations programs and the cultivation of media relationships, with the goal of
securing broader media coverage and public recognition of NetNation.
Distribution and Sales
- ----------------------
NetNation sells its products and services worldwide directly to existing and
potential customers and indirectly through Value Added Resellers (VARs) and
Original Equipment Manufacturers ("OEMs Direct sales are generated through the
use of traditional media and online marketing campaigns. NetNation has also
developed a global VAR network consisting of over 580 value-added resellers in
more than 45 countries, as at June 30, 1999. Recently, NetNation has commenced
the distribution of its services through OEM partners.
NetNation has about 7,000 accounts in over 90 countries as of June 30, 1999.
As of June 30, 1999, the United States comprised 57% of the total web hosting
customer base, followed by Canada at 25% Europe at 8%, Asia at 4% and all other
countries combined at 6%.
Direct Sales
At present, NetNation generates most of its new Web site hosting accounts from
online registrations on its Web site and calls received from its traditional
media and online advertising campaigns. NetNation's Web site enables customer
registration around the clock and its automated voice mail system allows sales
calls to be captured 24 hours a day, even when sales personnel are not
available. Current staffing resources dictate that the existing three sales
representatives have little time available for outgoing telemarketing
activities. NetNation intends to expand its sales force to include outbound
sales, as well as dedicated sales personnel, for both electronic commerce and
co-location services in the near future.
VARs
As at June 30, 1999, NetNation has a network of over 580 VARs in more than 45
countries that resell NetNation's services. Most of these VARs base their
businesses on selling Web page design, integration and consulting services.
NetNation's International Reseller Program was designed for these webmasters,
consultants and other value added resellers that wish to offer web hosting
services as a value added service in their particular market. The VARs are
responsible for maintaining customer relationships, technical support, customer
billing, and the provision of value-added services such as Web page design and
system integration. They buy web hosting services from NetNation at a discount
from retail and resell the services to their customers as a complete package.
Resellers set their own price, marketing and technical support policy that is
best suited to the market that they are serving.
<PAGE>
Page 12
This system allows NetNation to target a worldwide customer base without having
to set up a physical offices in every country of the world. Each VAR typically
resells NetNation's Web hosting services to between 5 and 10 new customers.
OEMs
OEM stands for "original equipment manufacturer", which in this document refers
to other service providers that may buy NetNation's services in bulk and resell
them under their own brand name. To further expand its distribution channels,
NetNation is establishing OEM relationships with companies that have an
attractive target customer base for NetNation's services. Candidates for this
OEM partnering include telecommunication and cable companies, online search and
Internet portal companies, ISPs, marketing organizations, and large system
integrators. NetNation believes that OEMs will typically consist of potential
competitors that for cost reasons have opted to outsource their web-hosting
services and resell them under their own brand name.
NetNation has OEM partnerships with several content providers and
search/directory companies for its SmartWhois service. These companies are
Euroseek.com, WebCity.ca, and Domain-o-matic.com. NetNation is currently in
negotiations with several additional companies to expand its partnerships.
NetNation also plans to distribute its services by bundling them with
complementary software packages such as HTML editors, online commerce packages
and other web development tools. The relationships with these software
companies call for a variety of distribution cooperation ranging from
advertising each others products on their respective web sites, to including
NetNation's free trial coupons in software packages directly targeted at Website
builders and users.
Business Relationships with Industry partners
In order to maintain a competitive level of service, including up-to-date
technologies and online commerce solutions, NetNation has made arrangements with
a number of industry partners. A brief summary of selected arrangements
follows.
1. Euroseek Incorporated - On November 5, 1998, NetNation Canada entered
into a co-branding agreement with Euroseek Incorporated to offer Euroseek users
domain name searches and submissions using a co-branded version of NetNation's
domain name search engine "swhois.com". "Swhois.com" allows searches of
InterNIC's database and 32 country registries to find available domain names in
multiple markets.
2. HyperBanner Network - On February 4, 1999, NetNation Canada entered into
a Private Label and Marketing Agreement with HyperBanner Network, the largest
global marketing network, which allows HyperBanner users to search and register
domain names using NetNation's domain name search engine "swhois" and providing
for the placement of a link on HyperBanner's main site for NetNation's products.
3. INEX Corporation - On February 17, 1999, NetNation Canada was granted a
renewable one-year non-exclusive license to resell the INEX Commerce Court
Suite. The INEX Suite is a bundle of software applications that enable a user
to set-up, operate and administer an Internet Commerce Web store. The license
is automatically renewable every year until notice of termination is provided.
4. LinkShare Corporation - On February 19, 1999 NetNation Canada entered
into an agreement with LinkShare Corporation, the creator of the affiliate
network concept and the owner of the largest affiliate network. The affiliate
network concept operates through the placement of links to affiliated members'
sites, wherein a sale generated through the link will entitle the owner of site
displaying the link to a percentage of the sale.
<PAGE>
Page 13
5. Miva Corporation - On March 1, 1999 NetNation Canada entered into an
agreement for purchases of Miva Merchant licenses. The Miva Merchant software
allows small to medium size businesses to open online stores at affordable
prices, the features of which include real-time electronic transactions,
electronic shopping carts that can manage multiple purchases, and the latest
security measures.
6. SoftQuad Software Inc. - On March 23, 1999, NetNation Canada entered into
a renewable one-year agreement with SoftQuad Software Inc. for the marketing of
HoTMetaL PRO 5.0 software. HoTMetaL is a multi-platform, standards-based
content publishing tool that allows for the development of transaction-oriented
websites.
7. Allaire Corporation - On May 22, 199 NetNation Canada purchased a 1-year
subscription to Allaire's ColdFusion Server Professional NT. ColdFusion is a
Web application server used to create interactive intranet, extranet and public
Internet sites.
Customer Service
- ----------------
NetNation uses online and automated customer support through its Web site and
online "frequently asked questions" feature (FAQ's). These online services are
in addition to technical support staff accessible via telephone or email 24
hours per day. Technical support staff are responsible for helping customers
with their Web site hosting accounts, Web page setup and transfer, and using the
various online Web Site management tools NetNation provides.
NetNation's Customer Service and Accounts Receivable/Accounting Solutions Group
handles accounting and billing information. NetNation recently added a feature
to its "Control Panel" to allow customers to check their billing statements
online. Additionally, customers can call NetNation during normal business hours
to discuss their accounts.
Technology
- ----------
NetNation believes it has created a high-performance, secure, scalable and
reliable Web site hosting service. NetNation further believes that this
technology provides a significant competitive advantage. NetNation focuses on
combining its internally developed technology with third-party software and
hardware.
Web Site Hosting Platform
NetNation attempts to balance and limit the number of Web site customers per
server machine to ensure quality service levels. Even though industry-standard
Web servers can support multiple Web sites on a single machine, the ability to
manage large numbers of sites is difficult and requires significant
technological innovations. NetNation has expended significant resources
developing technology and tools to efficiently manage a high ratio of customers
to servers and to simultaneously monitor service quality. Although NetNation
has developed the technology to allow over 1,000 simultaneous Web sites on a
single server, it generally limits the number of Web sites to 500 per machine.
NetNation believes that it has the capability to accommodate most
hardware/software configurations that prospective customers may have. NetNation
uses standard technologies such as the Linux operating system, Intel based
servers, Apache Web server software, Sendmail mail server, and Bind for DNS.
Some of the technological barriers that NetNation has been able to overcome
include the ability to communicate with a Microsoft Windows NT based SQL server
from a UNIX machine, the elimination of the "file handle" limits on the servers
and the ability to run Microsoft FrontPage extensions on Linux machines.
To facilitate customer maintenance and support, NetNation has developed various
tools that enables customers to change their own passwords, setup POP3 mail
accounts, modify email routing for automatic message forwarding, and to monitor
their Web site statistics. Customers access these services through a
proprietary Control Panel front-end interface. The Control Panel tools are
continually being upgraded to enhance customer service and ensure a high level
of scalability as additional servers and customers come online.
<PAGE>
Page 14
Network Operations
The provision of high-quality service is of the utmost importance to the
business of NetNation. Accordingly, NetNation has invested significant resources
into building its highly scalable network infrastructure. Wherever feasible,
NetNation has made its network fault tolerant with redundant equipment. These
measures, along with continual monitoring, are designed to help minimize down
time and identify potential sources of failure early. NetNation currently has
one Data Center, located in Vancouver, BC. For risk factors associated with
the network infrastructure see "Risk Factors" herein.
Intellectual Property Rights
- ----------------------------
NetNation relies on copyrights, trademarks, trade secret laws and contractual
restrictions to establish and protect its proprietary rights in its services and
products. NetNation does not have any patented technology at this time that
would limit competitors from entering NetNation's market. Management of
NetNation believes that the steps taken by NetNation to protect its intellectual
property are consistent with industry standards for Web site hosting companies
today.
NetNation also relies on third party software licenses. All employees and
contractors are required to and have entered into confidentiality and invention
assignment agreements. Suppliers, distributors and certain customers are also
required to enter into confidentiality agreements.
To date, NetNation has received no notification that its services or products
infringe the proprietary rights of third parties. Third parties could however
make such claims of infringement in the future. Any future claims that do occur
may have a material adverse affect on NetNation and its business. Refer to
"Risk Factors" herein.
Government Regulations
- ----------------------
As at the date of filing there are few laws and regulations that apply
specifically to access to, or commerce on, the Internet. Due to the increasing
popularity and use of the Internet, however, it is possible that laws and
regulations with respect to the Internet may be adopted at federal, state,
provincial and even local levels, covering issues such as user privacy, freedom
of expression, pricing, characteristics and quality of products and services,
taxation, advertising, intellectual property rights, information security and
the convergence of traditional telecommunications services with Internet
communications. Such future regulations may end up having a material adverse
affect on NetNation and its business. Refer to "Risk Factors" herein.
Employees
- ---------
As of June 30, 1999, NetNation had 40 employees. All employees, with the
exception of the founders, must enter into an employment agreement, which
contains industry standard terms including protection of proprietary interests,
confidentiality, and non-competition terms. As at June 30, 1999, NetNation was
conducting a hiring program for additional technical and administrative staff.
NetNation believes that its ability to attract, hire and retain qualified
personnel now and in the future is important to its success. While sourcing and
recruiting appropriate technical personnel is often difficult and competitive,
NetNation expects that its need to recruit additional personnel in the future
will not negatively affect its operations. Management believes that its
employee relations are good, and none of NetNation's employees are represented
by a collective bargaining unit. Refer to "Risk Factors" herein.
<PAGE>
Page 15
Competition
- -----------
It is estimated that there are over 5,000 Web hosting service providers in North
America alone. Over 95% of them are very small and run by programmers or other
"techies". Many are ISPs that offer limited Web site hosting as an add-on
service to their dial-up Web access services.
NetNation's current and potential competitors include:
a) other Web Hosting and Internet services companies
b) regional and national ISPs
c) regional and national telecommunications companies
d) large information technology outsourcing firms
e) cable and satellite service providers
The principal competitive factors in this market include:
a) customer service
b) quality and reliability of service
c) network capability and scalability (scalability refers to the ability
of the hardware and software to support increasingly larger or more complex
web site requirements of customers.)
d) pricing of services
e) brand name recognition
f) breadth of products and services offered and the timely introduction
thereof
g) technical and engineering expertise
h) network security
i) maintenance and expansion of marketing distribution channels
j) financial resources
k) development of a broad international presence
l) compliance with and the leveraging of industry standards
NetNation is among the top 60 web hosting companies worldwide (as measured by
the number of hosted web sites. Sources: TopHost and HostIndex). As at June
30, 1999,the largest in number of hosted web sites is Verio Inc. (which in the
last year acquired Hiway, Best, TABnet and iServer). As there are relatively few
barriers to entry, additional competition will be created from both new market
entrants and from existing competitors.
Management of NetNation considers that most competitors fit into two major
groupings, each having its own set of competitive strengths and weaknesses. The
first grouping and most obvious of NetNation's direct competitors are the big
telephone and cable companies. NetNation believes that because of their large
corporate size, it takes these competitors much longer to develop and
incorporate new features into their hosting services and to offer those services
at a competitive price without subsidizing the pricing. As a result, NetNation
believes that by careful attention to its cost structure and rapid response to
market demand for new features it can effectively compete with larger and more
financially secure companies, both in services provided and on price.
The second major type of competitors are smaller companies. NetNation believes
that many of these companies have insufficient resources, no proper
infrastructure, insufficient Internet connectivity, and/or inadequate technical
support. These companies may have congested network servers and slow Internet
connectivity causing delays in website access and upload. This can result in
lost customers visiting and exploring a web site through abandoned connections.
These small competitors may not have scalable systems that can respond quickly
to their customers' growth requirements and may not be capable of supporting
large numbers of new customers. NetNation is aware that some of its customers
came to NetNation as a result of experiencing an inadequate level of service
from a competitor. While smaller Web hosting companies may face these
competitive deficiencies, there are a number of smaller Web hosting companies
that have shown the ability to compete effectively. The ability of NetNation to
compete with these smaller companies over time is unproven. See "Risk Factors"
herein.
<PAGE>
Page 16
Certain of NetNation's larger competitors offer Web site hosting services
similar to those of NetNation at lower prices than those of NetNation or with
incentives not matched by NetNation, including free start-up and domain name
registration, periods of free service, low-priced Internet access or free
software. In addition, certain of NetNation's competitors may be able to
provide customers with additional benefits, including reduced communications
costs, which could reduce the overall costs of their services relative to those
of NetNation. NetNation may not be able to reduce the pricing of its services
or offer incentives in response to the actions of its competitors without a
material adverse impact on its operating results. NetNation also believes that
the market in which it competes is likely to encounter consolidation in the near
future, which could result in decreased price and other competition that could
have a material adverse effect on NetNation's business, results of operations
and financial condition. See "Risk Factors" herein.
Competitive Advantages
- ----------------------
Management of NetNation believe that there is currently, and will be in the
foreseeable future, significant competition from existing and future companies
that can offer a high level of service at competitive prices, while continuously
adapting to changing technologies and customer requirements. While NetNation
believes its business and marketing structure to be effective in the current Web
site hosting marketplace, the ability of NetNation to successfully compete with
these companies over time is unproven.
The following key advantages are provided to the customers of NetNation through
its various service solutions. The following competitive advantages should be
read in conjunction with risk factors that affect the company, several of which
are listed elsewhere herein under "Risk Factors":
High-performance with quality and reliability. NetNation's Web site hosting
solutions are designed to deliver a high level of hardware and software
performance to ensure customers' Web sites load rapidly when visited. This is a
factor that is consistently used by web hosting ratings services such as TopHost
and HostIndex. NetNation believes that features such as redundant and fault
tolerant equipment housed in secure and environmentally protected facilities
permit NetNation to offer a high quality and reliable service with minimal
downtime to customer web sites.
Large number of service options. NetNation's services range from simple
Domain-Name-Registration to sophisticated online commerce offerings. The bulk
of NetNation's current revenues are generated by Web site hosting services.
This is augmented by a number of fee based Internet enhancement services. These
enhanced services include electronic commerce solutions for the Web, expanded
disk storage and data bandwidth options, Web site to database interfaces, and
multimedia support tools for applications such as RealAudio and RealVideo.
NetNation also offers the ability for customers to co-locate their Web servers
on NetNation's secure premises and gain access to technical support services,
expertise, and high bandwidth.
Cost-effective solutions. There are potential significant cost saving benefits
to NetNation's customers through the elimination of high capital costs for Web
site equipment, labour, and software. Customers can tap directly into the
knowledge and operating experience of NetNation's staff. Ongoing operating
costs to customers are usually a small fraction of costs of staffing, support
and bandwidth of an internally hosted Web site costs. The shared nature of
NetNation's services provides customers with access to the huge bandwidth
capabilities at a cost of less than $100 versus over a $1,000 per month for
their own T-1 or greater bandwidth telephone line. Forrester Research Inc.
indicates that a customer with a Web site that required a dedicated T-1
connection and related equipment would save in excess of $40,000 annually over
an in-house solution by utilizing outsourcing services similar to that of
NetNation.
Flexibility and Scalability. NetNation's Web site hosting solutions offers a
highly scalable structure designed to permit the support of tens of thousands of
Web sites. This enables NetNation to provide a continual level of reliable
service to both existing and new customers. NetNation's structure permits the
quick expansion of available disk storage space and network bandwidth required
to accommodate rapid growth in the activity, size of or number of visitors to
customers' Web sites.
<PAGE>
Page 17
Customer Support. Through its standardized systems, NetNation has the ability to
rapidly deploy customer Web sites. Most of this process is automated and does
not require the extensive involvement of any NetNation personnel. NetNation
believes it has developed an efficient system of support and related customer
services via email or telephone through NetNation's technical service group.
Customer support services are available 24 hours per day and 7 days per week.
Ease of Use. Through interactions with its thousands of customers, NetNation has
developed and implemented proprietary software tools to assist its customers.
These tools allow customers to easily order, change and manage their Web sites,
remotely. Detailed statistics and activity logs are available for customers to
review their account and performance information. For customers that are buying
our "DomainPlus" package, NetNation has developed a tool that allows customers
to create a one page Web site based on a selection of Company provided
templates. By using this tool customers can create a simple Web site within
minutes.
Risk Factors
- ------------
In addition to the other information set forth elsewhere herein, the following
risk factors should be considered carefully in evaluating the merits of an
investment in NetNation.
Limited Operating History. NetNation Canada was incorporated in February 1997.
As a result, the business model is still in an evolving stage. The ability of
NetNation to sustain revenue and income is unproven, and NetNation's limited
operating history makes an evaluation of NetNation and its prospects difficult.
NetNation and its prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in the new and rapidly evolving market
for Web Hosting and related enhanced Internet services. To address these risks,
among other things, NetNation must market its services and build its brand names
effectively, provide scalable, reliable and cost-effective services, continue to
grow its infrastructure to accommodate additional customers and increased use of
its network bandwidth, expand its channels of distribution, continue to respond
to competitive developments and retain and motivate qualified personnel.
Although NetNation has experienced significant growth in revenues in recent
periods, NetNation may not sustain revenue growth in future quarterly or annual
periods. See "Management's Discussion and Analysis" herein.
Potential Fluctuations in Results of Operations. NetNation has experienced
significant fluctuations in its results of operations on a quarterly and an
annual basis. NetNation expects to continue to experience significant
fluctuations in its quarterly and annual results of operations due to a variety
of factors, many of which are outside the Company's control. These factors
include:
a) demand for and market acceptance of NetNation's services;
b) introductions of products or services by NetNation and its competitors;
c) reliable continuity of service and network availability;
d) the ability to increase bandwidth as necessary;
e) the mix of services sold by NetNation;
f) provisions for customer discounts and credits;
g) customer retention;
h) the timing and success of marketing efforts and service introductions by
the Company and its VARs and OEMs;
i) the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
j) the introduction by third parties of new Internet and networking
technologies;
k) increased competition in NetNation's markets;
l) changes in the pricing policies of NetNation and its competitors;
m) fluctuations in bandwidth used by customers;
n) the timing and magnitude of expenditures on advertising and promotion;
o) economic conditions specific to the Internet industry; and
p) other general economic factors.
<PAGE>
Page 18
In addition, a relatively large portion of NetNation's expenses are fixed in the
short-term, and therefore NetNation's results of operations are particularly
sensitive to fluctuations in revenues. If NetNation was unable to continue
using third-party products in NetNation's services offerings, NetNation's
service development costs could increase significantly. Although NetNation has
not encountered significant difficulties in collecting accounts receivable in
the past, many of NetNation's customers are individuals and small businesses,
and NetNation may not be able to collect accounts receivable on a timely basis.
For these and other reasons, in some future quarters, NetNation's results of
operations may not meet or exceed the expectations of the investors, which could
have a material adverse effect on NetNation's worth. See "Management's
Discussion and Analysis" herein.
Dependence Upon New Market; Uncertainty of Acceptance of Services. The market
for Web site hosting and related enhanced Internet services has only recently
begun to develop and is evolving rapidly. There is significant uncertainty
regarding whether this market ultimately will prove to be viable over the long
term or, if it proves viable, whether it will continue to grow. NetNation's
future growth, if any, will depend upon the willingness of businesses to
outsource Web site hosting services and NetNation's ability to market its
services in a cost-effective manner to a sufficiently large number of customers.
The market for NetNation's services may not develop further, NetNation's
services may not be more widely adopted, and significant numbers of businesses
or organizations may not use the Internet for commerce and communication. If
this market fails to develop further or develops slower than expected, or if
NetNation's services do not achieve broader market acceptance, NetNation's
business, results of operations and financial conditions would be materially and
adversely affected. In addition, to be successful in this emerging market,
NetNation must be able to differentiate itself from its competition through its
service offerings and brand recognition. NetNation may not be successful in
differentiating itself or achieving market acceptance of its services, and may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If NetNation incurs increased
costs or is unable, for technical or other reasons, to develop and introduce new
services or products or enhancements to existing services in a timely manner, or
if new services do not achieve market acceptance in a timely manner or at all,
NetNation's business, results of operations and financial condition could be
materially adversely affected.
Dependence Upon Channel Partners. An important element of NetNation's strategy
for growth is to continue to develop its reseller channel through the marketing
of Reseller Packages, which is being used by NetNation's network of domestic and
international VARs, and through the development of NetNation's OEM
relationships. NetNation's VARs typically are Web development or Web consulting
companies that also sell NetNation's Web site hosting services but that do not
generally have established customer bases to which they can market NetNation's
services. Therefore, in those markets, primarily international, where NetNation
does not focus its direct marketing efforts, NetNation is dependent on third
parties to stimulate demand for NetNation's services. The failure of NetNation's
services to be commercially accepted in certain markets, whether as a result of
a VARs performance or otherwise, could cause NetNation's current channel
partners to discontinue their relationships with NetNation, and NetNation may
not be successful in establishing additional channel partner relationships as
required. NetNation's OEM relationships have not generated a material amount
of revenue to date, and, in order for NetNation to be successful, revenues
generated by OEMs must increase significantly. OEMs and VARs have no obligation
to market or resell NetNation's Web site hosting services, and OEMs can
terminate their relationships with NetNation with limited or no penalty with as
little as 30 days' notice. The loss of VARs or OEMs, the failure of such
parties to perform under agreements with or the inability of NetNation to
attract and retain new VARs or OEMs with the industry experience required to
market NetNation's Web site hosting services successfully in the future could
have a material adverse effect on NetNation's business, results of operations
and financial condition. NetNation's direct sales efforts may conflict with the
efforts of its indirect channel partners, which may adversely affect NetNation's
relationships with such partners. In addition, to the extent that NetNation
succeeds in increasing its sales through indirect channels such as VARs or OEMs,
those sales will be at discounted rates, and revenue and gross margin to
NetNation for each such sale will be less than if NetNation had sold the same
services to the customer directly. Refer to "Distribution and Sales" herein.
<PAGE>
Page 19
Competition. The market served by NetNation is highly competitive and is
becoming more so. There are few substantial barriers to entry, and NetNation
expects that it will face additional competition from existing competitors and
new market entrants in the future.
NetNation may not have the resources, expertise or other competitive factors to
compete successfully in the future. Many of NetNation's competitors have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than NetNation. As a result, certain
of these competitors may be able to develop and expand their network
infrastructures and service offerings more rapidly, adapt to new or emerging
technologies and changes in customer requirements more quickly, take advantage
of acquisition and other opportunities more readily, devote greater resources to
the marketing and sale of their services and adopt more aggressive pricing
policies than can NetNation. In addition, these competitors have entered and
will likely continue to enter into joint ventures or consortiums to provide
additional services competitive with those provided by NetNation.
Management of Growth. NetNation is currently experiencing a period of rapid
expansion of its customer base and growth in the need for internal resources and
employees. This growth has placed, and if it continues will place, a significant
strain on NetNation's financial, management, operational and other resources.
In addition, NetNation must manage relationships with a growing number of third
parties as it seeks to complement its service offerings and increase its
indirect sales efforts. NetNation's management, personnel, systems, procedures
and controls may not be adequate to support NetNation's existing and future
operations, particularly if a large number of new accounts will be generated by
OEM agreements. NetNation's ability to manage its growth effectively will
require it to continue to expand its operating and financial procedures and
controls, to replace or upgrade its operational, financial and management
information systems and to attract, train, motivate, manage and retain key
employees. If NetNation's executives are unable to manage growth effectively,
NetNation's business, results of operations and financial condition could be
materially adversely affected.
Risks Associated with International Expansion and Operations. In 1997 and 1998,
revenues derived from customers outside Canada, primarily in the US, Europe and
Asia, represented approximately 70% and 75%, respectively, of NetNation's
revenues. NetNation's success is dependent in part on expanding its
international presence, primarily through NetNation's VARs. As a result,
NetNation will depend upon its VAR network to market and sell its services and
manage the accounts of customers internationally. NetNation's VARs may not be
able to continue to market and sell NetNation's Web site hosting services
successfully. NetNation denominates its sales to VARs in U.S. dollars. Thus,
fluctuations in the value of the U.S. dollar relative to the Canadian dollar and
to the currency of a given country may make NetNation's services less (or more)
profitable and therefore less (or more) attractive to VARs selling in that
country. In addition, there are certain risks inherent in conducting business
internationally, such as changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, differing technology standards,
longer payment cycles, political and economic instability, fluctuations in
currency exchange rates, imposition of currency exchange controls, seasonal
reductions in business activity, increased difficulty in enforcing contracts and
potentially adverse tax consequences, any of which could adversely affect
NetNation's international operations. Furthermore, certain foreign governments,
such as Germany, have enforced laws and regulations related to content
distributed over the Internet that are stricter than those currently in place in
the United States and Canada. One or more of these factors could have a material
adverse effect on NetNation's current or future international operations and,
consequently, on NetNation's business, results of operations and financial
condition. To the extent that NetNation does business in foreign markets
directly, NetNation will also be subject to risks such as challenges in staffing
and managing foreign operations, employment laws and practices in foreign
countries and problems in collecting accounts receivable. In addition, NetNation
or its channel partners may not be able to compete effectively in international
markets.
Unproven Network Scalability. NetNation must continue to expand and adapt its
network infrastructure as the number of users and the amount of information they
wish to transport increase and to meet changing customer requirements. The
expansion and adaptation of NetNation's telecommunications infrastructure will
require substantial financial, operational and management resources as NetNation
negotiates telecommunications capacity with existing and other network
infrastructure suppliers. If NetNation is required to expand its network
significantly and rapidly due to increased usage, additional stress will be
placed upon NetNation's network hardware and traffic management systems. Due to
the limited deployment of NetNation's services to date, the ability of
NetNation's network to connect and manage a substantially larger number of
customers at high transmission speeds is as yet unknown, and NetNation faces
risks related to the network's ability to be scaled up to its expected customer
levels while maintaining superior performance. As customers' usage of bandwidth
increases, NetNation will need to make additional investments in its
infrastructure to maintain adequate downstream data transmission speeds, the
availability of which may be limited or the cost of which may be significant.
Additional network capacity may not be available from third-party suppliers as
it is needed by NetNation, and, as a result, NetNation's network may not be able
to achieve or maintain a sufficiently high capacity of data transmission,
especially if the usage of NetNation's customers increases. NetNation's failure
to achieve or maintain high-capacity data transmission could significantly
reduce consumer demand for its services and have a material adverse effect on
its business, results of operations and financial condition.
<PAGE>
Page 20
Risk of System Failure. NetNation's operations depend upon its ability to
protect its network infrastructure, equipment and customer files against damage
from human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and similar
events. The occurrence of a natural disaster or other unanticipated problems at
NetNation's Network Operations Centers could result in interruptions in the
services provided by NetNation. The Company has no formal disaster recovery
plan. Although NetNation has attempted to build redundancy into its network,
NetNation's network is currently subject to various single points of failure,
and a problem with one of NetNation's routers or switches could cause an
interruption in the services provided by NetNation to a portion of its
customers. NetNation has, in the past, experienced periodic interruptions in
service. In addition, failure of any of NetNation's telecommunications providers
to provide the data communications capacity required by NetNation, as a result
of human error, a natural disaster, or other operational disruption, could
result in interruptions in NetNation's services. Any damage to, or failure of,
the systems of NetNation or its service providers could result in reductions in,
or terminations of, services supplied to NetNation's customers, which could have
a material adverse effect on NetNation's business, results of operations, and
financial condition. In addition, NetNation's reputation could be materially
adversely affected.
Dependence Upon Network Infrastructure. NetNation's success will depend upon the
capacity, scalability, reliability and security of its network infrastructure,
including the capacity leased from AT&T Canada Inc., its telecommunications
network supplier. Although AT&T Canada Inc. owns a nationwide network, it
heavily depends upon UUNet, Sprint and MCI for its backbone capacity, and
NetNation is therefore dependent on such companies to maintain the operational
integrity of their telecommunications networks. Therefore, NetNation's operating
results depend, in part, upon the pricing and availability of telecommunications
network capacity from a limited number of providers in a consolidated market. In
the event of a material increase in pricing or decrease in telecommunications
capacity available to NetNation, if NetNation were unable either to access
alternative networks on a cost-effective basis to distribute its customers'
content or to pass through any additional costs of utilizing existing or
alternative networks to its customers, NetNation's business, results of
operations and financial condition could be materially adversely affected.
Dependence Upon the Internet and Internet Infrastructure Development.
NetNation's success will depend largely upon continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for NetNation's services. The adoption
of the Internet for information retrieval and exchange, commerce and
communications, particularly by those enterprises that have historically relied
upon alternative means of information gathering, commerce and communications,
generally will require the acceptance of a new medium of conducting business and
exchanging information. Demand and market acceptance of the Internet are subject
to a high level of uncertainty and depend upon a number of factors, including
the growth in consumer access to and acceptance of new interactive technologies,
the development of technologies that facilitate interactive communication
between organizations and targeted audiences and increases in the speed of user
access. If the Internet as a commercial or business medium fails to develop
further or develops more slowly than expected, NetNation's business, results of
operations and financial condition could be materially adversely affected.
<PAGE>
Page 21
Rapid Technological Change; Evolving Industry Standards. NetNation's future
success will depend, in part, upon its ability to offer services that
incorporate leading technologies, address the increasingly sophisticated and
varied needs of its current and prospective customers and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. The market for NetNation's services is characterized
by rapidly changing and unproven technologies, evolving industry standards,
changes in customer needs, emerging competition and frequent new service
introductions. Technological advances may have the effect of encouraging certain
of NetNation's current or future customers to rely on in-house personnel and
equipment to furnish the services currently provided by NetNation. In addition,
keeping pace with technological advances in NetNation's industry may require
substantial expenditures and lead time, which may have a material adverse effect
on NetNation's business, results of operations and financial condition.
NetNation believes that its ability to compete successfully also depends upon
the continued compatibility and interoperability of its services with products
offered by various vendors. Enhanced or newly developed third-party products may
not be compatible with NetNation's infrastructure, and such products may not
adequately address the needs of NetNation's customers. Although NetNation
currently intends to support emerging standards, industry standards may not be
established, and even if they are established, NetNation may not be able to
conform to these new standards in a timely fashion and maintain a competitive
position in the market. The failure of NetNation to conform to the prevailing
standard, or the failure of a common standard to emerge, could have a material
adverse effect on NetNation's business, results of operations and financial
condition. In addition, products, services or technologies developed by others
could render NetNation's services noncompetitive or obsolete.
System Security Risks. A significant barrier to electronic commerce and
communications is the need for secure transmission of confidential information
over public networks. Certain of NetNation's services rely on security
technology licensed from third parties to provide the encryption and
authentication necessary to effect secure transmission of confidential
information. Despite NetNation's design and implementation of a variety of
network security measures, unauthorized access, computer viruses, accidental or
intentional actions and other disruptions could occur. NetNation has in the past
experienced and may in the future experience delays or interruptions in service
as a result of the accidental or intentional actions of Internet users, current
and former employees or others. Furthermore, such inappropriate use of the
network by third parties could also potentially jeopardize the security of
confidential information, such as credit card and bank account numbers, stored
in the computer systems of NetNation, which could result in liability to
NetNation and the loss of existing customers or the deterrence of potential
customers. Although NetNation intends to continue to implement industry-standard
security measures, such measures have been circumvented in the past, and any
such measures implemented by NetNation could be circumvented in the future. The
costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive and the efforts to address such
problems could result in interruptions, delays or cessation of service to
NetNation's customers, which could have a material adverse effect on NetNation's
business, results of operations and financial condition. Concerns over the
security of Internet transactions and the privacy of users may also inhibit the
growth of the Internet, especially as a means of conducting commercial
transactions.
Government Regulation and Legal Uncertainties. Only a small body of laws and
regulations currently apply specifically to content of, access to, or commerce
on, the Internet. It is possible that laws and regulations with respect to the
Internet may be adopted by governments in any of the jurisdictions in which
NetNation can sell its products, covering issues such as user privacy, freedom
of expression, pricing, characteristics and quality of products and services,
taxation, advertising, intellectual property rights, information security and
the convergence of traditional telecommunications services with Internet
communications. Although sections of the U.S. Communications Decency Act of
1996 (the "CDA") that, among other things, proposed to impose criminal penalties
on anyone distributing "indecent" material to minors over the Internet were held
to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed,
adopted and upheld in the U.S. or other jurisdiction. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, legislation similar to the CDA could subject
NetNation and/or its customers to potential liability, which in turn could have
a material adverse effect on NetNation's business, results of operations and
financial condition. The adoption of any such laws or regulations might decrease
the growth of the Internet, which in turn could decrease the demand for the
services of NetNation or increase the cost of doing business or in some other
manner have a material adverse effect on NetNation's business, results of
operations and financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyright and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues could create
uncertainty in the marketplace that could reduce demand for the services of
NetNation or increase the cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
have a material adverse effect on NetNation's business, results of operations
and financial condition. In addition, because NetNation's services are available
over the Internet virtually worldwide, and because NetNation facilitates sales
by its customers to end users located in multiple provinces, states and foreign
countries, such jurisdictions may claim that NetNation is required to qualify to
do business as a foreign corporation in each such state/province or that
NetNation has a permanent establishment in each such foreign country. Failure by
NetNation to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject NetNation to taxes and penalties for failure to
qualify and could result in the inability of NetNation to enforce contracts in
such jurisdictions. Any new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to
NetNation's business, could have a material adverse effect on NetNation's
business, results of operations and financial condition.
<PAGE>
Page 22
Risks Associated With Information Disseminated Through NetNation's Network. The
law relating to the liability of online services companies and Internet access
providers for information carried on or disseminated through their networks is
currently unsettled. It is possible that claims could be made against online
services companies and Internet access providers under United States, Canadian
and foreign laws for defamation, negligence or copyright or trademark
infringement, or other theories based on the nature and content of the materials
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon online services companies and Internet access providers are
currently pending. In addition, legislation has been proposed that imposes
liability for or prohibits the transmission over the Internet of certain types
of information. The imposition upon NetNation and other Web site hosting
providers of potential liability for information carried on or disseminated
through their systems could require NetNation to implement measures to reduce
its exposure to such liability, which may require the expenditure of substantial
resources, or to discontinue certain service offerings. The increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals also could affect the growth of Internet use. In addition, NetNation
is subject to a number of risks associated with the potential actions of
customers utilizing NetNation's network. For example, if a customer were to
engage in "spamming" (a practice of sending large quantities of unsolicited
email), NetNation would have an obligation to block that customer's access to
the Internet through NetNation's network. A failure by NetNation to satisfy this
obligation could result in NetNation being denied access to the
telecommunications networks through which NetNation's network links to the
Internet. Spamming could also cause a significant disruption in NetNation's
ability to route email to and from its customers.
Dependence on Key Personnel. NetNation's success depends in significant part
upon the continued services of its key technical, sales and senior management
personnel. Any officer or employee of NetNation can terminate his or her
relationship with NetNation at any time. NetNation's future success will also
depend on its ability to attract, train, retain and motivate highly qualified
technical, marketing, sales and management personnel. Competition for such
personnel is intense, and NetNation may not be able to attract and retain key
personnel. The loss of the services of one or more of NetNation's key employees
or NetNation's failure to attract additional qualified personnel could have a
material adverse effect on NetNation's business, results of operations and
financial condition. NetNation carries key-man life insurance for two of its
managers only.
<PAGE>
Page 23
Protection and Enforcement of Intellectual Property Rights. NetNation relies on
a combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect certain proprietary rights in
its services. NetNation has no patented technology that would preclude or
inhibit competitors from entering NetNation's market. NetNation has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and nondisclosure agreements with its suppliers, distributors and
certain customers in order to limit access to and disclosure of its proprietary
information. These contractual arrangements or the other steps taken by
NetNation to protect its intellectual property may not prove sufficient to
prevent misappropriation of NetNation's technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect NetNation's services or intellectual property rights
to the same extent as do the laws of the United States and Canada. NetNation
also relies on certain technologies that it licenses from third parties. These
third-party technology licenses may not continue to be available to NetNation on
commercially reasonable terms. The loss of the ability to use such technology
could require NetNation to obtain the rights to use substitute technology, which
could be more expensive or offer lower quality or performance, and therefore
have a material adverse effect on NetNation's business, results of operations
and financial condition. To date, NetNation is not a subject of a lawsuit in
respect to NetNation's services infringing the proprietary rights of third
parties, but third parties could claim infringement by NetNation with respect to
current or future services. NetNation expects that participants in its markets
will be increasingly subject to infringement claims as the number of services
and competitors in NetNation's industry segment grows. Any such claim, whether
meritorious or not, could be time-consuming, result in costly litigation, cause
service installation delays or require NetNation to enter into royalty or
licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to NetNation, or at all. As a result, any such
claim could have a material adverse effect upon NetNation's business, results of
operations and financial condition.
Potential Future Capital Needs. NetNation plans to invest in the development of
new services. However, NetNation may not be successful in generating sufficient
cash from operations or in raising capital in sufficient amounts on acceptable
terms. The failure to generate sufficient cash flows or to raise sufficient
funds may require NetNation to delay or abandon some or all of its development
and expansion plans or otherwise forego market opportunities and may make it
difficult for NetNation to respond to competitive pressures, any of which could
have a material adverse effect on NetNation's business, results of operations
and financial condition.
Possible Volatility of Stock Price. The market price of NetNation's shares
(Common Stock) could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in NetNation's results of operations,
announcements of technological innovations, new products or services introduced
by NetNation or its competitors, changes in financial estimates by securities
analysts, conditions and trends in the Internet, general market conditions and
other factors. Further, the stock markets, and in particular the OTC-BB
("Over-the-counter Bulletin-board), have experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at, or near, historical highs
and reflect price to earnings ratios substantially above historical levels.
These trading prices and price-to-earnings ratios may not be sustained. Market
fluctuations, as well as general economic, political and market conditions such
as recessions, interest rate changes or international currency fluctuations,
may adversely affect the market price of NetNation's shares. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect on NetNation's business, results of operations and financial
condition.
OTC-BB Eligibility Requirements. Recently the NASD imposed eligibility
requirements for continued listing on the OTC-BB. As a result of these new
eligibility requirements NetNation is required to register under the Securities
Exchange Act of 1934 (the "'34 Act") in order to maintain a listing on the
OTCBB. The current phase-in schedule for the new eligibility requirements
provide that NetNation must meet the requirements on or before October 1, 1999,
including filing and clearing a registration statement under the '34 Act with
the SEC. If NetNation is unable to meet the requirements in the prescribed time
the shares of NetNation may be delisted from the OTC-BB and will automatically
be quoted on a quotation service known as the "Pink Sheets" until such time as
the eligibility requirement is met. NASD will append an "E" to the ticker
symbol of NetNation 30 days prior to the delisting, which will denote that 30
days remain in which NetNation may meet the eligibility requirements. The
appending of the "E" to NetNation's ticker symbol or a delisting from the
OTC-BB may have a material adverse effect on the share price of NetNation's
shares. The imposition of the NASD eligibility requirements has resulted in a
large number of companies quoted on the OTC-BB filing registration statements
under the '34 Act with the SEC, and accordingly there may be significant delays
in clearing a registration statement with the SEC due to the volume of filings.
<PAGE>
Page 24
Control by Principal Stockholders, Executive Officers and Directors. NetNation's
executive officers and directors will, in the aggregate, beneficially own
approximately 61% of NetNation's outstanding Common Stock. As a result, such
persons, acting together, will have the ability to control most matters
submitted to stockholders of NetNation for approval (including the election and
removal of directors) and to control the management and affairs of NetNation.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of NetNation, impeding a merger,
consolidation, takeover or other business combination involving NetNation or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of NetNation, which in turn could have a material
adverse effect on NetNation's worth.
Dilutive Effect of Future Sales of Securities. Future sales of substantial
amounts of NetNation's Common in the public market could adversely affect the
market price of the Common Stock and could experience dilution in their stock
ownership of the Company and in the value of their shares. Dilution is a
reduction in the value of the holder's investment measured by the difference
between the purchase price of the shares of the Common Stock and the net
tangible book value of the shares after the purchase takes place. Further, as
at June 30, 1999 there were 10,233,000 shares of Common Stock which are
restricted or affiliate shares ("Restricted Shares"). Those Restricted Shares
will gradually be converted to free-trading shares, the sale of which could have
a material adverse effect on the future market price of NetNation's Common
Stock.
Year 2000
- ---------
IMPACT OF THE YEAR 2000. Many currently installed computer systems and
software products are coded to accept or recognize only two digit entries in the
date code field. These systems may therefor recognize a date using "00" as the
year 1900 rather than the year 2000. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS. The third-party vendor upon which we materially rely is
AT&T Canada Inc. which provides our connection to the Internet. The level of
AT&T Canada Inc.'s compliance with the Year 2000 subject is presented on their
web site (http://www.attcanada.com).
-------------------------
In addition, we plan to seek verification from other key vendors, distributors
and suppliers that they are Year 2000 compliant or, if they are not presently
compliant, to provide a description of their plans to become so. To the extent
that vendors fail to provide certification that they are Year 2000 compliant by
September 1999, we will seek to terminate and replace these relationships with
those who are Year 2000 compliant. Until our vendors, distributors and
suppliers have provided verification of their compliance, we will not be able to
completely evaluate whether our systems will need to be revised or replaced.
NetNation is conducting an internal assessment of all material information
technology and non-information technology systems at our headquarters for Year
2000 compliance. NetNation has set a date of August 31, 1999 for final
confirmation that all systems are Year 2000 compliant. There are no mission
critical systems that will not be Year 2000 compliant.
COSTS. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are not expected to be material to our financial
position or results of operations. These expenses, however, if higher than
anticipated, could have a material and adverse effect on our business, results
of operations and financial condition.
<PAGE>
Page 25
RISKS. There can be no assurance that we will not discover Year 2000 compliance
problems in our systems that will require substantial revisions or replacements.
In the event that the operational facilities are not Year 2000 compliant, we may
be unable to deliver services to our customers and all or portions of our Web
site may become unavailable. In addition, there can be no assurance that
third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be
Year 2000-compliant. The failure by these entities to be Year 2000-compliant
could result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material adverse effect on our business, results of operations and financial
condition.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year 2000
assessment and do not currently have a contingency plan to deal with the worst
case scenario that might occur if technologies on which we depend are not Year
2000-compliant and fail to operate effectively after the Year 2000. The
results of our Year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material adverse effect on our business, operating results and
financial condition.
(d) Financial information about geographic areas
The following table is a summary of estimated revenues derived from customers in
various geographic areas:
Country Year ended Year ended Period ended
December 31, 1997 December 31, 1998 March 31, 1999
- -------------------------------------------------------------------------------
U.S. $193,179 $629,031 $254,158
Canada $84,728 $275,891 $111,473
Europe $27,113 $88,285 $35,671
Asia $13,557 $44,142 $17,835
South & Central America $10,167 $33,107 $13,377
Africa $6,778 $22,071 $8,918
Australia & New Zealand $3,389 $11,036 $4,459
As discussed elsewhere herein, NetNation's business plan includes an aggressive
marketing campaign in Europe to expand its European customer base. For that
purpose NetNation has established a representative sales office in London,
England and is considering the establishment of offices in other areas of
Europe.
<PAGE>
Page 26
Item 2 FINANCIAL INFORMATION
- ------
Unless otherwise indicated or where the context requires otherwise, where the
term "NetNation" or the "Company" is used under this Item 2, such term shall
denote NetNation Canada. The following discussion covers the business
operations of NetNation Canada as the current business of NetNation relates
solely to NetNation Canada. Please refer to the audited financial statements of
Collectibles Entertainment Inc. for the period ended December 31, 1998 and
pro-forma financial statements for the period ended March 31, 1999 for
information on the activities of NetNation prior to the acquisition of
NetNation Canada, which activities were minimal and of no financial significance
to the current business of NetNation.
For consistency in this registration statement, and except where otherwise
noted, U.S. currency is used throughout. The rate of conversion from Canadian
to U.S. currency in the following table was determined based on the fiscal year
end (or interim period end) average exchange rate for items covering a period
(income statement items), or the exchange rate as at fiscal year end (or interim
period end) for items recorded as at a specific point in time (balance sheet
items).
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements appearing elsewhere in this
registration statement. The statement of operations data set forth below for the
years ended December 31, 1997 and 1998, and the balance sheet data as at
December 31, 1997 and December 31, 1998, are derived from NetNation Canada's
audited financial statements included elsewhere in this registration statement.
The statement of operations data for the quarter ended March 31, 1999 and the
balance sheet data as at March 31, 1999 are not audited. The historical results
are not necessarily indicative of results to be expected for any future period.
Since its inception, NetNation has been focused on maximizing growth. Prior to
April 1999, no significant external equity or debt was raised to assist in its
growth. NetNation has operated on the basis whereby all excess cash flow was
reinvested in NetNation in order to maximize growth. The majority of any surplus
funds were invested in expanded marketing activities, particularly advertising.
Advertising has been NetNation's prime generator of new business and has
consistently proven its ability to generate revenue growth and new customers.
NetNation's financial statements up to and including the fiscal year ended
December 31,1998 are presented in Canadian dollars. Subsequent to the December
31, 1998 year end NetNation Canada's Financial Statements are stated in U.S.
dollars. For consistency in this registration statement, U.S. currency is used
throughout. The rate of conversion from Canadian to U.S. currency in the
following table was determined based on the average exchange rate for the
applicable period, except for Total Assets which uses the exchange rate as at
the last day of the applicable period.
NetNation Canada
Selected Financial Data Table
Year ended Year ended Quarter ended
Dec 31, 1997 Dec 31, 1998 Mar 31, 1999
Audited Audited Unaudited
Sales $338,911 $1,103,563 $445,891
Net Income (Loss) ($19,645) ($98,651) ($4)
Long Term Debt - - -
Total Assets $92,064 $171,270 $227,040
- ------------ ------- -------- --------
<PAGE>
Page 27
Management's Discussion And Analysis Of Financial Condition And Results Of
- ---------------------------------------------------------------------------
Operations
- ----------
This registration statement contains forward-looking statements, the accuracy of
which involve risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future," "intends" and similar expressions to
identify forward-looking statements. This registration statement also contains
forward-looking statements attributed to certain third parties relating to their
estimates regarding the demand for Internet Web site hosting services, server
co-location services, enhanced Internet services, the rate of growth in the use
of the Internet generally, and the rate of growth in online commerce.
Prospective investors should not place undue reliance on these forward-looking
statements, which apply only as of the date of this registration statement.
NetNation's actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
NetNation described in "Risk Factors" and elsewhere in this registration
statement. The following discussion and analysis should be read in conjunction
with NetNation's Financial Statements and Notes thereto and other financial
information included elsewhere in this registration statement.
Overview
NetNation is a provider of Web site hosting and related enhanced Internet
services to small and medium sized businesses. It focuses on delivering
reliable, flexible and high quality Internet Web site hosting services that are
backed by first class customer support.
NetNation's main sources of revenue are derived from providing Web Hosting,
Server Co-Location and Domain Name Registration services. NetNation has over
25,000 Internet domain names registered and about 7,000 web sites hosted as of
June 30, 1999, worldwide. NetNation sells its products and services worldwide
directly to customers through VARs (Value Added Resellers) and OEMs (Original
Equipment Manufacturers). The geographic segmentation of revenue as at the six
month period ended June 30, 1999 was 57% United States, 25% Canada and 18%
international.
NetNation was incorporated under the under the laws of the State of Delaware on
May 7, 1998, under the name Collectibles Entertainment Inc. and on April 14,
1999 changed its name to NetNation Communications, Inc. (in this section
referred to as the "NetNation Parent Company") in conjunction with the
acquisition of the Web site hosting business which operated as NetNation
Communications Inc. ("NetNation Canada"). NetNation Canada, a private company
incorporated under the laws of the Province of British Columbia on February 19,
1997, is a wholly-owned subsidiary of the Delaware company. On April 7, 1999,
pursuant to a Share Purchase Agreement between the NetNation Parent Company and
the shareholders of NetNation Canada, NetNation Parent Company acquired
9,000,000 Class A common shares and 1,000,000 Class B common shares of NetNation
Canada, being all of the issued and outstanding share capital of NetNation
Canada. As consideration for the purchase of the shares of NetNation Canada,
NetNation Parent Company issued 10,000,000 common shares to the shareholders of
NetNation Canada.
As a result of these transactions, for accounting purposes the acquiror is
NetNation Canada , on the basis that 67.72% of the issued and outstanding
common shares of the NetNation Parent Company will be owned by the shareholders
of NetNation Canada and the entire Board of Directors of the NetNation Parent
Company is now comprised of the entire Board of Directors of NetNation Canada
along with one member from the original Board of the NetNation Parent Company.
As NetNation Canada is the legal subsidiary of the NetNation Parent Company,
the nature of the business combination is a reverse takeover whereby the control
of the NetNation Parent Company is acquired by NetNation Canada and the
consolidated financial statements are issued under the name of the NetNation
Parent Company but described in the notes and elsewhere as a continuation of
NetNation Canada. The legal capital structure remains that of the NetNation
Parent Company but the shareholders' equity of NetNation Canada will replace the
shareholders' equity of NetNation U.S.
NetNation has achieved significant revenue growth, having recorded nine
consecutive quarters of increasing revenues. However, such a trend may not be
sustainable by NetNation and it may experience significant fluctuations in its
quarterly and annual results of operations due to a variety of factors, many of
which may be outside of NetNation's control. Factors which may affect the volume
of sales and unit pricing of products or services include:
<PAGE>
Page 28
a) competitive global marketplace
b) customer care and service
c) provision of reliable and continuous service with minimal downtime
d) ability of NetNation to scale its operations to meet demand
e) product and service offerings relative to competitors
f) pricing and mix of product and service offerings
g) timing, type and effectiveness of advertising and marketing efforts
h) effectiveness of VARs to expand NetNation's marketing reach, and
i) economic and regulatory influences on the Internet industry
NetNation attempts to price its products and services with a strategy to achieve
long term profitability. However, fluctuations may occur from time to time in
the margins of products and services. These fluctuations can be affected by
several factors such as:
a) competitive pressures
b) desire to achieve market penetration
c) specific pricing strategies
d) bundling of products and services
e) commission structure
f) discounting, and
g) foreign exchange
NetNation may also experience fluctuations in indirect costs for several reasons
such as:
a) availability of qualified technical & professional personnel
b) expansion of premises and relocation costs
c) equipment redundancy
d) economic environment
e) access to capital markets and related borrowing and equity costs
f) merger and acquisition costs, and
g) costs related to global expansion (ie. offices, staffing, infrastructure
etc)
Liquidity and Capital Resources
NetNation Canada has historically satisfied its capital needs by cash generated
from operations, by borrowing and by issuing equity securities. Through June
30, 1999 , NetNation had raised approximately $2.0 million indirectly through
equity financings completed by the NetNation Parent Company. As a result of the
acquisition of NetNation Canada, the consolidated balance sheet as at March 31,
1999 indicates a deficit of $149,751. The deficit was primarily attributable to
cash used in advertising and marketing both of which are variable expenses and
monitored closely by NetNation On a quarterly basis, there may be periods which
incur greater losses or earnings than in other periods due to the timing when
expenses are incurred and associated revenues are received. These variations are
considered normal as NetNation operates on a cashflow policy whereby excess cash
is reinvested in NetNation in order to maximize growth.
NetNation has experienced rapid growth due to its reinvestment of earnings and
capital into advertising and marketing supported by further investment in human
resources and technological improvements. After due consideration for
NetNation's geographic expansion plans, NetNation is in a position to maintain
this pace of growth and reinvestment for the next twelve months.
NetNation's capital requirements may vary based upon the timing and success of
the establishment of additional new offices in Europe and planned new offices
the United States and as a result of regulatory, technological and competitive
developments or if demand for NetNation's services and associated products or
its anticipated cash flow from operations is less or more than expected;
NetNation's development plans or projections change or prove to be inaccurate;
or it engages in any mergers or acquisitions. NetNation is not presently
considering any specific business acquisition.
<PAGE>
Page 29
Equity or debt financing may not be available to NetNation in the future on
acceptable terms or at all. NetNation may need additional funds, which it may
not be able to obtain.
Outlook: Issues and Uncertainties
Refer to "Risk Factors" herein.
Full fiscal years: Years Ended December 31, 1997 and December 31, 1998
SALES
The majority of revenues are derived from customer fees for Web site hosting
and, to a lesser extent, by fees for enhanced Internet services. Normally,
customers pay regular monthly fees for the Web site hosting service along with
one-time set-up fees for the base and any enhanced Internet services. Customers
have the option of a prepaid billing cycle ranging from monthly to annually. The
monthly fees' are recognized as ratably over the one to twelve-month billing
period selected by a customer. One-time set-up fees are typically recognized at
the time that installation is completed.
NetNation's revenues increased 348% from $338,911 in 1997 to $1,103,563in 1998.
The rapid revenue increase from 1997 to 1998 resulted primarily from NetNation's
success in increasing its number of Web site hosting accounts. There were 1,450
Web site hosting accounts at the end of 1997 and about 4,600 active accounts at
the end of 1998. Although the price of NetNation's services did not change
significantly between the comparison periods, the mix of its customers (by
service-packages) did change toward the low-end service-package (EZsite).
NetNation maintains an enviable record of over 99.9% Internet connectivity
which contributes to it being selected by customers for reliable web hosting.
EXPENSES
Wages, Benefits and Subcontractors. This item increased from $167,834in 1997 to
$565,917in 1998, an increase of 337%, which is essentially proportional to the
revenue growth. The rise in these expenses from 1997 to 1998 resulted from the
inherent need to build the appropriate business structure and administration,
around the "technical core", in order to cover all the aspects of a business in
the Internet environment. Both the Chief Executive Officer and the Chief
Operating Officer were able to manage other key functions as they developed and
expanded the business. For example, the Chief Executive Officer fulfilled many
of the financial and legal roles for NetNation until a Chief Financial Officer
and General Counsel were recruited in June and July 1999 respectively. The Chief
Operating Officer managed some of the sales and systems responsibilities until
other qualified individuals were similarly recruited. Furthermore, in order to
service NetNation's growing customer base, there was an immediate need to
increase the number of employees in order to maintain NetNation's quality
standards for customer support.
Marketing and Selling. NetNation's marketing and selling expenses consist
primarily of print and online advertising costs, Internet connectivity costs,
fees paid to Domain Name registrars, Credit Card processing charges, and travel
& entertainment expenses. Marketing and Selling expenses increased from $127,633
in 1997 to $454,836 in 1998, an increase of 356%. These increases are primarily
the result of significantly expanded marketing and advertising programs in
connection with NetNation 's efforts to expand its customer base, create
national and international brands and the hiring of additional sales and
marketing personnel. NetNation has compensated salespersons on a fixed income
basis during the past two years but is moving towards a commission based
incentive structure in the latter half of 1999. This should provide a more
direct means of rewarding the employees and enhancing the sales and marketing
efforts. NetNation will also be in a better position to respond quickly and
effectively to competitive pressures in different markets. NetNation expects a
continued increase in its marketing and selling expenses in the future.
<PAGE>
Page 30
Office and Administrative. Office and administrative expenses consist primarily
of office expenses and supplies, rent, professional fees, and general. Office
and administrative expenses increased from $52,799 in 1997 to $160,589in 1998.
This increase was primarily the result of increases in the number of employees
and higher occupancy costs as the offices were relocated to larger premises
within the same office tower. From June to December 1998, NetNation experienced
a temporary significant increase in rent and other related costs as a result of
its California office trial, which is now closed. Management decided to close
the remote office and invest in further product development and advertising
rather than continue with the US office due to NetNation's limited capital base
at the time. Approximately $121,000 in non-recurring expenses was incurred over
that six month period and has been expensed
Provision for Income Taxes. No provision for income taxes has been made in the
accounts of NetNation due to the net loss in 1998 plus the tax loss
carryforward from the prior year. The value arising from a reduction in the
future income taxes from the carryforward of these losses has not been
recognized in NetNation's financial statements.
NetNation has approximately $28,044 of losses available to offset future income
taxes payable. Unless utilized, $3,913 will expire in 2004 and $24,131 will
expire in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Since inception to December 31, 1998, NetNation has financed its operations
solely through cash generated from operating activities and a small bank line of
credit. NetNation generated sufficient cash from operations to provide for both
its rapid growth and to allow NetNation to maintain its original ownership
structure.
Net cash provided by operations (1997: $76,208, 1998: $107,779) after adjustment
for amortization, resulted primarily from an increase in accounts payable and
accrued liabilities and deferred revenue which more than offset the net losses
of $26,993 and $105,953 in 1997 and 1998 respectively. Net cash used for
investing activities was principally for expenditures on computer equipment and
for NetNation's network and support infrastructure (1997: $49,904, 1998:
$86,451).
After other nominal investing and financing activities, the cash at December 31,
1997 was $26,357 and at December 31, 1998 was $45,938.
Through June 30, 1999, NetNation raised $2.0 million through equity and
convertible debt financing in connection with the acquisition of NetNation
Canada. The $2.0 million was advanced to NetNation Canada, of which
approximately $400,000 has been utilized by operations for acquisition of
computer and office equipment, establishment of a UK office, additional
marketing and advertising and payments on operational software. Over the next
several months, the non-recurring expenditures would be for the operational
software and implementation consulting, startup costs associated with the UK
office and legal, accounting and regulatory fees. Management estimates that
these non-recurring costs would not exceed $500,000 over the next six months.
The remainder of the $2.0 million raised are unallocated and will be reserved
for working capital purposes.
Based upon the current usage of working capital and availability of capital, it
is possible that NetNation may have additional capital requirements within the
next twelve months. Should this requirement materialize, then NetNation will
have to raise additional funds through the issuance of common shares,
convertible debt, bank debt or some combination of the foregoing and other
financial instruments. If these additional common shares or convertible
debentures are issued, there will or may be additional dilution of the existing
shareholders. The current convertible debentures aggregating $1,100,000 mature
on September 30 ,2000 and may or may not be converted. In planning for any
additional capital requirements for working capital purposes, NetNation must
also consider its liquidity requirements for the potential maturity and
repayment of any debt obligations.
<PAGE>
Page 31
Interim period ending March 31, 1999
Results of operations
During the fiscal quarter ended March 31, 1999 there were no known unusual or
infrequent events or transactions or significant economic changes that occurred
which materially affected the amount of reported income from continuing
operations, and the extent to which income was so affected is also described.
During the fiscal quarter ended March 31, 1999, there were no known trends or
uncertainties that have had or are reasonably expected to have a material
favorable or unfavorable impact on net sales or revenues or income from
continuing operations.
The material increases in net sale or revenues disclosed in the 1999 first
quarter interim financial statements are directly attributable to an increase in
the number of customers purchasing web hosting services.
There have been no material changes in financial condition of NetNation from its
preceding fiscal year end December 31, 1998 to March 31, 1999.
Between the period March 31, 1998 and March 31, 1999, there were two material
changes in results of operations; the first pertained to an increase in
marketing and selling expenses from $68,311 to $178,782, and the second
pertained to an increase in deferred revenue from $60,856 to $195,932.
The increased marketing and selling effort resulted in revenues increasing from
$196,992for the quarter ended March 31, 1998 to $445,891 for the quarter ended
March 31, 1999. However, during the quarter ended December 31, 1998, the
marketing and selling expenses declined to $68,311. During this quarter,
NetNation was re-evaluating the marketing portfolio with respect to the mix of
"online" ads versus "print" ads and publications by reducing selected levels of
advertising. As a result of its review, the marketing and selling expenses were
increased to $178,782 in the next quarter ended March 31, 1999
As NetNation attracted more customers due to its marketing and selling efforts,
the amount of deferred revenue also increased along with revenues applicable to
the latest quarter. As customers select their service programs, the mix of
services which has been selected by customers as a group may vary from time to
time. Any change in the mix of programs may also affect the amount of deferred
revenue.
To December 31, 1998, NetNation Canada had used the Canadian dollar as its
functional currency. Commencing with the financial reporting for the interim
period ended March 31, 1999, all financial statements are reported in US
dollars. The foreign exchange loss at March 31, 1999 was less than $1,000 US.
NetNation matches its primarily US dollar based advertising costs with US dollar
revenues and Canadian dollar based personnel and administration costs with
Canadian dollar denominated revenues.
Based on estimated revenues as being 25% from Canada settling in Canadian
dollars and the balance from the US and the rest of the world primarily settling
in US dollars, an assessment of currency risk can be made. At present, with
approximately three-quarters of the expenses attributed to Canada, a ten percent
fluctuation in the exchange rate would result in an exchange gain or loss of
approximately $20,000 for the quarter or less than 4.5% of sales. On an
annualized basis, the exchange gain or loss would be approximately $80,000.
Using an estimated 25% growth rate per quarter, the estimated exchange gain or
loss for one year would be in the range of $115,000 and, again, less than 4.5%
of sales. The opening of an office in the United States may increase the
proportion of expenses denominated in US dollars and reduce the difference that
is subject to currency fluctuationsOn the other hand, the availability of and
salaries required to attract technical personnel to the US office may result in
a greater expense. Many US companies are attracted to the Canadian labour market
due to the exchange rate difference, and even with an unfavorable ten percent
fluctuation, the exchange differential makes the utilization of Canadian labor
very attractive.
<PAGE>
Page 32
Item 3 PROPERTIES
- ------
Facilities
- ----------
NetNation's executive offices and Network Operation Center, are located in
Vancouver B.C., Canada. They consist of approximately 6,700 square feet, which
is leased pursuant to agreements that expire on April 30, 2002. The annual
lease rate is $19.55/square foot which includes additional rent. NetNation's
rent expense in 1997 was $11,817 and $62,877 for year ending December 31, 1998.
Commencing July 1, 1999, NetNation has established a representative sales
office in London, England. All property is insured to industry standards.
NetNation's Network Operation Center houses NetNation's servers, which feature
fast UNIX, Windows NT and Linux servers on an 155 Mbit network connection,
directly linked to major Internet backbones. NetNation's 155 Mbit network,
including all of its servers, is devoted to NetNation's Web site hosting
business, and none of the servers are devoted to supporting dial-up access.
Item 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------ MANAGEMENT
a. Security ownership of certain beneficial owners and management
Except as otherwise noted, the following table sets forth certain information
known to NetNation with respect to beneficial ownership of NetNation's Common
Stock as of June 30, 1999 by:
(i) each stockholder known by NetNation to be the beneficial owner of more
than 5% of NetNation 's Common Stock;
(ii) each director of NetNation; and
(iii) each of the named Executive Officers.
Title of Name and Address Amount of Percent of Class(2)
Class of Beneficial Owner Beneficial Ownership
- --------------------------------------------------------------------------------
Common David Talmor
CEO, President, and Director 4,500,000(1) 30.47%
6480 Dakota Drive
Richmond, B.C., Canada
Common Joseph Kibur
COO and Director 4,500,000 30. 47%
1189 Howe Street, Suite 211
Vancouver, B.C., Canada
Common Ernest Cheung
Director 0 0%
6091 Richards Drive
Richmond, B.C., Canada
Common Ashley Sinclair
CFO 0 0%
Suite 802, 1311 Beach Avenue
Vancouver, B.C., Canada
Common All Executive Officers and
Directors as a Group 9,000,000 60.94%
Except as noted below, all shares are held of record by the named individual.
(1) 2,250,000 common shares beneficially held by David Talmor are registered in
the name of Shelley Talmor, wife.
(2) Based on a total issued and outstanding share capital as at June 30, 1999
of 14,767,000 common shares .
<PAGE>
Page 33
NetNation Canada intended to grant the right to participate in an Incentive
Stock Option Plan (the "Incentive Plan") to the majority of the current
employees, officers, consultants, independent contractors, advisors and a few
former employees of NetNation Canada. The Incentive Plan was supposed to
provide an option to buy NetNation Canada's Class B Preferred Shares at a price
of Cdn $0.01 per share. A total of 1,000,000 shares of Class B Preferred stock
were reserved for issuance under the Incentive Plan. Because of the transaction
with Collectibles, NetNation Canada did not proceed with the Incentive Plan and
instead issued 1,000,000 Class B Preferred Shares to employees. Most of these
shares are subject to an "Escrow Agreement" and are subject to cancellation if
certain release conditions are not met, see below.
There are no arrangements known to NetNation, the operation of which may at a
subsequent date result in a change of control in NetNation.
Item 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
The following table sets forth certain information regarding the executive
officers and directors of NetNation:
NAME AGE DIRECTOR/OFFICER SINCE POSITION
- -------------------------------------------------------------------------------
David Talmor* 40 April 7, 1999 President, Chief Executive
(March 12, 1997 for Officer(CEO), Secretary
NetNation Canada)
Joseph Kibur* 26 April 12, 1999 Chief Operating Officer (COO)
(March 12, 1997 for and Director
NetNation Canada)
Ernest Cheung 48 February 1, 1999 Director
Ashley J. 50 June 14, 1999 Chief Financial Officer,
Sinclair* (July 1999 for (CFO), Treasurer
Treasurer NetNation Canada)
- --------------------------------------------------------------------------------
* David Talmor is a director, President and Chief Executive Officer of
NetNation Canada. Joseph Kibur is a director, secretary and Chief Operating
Officer of NetNation Canada. Ashley J. Sinclair is Chief Financial Officer of
NetNation Canada.
Each director will hold office until the next Annual Meeting of Stockholders and
until his successor is elected and qualified or until his earlier resignation or
removal. Each officer serves at the discretion of the Board of Directors (the
"Board").
It is NetNation's intention to expand the Board in the near future to include
potential representation from new equity investors along with the addition of
one additional independent director, to create a board with a total of five
members, and to appoint a three member audit committee.
There is no family relationship between any director, executive officer or
person nominated or chosen by NetNation to become a director or executive
officer.
Business experience
David Talmor David Talmor was appointed Chairman of the Board, President, Chief
Executive Officer and Secretary of NetNation in April 1999. Since March 1997,
Mr. Talmor served as Director, Chief Executive Officer and President of
NetNation Canada. Mr. Talmor has over 15 years of both Electronics Engineering
and Financial/Business experience. From 1996 to 1997, he was President of
Minerva Ventures Management, Richmond, British Columbia, Canada, investigating
suitable technological companies as investment and acquisition candidates. From
1994 to 1995, he was Business Development Manager of MacDonald Dettwiler &
Associates Ltd., Richmond, British Columbia, Canada, (www.mda.ca), the leading
Canadian company in the field of satellites' ground stations. Prior, he was
Vice President Business Development & Strategic Planning of Eldat Communications
Ltd. (www.eldat.com), Israel, a company that deals with Wireless ESLs
(Electronic Self-Labeling Systems). Prior, he was Vice President Finance &
Administration and Secretary of MAGIC Software Enterprises Ltd., Israel
(www.magic-sw.com), a NASDAQ company. Prior, he was President and Chief
Executive Officer of MOLDAT Technologies Ltd., (www.moldat.co.il), an Israeli
company that is the ASIC (application Specific Integrated Circuit) Design Center
of TOSHIBA in Israel. Mr. Talmor qualified as a Certified Public Accountant
(CPA) in Israel with Kesselman & Kesselman, Chartered Accountants, , the
largest accounting firm in Israel and associated with Coopers & Lybrand. Prior,
he was a member of the Israeli Air Force at the Electronic Warfare R&D
Department. Mr. Talmor received his B.A. in Accounting, Economics and
Statistics and an M.B.A., both from Tel-Aviv University.
<PAGE>
Page 34
Joseph Kibur was appointed a Director and Chief Operating Officer of NetNation
Canada in April 1999. Since March 1997 he was appointed a director of NetNation
Canada. From 1995 to 1997 Mr. Kibur operated his own Internet consulting
business until he co-founded NetNation Canada with Mr. David Talmor. Prior, Mr.
Kibur attended Simon Fraser University, Burnaby, British Columbia, Canada, and
in 1996 obtained his Bachelor of Science (B.Sc.) degree in Management and
Systems Science (Computer Science, Business and Mathematics).
Ernest Cheung has served as Director of NetNation since February 1999. Since
1996 he has been a Director of BIT Integration Technology, Inc. (ASE). From 1994
to 1996 he was Vice President of Finance and Director of BIT Integration
Technology, Inc. of Toronto, Canada. From 1992 to 1995 he served as a Director
of Tele Pacific International Communications Corp. (VSE). He has also served
as a Director for Richco Investors, Inc. (CDN) since 1995. From 1993 to 1994 he
was Vice Chairman, Tele Pacific International Communications Corp. of Vancouver,
B.C., Canada. From 1991 to 1993 he was Vice President of Midland Walwyn Capital,
Inc. of Toronto, Canada. From 1984 to 1991 he was Vice President and Director,
Capital Group Securities, Ltd. in Toronto, Canada. Mr. Cheung received an MBA in
Finance and Marketing from Queen's University, in Kingston, Ontario in 1975, and
obtained a Bachelors Degree in Math in 1973 from University of Waterloo,
Ontario.
Ashley James Sinclair has served as Chief Financial Officer and Treasurer of
NetNation since June 1999. Previously in 1999 Mr. Sinclair has served as Chief
Financial Officer and Director of Telepost Communications Inc. a post production
company in Vancouver, Canada. From 1994 to 1998, Mr. Sinclair was employed by
Kolter Corporation, Toronto, Canada, one of Canada's oldest private property
management and real estate companies, and also by Kolter Corporation's
subsidiaries as Vice President Finance of Brant Securities Limited, Toronto,
Canada and Director Trade Finance and Acting Managing Director of Euro Canadian
Bank & Trust Company Ltd., Nassau, Bahamas. From 1987 to 1993, he was a
financial consultant specializing in business financing, financial restructuring
and real estate financing and development. From 1985 to 1987, Mr. Sinclair was
an Investment Executive with Scotia McLeod, Toronto, Canada; Vice President
Finance & Administration with Xanaro Technologies Inc. Toronto, Canada; From
1984 to 1985 he was Senior Director Finance & Administration with Pioneer Trust
Company, Regina, Canada and from 1982 to 1984 he was Controller Financial
Analysis & Planning, Counsel Trust Company, Toronto, Canada. Mr. Sinclair
received his B.Math. from the University of Waterloo and an MBA from the
University of Manitoba. His professional designations include a CA (Chartered
Accountant) and CMA (Certified Management Accountant). Mr. Sinclair has
participated as a judge for the Financial Post Annual Report Awards on behalf of
the Canadian Institute of Chartered Accountants and has authored a paper on
"Corporate Restructuring" published by the American Management Association as
part of the AMA Management Handbook.
Item 6 EXECUTIVE COMPENSATION
- ------
Summary Compensation Table
- --------------------------
The following table discloses all plan and non-plan compensation awarded to,
earned by, or paid to the Chief Executive Officer ("CEO") or individual acting
in a similar capacity during the last completed fiscal year. The table includes
executive compensation paid to the principals of NetNation Canada prior to it
being acquired by NetNation.
<PAGE>
Page 35
Name and Annual Compensation Long Term Compensation All other
Principal Compensation
Position
- -------------------------------------------------------------------------------
Awards Payouts
- -------------------------------------------------------------------------------
Restricted Securities
Other Shares Or Under
Salary Bonus Annual Restricted Options/SARs LTIP
Year Comp. Units Granted Payouts
($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
- -------------------------------------------------------------------------------
David
Talmor, 1998* 56,395 - - - - - -
CEO,
President 1997* 21,542 - - - - - -
and
Director 1996* - - - - - - -
- -------------------------------------------------------------------------------
* Compensation in these years precedes the acquisition of NetNation Canada
by NetNation, and accordingly the Principal Position and compensation columns
relate to payments made by NetNation Canada and not NetNation.
** NetNation's fiscal year end was changed to December 31, in order to
match the fiscal year end of NetNation Canada. The information in the above
table is presented as at December 31 for each of the relevant years.
Option/SAR Grants or Exercises and Long Term Incentive Plan
There were no stock option grants, Stock Appreciation Rights (SAR's) grants,
option/SAR exercises or Long Term Incentive Plans (LTIP's) awarded to the named
executive officers in the last three financial years or the subsequent period.
Defined benefit of actuarial plan
NetNation does not have a defined benefit or actuarial plan in place.
Compensation of Directors
There are no standard arrangements pursuant to which directors of NetNation are
compensated for services provided as a director, including any additional
amounts payable for committee participation or special arrangements.
There were no arrangements pursuant to which any director of NetNation was
compensated during NetNation's last completed fiscal year for any service
provided as a director. NetNation intends to implement a compensation plan for
directors that are not otherwise officers or employees of NetNation.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
There are currently no employment contracts in place with the directors and
officers of NetNation other than the standard employment agreements used for all
employees. NetNation intends to review its contracts with certain key
individuals including the rights and obligations of NetNation upon the
resignation of an officer, or upon a change in control of NetNation.
Compensation Committee Interlocks and Insider Participation
NetNation does not have a compensation committee of its Board of Directors. Mr.
Talmor and Mr. Kibur participated as directors in deliberations of the Board of
Directors concerning executive compensation. No executive officer of NetNation
served as a member of a compensation committee or other board committee
performing equivalent functions with another entity during the last completed
fiscal year.
Performance Graph
No performance graph is available as NetNation does not currently have a class
of common stock registered under Section 12 of the Securities Exchange Act of
1934, as amended.
Item 7 CERTAIN RELATIONSHIPS AND RELATED
- ------
<PAGE>
Page 36
a. Transactions with management and others
No director, executive officer or nominee for election as a director of
NetNation, and no owner of five percent or more of NetNation's outstanding
shares or any member of their immediate family has entered into or proposed any
transaction in which the amount involved exceeds $60,000.
b. Certain business relationships
There are no business relationships regarding directors or nominees for
directors during NetNation's last fiscal year.
c. Indebtedness of Management
There are no persons who are directors, executive officers of NetNation,
nominees for election as a director, immediate family members of the foregoing,
corporations or organizations (wherein the foregoing are executive officers or
partners, or 10% of the shares of which are directly or beneficially owned by
the foregoing), trusts or estates (wherein the foregoing have a substantial
beneficial interest or as to which the foregoing serve as a trustee or in a
similar capacity) are indebted to NetNation in an amount in excess of $60,000.
d. Transactions with Promoters
There are no promoters of NetNation other than David Talmor and Joseph Kibur,
who are also directors and officers of NetNation.
Item 8 LEGAL
- ------
NetNation is not a party to any pending legal proceeding or litigation and none
of its property is the subject of a pending legal proceeding. Further, its
officers and directors know of no legal proceedings against NetNation or its
property contemplated by any governmental authority.
Item 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
- ------ RELATED STOCKHOLDER
a. Market information
Principal Market. NetNation's common shares are principally traded on the over
the counter market, with quotations posted on the Over-the-Counter Bulletin
Board under the ticker symbol NNCI. Prior to April 27, 1999, the common shares
of NetNation traded under the ticker symbol CBET, reflecting the previous name
of NetNation as Collectibles Entertainment Inc. On April 27, 1999, NetNation
began trading under the ticker symbol NNCI.
High and Low Bid Information. The Common Stock of NetNation began trading on
February 3, 1999 under the ticker symbol CBET on the OTC-BB. During the period
from the commencement of trading to March 31, 1999 the Common Stock of NetNation
traded at a high of $4.500 and a low of $1.997. During the period ending June
30, 1999, the Common Stock traded at a high of $6.125 and a low of $3.250. Quote
data is obtained from Canada Stockwatch. Quotations posted on the OTC-BB reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
b. Holders.
As at April 7, 1999, being the closing date of the acquisition of NetNation
Canada, there were approximately 103 stockholders of record holding 14,547,000
common shares of NetNation.
<PAGE>
Page 37
c. Dividends.
NetNation has not declared any cash dividends on Common Stock for the last 2
fiscal years or any subsequent interim period. NetNation does not intend to pay
cash dividends in the foreseeable future.
Item 10 RECENT SALES OF UNREGISTERED SECURITIES
- -------
All amounts shown under this item are in U.S. dollars.
On May 6, 1998, NetNation issued 1,000,000 shares of its Common Stock for
aggregate cash proceeds of $19,900 and an account receivable for $100.00 to a
director, who has since resigned. The shares were issued pursuant to action
taken at NetNation's initial organization meeting of the Board of Directors. As
the purchaser was a director and officer at the date of issuance the shares were
subject to the affiliate rules and Rule 144 under the Act. These shares were
subsequently surrendered to NetNation and cancelled on April 7, 1999 as part of
the acquisition of NetNation Canada.
On June 16, 1998, NetNation completed a sale of 97,000 shares of its Common
Stock for aggregate cash proceeds of $9,700. This offering was made without
registration under the Securities Act of 1933, as amended, (the "Act") in
reliance upon the exemption from registration afforded by sections 4(2) and 3(b)
of the Securities Act and Rule 504 of Regulation D promulgated thereunder. If
the exemption under Rule 504 of Regulation D is not available, NetNation
believes that this sale was also exempt under Regulation S and Sections 3(b) and
4(2) under the Act, due to the foreign nationality of 68 out of 70 of the
purchasers. The remaining 2 purchasers were a director of NetNation and a
immediate family member of a director.
On February 1, 1999, NetNation completed a sale of 4,000,000 shares of its
Common Stock for aggregate cash proceeds of $40,000. The offering was made to
17 purchasers without registration under the Act, in reliance upon the exemption
from registration afforded by Rule 504 of Regulation D. If the exemption under
Rule 504 of Regulation D is not available, NetNation believes that this sale was
also exempt under Regulation S and Sections 3(b) and 4(2) under the Act, due to
the foreign nationality of all purchasers, their prior contacts with NetNation
and its management and the limited number of investors.
On April 7, 1999, NetNation completed a sale of 450,000 shares of its Common
Stock at a price of $2.00 per share for a total of $900,000. The offering was
made to two investors without registration under the Act, in reliance upon the
exemption from registration afforded by Rule 504 of Regulation D. If the
exemption under Rule 504 of Regulation D is not available, NetNation believes
that this sale was also exempt under Regulation S and Sections 3(b) and 4(2)
under the Act, due to the foreign nationality of both purchasers, their level
of sophistication and the limited number of investors. The price per share in
the offering was determined by the board of directors of NetNation in connection
with the acquisition of NetNation Canada. Refer to the section entitled "Billing
and Working Capital Practices" herein for a description of the use of proceeds.
On April 7, 1999, NetNation issued 10,000,000 shares of its Common Stock to 33
shareholders of NetNation Canada in exchange for their shares of NetNation
Canada. The shares were issued pursuant to a Share Purchase Agreement between
NetNation Canada, its shareholders and Collectibles (now NetNation). As a
result of this share exchange, NetNation Canada became a wholly owned subsidiary
of NetNation. The issuance was made without registration under the Act, in
reliance upon the exemption from registration afforded by Regulation S and
Sections 3(b) and 4(2) under the Act, due to the foreign nationality of the
shareholders of NetNation Canada and their relationship to NetNation. As such
the shares are restricted in accordance with Rule 144 under the Act. The
issuance of the shares to 32 of the shareholders may also be exempt from
registration pursuant to Rule 701 promulgated under the Act as the these
shareholders are also officers and employees of NetNation Canada. The remaining
shareholder is an immediate family member of a director of NetNation.
Subsequent to the issuance of the shares, 80,000 of these securities were
surrendered and cancelled by NetNation due to two employees leaving NetNation.
On April 12, 1999, NetNation completed a sale of two Series A Convertible
Debentures in the amount of $550,000 each, to two investors for aggregate
proceeds of $1,100,000. The Convertible Debentures mature on September 30,
2000. The holder of each Convertible Debenture is entitled, at its option, at
any time commencing thirty days after issue to convert up to one hundred percent
of the original principal face amount into shares of Common Stock, at a deemed
conversion price for each share of Common Stock of $2.00. The offering was made
without registration under the Act, in reliance upon the exemption from
registration afforded by Regulation S and Sections 3(b) and 4(2) under the Act,
due to the foreign nationality of both purchasers, their level of
sophistication and the limited number of investors. The conversion price per
share in the offering was determined by the board of directors of NetNation
based on the previous offering of Common Stock at $2.00 per share which
completed on April 7, 1999. The securities issued upon conversion of the
debentures will be issued subject to restrictions on resale in accordance with
Rule 144 under the Act. Refer to the section entitled "Billing and Working
Capital Practices" herein for a description of the use of proceeds.
<PAGE>
Page 38
On June 23, 1999 NetNation issued 300,000 Shares of its Common Stock to one
company as consideration for the provision of investor relations and business
consulting services. The number of shares was determined by NetNation's board
of directors based on arm's length negotiations. The issuance was made without
registration under the Act, in reliance upon the exemption from registration
afforded by Regulation S and Sections 3(b) and 4(2) of the Act, as the holder is
a non-domestic person. The shares are restricted pursuant to Rule 144 of the
Act. These shares are further subject to escrow release requirements and are
subject to an earn-out at the rate of 30,000 shares per month for the first six
months of service, and 20,000 per month for the second six months of service.
All shares earned after 12 months will be subject to contractual volume
restrictions on resale.
NetNation has not sold any securities in reliance upon a registration statement
filed under the Securities Act.
Item 11 DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
- -------
a. Capital Stock
The authorized capital stock of NetNation consists of 50,000,000 common shares
(the "Common Stock") at US$0.0001 per share. Holders of Common Stock do not
have preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion or pre-emption
rights and is not subject to redemption or to any sinking fund provisions.
All shares of Common Stock are entitled to share equally in dividends from
sources legally available therefore when as and if declared by the Board of
Directors and, upon liquidation or dissolution of NetNation, whether voluntary
or involuntary, to share equally in the assets of NetNation available for
distribution to the shareholders.
All outstanding shares of Common Stock are validly authorized and issued, fully
paid and non-assessable.
Each holder of Common Stock is entitled to one vote per share on all matters on
which such shareholders are entitled to vote. There are no restrictions on
alienability of the Common Stock, nor are there any provisions discriminating
against any existing or prospective holder of the Common Stock as a result of
the shareholder owning a substantial amount of securities.
There are no provisions of NetNation's Certificate of Incorporation or Bylaws
that would have an effect of delaying, deferring or preventing a change in
control of NetNation and that would operate only with respect to an
extraordinary corporate transaction involving NetNation.
ITEM 12 INDEMNIFICATION OF DIRECTORS AND OFFICERS
- -------
NetNation shall indemnify, to the full extent and in the manner permitted under
the laws of Delaware and any other applicable laws, any person made or
threatened to be made a party to an action or proceed-ing, whether criminal,
civil, administrative or investigative, by reason of the fact that he is or was
a director or officer of this corporation or served any other enterprise as a
director or officer at the request of this corporation; such right of
indemnification shall also be applicable to the executors, administrators and
other similar legal representative of any such director or officer. The right
to indemnification is deemed to be a contract between the corporation and each
covered director and officer, and any repeal or modification of the right to
indemnification cannot retroactively reduce the scope of protection. The
foregoing rights of indemnification are not exclusive of any other rights to
which any director or officer or his legal representative may be entitled.
<PAGE>
Page 39
ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------
Financial Statements of NetNation, including NetNation Canada, are set forth
beginning on page F-1.
Item 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- FINANCIAL
No changes in and disagreements with accountants are reportable pursuant to this
item.
Item 15 FINANCIAL STATEMENTS AND EXHIBITS
- -------
(a) Index to Financial Statements
Exhibit Description
- ------- -----------
F/S-1 Audited Financial Statements of NetNation Canada for the fiscal year
ended December 31, 1998
Auditor's Report
Balance Sheets
Statements of Operations and Deficit
Statements of Cash Flows
Notes to Financial Statements
F/S-2 Audited Financial Statements of Collectibles Entertainment Inc. for
the period ended December 31, 1998
Independent Auditor's Report
Balance Sheet
Statements of Operations
Statements of Cash Flows
Notes to Financial Statements
F/S -3 Unaudited Financial Statements of NetNation Canada for the period
ended March 31, 1999
Balance Sheets
Statements of Operations and Deficit
Statements of Cash Flows
Statement of Share Capital and Deficit
Notes to Financial Statements'
F/S -4 Unaudited Financial Statements of Collectibles Entertainment Inc. for
the period ended March 31, 1999
Balance Sheet
Statement of Loss and Deficit
Statement of Cash Flows
Notes to Financial Statements
F/S-5 Pro-forma (unaudited) financial statements of Collectibles
Entertainment Inc. as at March 31, 1999
Pro-Forma Consolidated Balance Sheets
Pro-Forma Consolidated Statement of Loss and Deficit
Notes to Pro-Forma Consolidated Financial Statements
<PAGE>
NETNATION COMMUNICATIONS INC.
Financial Statements
Year ended December 31, 1998 and period from
incorporation on February 19, 1997 to December 31, 1997
INDEX
Page
----
AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations and Deficit 3
Statements of Cash Flows 4
Notes to Financial Statements 5
<PAGE>
Page 1
KPMG LLP
Chartered Accountants
Box 10426 777 Dunsmuir Street
Vancouver, B.C. V7Y 1K3
Canada
AUDITORS' REPORT
To the Board of Directors
NetNation Communications Inc.
We have audited the balance sheets of NetNation Communications Inc. as at
December 31, 1998 and 1997 and the statements of operations and deficit and
cash flows for the year ended December 31, 1998 and the period from
incorporation on February 19, 1997 to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1998 and 1997
and the results of its operations and its cash flows for the year ended December
31, 1998 and the period from incorporation on February 19, 1997 to December 31,
1997 in accordance with Canadian generally accepted accounting principles. As
required by the Company Act (British Columbia), we report that, in our opinion,
these principles have been applied on a consistent basis.
/s/KPMG LLP
Chartered Accountants
Vancouver, Canada
March 19, 1999
<PAGE>
Page 2
NETNATION COMMUNICATIONS INC.
Balance Sheets
December 31, 1998, with comparative figures for and 1997
1998 1997
Assets
- -------------------------------------------------------------------------------
Current assets
Cash $ 70,437 $ 37,729
Accounts receivable 19,404 7,185
Prepaid expenses and deposits 5,251 5,218
----------------------------------------------------------------------------
95,092 50,132
Capital assets (note 2) 160,238 81,565
- -------------------------------------------------------------------------------
$ 255,330 $ 131,697
- -------------------------------------------------------------------------------
Liabilities, Share Capital and Deficit
Current liabilities
Accounts payable and accrued liabilities $ 150,215 $ 59,924
Share redemption premium payable, current
portion (note 3) 53,400 -
Deferred revenue 277,593 74,523
----------------------------------------------------------------------------
481,208 134,447
Share redemption premium payable (note 3) 17,600 -
Share capital and deficit
Share capital (note 3) 1,825 100
Cost of shares repurchased but not cancelled (note 3(b)) (14,929) -
Contributed surplus (note 3(c)) - 24,143
Deficit (230,374) (26,993)
-----------------------------------------------------------------------------
(243,478) (2,750)
Commitment (note 4)
Uncertainty due to the Year 2000 Issue (note 5)
- --------------------------------------------------------------------------------
$ 255,330 $ 131,697
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 3
NETNATION COMMUNICATIONS INC.
Statements of Operations and Deficit
Year ended December 31, 1998, with comparative figures for and
period from incorporation on February 19, 1997 to December 31, 1997
1998 1997
- -------------------------------------------------------------------------------
Sales $ 1,643,757 $ 471,968
Expenses
Amortization 46,607 13,965
Marketing and selling 677,478 177,742
Office and administrative 239,197 73,528
Wages, benefits and subcontract 842,933 233,726
- -------------------------------------------------------------------------------
1,806,215 498,961
- -------------------------------------------------------------------------------
Net loss 162,458 26,993
Deficit, beginning of period 26,993 -
Premium on redemption of Class A common shares (note 3) 40,923 -
- -------------------------------------------------------------------------------
Deficit, end of period $ 230,374 $ 26,993
- -------------------------------------------------------------------------------
Loss per share $ 0.02 $ -
- -------------------------------------------------------------------------------
Weighted average number of common shares 9,833,333 10,000,000
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 4
NETNATION COMMUNICATIONS INC.
Statements of Cash Flows
Year ended December 31, 1998, with comparative figures for and
period from incorporation on February 19, 1997 to December 31, 1997
1998 1997
- -------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net loss $ (162,458) $ (26,993)
Amortization, an item not involving cash 46,607 13,965
Change in non-cash operating working capital
Accounts receivable (12,219) (7,185)
Prepaid expenses and deposits (33) (5,218)
Accounts payable and accrued liabilities 90,291 59,924
Deferred revenue 203,070 74,523
- -------------------------------------------------------------------------------
165,258 109,016
Investing activities
Purchase of property, plant and equipment (132,555) (71,387)
Proceeds on disposal of property, plant and equipment 7,275 -
- -------------------------------------------------------------------------------
(125,280) (71,387)
Financing activities
Redemption of capital (9,000) -
Issue of share capital 1,730 100
----------------------------------------------------------------------------
(7,270) 100
- -------------------------------------------------------------------------------
Increase in cash 32,708 37,729
Cash, beginning of period 37,729 -
- -------------------------------------------------------------------------------
Cash, end of period $ 70,437 $ 37,729
- -------------------------------------------------------------------------------
Supplementary information
Contribution of capital assets $ - $ 24,143
Cash paid for
Interest 10,650 2,485
Taxes - -
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 5
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements
Year ended December 31, 1998 and
period from incorporation on February 19, 1997 to December 31, 1997
NetNation Communications Inc. (the "Company") was incorporated February 19, 1997
under the Company Act (British Columbia). Its principal business activity is
the provision of web-site hosting and related services to small and medium sized
businesses.
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles in Canada and are reported in Canadian dollars,
the Company's functional currency. There are no significant differences from
generally accepted accounting principles in the United States and the rules and
regulations promulgated by the Securities and Exchange Commission. Amounts
reported in the statements of operations and deficit and cash flows for the
period ended December 31, 1997 are from the date of the Company's incorporation,
February 19, 1997.
These financial statements have been prepared on the going concern basis which
assumes the realization of assets and liquidation of liabilities in the normal
course of business. Management is currently investigating opportunities for the
sourcing of additional financing and continued operations depend upon the
successful completion of financing arrangements and sustaining profitable
operations.
(b) Revenue recognition
Revenue is recognized as web hosting and related services are provided. Funds
received in advance of the provision of services are deferred and recorded as
revenue when earned.
(c) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
reported amounts of assets, liabilities, revenues and expenses. Actual results
may differ from these estimates.
(d) Capital assets
Capital assets are stated at cost less accumulated amortization. Amortization
is computed using the declining balance method at the following rates:
Computer hardware Declining balance 30%
Furniture Declining balance 20%
Office equipment Declining balance 30%
<PAGE>
Page 6
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements, Continued
Year ended December 31, 1998 and
period from incorporation on February 19, 1997 to December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated
at year end exchange rates. Other assets and liabilities, revenue and expenses
are translated at the exchange rate in effect at the date of the transaction.
(f) Fair value of financial instruments
Carrying values of the Company's financial instruments, including cash, accounts
receivable and accounts payable and accrued liabilities approximate fair value
due to their short terms to maturities.
(g) Income taxes
The Company provides for income taxes based on net income or loss as reported in
the statement of operations. Future income tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
(h) Earnings per share
Basic earnings or loss per share is based on the weighted effect of all common
shares issued and outstanding, and is calculated by dividing net income or loss
by the weighted average shares outstanding during the period. Diluted earnings
or loss per share would be calculated by dividing net income or loss by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of any potentially dilutive common shares outstanding. The Company
had no potentially dilutive common shares outstanding and, accordingly, basic
and diluted earnings or loss per share do not differ.
2. CAPITAL ASSETS
December 31,
1998
Accumulated Net book
Cost depreciation value
- -------------------------------------------------------------------------------
Computer hardware $ 190,225 $ 51,981 $ 138,244
Furniture 9,587 2,417 7,170
Office equipment 20,998 6,174 14,824
- -------------------------------------------------------------------------------
$ 220,810 $ 60,572 $ 160,238
- -------------------------------------------------------------------------------
<PAGE>
Page 7
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements, Continued
Year ended December 31, 1998 and
period from incorporation on February 19, 1997 to December 31, 1997
2. CAPITAL ASSETS, CONTINUED
December 31,
1997
Accumulated Net book
Cost depreciation value
- -------------------------------------------------------------------------------
Computer hardware $ 78,158 $ 11,724 $ 66,434
Furniture 7,290 729 6,561
Office equipment 10,081 1,511 8,570
- -------------------------------------------------------------------------------
$ 95,529 $ 13,964 $ 81,565
- -------------------------------------------------------------------------------
3. SHARE CAPITAL
Authorized
100,000,000 Class A common shares, without par value
1,000,000 Class B preferred shares, non-cumulative, non-participating with
a par value of $0.01 per share
Issued
Class A common shares Class B preferred shares
- -------------------------------------------------------------------------------
Amount Number of shares Amount Number of shares
- -------------------------------------------------------------------------------
Class A common shares
issued for cash $ 100 10,000,000 $ - -
- -------------------------------------------------------------------------------
Balance, December 31,
1997 100 10,000,000 - -
- -------------------------------------------------------------------------------
Class A common shares
redeemed and cancelled (a) (5) (500,000) - -
Class B preferred shares
issued for cash on
exercise of options - - 1,730 173,000
Balance, December 31,
1998 $ 95 9,500,000 $ 1,730 173,000
- ------------------------------------------------------------------------------
<PAGE>
Page 8
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements, Continued
Year ended December 31, 1998 and
period from incorporation on February 19, 1997 to December 31, 1997
3. SHARE CAPITAL, CONTINUED
(a) On August 26, 1998, 500,000 Class A common shares were redeemed and
cancelled for $44,000 which is payable in instalments ending May 1, 2000 of
which the entire amount is outstanding at December 31, 1998. The premium paid
on redemption was partially applied to contributed surplus with the balance
charged to the deficit.
(b) On August 26, 1998, 500,000 Class A common shares were redeemed for
$36,000 which is payable in instalments ending September 1, 1999 of which
$27,000 is outstanding at December 31, 1998. The shares are held in escrow
until the final instalment payment is made at which time the shares will be
released to the Company for cancellation. The amount paid on redemption was
applied to eliminate the remaining contributed surplus with the balance charged
to the cost of shares repurchased but not cancelled account which will be
charged to share capital and the deficit when the shares are cancelled.
(c) Contributed surplus was recorded at the inception of the Company for the
contribution of assets, including furniture and computer hardware, by two
minority shareholders of the Company. The assets were recorded at their fair
market value at the date of contribution. The contributors received no
consideration, shares or otherwise, in return for their contribution.
4. COMMITMENT
The Company is committed to operating lease payments for rent on its current
premises in 1999 totalling $71,900.
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
<PAGE>
Page 9
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements, Continued
Year ended December 31, 1998 and
period from incorporation on February 19, 1997 to December 31, 1997
6. INCOME TAXES
No provision for income taxes has been made in the accounts of the Company for
the year due to available losses of the current year plus amounts carried
forward from the prior year. The Company has approximately $43,000 of tax
losses available to offset future income taxes payable. Unless utilized, $6,000
will expire in 2004 and $37,000 will expire in 2005.
The Company's future income tax asset is comprised of the following at December
31:
1998 1997
- ---------------------------------------------------------------------
Loss carryforwards $ 43,000 $ 37,000
Valuation allowance (43,000) (37,000)
- ----------------------------------------------------------------------
$ - $ -
- ----------------------------------------------------------------------
7. SEGMENTED INFORMATION
The Company operates in a single operating segment which involves the provision
of web-site hosting and related services. All of the Company's operations,
assets and employees are located in Canada. 1998 revenues are derived 57% from
the U.S., 25% from Canada and 18% from other countries (1997 - 50%, 30% and 20%
respectively).
<PAGE>
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Financial Statements
December 31, 1998
INDEX
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Cash Flows 4
Notes to Financial Statements 5
<PAGE>
Page 1
KPMG LLP
Chartered Accountants
Box 10426 777 Dunsmuir Street
Vancouver, B.C. V7Y 1K3
Canada
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Collectibles Entertainment Inc.
We have audited the balance sheet of Collectibles Entertainment Inc. (A
Development Stage Company) as at December 31, 1998 and the statements of
operations and cash flows for the period from incorporation on May 7, 1998 to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Collectibles Entertainment Inc.
(A Development Stage Company) as at December 31, 1998 and the results of its
operations and the changes in its cash flows for the period from incorporation
on May 7, 1998 to December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
June 21, 1999
<PAGE>
Page 2
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 1998
1998
Assets
Current assets
Cash $ 23,099
Liabilities and Stockholders' Equity
Stockholders' equity
Share capital (note 3 $ 110
Authorized: 50,000,000 shares, with par value of $0.0001
Issued: 1,097,000 shares
Contributed surplus (note 3) 29,590
Deficit accumulated during the development stage (6,601)
Operations (note 1)
Uncertainty due to the Year 2000 Issue (note 5)
Subsequent event (note 6)
$ 23,099
See accompanying notes to financial statements.
<PAGE>
Page 3
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Operations
For the period from incorporation on May 7, 1998 to December 31, 1998
1998
Office and administration expense $ 6,601
Net loss, being deficit accumulated during the
development stage $ (6,601)
Loss per share $ (0.01)
Weighted average number of common shares 913,402
See accompanying notes to financial statements.
<PAGE>
Page 4
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
For the period from incorporation on May 7, 1998 to December 31, 1998
1998
Cash flows from operating activities
Net loss $ (6,601)
Cash flows from financing activities
Proceeds from issuance of common stock 110
Contributed surplus on issuance of common stock 29,590
29,700
Increase in cash, being cash, end of period $ 23,099
Supplemental information
Cash paid for
Taxes $ -
Interest $ -
See accompanying notes to financial statements.
<PAGE>
Page 5
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
For the period from incorporation on May 7, 1998 to December 31, 1998
1. OPERATIONS
The Company was incorporated on May 7, 1998, under the laws of the State of
Delaware.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The Company has no operations and
in accordance with Statement of Financial Accounting Standard 7, the Company is
considered to be in development stage as it is devoting substantial efforts to
developing its business operations.
(b) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
(c) Income taxes
The Company follows the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized based on the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
3. COMMON STOCK
During the period from incorporation on May 7, 1998 to December 31, 1998, the
Company issued 1,097,000 common shares for cash proceeds of $29,700.
Contributed surplus arose on the issuance of the common shares at a price in
excess of par value.
4. INCOME TAXES
To December 31, 1998, the Company has incurred losses for income tax purposes of
approximately $6,601, which are available to reduce income for tax purposes
through the year 2005.
The unrecorded benefit of these loss carryforwards is approximately $1,500.
Under the provisions of Statement 109, the effect of this benefit has been fully
offset by a valuation allowance due to the uncertainty of the realization of the
benefits.
<PAGE>
Page 6
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements, Continued
For the period from incorporation on May 7, 1998 to December 31, 1998
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
<PAGE>
Page 7
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements, Continued
For the period from incorporation on May 7, 1998 to December 31, 1998
6. SUBSEQUENT EVENTS
On April 8, 1999, the Company entered into a business combination with NetNation
Communications Inc. ("NetNation") whereby the Company would acquire all issued
common shares of NetNation in exchange for 10,000,000 common shares of the
Company.
As the transaction will result in the stockholders of NetNation owning greater
than 50% of the Company's common shares, accounting principles applicable to
reverse takeovers will be used to record the acquisition under the purchase
method, with the Company deemed to be the purchased entity.
As a condition precedent to the closing of the transaction, the Company will
complete a private placement for the issuance of:
450,000 common shares of the Company at $2.00 per share for proceeds of
$900,000.
550,000 convertible debentures for proceeds of $1,100,000. Each
convertible debenture is convertible into one common share of the
Company at $2.00 per share.
<PAGE>
NETNATION COMMUNICATIONS INC.
Financial Statements
(Unaudited)
(Expressed in U.S. dollars)
March 31, 1999
INDEX
Page
----
FINANCIAL STATEMENTS
Balance Sheets 1
Statements of Operations and Deficit 2
Statements of Cash Flows 3
Statements of Share Capital and Deficit 4
Notes to Financial Statements 5
<PAGE>
Page 1
NETNATION COMMUNICATIONS INC.
Balance Sheets
(Unaudited)
March 31, 1999 with comparative figures for December 31, 1998
(Expressed in U.S. dollars)
1999 1998
- -------------------------------------------------------------------------------
Assets
Current assets
Cash $ 71,279 $ 45,938
Accounts receivable 7,660 12,655
Prepaid expenses and deposits 4,135 3,425
- -------------------------------------------------------------------------------
83,074 62,018
- -------------------------------------------------------------------------------
Capital assets 143,966 109,252
- -------------------------------------------------------------------------------
$ 227,040 $ 171,270
- -------------------------------------------------------------------------------
Liabilities and Share Capital and Deficit
Current liabilities
Accounts payable and accrued liabilities $ 153,859 $ 97,968
Share redemption premium payable, current portion 11,666 34,827
Payable to shareholders 7,125 -
Deferred revenue 195,532 181,043
- -------------------------------------------------------------------------------
368,182 313,838
- -------------------------------------------------------------------------------
Share redemption premium payable 11,666 11,479
Share capital and deficit
Share capital (note 1) 6,680 1,198
Cost of shares repurchased but not cancelled (9,737) (9,737)
Deficit (149,751) (145,508)
- --------------------------------------------------------------------------------
(152,808) (154,047)
- --------------------------------------------------------------------------------
$ 227,040 $ 171,270
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 2
NETNATION COMMUNICATIONS INC.
Statements of Operations and Deficit
(Unaudited)
Quarters ended March 31, 1999 and 1998
(Expressed in U.S. dollars)
1999 1998
- -------------------------------------------------------------------------------
Sales $ 445,891 $ 196,992
Expenses
Amortization 13,355 4,728
Marketing and selling 178,782 68,311
Office and administrative 52,649 24,768
Wages, benefits and subcontract 205,348 87,229
- -------------------------------------------------------------------------------
450,134 185,036
- -------------------------------------------------------------------------------
Net income (loss) $ (4,243) $ 11,956
- -------------------------------------------------------------------------------
Income (loss) per share $ - $ -
- -------------------------------------------------------------------------------
Weighted average number of common shares 9,500,000 10,000,000
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 3
NETNATION COMMUNICATIONS INC.
Statements of Share Capital and Deficit
(Unaudited)
Quarters ended March 31, 1999 and 1998
(Expressed in U.S. dollars)
Cost of shares Total
repurchased share
Share but not capital
capital cancelled Deficit and deficit
- -------------------------------------------------------------------------------
Balance, December 31, 1998 $ 1,198 $ (9,737) $(145,508) $(154,047)
Common shares issued 5,482 - - 5,482
Net loss - - (4,243) (4,243)
- -------------------------------------------------------------------------------
Balance, March 31, 1999 $ 6,680 $ (9,737) $(149,751) $(152,808)
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 4
NETNATION COMMUNICATIONS INC.
Statements of Cash Flows
(Unaudited)
Quarters ended March 31, 1999 and 1998
(Expressed in U.S. dollars)
1999 1998
Cash provided by (used in)
Operations
Net income (loss) $ (4,243) $ 11,956
Amortization, an item not involving cash 13,355 4,728
Change in non-cash operating working capital
Accounts receivable 4,995 1,475
Prepaid expenses and deposits (710) (3,447)
Accounts payable and accrued liabilities 55,891 (390)
Deferred revenue 14,489 9,326
- --------------------------------------------------------------------------------
83,777 23,648
Investments
Capital asset additions, net (48,069) (17,214)
Financing
Issue of share capital 5,482 -
Share redemption premium payable (22,974) -
Payable to shareholders 7,125 -
- --------------------------------------------------------------------------------
(10,367) -
Increase in cash position 25,341 6,434
Cash position, beginning of quarter 45,938 26,375
- --------------------------------------------------------------------------------
Cash position, end of quarter $ 71,279 $ 32,809
- --------------------------------------------------------------------------------
Cash paid for
Taxes $ - $ -
Interest $ 1,958 $ 9
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Page 5
NETNATION COMMUNICATIONS INC.
Notes to Financial Statements
(Unaudited)
March 31, 1999
(Expressed in U.S. dollars)
NetNation Communications Inc. (the "Company") was incorporated February 19, 1997
under the Company Act (British Columbia). Its principal business activity is
the provision of web-site hosting and related services to small and medium sized
businesses.
1. SHARE CAPITAL
Authorized
100,000,000 Class A common shares, without par value
1,000,000 Class B preferred shares, non-cumulative, non-participating with
a par value of $0.01 per share
Issued
Class A common shares Class B preferred shares
--------------------- ------------------------
Number of Number of
Amount shares Amount shares
- --------------------------------------------------------------------------------
Class A common shares
issued for cash $ 73 10,000,000 $ - -
- --------------------------------------------------------------------------------
Balance, December 31, 1997 73 10,000,000 - -
- --------------------------------------------------------------------------------
Class A common shares
redeemed and cancelled (3) (500,000) - -
Class B preferred shares
issued for cash on
exercise of options 1,128 173,000
- --------------------------------------------------------------------------------
Balance, December 31, 1998 70 9,500,000 1,128 173,000
- --------------------------------------------------------------------------------
Class A common shares
issued for cash 5,482 827,000 - -
- --------------------------------------------------------------------------------
Balance, March 31, 1999 $ 5,552 10,327,000 $1,128 173,000
- --------------------------------------------------------------------------------
<PAGE>
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Financial Statements
(Unaudited)
March 31, 1999
INDEX
Page
FINANCIAL STATEMENTS
Balance Sheet 1
Statement of Loss and Deficit 2
Statement of Cash Flows 3
Notes to Financial Statements 4
<PAGE>
Page 1
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
(Unaudited)
March 31, 1999 with comparative figures for December 31, 1998
1999 1998
Assets
Cash $ 26,687 $ 23,099
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities $ 15 $ -
Shareholders' equity
Share capital (note 1) 510 110
Contributed surplus 69,190 29,590
Deficit accumulated during the development stage (43,028) (6,601)
26,672 23,099
$ 26,687 $ 23,099
See accompanying notes to financial statements.
<PAGE>
Page 2
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Loss and Deficit
(Unaudited)
Quarter ended March 31, 1999
Cumulative
from inception
to March 31,
1999 1999
Office and administration $ 36,427 $ 43,028
Net loss 36,427 43,028
Deficit accumulated during the development
stage, beginning of quarter 6,601 -
Deficit accumulated during the development
stage, end of quarter $ 43,028 $ 43,028
Loss per share $ (0.01) $ -
Weighted average number of common shares 3,719,222 -
See accompanying notes to financial statements.
<PAGE>
Page 3
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
(Unaudited)
Quarter ended March 31, 1999
Cumulative
from inception
to March 31,
1999 1999
Cash provided by (used in)
Operations
Net loss $ (36,427) $ (43,028)
Change in accounts payable and accrued
liabilities 15 15
(36,412) (43,013)
Financing
Issuance of share capital 400 510
Contributed surplus 39,600 69,190
40,000 69,700
Increase in cash position 3,588 26,687
Cash, beginning of quarter 23,099 -
Cash, end of quarter $ 26,687 $ 26,687
Cash paid for
Taxes $ - $ -
Interest $ 90 $ -
See accompanying notes to financial statements.
<PAGE>
Page 4
COLLECTIBLES ENTERTAINMENT INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
(Unaudited)
March 31, 1999
The Company was incorporated May 7, 1998, under the laws of the State of
Delaware. The Company has no operations and in accordance with Statement of
Financial Accounting Standard 7, the Company is considered to be a development
stage company. It is management's plan to seek a combination with an existing
operating company.
1. SHARE CAPITAL
(a) Authorized
50,000,000 Common shares, with a par value of $0.0001
(b) Issued and outstanding
Number of Par
Shares Value
Shares subscribed on incorporation 1,097,000 $ 110
Outstanding, December 31, 1998 1,097,000 110
Issued pursuant to a private placement 4,000,000 400
Outstanding, March 31, 1999 5,097,000 $ 510
<PAGE>
COLLECTIBLES ENTERTAINMENT INC.
Pro Forma Consolidated Financial Statements
(Unaudited)
March 31, 1999
INDEX
Page
----
FINANCIAL STATEMENTS
Pro Forma Consolidated Balance Sheet 1
Pro Forma Consolidated Statement of Loss and Deficit 2
Notes to Pro Forma Consolidated Financial Statements 3
<PAGE>
Page 1
COLLECTIBLES ENTERTAINMENT INC.
Pro Forma Consolidated Balance Sheet
(Unaudited)
March 31, 1999
Pro forma
NetNation Collectibles Pro forma Collectibles
Communications Entertainment adjustments Entertainment
Inc. Inc. and Inc.
March 31, March 31, eliminating March 31,
1999 1999 entries 1999
- -------------------------------------------------------------------------------
Assets
Current assets
Cash $ 71,279 $ 26,687 $ - $ 97,966
Accounts receivable 7,660 - 2,000,000(2) 2,007,660
Prepaid expenses and
deposits 4,135 - - 4,135
83,074 26,687 2,000,000 2,109,761
Capital assets 143,966 - - 143,966
- -------------------------------------------------------------------------------
$ 227,040 $ 26,687 $ 2,000,000 $ 2,253,727
- -------------------------------------------------------------------------------
Liabilities, Share Capital and Deficit
Current liabilities
Accounts payable and
accrued liabiliti $ 153,859 $ 15 $ - $ 153,874
Share redemption
premium payable,
current portion 11,666 - - 11,666
Payable to shareholder 7,125 - - 7,125
Deferred revenue 195,532 - - 195,532
- -------------------------------------------------------------------------------
368,182 15 - 368,197
- -------------------------------------------------------------------------------
Share redemption premium
payable 11,666 - - 11,666
Debentures payable - - 1,100,000(2) 1,100,000
Share capital and deficit
Share capital 6,680 510 926,162(3) 933,352
Excess redemption value
over cost (9,737) - - (9,737)
Contributed surplus - 69,190 (69,190) -
Deficit (149,751) (43,028) 43,028 (149,751)
- -------------------------------------------------------------------------------
(152,808) 26,672 900,000 773,864
- -------------------------------------------------------------------------------
$ 227,040 $ 26,687 $ 2,000,000 $ 2,253,727
- -------------------------------------------------------------------------------
See accompanying notes to pro forma consolidated financial statements.
<PAGE>
Page 2
COLLECTIBLES ENTERTAINMENT INC.
Pro Forma Consolidated Statement of Loss and Deficit
(Unaudited)
Quarter ended March 31, 1999
Pro forma
NetNation Collectibles Pro forma Collectibles
Communications Entertainment adjustments Entertainment
Inc. Inc. and Inc.
March 31, March 31, eliminating March 31,
1999 1999 entries 1999
- -------------------------------------------------------------------------------
Sales $ 445,891 $ - $ - $ 445,891
Expenses
Amortization 13,355 - - 13,355
Marketing and selling 178,782 - - 178,782
Office and
administration 52,649 36,427 (36,427) 52,649
Wages, benefits and
subcontract 205,348 - - 205,348
- --------------------------------------------------------------------------------
450,134 36,427 (36,427) 450,134
- --------------------------------------------------------------------------------
Net income (loss) (4,243) (36,427) 36,427 (4,243)
Deficit, beginning of
quarter 145,508 6,601 (6,601) 145,508
- --------------------------------------------------------------------------------
Deficit, end of quarter $ 149,751 $ 43,028 $ (43,028) $ 149,751
- --------------------------------------------------------------------------------
See accompanying notes to pro forma consolidated financial statements.
<PAGE>
Page 3
COLLECTIBLES ENTERTAINMENT INC.
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)
March 31, 1999
1. PROPOSED ARRANGEMENT AND BASIS OF PRESENTATION
The accompanying pro forma consolidated financial statements have been compiled
for purposes of inclusion in the proposed filing of a Form 10 registration
statement with the Securities and Exchange Commission (the "Commission")
pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934. The
pro forma consolidated financial statements give effect to the proposed
arrangement between Collectibles Entertainment Inc. ("Collectibles") and
NetNation Communications Inc. ("NetNation") which will result in the exchange by
the shareholders of NetNation of all issued common shares for 10,000,000 common
shares of Collectibles.
The pro forma consolidated financial statements should be read in conjunction
with the December 31, 1998 audited financial statements and other information
referred to in the registration statement. It has been compiled from the
unaudited financial statements of NetNation and Collectibles as at and for the
quarter ended March 31, 1999.
As this proposed transaction will result in the shareholders of NetNation owning
greater than 50% of Collectibles' common shares, accounting principles
applicable to reverse takeovers have been used in the compilation of these pro
forma financial statements to record the acquisition using the purchase method,
with Collectibles deemed to be the purchased entity.
2. PRO FORMA ADJUSTMENTS
The pro forma consolidated financial statements at March 31, 1999 have been
compiled assuming the transactions relating to the proposed arrangement occurred
on March 31, 1999 and gives effect to the following:
(a) The issuance of 10,000,000 common shares of Collectibles to the
shareholders of NetNation in exchange for all issued and outstanding shares of
NetNation.
(b) The issuance of 450,000 common shares of Collectibles at $2.00 per share
for proceeds of $900,000.
(c) The issuance of two convertible debentures in the amount of $550,000
each for total proceeds of $1,100,000. Each convertible debenture is
convertible into 225,000 common shares of Collectibles at $2.00 per share and
may be converted in whole or in part.
<PAGE>
Page 4
COLLECTIBLES ENTERTAINMENT INC.
Notes to Pro Forma Consolidated Financial Statements, Continued
(Unaudited)
March 31, 1999
3. SHARE CAPITAL
Number of
Shares Amount
- -------------------------------------------------------------------------------
Authorized
50,000,000 Common shares, with a par value of $0.0001
Issued
Balance before transaction per Collectibles financial
statements 5,097,000 $ 510
Shares issued to purchase all issued and outstanding
shares of NetNation 10,000,000 -
Adjustment of Collectibles share capital to comply
with reverse take-over accounting
Elimination of Collectibles share capital - (510)
NetNation share capital - 6,680
NetNation share capital issued to purchase
net assets of Collectibles - 26,672
Share capital issued as condition precedent to
closing (note 2) 450,000 900,000
- -------------------------------------------------------------------------------
Pro Forma balance, March 31, 1999 15,547,000 $ 933,352
- -------------------------------------------------------------------------------
<PAGE>
(b) Index to Exhibits
Exh. Description
- ---- -----------
2 Agreement dated March 31, 1999 between the shareholders of
NetNation Canada, NetNation Canada and NetNation US (formerly
Collectibles EntertainmentInc.)
3 (i) Articles of Incorporation
3 (ii) By-laws
4.1 Convertible Debenture for $550,000 Maturing on September 30, 2000
issued to Polaris Investitionen Ltd.
4.2 Convertible Debenture for $550,000 Maturing on September 30, 2000
issued to Beste Investitionen Ltd.
21 Subsidiaries of NetNation
27 Financial Data Schedule
<PAGE>
SHARE PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 31st day of March, 1999.
BETWEEN:
DAVID TALMOR, JOSEPH KIBUR, SIMON KIRBY, BLAIR PONSFORD, CHRISTOPHER KRUK,
MAHDERE ASFAW, YARED DEMISSIE, CALIN MEDIANU, DAVE HIRSCH, CHARLES HOWES, KEVIN
LINDSAY, MARCO MELAGAZZI, CORINA URSU, PAUL WHITHAM, SCOTT THOMASSON, GEORGE
MUENZ, LEO ROMANO, BENJAMIN ORPILLA, ADAM CLARK, JOSH GIBSON, KEMERIA
NEGASH-ALI, FRITZ BAYLEN, NUMAN HASSEN, ATSUSHI IKEDA, TRACEE DANCHAK, PETER
SMITH-GIBBON, ZOLYNNE SYKUT, GARTH WOOD, TERSES YONAS, OFER BEZALEL, BETHLEHEM
BERHANU-KIDANU, and DEREJE TESFA
(hereinafter collectively called the "Vendors")
AND:
COLLECTIBLES ENTERTAINMENT INC., a Delaware corporation with a registered office
in the State of Delaware, USA, located at 1013 Centre Road, Wilmington,
Newcastle, Delaware, USA, 19805, and a head office within BC located at 830-789
West Pender Street, Vancouver, BC, V7C 1H2
(hereinafter called the "Purchaser")
AND:
NETNATION COMMUNICATIONS INC., a company duly incorporated under the laws of BC
and having an office and place of business at 2040-555 West Hastings Street,
Vancouver, BC, V6B 4N6.
(hereinafter called the "Company")
WITNESSES THAT WHEREAS:
A. The Vendors are the legal and/or beneficial owners of an aggregate of
9,000,000 Class A common shares and 1,000,000 Class B preferred shares in the
capital of the Company (the "Class A Shares" and the "Class B Shares"
respectively, and collectively the "Shares"), allocated as follows:
Class A Shares
- --------------
David Talmor 2,250,000
David Talmor 2,250,000 (held in trust for his wife, Shelley Talmor
(aka Zilli (Zila) Talmor)
Joseph Kibur 4,500,000
TOTAL 9,000,000
Class B Shares
- --------------
Simon Kirby 144,000
Blair Ponsford 144,000
Christopher Kruk 72,000
Mahdere Asfaw 48,000
Yared Demissie 48,000
Marco Melagazzi 48,000
Leo Romano 48,000
Scott Thomasson 48,000
Corina Ursu 48,000
Paul Whitham 48,000
Charles Howes 36,000
Calin Medianu 36,000
George Muenz 36,000
Adam Clark 18,000
Josh Gibson 18,000
Kemeria Negash-Ali 18,000
Fritz Baylen 12,000
Numan Hassen 12,000
Dave Hirsch 12,000
Atsushi Ikeda 12,000
Kevin Lindsay 12,000
Tracee Danchak 12,000
Peter Smith-Gibbon 12,000
Zolynne Sykut 12,000
Garth Wood 12,000
Terses Yonas 12,000
Ofer Bezalel 7,000
Bethlehem Berhanu-Kidanu 5,000
Benjamin Orpilla 5,000
Dereje Tesfa 5,000
TOTAL 1,000,000
C. The Vendors have each agreed to sell and the Purchaser has agreed to
purchase the Shares upon the terms and conditions herein set forth;
NOW THEREFORE in consideration of the premises, the covenants and agreements and
warranties hereinafter set forth, it is hereby agreed as follows:
SALE AND PURCHASE
1. Based on and relying upon the representations and warranties herein, the
Vendors hereby each agree to sell the Shares to the Purchaser and the Purchaser
hereby agrees to purchase the Shares from the Vendors on the terms and
conditions herein contained.
2. The purchase price payable by the Purchaser to the Vendors for the Shares
shall be CDN $1,000,000 (the "Purchase Price") payable on the Closing Date by
the issuance of 10,000,000 common shares in the capital stock of the Purchaser
(the "Exchangeable Shares") as per the allocation table set out in Schedule "A",
to be issued in exchange for the Shares held by the Vendors in the Company.
3. The Exchangeable Shares will be issued pursuant to exemptions under
Regulation S promulgated under the U.S. Securities Act of 1933.
COMPANY AND VENDORS' REPRESENTATIONS AND WARRANTIES
- ---------------------------------------------------
4. The Company and the Vendors, jointly and severally, represent and warrant
to the Purchaser, to the best of their knowledge, information and belief after
making due inquiry that:
(a) the Company is a company duly incorporated under the laws of the
Province of British Columbia, is not a reporting company and is a valid and
subsisting company in good standing with all regulatory authorities;
(b) the authorized capital of the Company consists of 100,000,000 Class A
common shares without par value, of which there are 9,000,000 Class A common
shares issued and outstanding, and 1,000,000 Class B Preferred shares with a par
value of CDN $0.01 per share, all of which are issued and outstanding;
(c) the Shares are free and clear of all liens, claims, charges and
encumbrances of every nature and kind whatsoever;
(d) the Shares are duly authorized, validly issued and outstanding as fully
paid and non-assessable shares;
(e) the Vendors are the sole registered and/or beneficial owners of the
Shares and have due and sufficient right and authority to transfer the legal and
beneficial title and ownership of the Shares to the Purchaser, and each of the
Vendors and the Company has due and sufficient right, power and authority
(including any and all necessary corporate and/or shareholder authorizations) to
enter into this Agreement on the terms and conditions herein set forth, and this
Agreement, when executed and delivered by the Vendors and Company, will
constitute a legal and binding obligation of each such party enforceable against
it in accordance with its terms;
(f) other than the 2,250,000 Class A common shares held by David Talmor in
trust for his wife, no person, firm or corporation has any agreement or option
or a right capable of becoming an agreement for the purchase of the Shares or
any other shares in the capital of the Company owned by the Vendors or any right
capable of becoming an agreement for the purchase, subscription or issuance of
any of the unissued shares in the capital of the Company;
(g) the Company has the full corporate power and authority to carry on the
business presently being carried on by it and as proposed to be carried on by it
;
(h) the Company holds all licenses and permits as may be requisite for
carrying on its business in the manner in which it has heretofore been carried
on.
(i) the unaudited financial statements of the Company, for the fiscal year
of 1997, which are attached hereto as Schedule "B" (the "Financial Statements")
have been prepared in all material respects in accordance with Canadian
generally accepted accounting principles;
(j) there are no liabilities, contingent or otherwise, of the Company which
are not disclosed or reflected in the Financial Statements or as set forth in
Schedule "C" attached hereto;
(k) at the Time of Closing, the Company shall not have any liabilities,
contingent or otherwise other than those liabilities set forth in Schedule "C"
attached hereto;
(l) the books and records of the Company fairly and correctly set out and
disclose in all material respects, in accordance with Canadian generally
accepted accounting principles, the financial position of the Company as at the
date hereof and all material financial transactions of the Company relating to
its business have been accurately recorded in such books and records;
(m) no payments of any kind have been made or authorized since December 31,
1997 to or on behalf of the Vendors or any of them or to or on behalf of
officers, directors or shareholders of the Company or under any management
agreements with the Company which have not been disclosed in writing to the
Purchaser other than payments made in the normal course of business;
(n) since December 31, 1997:
(i) there has not been any material adverse change in the financial position
or condition of the Company or any damage, loss or other change in circumstances
materially affecting the business or property of the Company or its right or
capacity to carry on business;
(ii) the Company has not waived or surrendered any right of material value;
(iii) the business of the Company has been carried on in the ordinary
course; and
(iv) no capital expenditures have been authorized or made by the Company
except in the ordinary course of its business;
(o) there is no basis for and there are no actions, suits, judgments,
investigations or proceedings outstanding or pending or to the knowledge of the
Company or the Vendors, jointly or severally, threatened against or affecting
the Company at law or in equity or before or by any federal, state, municipal or
other governmental department, commission, board, bureau or agency;
(p) to the best of the Vendors' knowledge, the Company is not in breach of
any laws, ordinances, statutes, regulations, by-laws, orders or decrees to which
it is subject or which apply to it;
(q) the Company is not a party to any collective agreement with any labour
union or other association or employees and no attempt has been made to organize
or certify the employees of the Company as a bargaining unit;
(r) there are no pensions, profit sharing, group insurance or similar plans
or other deferred compensation plans affecting the Company;
(s) the Company is not indebted to any employee of the Company or other
workers engaged in the business of the Company and the Company has not received
or been notified of any general wage claims;
(t) the Company is the sole beneficial owner and has good and marketable
title to all its properties and assets free and clear of all liens, mortgages,
pledges, deeds of trust, conditional sale agreements, encumbrances, charges or
claims of every kind and nature whatsoever;
(u) the Company has not experienced nor is it aware of any occurrence or
event which has had, or might reasonably be expected to have, a materially
adverse affect on its business or the results of its operations;
(v) neither the Vendors nor any officer, director, employee or shareholder
of the Company is now indebted or under obligation to the Company on any account
whatsoever; and the Company is not indebted or under obligation to the Vendors
or any officer, director, employee or shareholder of the Company.
(w) this Agreement once duly executed and delivered by the Vendors and the
Company will constitute a legal, valid and binding obligation of the Vendors and
the Company; enforceable against the Vendors and the Company in accordance with
its terms;
5. The Vendors hereby jointly and severally represent and warrant to the
Purchaser as follows that:
(a) the Vendors have the capacity to protect their own interests in
connection with the acquisition of the common Shares of the Purchaser and are
capable of evaluating the merits and risks of an investment in the Purchaser by
reason of their business and financial knowledge and experience;
(b) other than the 2,250,000 Class A common shares of the Purchaser being
acquired by David Talmor for his wife, the Vendors are acquiring the common
shares of the Purchaser for investment for their own account, not as a nominee
or agent, and not with the view to, or for resale in connection with, any
distribution thereof. The Vendors understand that the common shares of the
Purchaser have not been, and will not be, registered under the Securities Act of
1933, as amended (the "Securities Act"), by reason of a specific exemption from
the registration provisions of the Securities Act, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of the Vendors' representations as expressed herein;
(c) each Vendor acknowledges that the common shares of the Purchaser must be
held indefinitely unless subsequently registered under the Securities Act or
unless an exemption from such registration is available. Each Vendor is aware
of the restrictions and limitations on resale of the common shares of the
Purchaser into the United States or to a US Person pursuant to the provisions of
Regulation S promulgated under the Securities Act. In addition, each Vendor is
aware of the provisions of Rule 144 promulgated under the Securities Act ("Rule
144") which permit limited resales in the US of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the common shares of the
Purchaser, the availability of certain current public information about the
Purchaser, the resale occurring not less than one year after a party has
purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations;
(d) each of the Vendors has had an opportunity to discuss the Purchaser's
business, management and financial affairs with the Company's management and has
also had an opportunity to ask questions of the Purchaser's officers, which
questions were answered to the Vendors' satisfaction. Each Vendor has been
furnished with or has had access to such information as a sophisticated investor
would customarily require to evaluate the merits and risks of the proposed
investment together with such additional information as is necessary to verify
the accuracy of the information supplied. The Vendors represent and acknowledge
that they have been solely responsible for their own due-diligence investigation
of the Purchaser and its management and business, for its own analysis of the
merits and risks of this investment, and for its own analysis of the terms of
the investment, and that in taking any action or performing any role relative to
the proposed investment, it has acted solely in its own interest, and that
neither it nor any of its agents or employees has acted as an agent, employee,
partner or fiduciary of any other person, or as an agent of the Purchaser, or as
an issuer, underwriter, broker, dealer or investment advisor relative to this
investment;
(e) each of the Vendors understands that the Purchaser has no operating
history, and that investment in the Purchaser involves substantial risks. The
Vendors further understand that the acquisition of the common shares of the
Purchaser will be a highly speculative investment. Each of the Vendors is able,
without impairing his financial condition, to hold the common shares of the
Purchaser for an indefinite period of time and to suffer a complete loss of his
investment;
(f) each of the Vendors agrees to indemnify and hold harmless the Purchaser
and its officers, directors and agents for any costs, liabilities or losses
caused by any misstatement of material fact by such Vendor with respect to the
representations and warranties contained in this Section or any other written
information provided to the Purchaser by such Vendor in connection with the
investment contemplated by this Agreement;
(g) each Vendor represents and warrants to the Purchaser that he is not a US
Person as defined in Regulation S as promulgated under the Securities Act and
that the buy order for the common shares of the Purchaser originated by each
Vendor outside of the US; and
(h) David Talmor holds the power of attorney for all the Vendors except
Joseph Kibur for the execution of this Agreement.
VENDORS' COVENANTS
- ------------------
6. The Vendors jointly and severally covenant and agree that:
(a) the representations and warranties contained in this Agreement shall be
true at and as of the Time of Closing as if such representations and warranties
were made as of such time;
(b) the Vendors will permit the Purchaser or whoever it direct on its behalf
to examine the records, statements and accounts of the Company on regular
business days and during regular business hours up to and including the Closing
Date and make such audit of the books of account of the Company and physical
verification of the inventory of the Company as the Purchaser may see fit;
(c) the representations, warranties, covenants and agreements contained
herein shall survive the Closing Date and notwithstanding the Closing of the
purchase and sale herein contemplated, shall continue in full force and effect;
(d) the Vendors will, jointly and severally, prior to Closing, take all
steps and proceedings and execute such further assurances and documents as may
be required to obtain the transfer and registration of the Shares into the name
of the Purchaser provided that all terms and conditions to be observed and
performed by the Purchaser at the Time of Closing have been observed and
performed;
PURCHASERS' REPRESENTATIONS AND WARRANTIES
- ------------------------------------------
7. As an inducement to the Company and each of the Vendors to enter into
this Agreement and to consummate the transactions provided for herein, the
Purchaser represents and warrants to the Company and each of the Vendors, to the
best of its knowledge, information and belief after making due inquiry that:
(a) the Purchaser is duly incorporated, validly existing and in good
standing under the laws of the State of Delaware;
(b) the Purchaser is now and as of the Closing Date will be traded on the
OTC Bulletin Board and no further action must be taken before the Closing Date
for continued trading on the Bulletin Board except for the filing of a
registration statement with the U.S. Securities and Exchange Commission, on Form
10-SB or similar prescribed form, such filing to be the responsibility of the
Purchasers new management following the Closing Date;
(c) it has full and absolute right, power and authority to enter into this
Agreement on the terms and conditions herein set forth, to carry out the
transactions contemplated hereby and, to transfer on the Closing Date to the
vendors all legal and beneficial ownership in and to the Exchangeable Shares;
(d) this Agreement once duly executed and delivered by the Purchaser will
constitute a legal, valid and binding obligation of the Purchaser; enforceable
against the Purchaser in accordance with its terms;
(e) no proceedings have been taken or authorized by the purchaser, or to the
knowledge of the purchaser, by any person, with respect to the bankruptcy,
insolvency, liquidation, dissolution or winding-up of the Purchaser or with
respect to any amalgamation, merger, consolidation, arrangement or
reorganization relating to the Purchaser;
(f) the authorized capital stock of the Purchaser consists solely of
50,000,000 common shares with a par value of USD $0.0001 of which 5,097,000 are
issued and outstanding on the date of this Agreement.
(g) There are currently no persons or group of persons acting in concert,
that directly or indirectly hold shares of the Purchaser that would constitute a
control block, other than 1,000,000 shares held by Robert A. Berk.
(h) there are not outstanding (i) any options, warrants, rights of first
refusal or other rights to purchase any shares of the Purchaser, (ii) any
securities convertible into or exchangeable for such shares or (iii) any other
commitments of any kind for the issuance of additional shares of the Purchaser
or options warrants or other securities of the Purchaser;
(i) all of the issued and outstanding shares of the Purchaser have been duly
and validly authorized and issued in accordance with applicable laws and are
validly outstanding, fully paid and non-assessable;
(j) all of the Exchangeable Shares which will be issued to the Vendors
hereunder in compliance with applicable laws and the articles of the Purchaser,
and will be issued fully paid and non-assessable, and free and clear of all
liens, charges, encumbrances and trading restrictions other than as may be
imposed by applicable U.S. Federal and State laws, and the laws of British
Columbia;
(k) the Purchaser has no subsidiaries;
(l) the officers and directors of the Purchaser are as follows:
Name Position
---- --------
Ernest Cheung Director, President, Secretary
(m) attached hereto as Schedule "D" are true and complete copies of the
Purchasers audited financial statements for the period May 7, 1998, being the
inception date, to June 30, 1998 (the "Purchasers Financial Statements"). The
Purchasers Financial Statements have been prepared in accordance with American
GAAP and present fairly the financial position, results of operations and
statements of changes in the Parent's financial position for the period
indicated;
(n) no adverse material changes in the affairs of the purchaser have
occurred since June 30, 1998;
(o) the Purchaser is in the process of obtaining irrevocable subscriptions
from purchasers not residents or citizens of Canada or the United States, for
the purchase of 450,000 common shares of the Purchaser at USD $2.00 per common
share pursuant to Rule 504 (the "Rule 504 Offering"), and for the purchase of
USD $1,100,000 of convertible debentures of the Purchaser, convertible into
common shares at the rate of USD $2.00 per common share pursuant to Regulation S
(the "Regulation S Offering"), for total proceeds of USD $2,000,000, such
subscriptions being made in accordance with an exemption from the registration
requirements of the Securities Act and applicable U.S. state legislation.
(p) there are no liabilities, contingent or otherwise of the Purchaser which
are not disclosed or reflected in its Financial Statements or as set forth in
Schedule "E" attached hereto;
(q) at the time of Closing the Purchaser shall not have any liabilities,
contingent or otherwise, other than those liabilities set forth in Schedule "E"
attached hereto;
(r) there are no employment, consulting, severance pay, continuation pay,
termination pay, indemnification agreements, collective agreements, employee
benefit plans or other similar agreement of any nature whatsoever affecting the
Purchaser;
(s) there is no litigation, proceeding, or investigation pending or
threatened against the Purchaser, nor does the Purchaser know, or have grounds
to know, of any basis for any litigation, proceeding or investigation against
the Purchaser, except as disclosed in writing to the Vendors;
(t) since June 30, 1998, the Purchaser's business has been operated
substantially in accordance with all laws, rules, regulations, orders of
competent regulatory authorities, and there has not been:
(i) any event or change in circumstances that has had, or which the
Purchaser may expect to have, a material adverse effect on the Purchaser or its
business;
(ii) any change in liabilities of the Purchaser that has had, or which the
Purchaser may expect to have, a material adverse effect on the Purchaser or its
business;
(iii) any incidence, assumption or guarantee of any indebtedness for
borrowed money by the Purchaser;
(iv) any payments by the Purchaser in respect of any indebtedness of the
Purchaser for borrowed money or in satisfaction of any liabilities of the
Purchaser, other than in the ordinary course of business;
(v) the creation, assumption or sufferance of the existence of any lien on
any assets reflected on the Purchaser Financial Statements;
(vi) any transaction or commitment made, or any contract entered into, by
the Purchaser;
(vii) any grant of any severance, continuation or termination pay to any
director, officer, stockholder or employee of the Purchaser; or any entering
into of an employment, deferred compensation or other similar agreement, or
amendment or variation to any such existing agreement;
(viii) any change by the Purchaser in its accounting principles, methods or
practices or in the manner it keeps its books and records;
(ix) any distribution, dividend, bonus, management fee or other payment by
the Purchaser to any of its respective officers, directors stockholders or
affiliates, or any of their respective affiliates or associates; and
(x) any material capital expenditure or commitment by the Purchaser or
material sale, assignment, transfer, lease or other disposition of or agreement
to sell, assign, transfer lease or otherwise dispose of any asset or property by
the Purchaser other than in the ordinary course of business.
(u) the Purchaser does not own or lease any real property or material
assets;
(v) the Purchaser currently has no operating business and has not had an
operating business since May 7, 1997, being the date the Purchaser was organized
under the laws of Delaware;
(w) there are no contracts or indebtedness between the Purchaser and any of
its shareholders, or affiliates or associates of any of its shareholders;
(x) there are no material contracts to which the Purchaser is a party other
than as specified in this Agreement;
(y) the operation of the Purchaser's business has not violated or infringed
any U.S. Federal or State securities laws or regulations;
(z) all tax returns and reports of the Purchaser required by law to be filed
prior to the date hereof have been filed and are substantially true, complete
and correct, and all taxes and other government charges have been paid or
accrued in the Purchaser Financial Statements;
(aa) the information contained in the documents, certificates and written
statements (including this Agreement and the attachments thereto) furnished by
the Purchasers to the Vendors are true and complete in all material respects and
do not omit to state any material fact necessary in order to make the statements
therein;
(bb) there is no fact known to the Purchaser that has not been disclosed to
the Vendors in writing that could reasonably have a material adverse effect on
the Purchaser.
(cc) as of the Date of Closing the Purchaser will have a cash balance of
approximately US $13,000 held in all bank accounts of the Purchaser (the "Bank
Balance").
Purchasers Covenants
- --------------------
8. The Purchaser covenants and agrees as follows:
(a) on the Closing Date, all of the directors and officers of the Purchaser
will resign and the following persons will be appointed the directors and
officers of the Purchaser:
Name Position
---- --------
David Talmor Director, President
Joseph Kibur Director
(b) on the Closing Date, and provided that all terms and conditions to be
observed and performed by the Vendors at the Time of Closing have been observed
and performed, the Purchaser will issue the Exchangeable Shares to the Vendors,
such Exchangeable Shares to be issued free and clear of any liens, encumbrances
and charges, but subject to applicable trading restrictions imposed by U.S.
securities legislation, and imposed under such other securities legislation
applicable in the each jurisdiction where any of the Vendors are resident;
(c) the Purchaser shall not disseminate to any third party any information,
by press-release or otherwise, without the prior written consent of the Vendors
and the Company;
(d) to forthwith deliver to Vendors or legal counsel designated by the
Vendor, a copy of the corporate records and minute books of the Purchaser, a
copy of all current bank account statements or investment account statements, a
copy of all documents filed with U.S. State and Federal securities regulatory
authorities since the date of incorporation of the Purchaser, a current copy of
the shareholder list kept by the transfer agent of the Purchaser and all such
documents as the Vendors or its legal counsel may request as part of their due
diligence investigation of the Purchaser. The Purchaser agrees to provide
access to all corporate records and otherwise assist the Vendors in the
completion of their due diligence;
(e) the Purchaser agrees to sign all documents required, and otherwise
assist the Vendors, to transfer of signing authority over all bank accounts of
the Purchaser.
CONDITIONS PRECEDENT FOR THE VENDORS
- ------------------------------------
9. The joint and several obligations of the Vendors to carry out the terms
of this Agreement and to complete the sale contemplated herein is subject to the
following conditions:
(a) the Purchaser shall have performed and satisfied each of its obligations
hereunder required to be performed and satisfied by it on or prior to the
Closing Date and each of the representations and warranties of the Purchaser
contained herein shall have been true and correct and contained no misstatement
or omission that would make any such representation or warrant misleading when
made, and shall be true and correct and contain no misstatement or omission that
would make any such representation or warranty misleading at and as of the
Closing Date with the same force and effect as if made as of the Closing Date;
(b) the Vendors shall have had the opportunity to complete their due
diligence, and all matters arising therefrom shall have been resolved by the
Purchaser. The Vendors, acting reasonably, may in their sole discretion
terminate this Agreement without further obligation or liability to the
Purchaser, if matters arising from the due diligence investigation of the
Purchaser are considered to be materially adverse to the interests of the
Vendors or the Company, and such matters cannot be cured or otherwise rectified
promptly by the Purchaser;
(c) the transactions contemplated by this Agreement shall not violate any
applicable law and there shall be no pending actions or proceedings by any
State, U.S. Federal or Provincial regulatory authority or by any other person
challenging or seeking to materially restrict or prohibit the transfer and
exchange contemplated hereby or the consummation of the transactions
contemplated by this Agreement;
(d) subsequent to the date hereof and prior to the Closing Date, there shall
not have been any event, occurrence, development or state of circumstances or
facts that has had or that may be reasonably expected to have a material adverse
effect on the Purchaser;
(e) the Purchaser's Board of Directors, by proper and sufficient vote
respectively, shall have approved this Agreement and the transactions
contemplated hereby;
(f) Prior to the Closing Date, the Purchaser shall have cancelled 1,000,000
common shares in the capital of the Purchaser held by Robert A. Berk, such
cancellation to be evidenced on the shareholder list delivered to the Vendors;
(g) the Purchaser shall have completed the Rule 504 Offering and issued the
shares to the investors thereunder and the Purchaser shall have filed the
appropriate Form D with the U.S. Securities and Exchange Commission and any
state securities regulatory authority, as required by applicable Federal and
Delaware securities laws;
(h) the Purchaser shall have completed the Regulation S Offering and issued
the convertible debenture to the investors thereunder, and the Purchaser shall
have filed the filings required to be filed under Regulation S, with the U.S.
Securities and Exchange Commission and any state securities regulatory
authority, as required by applicable Federal and Delaware securities laws.
CONDITIONS PRECEDENT FOR THE PURCHASER
- --------------------------------------
10. All obligations of the Purchaser under this Agreement are subject to the
fulfillment on or prior to Closing, of each of the following conditions to the
satisfaction of the Purchaser's solicitor:
(a) all covenants, warranties and agreements of the Vendors to be performed
on or before the Closing Date pursuant to the terms and conditions of this
Agreement have been duly performed;
(b) the Vendors shall transfer the Shares to the Purchaser and such Shares
shall be registered on the books of the Company in the name of the Purchaser at
the Time of Closing; and
(c) the representations and warranties of the Vendors set forth in this
Agreement shall be true and correct as of the date of the Agreement and shall be
true and correct as at the Date of Closing as if made by the Vendors on the
Closing Date.
11. The Vendors jointly and severally agree that the foregoing conditions in
paragraph 10 are inserted for the exclusive benefit of the Purchaser and may be
waived by the Purchaser in whole or in part at any time.
12. In the event any of the conditions set forth in paragraph 10, are not
met by the Closing Date for whatever reason, the Purchaser at his option, may
elect not to proceed with the purchase of the Shares contemplated herein without
prejudice to any other rights and remedies.
INTELLECTUAL PROPERTY
- ---------------------
13. The Purchaser acknowledges and agrees that the Company has no right,
title, claim or interest in or to the Linux distribution software (the "Linux
Technology") that was developed by David Talmor and Joseph Kibur. The Purchaser
agrees that the Linux Technology is the exclusive property of Stormix
Technology Inc.
14. The Purchaser agrees that prior to the consummation of the transactions
contemplated hereunder, all information respecting the Company and its
technology or the Linux Technology that may be provided to the Purchaser or that
is otherwise obtained by the Purchaser in relation to the negotiation and
performance of this Agreement, shall be considered as confidential information.
The Purchaser agrees not to disseminate, reproduce in whole or in part, or use
such confidential information without the prior written agreement of the
Company, and of Stormix Technology Inc. with respect to the Linux Technology.
SHARE CERTIFICATE LEGENDS
- -------------------------
15. It is understood that the certificates evidencing the common shares of
the Purchaser may bear one or more legends in substantially the following forms,
as well as any other legend required by the laws of any applicable jurisdiction:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
U.S. OR TO US PERSONS IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. HEDGING TRANSACTIONS FOR
SUCH SECURITIES MAY NOT BE MADE UNLESS IN COMPLIANCE WITH SUCH ACT.
THE SHARES ARE SUBJECT TO RESTRICTION ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD IN THE U.S. OR TO US PERSONS EXCEPT AS PERMITTED UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION
OR EXEMPTION THEREFROM.
The Purchaser need not record a transfer of the shares, unless the
conditions specified in any applicable legends are satisfied. The Purchaser may
also instruct its transfer agent not to record the transfer of any of the shares
unless the conditions specified in the applicable legends are satisfied.
16. The legend relating to the Securities Act endorsed on a stock
certificate pursuant to this Agreement and the stop transfer instructions with
respect to the shares represented by such certificate shall be removed and the
Purchaser shall issue a certificate without such legend to the holder of such
shares if such shares are registered under the Securities Act and a prospectus
meeting the requirements of Section 10 of the Securities Act is available or if
such holder provides to the Purchaser an opinion of counsel reasonably
satisfactory to the Purchaser, or a no-action letter or interpretive opinion of
the staff of the Securities and Exchange Commission (the "SEC") to the effect
that a public sale, transfer or assignment of shares may be made without
registration and without compliance with any restriction such as Rule 144.
CLOSING
- -------
17. The sale and purchase of the Shares shall be closed on April 7, 1999, at
the office of Fraser and Company, or at any other place agreed to by all of the
Parties, which date and time are referred to herein as the "Date of Closing",
the "Closing Date", the "Closing" and the "Time of Closing".
18. At Closing, the Vendors shall deliver to the Purchaser:
(a) share certificates duly endorsed for transfer of 9,000,000 Class A
common shares without par value and 1,000,000 Class B Preferred shares with par
value of CDN $0.01 in the capital of the Company into the Purchaser's name
representing the Shares;
(b) certified copies of resolutions of the directors of the Company
authorizing and approving the transfer of the Shares, registration of the Shares
in the name of the Purchaser, authorizing the issue of new share certificates
representing the Shares in the name of the Purchaser, and entry of the name and
address of the Purchaser into the Register of Members and Register of Directors
of the Company;
(c) all corporate records and books of account of the Company, including,
without limitation, the minute book, corporate seal, share register books, share
certificate books and annual reports of the Company;
(d) certified copies of such resolutions of the shareholders and directors
of the Company as are to be passed to authorize the execution, delivery and
implementation of this Agreement and of all documents to be delivered by the
Vendor pursuant thereto;
(e) a certificate signed by the Vendors that all covenants, warranties and
agreements of the Vendors pursuant to the terms of this Agreement have been duly
performed and that the representations and warranties of the Vendors set forth
in this Agreement are true and correct as at the Date of Closing;
19. On Closing the Purchaser shall deliver to the Vendor the following:
(a) share certificates representing the Exchangeable Shares in the names and
denominations set out in Schedule "A" hereto;
(b) certified copies of resolutions of the directors of the Purchaser
authorizing and approving the issuance of the Exchangeable Shares, registration
of the Exchangeable Shares in the name of the Vendors in accordance with
Schedule "A" hereto and authorizing the issue of the new share certificates
representing such Exchangeable Shares;
(c) all corporate records and books of account of the Company, including
without limitation, the minute book, corporate seal, any documents relating to
the Purchasers bank accounts and investment accounts;
(d) certified copies of such resolutions of the directors of the Purchaser
as are to be passed to authorize the execution, delivery and implementation of
this Agreement and of all documents to be delivered to the Vendors pursuant
thereto;
(e) a certificate signed by a duly authorized officer of the Purchaser that
all covenants, warranties and agreements of the Purchaser pursuant to the terms
of this Agreement have been duly performed and that the representations and
warranties of the Purchaser set forth in this Agreement are true and correct as
at the Closing;
(f) the signed resignations of the directors and officers of the Purchaser
and good evidence of proper termination of all employment or consulting
contracts to which the Purchaser is a party; and
(g) a certified cheque from Collectibles Entertainment Inc. in the amount of
US $2,000,000 payable to NetNation Communications Inc. representing the proceeds
of the Rule 504 Offering and the Regulation S Offering; and
(h) certified copies of resolutions, certificates or other documents
required to transfer signing authority over all bank accounts of the Purchaser
to nominees of the Vendors and the Company.
INDEMNITY
- ---------
20. The Purchaser shall be indemnified and held harmless by the Vendors in
respect of any and all damages incurred by the Purchaser as a result of any
inaccuracy or misrepresentation in or breach of any representation or warranty,
covenant or agreement made in this Agreement by the Vendors.
21. The Vendors shall each be indemnified and held harmless by the Purchaser
in respect of any and all damages incurred by any of such Vendors as a result of
any inaccuracy or misrepresentation in or breach of any representation,
warranty, covenant or agreement made by the Purchaser in this Agreement.
SURVIVAL OF REPRESENTATION, WARRANTIES AND COVENANTS
- ----------------------------------------------------
22. Except as hereinafter provided, all representations, warranties,
covenants, agreements and obligations of the parties hereto shall survive the
Closing and shall expire one year following the Closing Date.
GENERAL
- -------
23. This Agreement and the terms hereunder shall be treated as confidential
information and no disclosure thereof can be made without the written consent of
the Vendors and the Company.
24. It is understood that the 10,000,000 common shares to be issued to the
Vendors in the capital of the Purchaser shall be subject to a 12 month hold
period from the Closing Date.
25. This Agreement shall be governed by and be construed in accordance with
the laws of the Province of British Columbia.
26. Any notice to be given to a party hereto shall be in writing and signed
by or on behalf of such party and shall be given to the other party by delivery
thereto, or by sending by prepaid registered mail, telex, facsimile, telegram or
cable to the address of the other as hereinbefore set forth or to such other
address of which notice is given, and any notice shall be deemed not to have
been sufficiently given until it is received. Any notice or other communication
contemplated herein shall be deemed to have been received on the day delivered,
if delivered; on the seventh business day following the mailing thereof, if sent
by registered mail; and on the business day following the transmittal thereof,
if sent by telex, facsimile, telegram or cable. If normal mail, telex,
facsimile, telegram or cable service shall be interrupted by strike, slow down,
force majeure or other cause, the party sending the notice shall utilize any of
the other such services which have not been so interrupted or shall deliver such
notice in order to ensure prompt receipt of same by the other party.
27. The parties shall execute such further assurances and other documents
and instruments and do such further and other things as may be necessary to
implement and carry out the intent of this Agreement.
28. The provisions herein contained constitute the entire agreement between
the parties hereto and supersede all previous expectations, understandings,
communications, representations and agreements whether verbal or written between
parties.
29. This Agreement may be amended by a written instrument signed by the
party against whom enforcement of the amendment is sought and any waivers made
on the part of the Purchaser with respect to any terms or conditions herein must
be in writing and signed by them.
30. If any provision of this Agreement is unenforceable or invalid for any
reason whatever, such unenforceability or invalidity shall not effect the
enforceability or validity of the remaining provisions of this Agreement and
such provision shall be severable from the remainder of this Agreement.
31. Time shall be of the essence hereof.
32. The headings appearing in this Agreement are inserted for convenience of
reference only and shall not affect the interpretation of this Agreement.
33. This Agreement shall enure to the benefit of and be binding upon the
parties and their successors and permitted assigns.
<PAGE>
34. This Agreement may be executed in as many counterparts as may be
necessary or by facsimile and each such agreement or facsimile so executed shall
be deemed to be an original and such counterparts together shall constitute one
and the same Agreement.
IN WITNESS WHEREOF the parties hereto have caused this indenture to be executed
as of the day and year first above written.
SIGNED, SEALED and DELIVERED by DAVID )
TALMOR in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) DAVID TALMOR
) (personally)
)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
IN WITNESS WHEREOF the parties hereto have caused this indenture to be executed
as of the day and year first above written.
SIGNED, SEALED and DELIVERED by BLAIR )
PONSFORD in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) BLAIR PONSFORD
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by CHRISTOPHER )
KRUK in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) CHRISTOPHER KRUK
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by JOSEPH )
KIBUR in the presence of: )
)
)/s/ Joseph Kibur
- --------------------------------------------)----------------------------------
witness name ) JOSEPH KIBUR
) (personally)
)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by SIMON )
KIRBY in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) SIMON KIRBY
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by MAHDERE )
ASFAW in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) MAHDERE ASFAW
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by YARED )
DEMISSIE in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) YARED DIMISSIE
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by CALIN )
MEDIANU in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) CALIN MEDIANU
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by DAVE )
HIRSCH in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) DAVE HIRSCH
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by CHARLES )
HOWES in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) CHARLES HOWES
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by KEVIN )
LINDSAY in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) KEVIN LINDSAY
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by MARCO )
MELAGAZZI in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) MARKO MELAGAZZI
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by CORINA )
URSU in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) CORINA URSU
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by PAUL )
WHITHAM in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) PAUL WHITHAM
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by SCOTT )
THOMASSON in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) SCOTT THOMASSON
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by GEORGE )
MUENZ in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) GEORGE MUENZ
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by LEO )
ROMANO in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) LEO ROMANO
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by BENJAMIN )
ORPILLA in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) BENJAMIN ORPILLA
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by ADAM )
CLARK in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) ADAM CLARK
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by JOSH )
GIBSON in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) JOSH GIBSON
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by KEMERIA )
NEGASH-ALI in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) KEMERIA NEGASH-ALI
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by FRITZ )
BAYLEN in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) FRITZ BAYLEN
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by NUMAN )
HASSEN in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) NUMAN HASSEN
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by ATSUSHI )
IKEDA in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) ATSUSHI IKEDA
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by TRACEE )
DANCHAK in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) TRACEE DANCHAK
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by PETER )
SMITH-GIBBON in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) PETER SMITH-GIBBON
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by ZOLYNNE )
SYKUT in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) ZOLYNNE SYKUT
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by GARTH )
WOOD in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) GARTH WOOD
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by TERSES )
YONAS in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) TERSES YONAS
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by OFER )
BEZALEL in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) OFER BEZALEL
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by BETHLEHEM )
BERHANU-KIDANU in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) BETHLEHEM BERHANU-KIDANU
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
SIGNED, SEALED and DELIVERED by DEREJE )
TESFA in the presence of: )
)
)/s/ David Talmor
- --------------------------------------------)----------------------------------
witness name ) DEREJE TESFA
) (signed by his Attorney,
) David Talmor)
- --------------------------------------------)
witness address )
)
)
- --------------------------------------------)
witness occupation )
COLLECTIBLES ENTERTAINMENT INC.
Per:
/s/ Ernest Cheung
- -----------------
Authorized Signatory
- -----------------
Authorized Signatory
NETNATION COMMUNICATIONS INC.
Per:
/s/ David Talmor
- ----------------
Authorized Signatory
- ----------------
Authorized Signatory
<PAGE>
LIST OF SCHEDULES
- -----------------
1. Schedule A: Share Allocation Table for shares of the Purchaser to be
issued to the Vendors
2. Schedule B: Financial Statements of NetNation Communications Inc.
3. Schedule C: Current Liabilities of NetNation Communications Inc.
4. Schedule D: Financial Statements of Collectibles Entertainment Inc.
5. Schedule E: Current Liabilities of Collectibles Entertainment Inc.
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "COLLECTIBLES ENTERTAINMENT, INC.",
CHANGING ITS NAME FROM "COLLECTIBLES ENTERTAINMENT, INC." TO
"NETNATION COMMUNICATIONS, INC.", FILED IN THIS OFFICE ON THE
FOURTEENTH DAY OF APRIL, A.D. 1999, AT 9 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL,
- ---------------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
9689311
DATE: 04-15-99
2891258 8100
991147789
<PAGE>
State of Delaware
Secretary of State
Division of Corporations
Filed 09:00 AM 04/14/1999
991147789 - 2891258
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
COLLECTIBLES ENTERTAINMENT, INC.
Pursuant to section 242 of the Corporate Code of the State of Delaware, the
undersigned, being the designated Officer for the execution hereof for this
Corporation, COLLECTIBLES ENTERTAINMENT. INC. (the "Corporation") does hereby
Certify as follows:
First: The name of the Corporation is COLLECTIBLES ENTERTAINMENT, INC.
Second: The Certificate of Incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on the 7th day of May, 1998.
Third: A Certificate of Correction of the Corporation was filed with the
Secretary of State of the State of Delaware on the 3rd day of June, 1998
changing the name of the Corporation from Collectable Entertainment, Inc. to
Collectibles Entertainment, Inc.
Forth: That by unanimous written consent of the Board of Directors of
the Corporation, resolutions were duly adopted setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and submitting to the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
It is Hereby Resolved that the Certificate of Incorporation of the Corporation
be amended by changing Article one, designated as "First" so that, as amended,
said Article shall be and read as follow: "The name of this Corporation shall
be NETNATION COMMUNICATIONS, INC."
Fifth: That thereafter, pursuant to resolutions of its Board of
Directors, the resolution was submitted to the stockholders and, pursuant of
section 228 of the General Corporation Law of the State of Delaware, in lieu of
a special meeting of the stockholders of said corporation,
<PAGE>
holders of a majority of the issued and outstanding shares of capital stock
entitled to vote, voted in favor of the amendment.
Sixth: That said amendment was duly adopted in accordance with the
provison of Section 242 of the General Corporation Law of the State of Delaware.
Seventh: The Certificate of Incorporation of the Corporation is hereby
amended to effect a change in the Article thereof, relating to the name of the
Corporation. Accordingly, the first Article of the Certificate of Incorporation
shall be amended to read in its entirety as follows:
FIRST. The name of this Corporation shall be NetNation Communications.
Inc.
Eight: This amendment to the Certificate of Incorporation of the
Corporation was approved by unanimous consent of its Board of Directors and by
majority consent of its shareholders.
In Witness whereof, the undersigned designated Officer has executed this
Certificate this 12th day of April, 1999.
COLLECTIBLES ENTERTAINMENT, INC.
By: /s/ David Talmor
---------------------------------
Its: President, Secretary
<PAGE>
ACTION OF SOLE INCORPORATOR
COLLECTABLE ENTERTAINMENT,INC.
The undersigned, without a meeting, being the sole incorporator of the
Corporation, does hereby elect the persons listed below to serve as directors of
the corporation until the first annual meeting of shareholders and until their
successors are elected and qualify:
ROBERT BERK
/s/ Stacie Keffer
- ---------------------------
Stacie Keffer
Incorporator
Dated: MAY 5, 1998
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION CORPORATIONS
LED 09:00 AM
0510711998
981176156 - 2891258
CERTIFICATE OF INCORPORATION
OF
COLLECTABLE ENTERTAINENT,INC.
FIRST. The name of this corporation shall be:
COLLECTABLE ENTERTAINMENT, INC.
SECOND. Its registered office in the State of Delaware is to be located at
1013 Centre Road, in the City of Wilmington, County of New Castle, 19805, and
its registered agent at such address is CORPORATE AGENTS, INC.
THIRD. The purpose or purposes of the corporation shall be:
To engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which this corporation is
authorized to issue is;
Fifty Million (50,000,000) shares with a par value of One Tenth of One Mi
($0.001) per share, amounting to Five Thousand Dollars ($5000).
FIFTH. The name and mailing address of the incorporator is as follows:
Stacie Keffer
Corporate Agents, Inc.
1013 Centre Road
WILMINGTON, DE 19805
SIXTH. The Board of Directors shall have the power to adopt, amend or repeal
the by-laws.
IN WITNESS WHEREOF, The undersigned, being the incorporator hereinbefore named,
has executed, signed and acknowledged this certificate of incorporation this
fifth day of May, A.D. 1998.
/s/ Stacie Keffer
- ----------------------------------
Stacie Keffer
Incorporator
<PAGE>
State of Delaware
Office of the Secretary of State
1, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF CORRECTION
OF "COLLECTABLE ENTERTAINMENT, INC.", CHANGING ITS NAME FROM "COLLECTABLE
ENTERTAINMENT, INC." TO "COLLECTIBLES ENTERTAINMENT, INC. FILED IN THIS OFFICE
ON THE THIRD DAY OF JUNE, A.D. 1998, AT 9 O'CL0CK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
- -----------------------------------
Edward J. Freel, Secretary of State
2891258 8100
9812124239
AUTHENTICATION: 9121238 DATE:6-05-98
<PAGE>
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF INCORPORATION
OF
COLLECTABLE ENTERTAINMENT, INC.
(Pursuant to Section 103 (f) of the General
Corporation Law of the State of Delaware)
I, the undersigned, being the sole incorporator of COLLECTABLE ENTERTAINMENT,
INC., do hereby certify that the Certificate of Incorporation filed on May 7,
1998 contained an inaccurate record.
ARTICLE FIRST provided that the name of the corporation shall be COLLECTABLE
ENTERTAINMENT, INC.
ARTICLE FIRST should read as follows: The name of the corporation shall be:
COLLECTIBLES ENTERTAINMENT, INC.
I have duly executed this Certificate of Correction of Certificate of
Incorporation this Third day of June, A.D. 1998.
/s/ Stacie Keffer
- ------------------------------
Stacie Keffer
Incorporator
<PAGE>
State of Delaware
Office of the Secretary of State
I. EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY "COLLECTIBLES ENTERTAINMENT, INC." IS DULY INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL CORPORATE
EXISTENCE SO FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE FIFTH DAY OF
JUNE, A.D. 1998.
AND I DO HEREBY FURTHER CERTIFY THAT THE FRANCHISE TAXES HAVE NOT BEEN ASSESSED
TO DATE.
2891258 8300
981216805
9122068
6-05-98
/s/ Edward L. Freel
- ----------------------------------
Edward L. Freel, Secretary of State
AUTHENTICATION: DATE:
<PAGE>
<PAGE>
Exhibit 3 (ii)
EXHIBIT A
ARTICLES OF INCORPORATION
(DELAWARE)
<PAGE>
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF INCORPORATION
OF
COLLECTABLE ENTERTAINMENT, INC.
(Pursuant to Section 103 (f) of the General
Corporation Law of the State of Delaware)
I, the undersigned, being the sole incorporator of COLLECTABLE
ENTERTAINMENT, INC., do hereby certify that the Certificate of
Incorporation filed on May 7, 1998 contained an inaccurate record.
ARTICLE FIRST provided that the name of the corporation shall be
COLLECTABLE ENTERTAINMENT, INC.
ARTICLE FIRST should read as follows: The name of the corporation shall be:
COLLECTIBLES ENTERTAINMENT, INC.
I have duly executed this Certificate of Correction of Certificate of
Incorporation this Third day of June, A.D. 1998.
/s/ Stacie Keffer
- --------------------------
Stacie Keffer
Incorporator
<PAGE>
EXHIBIT B
BY-LAWS
(DELAWARE)
<PAGE>
BYLAWS
OF
COLLECTIBLES ENTERTAINMENT, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK . Certificates representing stock in the
corporation shall be signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the
President or a Vice-President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the corporation.
Any or all the signatures on any such certificate may be a facsimile. In
case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration
of transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to
have been lost. stolen, or destroyed, and the Board of Directors may
require the owner of the lost, stolen, or destroyed certificate, or his
legal representative, to give the corporation a bond sufficient to
indemnify the corporation against any claim that may be made against it on
account of the alleged loss, theft, or destruction of any such certificate
or the issuance of any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General
Corporation Law, the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series
of the stock of the corporation shall be uncertificated shares. Within a
reasonable time after the issuance or transfer of any uncertificated
shares, the corporation shall send to the registered owner thereof any
written notice prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair
value of fractions of a share as of the time when those entitled to receive
such fractions are determined, or (3) issue scrip or warrants in registered
form (either represented by a certificate or uncertificated) or bearer form
(represented by a certificate) which shall entitle the holder to receive a
full share upon the surrender of such scrip or warrants aggregating a full
share. A certificate for a fractional share or an uncertificated fractional
share shall, but scrip or warrants shall not unless otherwise provided
therein, entitle the holder to exercise voting rights, to receive dividends
thereon, and to participate in any of the assets of the corporation in the
event of liquidation. The Board of Directors may cause scrip or warrants to
be issued subject to the conditions that they shall become void if not
exchanged for certificates representing the full shares or uncertificated
full shares before a specified date, or subject to the conditions that the
shares for which scrip or warrants are exchangeable may be sold by the
corporation and the proceeds thereof distributed to the holders of scrip or
warrants, or subject to any other conditions which the Board of Directors
may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers
or registration of transfers of shares of stock of the corporation shall be
made only on the stock ledger of the corporation by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and, in the case of shares represented by
certificates, on surrender of the certificate or certificates for such
shares of stock properly endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting. In order
that the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may
fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors,
and which date shall not be more than ten days after the date upon which
the resolution fixing the record date is adopted by the Board of Directors.
If no record date has been fixed by the Boar of Directors, the record date
for determining the stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors
is required by the General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed
to be taken is delivered to the corporation by delivery to it, registered
office in the State of Delaware, its principal place of business, or an
officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholder, are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed
by the Board of Directors and prior action by the Board of Directors is
required by the General Corporation Law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action. In order that the
corporation may determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date
is adopted, and which record date shall be not more than sixty days prior
to such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate
or vote thereat or to consent or dissent in writing in lieu of a meeting,
as the case may be, the term "share" or "Shares" or "share of stock" or
'shares of stock* or 'stockholder' or 'stockholders' refers to an
outstanding sham or shares of stock and to a holder or holders of record of
outstanding shares of stock when the corporation is authorized to issue
only one class of shares of stock. and said reference is also intended to
include any outstanding share or shares of stock and any holder or holders
of record of outstanding shares of stock of any class upon which or upon
whom the certificate of incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom
the General Corporation Law confers such rights notwithstanding that the
certificate of incorporation may provide for more than one class or series
of shares of stock, one or more of which are limited or denied such rights
thereunder; provided, however, that no such right shall vest in the event
of an increase or a decrease in the authorized number of shares of stock of
any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of
law may otherwise require.
7. STOCKHOLDER MEETINGS.
- - TIME. The annual meeting shall be held on the date and at the time fixed,
from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the
organization of the corporation, and each successive annual meeting shall
be held on a date within thirteen months after the date of the preceding
annual meeting. A special meeting shall be held on the date and at the time
fixed by the directors.
- - PLACE . Annual meetings and special meetings shall be held at such place,
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
- - CALL . Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the
meeting.
- - NOTICE OR WAIVER OF NOTICE . Written notice of all meetings shall be
given, stating the place, date, and hour of the meeting and stating the
place within the city or other municipality or community at which the list
of stockholders of the corporation may be examined. The notice of an annual
meeting shall state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and shall (if any other action which could be taken
at a special meeting is to be taken at such annual meeting) state the
purpose or purposes. The notice of a special meeting shall in all instances
state the purpose or purposes for which the meeting is called. The notice
of any meeting shall also include, or be accompanied by, any additional
statements, information, or documents prescribed by the General Corporation
Law. Except as otherwise provided by the General Corporation Law, a copy of
the notice of any meeting shall. be given, personally or by mail, not less
than ten days nor more than sixty days before the date of the meeting,
unless the lapse of the prescribed period of time shall have been waived,
and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary
of the corporation. Notice by mail shall be deemed to be given when
deposited with postage thereon prepaid, in the United States Mail. If a
meeting is adjourned to another time, not more than thirty days hence,
and/or to another place, and if an announcement of the adjourned time
and/or place is made at the meeting, it shall not be necessary to give
notice of the adjourned meeting unless the directors, after adjournment,
fix a new record date for the adjourned meeting. Notice need not be given
to any stockholder who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such
meeting, except when the stockholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfuIly called or convened.
Neither the business to be transacted at, nor the purpose of, any regular
or special meeting of the stockholders need be specified in any written
waiver of notice.
- - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten days prior to the meeting, either at a place within the city or
other municipality or community where the meeting is to be held, which
place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
The stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this section or
the books of the corporation, or to vote at any meeting of stockholders.
- - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over
by one of the following officers in the order of seniority and if present
and acting - the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, a Vice-President, or, if none of the
foregoing is in office and present and acting, by a chairman to be chosen
by the stockholders. The Secretary of the corporation, or in his absence,
an Assistant Secretary, shall act as secretary of every meeting, but if
neither the Secretary nor an Assistant Secretary is present the Chairman of
the meeting shall appoint a secretary of the meeting.
- - PROXY REPRESENTATION . Every stockholder may authorize another person or
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting
or participating at a meeting, or expressing consent or dissent without a
meeting. Every proxy must be signed by the stockholder or by his attorney-
in-fact. No proxy shall be voted or acted upon after three years from its
date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether
the interest with which it is coupled is an interest in the stock itself or
an interest in the corporation generally.
- - INSPECTORS. The directors, in advance of any meeting, may, but need not,
appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. if an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. in case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the
directors in advance of the meeting or at the meeting by the person
presiding thereat. Each inspector, if any, before entering upon the
discharge of his duties, shall take and sip an oath faithfully to execute
the duties of inspectors at such meeting with strict impartiality and
according to the best of his ability. The inspectors, if any, shall
determine the number of shares of stock outstanding and the voting power of
each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes,
ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On
request of the person presiding at the meeting, the inspector or
inspectors, if any, shall make a report in writing of any challenge,
question, or matter determined by him or them and execute a certificate of
any fact found by him or them. Except as otherwise required by subsection
(e) of Section 231 of the General Corporation Law, the provisions of that
Section shall not apply to the corporation.
- - QUORUM. The holders of a majority of the outstanding shares of stock
shall constitute a quorum at a meeting of stockholders for the transaction
of any business. The stockholders present may adjourn the meeting despite
the absence of a quorum.
- - VOTING. Each share of stock shall entitle the holder thereof to one vote.
Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Any other action shall be authorized by
a majority of the votes cast except where the General Corporation Law
prescribes a different percentage of votes and/or a different exercise of
voting power, and except as may be otherwise prescribed by the provisions
of the certificate of incorporation and these Bylaws. In the election of
directors, and for any other action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS . Any action required by the General
Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special
meeting of stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Action taken pursuant to this paragraph shall be subject to the provisions
of Section 228 of the General Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors of the
corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board"
herein refers to the total number of directors which the corporation would
have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. T'he
initial Board of Directors shall consist of persons. Thereafter the number
of directors constituting the whole board shall be at least one. Subject to
the foregoing limitation and except for the first Board of Directors, such
number may be fixed from time to time by action of the stockholders or of
the directors, or, if the number is not fixed, the number shall be . The
number of directors may be increased or decreased by action of the
stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office until
the first annual meeting of stockholders and until their successors are
elected and qualified or until their earlier resignation or removal. Any
director may resign at any time upon written notice to the corporation.
Thereafter, directors who are elected at an annual meeting of stockholders,
and directors who are elected in the interim to fill vacancies and newly
created directorships, shall hold office until the next annual meeting of
stockholders and until their successors are elected and qualified or until
their earlier resignation or removal. Except as the General Corporation Law
may otherwise require, in the interim between annual meetings of
stockholders or of special meetings of stockholders called for the election
of directors and/or for the removal of one or more directors and for the
filling of any vacancy in that connection, newly created directorships and
any vacancies in the Board of Directors, including unfilled vacancies
resulting from the removal of directors for cause or without cause. may be
filled by the vote of a majority of the remaining directors then in office,
although less than a quorum, or by the sole remaining director.
4. MEETINGS.
- - TIME. Meetings shall be held at such time as the Board shall fix, except
that the first meeting of a newly elected Board shall be held as soon after
its election as the directors may conveniently assemble.
- - PLACE . Meetings shall be held at such place within or without the State
of Delaware as shall be fixed by the Board.
- - CALL . No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the
direction of the chairman of the Board, if any, the Vice-chairman of the
Board, if any, of the President, or of a majority of the directors in
office.
- - NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
regular meetings for which the time and place have been fixed. Written,
oral, or any other mode of notice of the time and place shall be given for
special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any director or to any
member of a committee of directors who submits a written waiver of notice
signed by him before or after the time stated therein. Attendance of any
such person at a meeting shall constitute a waiver of notice of such
meeting, except when he attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any regular or
special meeting of the directors need be specified in any written waiver of
notice.
- - QUORUM AND ACTION . A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon
a majority of the directors in office shall constitute a quorum, provided,
that such majority shall constitute at least one-third of the whole Board.
A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law,
the vote of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board. The quorum and voting
provisions herein stated shall not be construed as conflicting with any
provisions of the General Corporation Law and these Bylaws which govern a
meeting of directors held to fill vacancies and newly created directorships
in the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any
such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other.
- - CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present
and acting, shall preside at all meetings. Otherwise, the Vice-chairman of
the Board, if any and if present and acting, or the President, if present
and acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General
Corporation Law, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each
committee to consist' of one or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of any member of any
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise the were and authority
of the Board of Directors in the management of the business and affairs of
the corporation with the exception of any authority the delegation of which
is prohibited by Section 141 of the General Corporation Law, and may
authorize the seal of the corporation to be affixed to all papers which may
require it.
7. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President, a Secretary,
a Treasurer, and. if deemed necessary, expedient, or desirable by the Board
of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an
Executive Vice-President, one or more other Vice-Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors
choosing them shall designate. Except as may otherwise be provided in the
resolution of the Board F Directors choosing him, no officer other than the
Chairman or Vice-Chairman of the Board, if any, need be a director. Any
number of offices may be held by the same person, as the directors may
determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting, of the
Board of Directors following the next annual meeting of stockholders and
until his successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform such
duties in the management and operation of the corporation as shall be
prescribed in the resolutions of
the Board of Directors designating and choosing such officers and
prescribing their authority and duties, and shall have such additional
authority and duties as are incident to their office except to the extent
that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings
of all meetings and actions in writing of stockholders, directors, and
committees of directors, and shall exercise such additional authority and
perform such additional duties as the Board shall assign to him. Any
officer may be removed, with or without cause, by the Board of Directors.
Any vacancy in any office may be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BYLAWS
1. Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or
repeal these Bylaws and to adopt new Bylaws may be exercised by the Board
of Directors or by the stockholders.
I HEREBY CERTIFY that the foregoing is a full, true. and correct copy of
the Bylaws of Collectibles Entertainment Inc., a Delaware corporation. as
in effect on the date hereof.
Dated: May 11, 1998
Secretary of
(SEAL)
<PAGE>
Exhibit 4.1
CONVERTIBLE DEBENTURE
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER (1) THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR (2) ANY APPLICABLE
CANADIAN LAWS (THE "CANADIAN LAWS"), AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE ACT)
EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS OR TO
OR FOR THE BENEFIT OF CANADIAN PERSONS (AS DEFINED HEREIN) EXCEPT IN COMPLIANCE
WITH APPLICABLE CANADIAN LAWS.
No: CD-2 US $550,000
COLLECTIBLES ENTERTAINMENT, INC.
Series A Convertible Debenture Maturing September 30, 2000
THIS DEBENTURE is one of a duly authorized issue of Series A Debentures of
Collectibles Entertainment, Inc., a corporation duly organized and existing
under the laws of Delaware (the "Company") designated as its Series A
Convertible Debenture Due September 30, 2000, in an aggregate principal face
amount not exceeding five hundred and fifty thousand dollars (US $550,000),
which Debentures are being purchased for one hundred percent (100%) of the face
amount stated on such Debentures.
FOR VALUE RECEIVED, the Company promises to pay to Beste Investitionen
Ltd., the registered holder hereof or its successors and assigns (the "Holder"),
the principal sum of five hundred and fifty thousand dollars (US $550,000) on
September 30, 2000 (the "Maturity Date"), and to pay no interest on the
principal face amount sum outstanding. The principal face amount payable will
be paid to the person in whose name this Debenture is registered on the records
of the Company regarding registration and transfers of the Debentures (the
"Debenture Register"); provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions of the
Subscription Agreement dated as of April 7, 1999 between the Company and Beste
Investitionen Ltd. (the "Subscription Agreement"). The principal of this
Debenture is payable in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public or private debts,
at the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder hereof from time to time. The Company will
pay the outstanding principal face amount of this Debenture on the Maturity
Date, less any amounts required by law to be deducted or withheld by way of
cheque or bankdraft, to the Holder of this Debenture and addressed to such
Holder at the last address appearing on the Debenture Register. The forwarding
of such cheque or bankdraft shall constitute a payment of outstanding principal
hereunder and shall satisfy and discharge the liability for principal on this
Debenture to the extent of the sum represented by such cheque or bankdraft plus
any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are exchangeable commencing sixty (60) days from the date
hereof for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same but
not less that seventy five thousand dollars (US $75,000). No service charge
will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of principal
of this Debenture any amounts required to be withheld under the applicable
provisions of the United States and/or Canadian income tax or other applicable
laws at the time of such payments.
3. This Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged in the U.S. or
to a U.S. Person or a Canadian Person (as defined herein) only in compliance
with the Act and applicable state securities laws and may only be transferred in
Canada in compliance with relevant Canadian Laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected or bound
by notice to the contrary. Any Holder of this Debenture, electing to exercise
the right of conversion set forth in section 4 hereof, in addition to the
requirements set forth in section 4, is also required to give the Company (i)
written confirmation that it is not a U.S. Person or a Canadian Person and the
Debenture is not being converted on behalf of a U.S. Person or a Canadian Person
or (ii) an opinion of U.S. counsel to the effect that the Debenture and shares
of common stock of the Company (the "Common Stock") issuable upon conversion
thereof have been registered under the Act or are exempt from such registration.
In the event a notice of conversion or opinion of counsel is not provided the
Holder hereof will not be entitled to exercise the right to convert the
Debentures pursuant to section 4 herein. For purposes hereof a "Canadian
Person" shall mean any person or other entity resident or organized in Canada.
4. The Holder of this Debenture is entitled, at its option, at any time
commencing thirty (30) days after issue hereof to convert up to one hundred
percent (100%) of the original principal face amount of this Debenture into
shares of Common Stock, at a conversion price for each share of Common Stock of
two dollars (US $2.00) (the "Conversion Price"). Such conversion shall be
effectuated by surrendering the Debentures to be converted with the form of
notice of conversion attached hereto as Exhibit A (the "Notice of Conversion"),
executed by the Holder of this Debenture evidencing such Holder's intention to
convert this Debenture or a specified portion (as above provided) hereof, and
accompanied by proper assignment hereof in blank, by facsimile copy to the
Company. No fractional shares or scrip representing fractions of shares will be
issued on conversion, but the number of shares issuable shall be rounded to the
nearest whole share. The date on which Notice of Conversion is given shall be
deemed to be the date on which the Holder has delivered this Debenture, with the
Notice of Conversion duly executed, to the Company, or, if earlier, the date set
forth in such Notice of Conversion if the Debenture is received by the Company
within five (5) business days thereafter.
5. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of this
Debenture at the time, place, and rate, and in the coin currency, herein
prescribed. This Debenture and all other Debentures now or hereafter issued of
similar terms are direct obligations of the Company. This Debenture ranks
equally with all other Debentures now or hereafter issued under the terms set
forth herein. The Conversion Price and number of shares of Common Stock
issuable upon conversion shall be subject to adjustment from time to time as
provided in section 6.
6. (a) In the event the Company should at any time or from time to time,
after the date of this Debenture, fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock of the
determination of Holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock (equal to at least ten
percent (10%) or more of the Company's then issued and outstanding shares of
Common Stock) or other securities or rights convertible into, or entitling the
Holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such Holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the date of this Debenture is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be decreased in proportion to such decrease in outstanding shares.
7. The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of this Debenture, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the outstanding principal amount; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Debenture, in addition to such other remedies as shall be
available to the Holder, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, using its best efforts to obtain the
requisite stockholder approval necessary to increase the Company's authorized
Common Stock.
8. Except as set out in section 10 hereof, the Company hereby expressly
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
9. The Company agrees to pay all costs and expenses, including reasonable
attorneys' fees, which may be incurred by the Holder in collecting any amount
due under this Debenture.
10. If one or more of the following described "Events of Default" shall
occur:
(a) The Company shall default in the payment of principal on this
Debenture for a period of seven (7) days following the due date; or
(b) Any of the representations or warranties made by the Company
herein, in the Subscription Agreement, or in any certificate or financial or
other written statements heretofore or hereafter furnished by or on behalf of
the Company in connection with the execution and delivery of this Debenture or
the Subscription Agreement shall be false or misleading in any material respect
at the time made and the Holder shall have provided seven (7) days prior written
notice to the Company of the alleged misrepresentation or breach of warranty; or
(c) The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or obligation
of the Company under this Debenture including failure to convert this Debenture
pursuant to section 4 herein and such failure shall continue uncured for a
period of seven (7) days after notice from the Holder of such failure; or
(d) The Company shall (i) become insolvent; (ii) admit in writing its
inability to pay its debts generally as they mature; (iii) make an assignment
for the benefit of creditors or commence proceedings for its dissolution; or
(iv) apply for, or consent to the appointment of, a trustee, liquidator or
receiver for its or for a substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company and
shall not be dismissed within thirty (30) days thereafter; or
(g) Any money judgment, writ or warrant of attachment, or similar
process in excess of one hundred thousand dollars ($100,000) in the aggregate
shall be entered or filed against the Company or any of its properties or other
assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of
fifteen (15) days or in any event later than five (5) days prior to the date of
any proposed sale thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within thirty (30) days
after such instruction of the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit the material
allegations of, or default in answering a petition filed in any such proceeding;
or
(i) The Company shall be a party to any merger or consolidation or
shall dispose of all or substantially all of its assets in one or more
transactions or shall redeem more than a de minimis amount of its outstanding
shares of capital stock.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may immediately
accelerate the maturity hereof, whereupon all principal and interest hereunder
shall be immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately, and upon expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.
11. As set forth herein, the Company shall use all reasonable efforts to
issue and deliver, within three (3) business days after the Holder has fulfilled
all conditions and submitted all necessary documents duly executed and in proper
form required for conversion (the "Deadline"), to the Holder or any party
receiving a Debenture by transfer from the Holder (together, a "Holder"), at the
address of the Holder on the books of the Company, a certificate or certificates
for the number of shares of Common Stock to which the Holder shall be entitled.
12. This Debenture represents a general unsecured obligation of the Company.
No recourse shall be had for the payment of the principal of, or the interest
on, this Debenture, or for any claim based hereon, or otherwise in respect
hereof, against any incorporator, shareholder, officer or director, as such,
past, present or future, of the Company of any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
13. The Holder of this Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the shares of Common Stock
issuable upon exercise thereof except under circumstances which will not result
in a violation of the Act, the Canadian Laws or any applicable state Blue Sky
law or similar laws relating to the sale of securities; notwithstanding the
foregoing, that the Holder of this Debenture has not intention of offering,
selling or otherwise disposing of this Debenture or shares of Common Stock
issuable upon conversion thereof to a Canadian Person.
14. This Debenture and the agreements referred to in this Debenture
constitute the full and entire understanding and agreement between the Company
and the Holder with respect to the subject hereof. Neither this Debenture nor
any term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
15. This Debenture shall be governed by and construed in accordance with the
laws of the State of Delaware and the Company agrees to submit to such
jurisdiction.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed this 12th day of April, 1999 by an officer duly authorized.
COLLECTIBLES ENTERTAINMENT, INC.
By: /s/ Ernest Cheung
------------------
Title: Director
---------
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ of the above
Debenture No. into shares of Common Stock of COLLECTIBLES ENTERTAINMENT,
INC. (the "Company") according to the conditions set forth in such Debenture, as
of the date written below.
The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933, as amended, and is
not converting the Debenture on behalf of any U.S. Person and the
representations contained in the Subscription Agreement are true.
Date of Conversion: *
Applicable Conversion Price:
Signature:
Address:
* This original Debenture and Notice of Conversion must be received by the
Escrow Agent and the Company by the fifth business date following the Date of
Conversion.
<PAGE>
Exhibit 4.2
CONVERTIBLE DEBENTURE
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER (1) THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR (2) ANY APPLICABLE
CANADIAN LAWS (THE "CANADIAN LAWS"), AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE ACT)
EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS OR TO
OR FOR THE BENEFIT OF CANADIAN PERSONS (AS DEFINED HEREIN) EXCEPT IN COMPLIANCE
WITH APPLICABLE CANADIAN LAWS.
No: CD-1 US $550,000
COLLECTIBLES ENTERTAINMENT, INC.
Series A Convertible Debenture Maturing September 30, 2000
THIS DEBENTURE is one of a duly authorized issue of Series A Debentures of
Collectibles Entertainment, Inc., a corporation duly organized and existing
under the laws of Delaware (the "Company") designated as its Series A
Convertible Debenture Due September 30, 2000, in an aggregate principal face
amount not exceeding five hundred and fifty thousand dollars (US $550,000),
which Debentures are being purchased for one hundred percent (100%) of the face
amount stated on such Debentures.
FOR VALUE RECEIVED, the Company promises to pay to Polaris Investitionen
Ltd., the registered holder hereof or its successors and assigns (the "Holder"),
the principal sum of five hundred and fifty thousand dollars (US $550,000) on
September 30, 2000 (the "Maturity Date"), and to pay no interest on the
principal face amount sum outstanding. The principal face amount payable will
be paid to the person in whose name this Debenture is registered on the records
of the Company regarding registration and transfers of the Debentures (the
"Debenture Register"); provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions of the
Subscription Agreement dated as of April 7, 1999 between the Company and Polaris
Investitionen Ltd. (the "Subscription Agreement"). The principal of this
Debenture is payable in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public or private debts,
at the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder hereof from time to time. The Company will
pay the outstanding principal face amount of this Debenture on the Maturity
Date, less any amounts required by law to be deducted or withheld by way of
cheque or bankdraft, to the Holder of this Debenture and addressed to such
Holder at the last address appearing on the Debenture Register. The forwarding
of such cheque or bankdraft shall constitute a payment of outstanding principal
hereunder and shall satisfy and discharge the liability for principal on this
Debenture to the extent of the sum represented by such cheque or bankdraft plus
any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are exchangeable commencing sixty (60) days from the date
hereof for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same but
not less that seventy five thousand dollars (US $75,000). No service charge
will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of principal
of this Debenture any amounts required to be withheld under the applicable
provisions of the United States and/or Canadian income tax or other applicable
laws at the time of such payments.
3. This Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged in the U.S. or
to a U.S. Person or a Canadian Person (as defined herein) only in compliance
with the Act and applicable state securities laws and may only be transferred in
Canada in compliance with relevant Canadian Laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected or bound
by notice to the contrary. Any Holder of this Debenture, electing to exercise
the right of conversion set forth in section 4 hereof, in addition to the
requirements set forth in section 4, is also required to give the Company (i)
written confirmation that it is not a U.S. Person or a Canadian Person and the
Debenture is not being converted on behalf of a U.S. Person or a Canadian Person
or (ii) an opinion of U.S. counsel to the effect that the Debenture and shares
of common stock of the Company (the "Common Stock") issuable upon conversion
thereof have been registered under the Act or are exempt from such registration.
In the event a notice of conversion or opinion of counsel is not provided the
Holder hereof will not be entitled to exercise the right to convert the
Debentures pursuant to section 4 herein. For purposes hereof a "Canadian
Person" shall mean any person or other entity resident or organized in Canada.
4. The Holder of this Debenture is entitled, at its option, at any time
commencing thirty (30) days after issue hereof to convert up to one hundred
percent (100%) of the original principal face amount of this Debenture into
shares of Common Stock, at a conversion price for each share of Common Stock of
two dollars (US $2.00) (the "Conversion Price"). Such conversion shall be
effectuated by surrendering the Debentures to be converted with the form of
notice of conversion attached hereto as Exhibit A (the "Notice of Conversion"),
executed by the Holder of this Debenture evidencing such Holder's intention to
convert this Debenture or a specified portion (as above provided) hereof, and
accompanied by proper assignment hereof in blank, by facsimile copy to the
Company. No fractional shares or scrip representing fractions of shares will be
issued on conversion, but the number of shares issuable shall be rounded to the
nearest whole share. The date on which Notice of Conversion is given shall be
deemed to be the date on which the Holder has delivered this Debenture, with the
Notice of Conversion duly executed, to the Company, or, if earlier, the date set
forth in such Notice of Conversion if the Debenture is received by the Company
within five (5) business days thereafter.
5. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of this
Debenture at the time, place, and rate, and in the coin currency, herein
prescribed. This Debenture and all other Debentures now or hereafter issued of
similar terms are direct obligations of the Company. This Debenture ranks
equally with all other Debentures now or hereafter issued under the terms set
forth herein. The Conversion Price and number of shares of Common Stock
issuable upon conversion shall be subject to adjustment from time to time as
provided in section 6.
6. (a) In the event the Company should at any time or from time to time,
after the date of this Debenture, fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock of the
determination of Holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock (equal to at least ten
percent (10%) or more of the Company's then issued and outstanding shares of
Common Stock) or other securities or rights convertible into, or entitling the
Holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such Holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the date of this Debenture is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be decreased in proportion to such decrease in outstanding shares.
7. The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of this Debenture, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the outstanding principal amount; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Debenture, in addition to such other remedies as shall be
available to the Holder, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, using its best efforts to obtain the
requisite stockholder approval necessary to increase the Company's authorized
Common Stock.
8. Except as set out in section 10 hereof, the Company hereby expressly
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
9. The Company agrees to pay all costs and expenses, including reasonable
attorneys' fees, which may be incurred by the Holder in collecting any amount
due under this Debenture.
10. If one or more of the following described "Events of Default" shall
occur:
(a) The Company shall default in the payment of principal on this
Debenture for a period of seven (7) days following the due date; or
(b) Any of the representations or warranties made by the Company
herein, in the Subscription Agreement, or in any certificate or financial or
other written statements heretofore or hereafter furnished by or on behalf of
the Company in connection with the execution and delivery of this Debenture or
the Subscription Agreement shall be false or misleading in any material respect
at the time made and the Holder shall have provided seven (7) days prior written
notice to the Company of the alleged misrepresentation or breach of warranty; or
(c) The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or obligation
of the Company under this Debenture including failure to convert this Debenture
pursuant to section 4 herein and such failure shall continue uncured for a
period of seven (7) days after notice from the Holder of such failure; or
(d) The Company shall (i) become insolvent; (ii) admit in writing its
inability to pay its debts generally as they mature; (iii) make an assignment
for the benefit of creditors or commence proceedings for its dissolution; or
(iv) apply for, or consent to the appointment of, a trustee, liquidator or
receiver for its or for a substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company and
shall not be dismissed within thirty (30) days thereafter; or
(g) Any money judgment, writ or warrant of attachment, or similar
process in excess of one hundred thousand dollars ($100,000) in the aggregate
shall be entered or filed against the Company or any of its properties or other
assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of
fifteen (15) days or in any event later than five (5) days prior to the date of
any proposed sale thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within thirty (30) days
after such instruction of the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit the material
allegations of, or default in answering a petition filed in any such proceeding;
or
(i) The Company shall be a party to any merger or consolidation or
shall dispose of all or substantially all of its assets in one or more
transactions or shall redeem more than a de minimis amount of its outstanding
shares of capital stock.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may immediately
accelerate the maturity hereof, whereupon all principal and interest hereunder
shall be immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately, and upon expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.
11. As set forth herein, the Company shall use all reasonable efforts to
issue and deliver, within three (3) business days after the Holder has fulfilled
all conditions and submitted all necessary documents duly executed and in proper
form required for conversion (the "Deadline"), to the Holder or any party
receiving a Debenture by transfer from the Holder (together, a "Holder"), at the
address of the Holder on the books of the Company, a certificate or certificates
for the number of shares of Common Stock to which the Holder shall be entitled.
12. This Debenture represents a general unsecured obligation of the Company.
No recourse shall be had for the payment of the principal of, or the interest
on, this Debenture, or for any claim based hereon, or otherwise in respect
hereof, against any incorporator, shareholder, officer or director, as such,
past, present or future, of the Company of any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
13. The Holder of this Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the shares of Common Stock
issuable upon exercise thereof except under circumstances which will not result
in a violation of the Act, the Canadian Laws or any applicable state Blue Sky
law or similar laws relating to the sale of securities; notwithstanding the
foregoing, that the Holder of this Debenture has not intention of offering,
selling or otherwise disposing of this Debenture or shares of Common Stock
issuable upon conversion thereof to a Canadian Person.
14. This Debenture and the agreements referred to in this Debenture
constitute the full and entire understanding and agreement between the Company
and the Holder with respect to the subject hereof. Neither this Debenture nor
any term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
15. This Debenture shall be governed by and construed in accordance with the
laws of the State of Delaware and the Company agrees to submit to such
jurisdiction.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed this 12th day of April, 1999 by an officer duly authorized.
COLLECTIBLES ENTERTAINMENT, INC.
By: /s/ Ernest Cheung
------------------
Title: Director
---------
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ of the above
Debenture No. into shares of Common Stock of COLLECTIBLES ENTERTAINMENT,
INC. (the "Company") according to the conditions set forth in such Debenture, as
of the date written below.
The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933, as amended, and is
not converting the Debenture on behalf of any U.S. Person and the
representations contained in the Subscription Agreement are true.
Date of Conversion: *
Applicable Conversion Price:
Signature:
Address:
* This original Debenture and Notice of Conversion must be received by the
Escrow Agent and the Company by the fifth business date following the Date of
Conversion.
<PAGE>
Exhibit 21
List of Subsidiaries
NetNation Comunications Inc., a company incorporated under the laws of the
Province of British Columbia, Canada, is the sole subsidiary of NetNation.
<PAGE>
Exhibit 27
Page 1
COLLECTIBLES ENTERTAINMENT INC.
APPENDIX A TO ITEM 601(C) OF REGULATION S-K
DECEMBER 31, 1998
DEC 31
BALANCE SHEET ITEMS 1998
5-02(1) Cash and cash items 23,099
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable-trade -
5-02(4) Allowances for doubtful accounts -
5-02(6) Inventory -
5-02(9) Total current assets 23,099
5-02(13) Property, plant and equipment -
5-02(14) Accumulated depreciation -
5-02(18) TOTAL ASSETS 23,099
5-02(21) Total current liabilities -
5-02(22) Bonds, mortgages and similar debt -
5-02(28) Preferred stock-mandatory redemption -
5-02(29) Preferred stock-no mandatory redemption -
5-02(30) Common stock 110
5-02(31) Other stockholders' equity 22,989
5-02(32) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 23,099
MAY 7 TO
DEC 31
INCOME STATEMENT ITEMS 1998
----------------------
5-03(b)1(a) Net sales of tangible products -
5-03(B)1 TOTAL REVENUES -
5-03(b)2(a) Cost of tangible goods sold -
5-03(b)2 Total costs and expenses applicable to
sales and revenues -
5-03(b)5 Other cost and expenses 6,601
5-03(b)3 Provision for doubtful accounts and notes -
5-03(b)(8) Interest and amortization of debt discount -
5-03(B)(10) INCOME BEFORE TAXES AND OTHER ITEMS (6,601)
5-03(b)(11) Income tax expense -
5-03(b)(14) Income/loss continuing operations -
5-03(b)(15) Discontinued operations -
5-03(b)(17) Extraordinary items -
5-03(b)(18) Cumulative effect-changes in accounting
principles -
5-03(b)(19) Net income or loss (6,601)
5-03(b)(20) Earnings per share-primary (0.01)
5-03(b)(20) Earnings per share-fully diluted -
<PAGE>
Page 2
COLLECTIBLES ENTERTAINMENT INC.
APPENDIX A TO ITEM 601(C) OF REGULATION S-K
MARCH 31, 1999
MAR 31 DEC 31
BALANCE SHEET ITEMS 1999 1998
5-02(1) Cash and cash items 26,687 23,099
5-02(2) Marketable securities - -
5-02(3)(a)(1) Notes and accounts receivable-trade - -
5-02(4) Allowances for doubtful accounts - -
5-02(6) Inventory - -
5-02(9) Total current assets 26,687 23,099
5-02(13) Property, plant and equipment - -
5-02(14) Accumulated depreciation - -
5-02(18) TOTAL ASSETS 26,687 23,099
5-02(21) Total current liabilities 15 -
5-02(22) Bonds, mortgages and similar debt - -
5-02(28) Preferred stock-mandatory redemption - -
5-02(29) Preferred stock-no mandatory redemption - -
5-02(30) Common stock 510 110
5-02(31) Other stockholders' equity 26,162 22,989
5-02(32) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 26,687 23,099
JAN 1, 99 TO INCEPTION TO
INCOME STATEMENT ITEMS MAR 31, 99 MAR 31, 99
5-03(b)1(a) Net sales of tangible products - -
5-03(B)1 TOTAL REVENUES - -
5-03(b)2(a) Cost of tangible goods sold - -
5-03(b)2 Total costs and expenses applicable to
sales and revenues - -
5-03(b)5 Other cost and expenses 36,427 43,028
5-03(b)3 Provision for doubtful accounts and notes - -
5-03(b)(8) Interest and amortization of debt discount - -
5-03(B)(10) INCOME BEFORE TAXES AND OTHER ITEMS (36,427) (43,028)
5-03(b)(11) Income tax expense - -
5-03(b)(14) Income/loss continuing operations - -
5-03(b)(15) Discontinued operations - -
5-03(b)(17) Extraordinary items - -
5-03(b)(18) Cumulative effect-changes in
accounting principles - -
5-03(B)(19) NET INCOME OR LOSS (36,427) (43,028)
5-03(b)(20) Earnings per share-primary (0.01) -
5-03(b)(20) Earnings per share-fully diluted - -
<PAGE>
Page 3
NETNATION COMMUNICATIONS INC.
APPENDIX A TO ITEM 601(C) OF REGULATION S-K
MARCH 31, 1999
MAR 31 DEC 31
BALANCE SHEET ITEMS 1999 1998
5-02(1) Cash and cash items 71,279 45,938
5-02(2) Marketable securities - -
5-02(3)(a)(1) Notes and accounts receivable-trade 7,660 12,655
5-02(4) Allowances for doubtful accounts - -
5-02(6) Inventory - -
5-02(9) Total current assets 83,074 62,018
* Includes prepaids
5-02(13) Property, plant and equipment 198,643 150,791
5-02(14) Accumulated depreciation (54,677) (41,539)
5-02(18) TOTAL ASSETS 227,040 171,270
5-02(21) Total current liabilities 368,182 313,838
5-02(22) Bonds, mortgages and similar debt 11,666 11,479
5-02(28) Preferred stock-mandatory redemption - -
5-02(29) Preferred stock-no mandatory redemption - -
5-02(30) Common stock 6,680 1,198
5-02(31) Other stockholders' equity (159,488) (155,245)
5-02(32) TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY 227,040 171,270
JAN 1 TO JAN 1 TO
MAR 31 MAR 31
INCOME STATEMENT ITEMS 1999 1998
5-03(b)1(a) Net sales of tangible products 445,891 196,992
5-03(B)1 TOTAL REVENUES 445,891 196,992
5-03(b)2(a) Cost of tangible goods sold - -
5-03(b)2 Total costs and expenses applicable to
sales and revenues 281,456 111,926
* Assuming 50% of wages and benefits
related to sales and revenues.
5-03(b)5 Other cost and expenses 168,678 73,110
5-03(b)3 Provision for doubtful accounts and notes - -
5-03(b)(8) Interest and amortization of debt discount - -
5-03(B)(10) INCOME BEFORE TAXES AND OTHER ITEMS (4,243) 11,956
5-03(b)(11) Income tax expense - -
5-03(b)(14) Income/loss continuing operations - -
5-03(b)(15) Discontinued operations - -
5-03(b)(17) Extraordinary items - -
5-03(b)(18) Cumulative effect-changes in
accounting principles - -
5-03(B)(19) NET INCOME OR LOSS (4,243) 11,956
5-03(b)(20) Earnings per share-primary (0.00) 0.00
5-03(b)(20) Earnings per share-fully diluted - -
<PAGE>
Page 4
NETNATION COMMUNICATIONS INC.
APPENDIX A TO ITEM 601(C) OF REGULATION S-K
DECEMBER 31, 1998
DEC 31
BALANCE SHEET ITEMS 1998
5-02(1) Cash and cash items 45,938
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable-trade 12,655
5-02(4) Allowances for doubtful accounts -
5-02(6) Inventory -
5-02(9) Total current assets 62,018
* Includes prepaids
5-02(13) Property, plant and equipment 150,791
5-02(14) Accumulated depreciation (41,539)
5-02(18) TOTAL ASSETS 171,270
5-02(21) Total current liabilities 313,838
5-02(22) Bonds, mortgages and similar debt 11,479
5-02(28) Preferred stock-mandatory redemption -
5-02(29) Preferred stock-no mandatory redemption -
5-02(30) Common stock 1,198
5-02(31) Other stockholders' equity (155,245)
5-02(32) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 171,270
DEC 31
INCOME STATEMENT ITEMS 1998
5-03(b)1(a) Net sales of tangible products 1,103,563
5-03(B)1 TOTAL REVENUES -
5-03(b)2(a) Cost of tangible goods sold -
5-03(b)2 Total costs and expenses applicable
to sales and revenues 737,795
*Assuming 50% of wages and benefits
related to sales and revenues.
5-03(b)5 Other cost and expenses 475,325
5-03(b)3 Provision for doubtful accounts and notes -
5-03(b)(8) Interest and amortization of debt discount -
5-03(B)(10) INCOME BEFORE TAXES AND OTHER ITEMS (1,202,214)
*Includes FX gain
5-03(b)(11) Income tax expense -
5-03(b)(14) Income/loss continuing operations -
5-03(b)(15) Discontinued operations -
5-03(b)(17) Extraordinary items -
5-03(b)(18) Cumulative effect-changes in
accounting principles -
5-03(B)(19) NET INCOME OR LOSS (1,202,214)
5-03(b)(20) Earnings per share-primary -
5-03(b)(20) Earnings per share-fully diluted -
<PAGE>
Page 5
COLLECTIBLES ENTERTAINMENT INC. [PROFORMA CONSOLIDATION]
APPENDIX A TO ITEM 601(C) OF REGULATION S-K
MARCH 31, 1999 [PROFORMA CONSOLIDATION]
MAR 31
BALANCE SHEET ITEMS 1999
5-02(1) Cash and cash items 97,966
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable-trade 2,007,660
5-02(4) Allowances for doubtful accounts -
5-02(6) Inventory -
5-02(9) Total current assets 2,109,761
* Includes prepaids
5-02(13) Property, plant and equipment 198,643
5-02(14) Accumulated depreciation (54,677)
5-02(18) TOTAL ASSETS 2,253,727
5-02(21) Total current liabilities 368,197
5-02(22) Bonds, mortgages and similar debt 1,111,666
5-02(28) Preferred stock-mandatory redemption -
5-02(29) Preferred stock-no mandatory redemption -
5-02(30) Common stock 933,352
5-02(31) Other stockholders' equity (159,488)
5-02(32) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,253,727
JAN 1, 99 TO
INCOME STATEMENT ITEMS MAR 31, 99
5-03(b)1(a) Net sales of tangible products 445,891
5-03(B)1 TOTAL REVENUES 445,891
5-03(b)2(a) Cost of tangible goods sold -
5-03(b)2 Total costs and expenses applicable
to sales and revenues 281,456
5-03(b)5 Other cost and expenses 168,678
5-03(b)3 Provision for doubtful accounts and notes -
5-03(b)(8) Interest and amortization of debt discount -
5-03(B)(10) INCOME BEFORE TAXES AND OTHER ITEMS (4,243)
5-03(b)(11) Income tax expense -
5-03(b)(14) Income/loss continuing operations -
5-03(b)(15) Discontinued operations -
5-03(b)(17) Extraordinary items -
5-03(b)(18) Cumulative effect-changes in
accounting principles -
5-03(B)(19) NET INCOME OR LOSS (4,243)
5-03(b)(20) Earnings per share-primary (0.00)
5-03(b)(20) Earnings per share-fully diluted -
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
NETNATION COMMUNICATIONS, INC.
(Registrant)
Date: June 28, 1999
By: /s/ Ashley James Sinclair
(Signature)*
Ashley James Sinclair, Chief Financial Officer
*Print name and title of the signing officer under his signature.
