SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2)
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
NETWORKS NORTH, INC.
________________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
Not Applicable
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No Fee Required
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
Common Shares
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2. Aggregate number of securities to which transaction applies:
7,325,000 Shares
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3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$3.92 (This represents the average closing price for the Common
Stock of Networks North for the 30 day period ending Mar 31, 2000)
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4. Proposed maximum aggregate value transaction:
$28,714,000
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5. Total fee paid:
$5,742.80
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|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration number, or
the Form or Schedule and the date of its filing.
1. Amount previously paid:
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2. Form, Schedule or Registration Statement No.:
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3. Filing Party:
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4. Date Filed:
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NETWORKS NORTH, INC.
14 Meteor Drive
Toronto, Ontario
Canada M9W 1A4
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
September 8, 2000
To the Shareholders of Networks North, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting") of
Shareholders of Networks North, Inc., a New York corporation (the "Company"),
will be held at 10:00 a.m., local time, on September 8, 2000, at the offices of
the Company, 14 Meteor Drive, Toronto, Ontario, Canada M9W 1A4, for the
following purposes:
(a) To consider and approve the purchase by the Company of
certain assets and shares owned by Chell.com Ltd. ("Chell.com") and
Cameron Chell.
(b) To consider and vote upon an amendment to Article 1 of the
Company's Certificate of Incorporation, which provides for a change
of the name of the Company from Networks North, Inc. to Chell
Corporation.
(c) To consider the issuance of a new class of voting stock
which would be required to carry out obligations of the Company upon
completion of the transactions described in paragraph (a) above.
(d) To consider and transact such other business as may
properly come before the Special Meeting and any adjournments
thereof.
In accordance with the provisions of the Company's By-laws, the Board of
Directors has fixed the close of business on July 31, 2000 as the date for
determining the shareholders of record entitled to receive notice of, and to
vote at, the Special Meeting and any adjournments thereof.
Dated: August 8, 2000 By Order of the Board of Directors,
Mark Truman, Secretary
SHAREHOLDERS ARE URGED TO FILL IN, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING PREPAID ENVELOPE.
It is desirable that as many shareholders as possible be represented, in
person or by proxy, at the Special Meeting. Consequently, whether or not you now
expect to be present, please execute and return the enclosed proxy. You have the
power to revoke your proxy at any time before it is voted, and the giving of a
proxy will not affect your right to vote in person if you attend the Special
Meeting.
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[THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
NETWORKS NORTH, INC.
14 Meteor Drive
Toronto, Ontario
Canada M9W 1A4
(416) 675-6666
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
September 8, 2000
August 8, 2000
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Networks North, Inc. (the
"Company") for use at the Company's Special Meeting of Shareholders to be held
on September 8, 2000, and at any adjournment thereof (the "Special Meeting").
Further, solicitation of proxies may be made personally, or by telephone or
telegraph, by regularly employed officers and other employees of the Company,
who will receive no additional compensation for such. The cost of soliciting
proxies will be borne by the Company which may enlist the assistance, and
reimburse the reasonable expenses, of banks and brokerage houses in the
additional solicitation of proxies and proxy authorizations, particularly from
their customers whose stock is not registered in the owner's name, but in the
name of such banks or brokerage houses.
All shares represented at the Special Meeting by proxies will be voted
provided that such proxies are properly signed and dated. In cases where a
choice is indicated, the shares represented will be voted in accordance with the
specifications so made. In cases where no specifications are made, the shares
represented will be voted FOR the ratification of purchase by the Company of
certain assets and shares owned by Chell.com, Ltd. (Chell.com) and Cameron
Chell, FOR the amendment of the Company's Certificate of Incorporation providing
for a change of name of the Company to Chell Corporation, and FOR the issuance
of a new class of voting stock.
Any shareholder executing and returning a proxy has the power to revoke
such proxy at any time prior to the voting thereof by: (a) written notice to the
Secretary of the Company at the Company's headquarters delivered prior to the
commencement of the Special Meeting, (b) providing a signed proxy bearing a
later date, or (c) appearing in person and voting at the Special Meeting.
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VOTING SECURITIES
Only shareholders of record at the close of business on July 31, 2000 are
entitled to vote at the Special Meeting. The total number of shares of common
stock, par value $.0467 per share (the "Common Stock"), of the Company, issued,
outstanding and entitled to be voted on the record date was 2,901,153 shares.
Each of such shares of Common Stock is entitled to one vote upon all matters to
be acted upon at the Special Meeting. In addition, the Company has outstanding
900,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"), of the Company. In accordance with the terms of the Certificate of
Designation by which the Preferred Stock was authorized, as modified by action
of the Company's Board of Directors, holders of Preferred Stock are entitled
(after giving effect to the Stock Splits) to one vote for every three shares of
Preferred Stock held of record as of the record date for the Special Meeting.
Accordingly, there will be 2,901,153 shares (2,901,153 votes) of Common Stock
and 900,000 shares (300,000 votes) of Preferred Stock, or an aggregate of
3,201,153 votes available to be cast at the Special Meeting. The holders of a
majority of the outstanding votes (i.e., 1,600,577 votes) shall constitute a
quorum, which is necessary for the transaction of business at the Special
Meeting. In accordance with the Company's Certificate of Incorporation and
By-laws, and applicable law, the ratification of the purchase of certain assets
and shares owned by Chell.com and Cameron Chell, the ratification of an
amendment of Article 1 of the Company's Certificate of Incorporation which
provides for a change of name of the Company from Networks North, Inc. to Chell
Corporation, and the ratification of the issuance of a new class of voting stock
shall be a majority of the votes cast.
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Shares Held by Certain Shareholders
The following table sets forth, as of the close of business on July 31, 2000,
certain information with respect to each person who is known to the Company to
be the beneficial owner of more than five (5%) percent of the Common Stock.
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Name and Address Amount and Nature of Percent (1)
---------------- Beneficial Ownership (1) -----------
------------------------
--------------------------------------------------------------------------------
Chell.com Ltd. (2)
500, 630 8th Avenue SW
Calgary, AB T2P 1G6
Canada......................... 462,894 14.46%
Hammock Group Ltd.
Penthouse Suite
129 Front Street
Hamilton, Bermuda, HM 12
............................... 462,893 14.46%
Anor Management Ltd.
c/o Peter Rona
Networks North, Inc.
14 Meteor Drive
Toronto, Ontario
Canada M9W 1A4
............................... 300,000 (2) 9.37%
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(1) Unless otherwise indicated, the Company believes that all persons
named in the table have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them. A person is deemed
to be the beneficial owner of securities which may be acquired by such
person within 60 days from the date on which beneficial ownership is to be
determined, upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants and convertible securities that are held
by such person (and those held by other persons) have not been exercised.
(2) Represents 300,000 shares of Common Stock issuable upon conversion of
the 900,000 shares of Convertible Preferred Stock held of record by Anor
Management Ltd. The 900,000 shares of Convertible Preferred Stock have the
equivalent voting power to 300,000 shares of Common Stock.
Voting by Directors and Executive Officers
It is anticipated that the directors and the Named Executive Officers of
the Company will vote, FOR the purchase of certain assets and shares owned by
Chell.com and Cameron Chell by the Company, FOR an amendment of Article 1 of the
Company's Certificate of Incorporation which provides for a change of name of
the Company from Networks North, Inc. to Chell Corporation, and FOR approval of
the issuance of new
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voting class of stock. Such directors and executive officers, and their
affiliates, hold 24.79% of the votes entitled to be cast at the Special Meeting.
RATIFICATION OF THE PURCHASE BY THE COMPANY OF CERTAIN ASSETS AND SHARES OWNED
BY CHELL.COM LTD. AND CAMERON CHELL
Summary of the Transaction
Networks North, Inc. ("the Company") intends to enter into an "Agreement
Of Purchase And Sale" (the "Agreement"), a copy of which is attached hereto as
Exhibit "A", with Chell.com, Ltd., ("Chell.com"), and Cameron Chell ("Chell").
Effective July 31, 2000, Chell.com Ltd. was amalgamated with Chell.com Inc. and
ASP Bridge Inc. and the amalgamated entity was called "Chell.com Ltd." The
amalgamated entity will be referred to as "Chell.com". For the purposes of
carrying out some of the transactions in the Agreement, the Company will
incorporate Networks North Acquisition Corp., ("NNAC") as a wholly owned
subsidiary.
Pursuant to the terms of the Agreement, Chell.com and Chell (jointly the
"Vendors" and when referring to each in their own capacity the "Vendor") have
agreed to sell certain assets and shares to the Company and NNAC and, subject to
the terms of the Agreement, the Company and NNAC have agreed to purchase such
assets and shares. The Company will pay for the assets and shares by the
issuance of common shares of the Company (at $3.91155/share) and by issuance of
Exchangeable Shares in NNAC which may be converted into common shares of the
Company. The reason for the incorporation of NNAC and the issuance of
exchangeable shares is to permit Chell and Chell.com to defer the Canadian tax
payable on the transaction.
It is anticipated that the employees of Chell.com will become employees of
the Company.
Chell is the Chairman of the Board of the Company and the Chief Executive
Officer of Chell.com and owns all of the outstanding shares of Chell.com. Chell
has declared a conflict of interest to the Company with respect to the
transactions in the Agreement.
Overview of the Vendor's Assets and Shares to be Purchased by the Company and
NNAC
The assets and shares of the Vendors referred to in this section are owned
by Chell.com and Chell. Chell.com is a technology strategy bank founded by
Cameron Chell to incubate, test and grow businesses out of the latest in
technology and service innovations. Chell.com is comprised of a group of more
than 20 professionals specialized in the areas of technology, finance, corporate
law, investor relations, public relations, marketing, and human resources
recruitment. Not all of Chell.com's assets are being sold. The assets, which are
being sold, are shares in four companies, three of which are start up companies
plus certain physical assets and contractual rights. These companies are:
ENGYRO, Inc.("Engyro"), eSupplies (Alberta) Ltd. ("eSupplies), cMeRun Corp. ("C
Me Run") and cDemo, Inc. ("cDemo"). Pursuant to the Agreement, Chell.com will
sell to the Company: (a) 480,000 shares of cDemo, which is 22.9% of its
outstanding stock (being reduced to 16.39% of the outstanding stock following a
financing scheduled to close prior to the sale of the cDemo shares to the
Company) for $2,510,000; (b) 875,000 shares of Engyro, which is 55.2% of its
outstanding stock (being reduced to 34.1% of the outstanding stock following a
financing scheduled to close prior to the sale of the Engyro shares to the
Company) for $16,950,000; and (c) the Chell.com assets with a value of
$1,767,503. Chell will also sell to the Company: (a) 150,000 shares of C Me Run,
which is 1.0% of
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its outstanding stock on a fully diluted basis following the closing of an
anticipated takeover bid to purchase the outstanding securities of C Me Run
(Alberta) Ltd. for $1,650,000; and (b) 962,500 shares of eSupplies, which is
27.1% of its outstanding stock for $5,780,000. NNAC will also assume a liability
in the amount of $1,767,499 to CALP II Limited Partnership, a creditor of
Chell.com provided that the creditor accepts full settlement of such
indebtedness by NNAC issuing 451,868 exchangeable shares of NNAC. The total
consideration will be $28,652,086 and shall be payable by issuance of the
following shares:
<TABLE>
<S> <C> <C>
(a) Chell.com Ltd. 4,974,904 shares of the Company
(b) Chell.com Ltd. 1 shares of NNAC
(c) Cameron Chell 421,829 shares of the Company
(d) Cameron Chell 1,476,398 shares of NNAC
---------
6,873,132
(e) CALP II Limited
Partnership 451,868 shares of NNAC
---------
7,325,000 shares of the Company or Shares exchangeable
into shares of the Company
</TABLE>
The Chell.com assets include:
1. Leased property consisting of Chell.com's executive offices at Unit 11
(east half), Suite 302, 630 8th Avenue SW, Calgary, and Unit 13, Suite
500, 630 8th Avenue SW, Calgary;
2. Office equipment, servers, computers, office supplies (as well as any
leases pertaining thereto) and leasehold improvements;
3. All contracts of insurance covering any of the Chell.com assets to the
extent that such are assignable;
4. All contracts of employment or contracts for services with independent
contractors for the performance of personal services to Chell.com;
5. Service agreements between Chell.com and C Me Run dated November 15, 1999,
Chell.com and eSupplies dated February 8, 2000, Chell.com and R Home
Funding Co. Ltd. (the former name of Engyro) dated January 17, 2000 and
Chell.com and Buyersangel.com (the former name of cDemo) dated March 1,
2000.
Chell.com Ltd. is a shareholder of the Company having acquired 462,894 in a
transaction dated April 3, 2000. The following table details that if the
transaction is complete, Chell/Chell.com will own 69.65% of the issued and
outstanding shares of the Company (assuming all NNAC are converted to common
shares)including all exchangeable shares of NNAC. Chell/Chell.com may also be in
a position to exert influence over shares which may be issued to VC Advantage
Fund Limited Partnership as part of a convertible debenture financing which is
subject to shareholder approval at the Company's annual meeting scheduled to be
held on August 31, 2000. At the Annual General Meeting of Shareholders to be
held on August 31, 2000, the shareholders are being asked to approve the
issuance of an unsecured convertible debenture in the amount of $3,000,000 to VC
Advantage Limited Partnership ("VCALP") which convertible debenture may be
converted into shares of the Company at $3.00 per share. Chell is a shareholder
and director of VC Advantage Limited, the general partner of VC Advantage Fund
Limited Partnership. Assuming that VC Advantage Fund Limited Partnership
converts its debt and exercises all warrants it is entitled to, an additional
1,050,000 common shares of the Company would be issued.
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The following table outlines the percentage of the common shares of Company
stock which would be outstanding following the closing of the transaction
contemplated by the purchase agreement including all exchangeable shares of
NNAC. The table does not take into account outstanding options or warrants
numbering 874,985 as of July, 14, 2000 or the anticipated convertible debt of VC
Advantage Fund Limited Partnership.
--------------------------------------------------------------------------------
Shares %
Non-Diluted
--------------------------------------------------------------------------------
(1) Issued and Outstanding (except Chell 2,438,259 23.16%
and Chell.com)
--------------------------------------------------------------------------------
(2) Chell.com Ltd. (existing) 462,894 4.39%
--------------------------------------------------------------------------------
(3) To be issued on exchange - Chell.com 4,974,905 47.26%
--------------------------------------------------------------------------------
(4) To be issued to Cameron Chell 1,898,227 18%
--------------------------------------------------------------------------------
(5) To be issued to CALP II Limited
Partnership 451,868 4.29%
--------------------------------------------------------------------------------
(6) Preferred Stock (900,000 shares
convertible at the rate of 3 preferred
for 1 common share) 300,000 2.9%
--------------------------------------------------------------------------------
Total 10,526,653 100%
--------------------------------------------------------------------------------
The shareholders are also being asked to approve, as part of the terms of the
term sheet with VCALP dated April 3, 2000, the issuance of 50,000 warrants to
purchase common stock of the Company at $3.00 per share. If these transactions
are approved and VCALP converts its debt and exercises its warrants, Mr. Chell
may also exercise voting control over an additional 1,050,000 common shares of
the Company.
Background of the Transaction
On April 3, 2000, Chell.com entered into an Agreement of Purchase and Sale
with Netstar Enterprises Inc. and acquired 462,894 common shares of the Company.
Also, on April 3, 2000, a restructuring of the Company's Board of
Directors took place whereby Cameron Chell became the Chairman and Blair Layton,
David Bolink, Don Pagnutti and Frank Killoran, became board members. Blair
Layton resigned on May 18, 2000 and was replaced by Gordon Herman. Each of
Messrs. Bolink, Killoran and Herman are employees of Chell.com.
The new Board of Directors entered into discussions pertaining to the
Company's need to attract financing to fully develop its existing new technology
businesses, the Company's need to increase shareholder value, and the Company's
overall business objectives.
It was believed by the Board of Directors that a purchase of certain
assets of Chell.com would increase the attractiveness of the Company to venture
capitalists, allow the Company to develop its existing businesses and thereby
increase shareholder value. It was determined that four companies which were in
various stages of development by Chell.com, would be of interest to the Company
along with the experience of the existing team of professionals employed by
Chell.com.
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Messrs. Chell, Bolink, Killoran and Herman, as a result of their
association with Chell.com, declared a conflict of interest. As a result, a
committee of the remaining directors of the Company was established to review
the proposed transaction on the Company's behalf and to conduct due diligence.
Stanford Keene, an independent valuator, was retained by the Company, Mr.
Chell and Chell.com to perform a valuation on the proposed sale of assets and to
provide a fairness report to the Board of Directors. On July 14, 2000, the
fairness report of Stanford Keene with a valuation dated as of May 31, 2000 (the
"Valuation Report") concluded that the issuance of 7,325,000 common shares of
Networks North to Mr. Chell and Chell.com in exchange for the assets being
transferred is fair. The Board of Directors has reviewed the fairness report and
accepts its conclusion. A copy of the fairness report is attached hereto as
Exhibit "B".
Networks North Reasons for the Merger; Recommendations of the Board of Directors
The Board of Directors has unanimously (excluding members who have
declared a conflict) approved the purchase of assets from Mr. Chell and
Chell.com, subject to shareholder approval. The Board of Directors has
authorized the execution and delivery of the merger agreement and believes that
the merger is in the best interest of the Company and its shareholders.
In making its determination with respect to the contemplated transaction,
the Board of Directors considered the following factors material. This is not an
exhaustive list of all the factors considered. Each member of the Board of
Directors may have considered different factors or assigned different weights to
different factors. The Board of Directors evaluated these factors as a whole and
did not quantify or otherwise assign relative weights to the factors considered.
Those factors were:
1. The prospective financial condition of the companies in which shares
were being purchased by the Company and the ability of such
companies to raise capital on their own. The board of directors
considered this factor important, as the companies will need
additional financing.
2. The opportunity for the Company to advance technologically. The
Board of Directors considered this factor important because in order
for its existing business to grow and retain market share and in
order to fully develop some existing projects, the Company will need
to obtain certain expertise, much of which can be obtained through
Chell.com and its contactors.
3. The opinion of Stanford Keene that the exchange ratio is fair to the
shareholders of the Company. The Board of Directors considered this
factor important because their independent determination
corroborated, from a financial perspective, what the board believed
to be the case from a business perspective.
4. The ease of transition for the combined company after the purchase
due to the current infrastructure of the Company, which includes
several members of Chell.com on its Board of Directors.
5. The ability of the Company to capitalize on the contacts and
goodwill established by Mr. Chell and Chell.com in capital markets.
By having Mr. Chell as a full time employee of the Company, by the
purchase of a majority of the assets of Chell.com, and by changing
the name of the Company to Chell Corporation, the Board of Directors
believe that there will be value added to the Company.
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The determination of the Board of Directors involved judgment with respect
to, among other things, future economic, competitive and financial market
conditions and future business decisions which may not be realized and are
inherently subject to significant business, economic, competitive and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.
General Risk Factors
SHAREHOLDERS SHOULD CONSIDER CAREFULLY THE RISK FACTORS RELATING TO THE
PURCHASE OF THE SHARES OF CDEMO, ENGYRO, C ME RUN AND ESUPPLIES AND ASSETS OF
CHELL.COM INCLUDING, BUT NOT LIMITED TO, THOSE WHICH ARE DISCUSSED BELOW, AND
SHOULD CONSULT THEIR OWN LEGAL, TAX AND FINANCIAL ADVISORS. WE ARE NOT GIVING
ADVICE AS TO THE TAX CONSEQUENCES OF THE TRANSACTIONS HEREIN, AS THEY RELATE TO
CANADIAN AND UNITED STATES TAX LAW.
THE FOLLOWING RISK FACTORS ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF
THE GENERAL OR SPECIFIC RISKS RELATING TO THE PURCHASE OF THE ASSETS AND SHARES
OF CDEMO, ENGYRO, C ME RUN AND ESUPPLIES AND ASSETS OF CHELL.COM. ADDITIONAL
RISK FACTORS RELATING TO AN INVESTMENT IN THE COMPANY ARE DESCRIBED THROUGHOUT
THIS PROXY STATEMENT.
1. Lack of Operating History
cDemo and Engyro have not commenced operations and are entering a highly
competitive market. Shareholders should be aware of the difficulties that cDemo
and Engyro will encounter, since cDemo and Engyro are recently formed companies
and have not commenced operations, including, but not limited to, competition
and unanticipated costs and expenses. There can be no assurance that cDemo and
Engyro will ever realize a positive net cash flow from their planned operations.
If the business and development plans of cDemo and Engyro prove to be
unsuccessful, they may not be able to continue in business and any value
attached to their shares will be lost.
C Me Run and eSupplies may still be considered to be in their early
stages. Shareholders should be aware of the difficulties, which are generally
encountered by an enterprise in its early stages, including, but not limited to,
marketing, competition and unanticipated costs and expenses. In view of the fact
that C Me Run and eSupplies are relatively new ventures with no established
revenues and no record of profits, there is no substantial record at this time
upon which to base an assumption that C Me Run and eSupplies' plans will prove
successful.
In the case of each of Engyro, eSupplies, cDemo and C Me Run, it is
expected that negative cash flow will continue and increase in the future. The
ability of each company to raise additional capital is necessary in order for
them to achieve their respective business plans.
2. Valuation Report - Stanford Keene
The value of the shares of Engyro and cDemo was based on discounted
projected cash flows from
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proposed business plans. The cashflows upon which Stanford Keene relied, were
prepared by management of Engyro and cDemo respectively. There can be no
assurance that the projections will ever be realized. The value of eSupplies was
based on the pricing of a prior transaction. The shares of C Me Run trade on the
OTC-BB under the symbol "CMER". The value of C Me Run was based on historical
trading information.
3. Rapid Technological Change
The markets in which each of cDemo, Engyro, C Me Run and eSupplies will
compete are characterized by rapidly changing technology, evolving industry
standards, frequent new service and product announcements, introductions and
enhancements, and changing customer demands. These market characteristics are
exacerbated by the emerging nature of the Web and the apparent need of companies
from a multitude of industries to offer web based products and services.
Accordingly, the future success of each of cDemo, Engyro, C Me Run and eSupplies
will depend upon each company's ability to adapt to rapidly changing
technologies, their ability to adapt their services to evolving industry
standards and their ability to continually improve the performance, features and
reliability of their service and product offerings. The failure of cDemo,
Engyro, C Me Run and eSupplies to adapt to such changes and evolution could have
a materially adverse effect upon their business, resulting operations and
financial condition.
4. Recently Organized Entities
cDemo, Engyro, C Me Run and eSupplies are recently formed entities and
have limited historical financial data upon which to base their planned
operating expenses. Accordingly, the expense levels of cDemo, Engyro, C Me Run
and eSupplies are based in part upon their respective managements' estimates and
expectations with respect to future revenue and anticipated growth. In view of a
number of factors, the revenues and operating results of cDemo, Engyro, C Me Run
and eSupplies may fluctuate from quarter to quarter. Such factors include, but
are not limited to, variations in expenditures for personnel and marketing,
interest in their products and services and sales, resulting from the
introduction of new systems or services by cDemo, Engyro, C Me Run and eSupplies
and their competitors, and general economic conditions. In view of such factors,
there can be no assurance that cDemo, Engyro, C Me Run and eSupplies shall be
able to attain profitability on a quarterly or annual basis.
5. Projections
The projections upon which the valuations are based, as set forth in the
Valuation Report, were prepared by Management of each of cDemo, Engyro and
eSupplies, and based upon assumptions concerning circumstances and events which
have not occurred. The anticipated results, which are set forth, are subject to
changes and variations as future operations and events occur. Moreover, although
Management of each of cDemo, Engyro and eSupplies reasonably expects, to the
best of their knowledge and belief, that the results to be achieved by each
company will be as set forth in the projections, the projections are not
guarantees, and there can be no assurance that any of the potential benefits
which are described therein will occur. Furthermore, there will usually be
differences between the projected and actual results because events and
circumstances frequently do not occur as expected and the differences may be
material. If each of cDemo, Engyro, C me Run and eSupplies is not able to
achieve profitability, they may not be able to continue in the long term and any
value attached to shares of each of cDemo, Engyro, C Me Run and eSupplies will
be lost.
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6. Expansion
cDemo, Engyro, C Me Run and eSupplies intend, subject to availability of
funds, to implement an aggressive marketing program to take advantage of what
they believe are significant market opportunities. There can be no assurance
that the targeted market shall accept their products or services, or even if
accepted, shall be of sufficient volume to enable them to be profitable.
Significant expenditures, management resources and time shall be required to
develop broader distribution channels. There can be no assurance that cDemo,
Engyro, C Me Run and eSupplies shall be successful in gaining market acceptance
of their products or services.
7. Competition
Competitors with superior resources may be able to bring new, better and
cheaper products to the market more quickly than cDemo, Engyro, C Me Run and
eSupplies, thereby gaining a competitive edge over them. cDemo, Engyro, C Me Run
and eSupplies each believe that the quality of their respective goods and
services combined with the expertise of their respective management should give
them each a competitive edge. However, there can be no assurance that they will
each be able to compete successfully or that competitive pressures faced by each
of them will not have a material adverse effect of their business, operating
results and financial condition.
8. Nature of the Web Based Market
The web based markets which cDemo, Engyro, C Me Run and eSupplies intend
to utilize for their products and services have only recently commenced and are
rapidly evolving. The markets are characterized by an increasing number of
market entrants who have introduced or developed products and services similar
to the products of cDemo, Engyro, C Me Run and eSupplies, thereby, making the
demand and market acceptance for recently introduced products or services, such
as the products and services of cDemo, Engyro, C Me Run and eSupplies, subject
to a high level of uncertainty and risk. If the market fails to develop, or
develops more slowly than is expected, or becomes saturated with competitors, or
if the goods and services of cDemo, Engyro, C Me Run and eSupplies do not
achieve or sustain market acceptance, their business, operating results and
financial conditions shall be adversely affected and the may not be able to
continue in business. As a result, any value attached to shares of each of
cDemo, Engyro, C Me Run and eSupplies would be lost.
9. Government Regulation
There are currently few laws or regulations directly applicable to the
Internet. However, based upon the increasing popularity and use of the Internet,
a number of legislative and regulatory proposals are under consideration, and
there is a possibility that a number of laws and regulations may be adopted with
respect to the Internet, relating to such issues as, user privacy, taxation,
infringement, pricing, and quality of products and services. Although cDemo,
Engyro, C Me Run and eSupplies will make every effort to comply with applicable
regulations, there can be no assurance of their ability to do so. Additionally,
the adoption of such laws and regulations may decrease growth in the use of the
Internet. Therefore, if cDemo, Engyro, C Me Run and eSupplies are unable to
comply with new laws and regulations, or Internet use decreases as a result,
their business, operations and financial conditions would be adversely affected.
10. Highly Qualified Personnel
10
<PAGE>
The success of cDemo, Engyro, C Me Run and eSupplies is dependent, among
other things, upon their ability to attract and retain highly qualified
personnel. Competition for such personnel is intense and there can be no
assurance that cDemo, Engyro, C Me Run and eSupplies shall be able to attract
and retain the personnel necessary for the development and operation of their
businesses. The loss of the services of any such personnel may have a material
adverse effect upon their financial condition and their existing or planned
operations. Each of cDemo, Engyro, C Me Run and eSupplies is substantially
dependent on the services of Cameron Chell. In addition to being the CEO and
Chairman of the Board of Directors of the Company Chell plays an integral part
in the management and direction of cDemo, Engyro, C Me Run and eSupplies.
11. Conflicts of Interest
The transaction, which is described in this statement, involves a
significant conflict of interest among those persons who are associated with the
transaction. cDemo, Engyro, C Me Run and eSupplies' principal shareholder is
Chell or Chell.com. Chell.com has received fees from cDemo, Engyro, eSupplies
and C Me Run. Chell.com will retain warrants to purchase shares in cDemo, Engyro
and eSupplies. Chell will remain the largest shareholder in C Me Run. Chell will
retain warrants to purchase shares in C Me Run. By virtue of various agreements,
VC Advantage Limited Partnership has either lent money or subscribed for shares
in each of cDemo, eSupplies, Engyro and C Me Run and, subject to shareholder
approval at the Company's annual meeting of August 31, 2000, will have done the
same in the Company. VC Advantage Limited Partnership has warrants to acquire
shares in each of cDemo, Engyro, C Me Run and eSupplies. Chell, directly or
indirectly, is entitled to compensation from VC Advantage Limited Partnership.
Chell is the Chairman of the Board of the Company and Chief Executive Officer of
Chell.com. In his capacity as Chairman of the Board and as stockholder, Chell
may have a substantial interest in the successful completion of this
transaction. Frank Killoran, Gord Herman and David Bolink, members of the Board
of Directors of the Company, are also employees of Chell.com. Frank Killoran,
Gord Herman and Dave Bolink have option agreements to purchase shares of the
Company from Chell.com arising from this transaction. Frank Killoran (or family
members) and Gord Herman own shares in cDemo. Dave Bolink owns shares or rights
to acquire shares in C Me Run. As such, Frank Killoran, Gord Herman and Dave
Bolink have a direct interest in the successful completion of this transaction.
12. Nature of the Businesses
The nature of the businesses of cDemo, Engyro, C Me Run and eSupplies
differs from the Company's operations. Completion of this transaction will take
the Company in a different direction, offering an opportunity to diversify, a
potential for growth and an increase in shareholder value. However, there are
inherent risks in such new business activities including, but not limited to,
financing, and changing economic conditions.
13. State of Incorporation
The Company is incorporated in the State of New York. cDemo, Engyro, C Me
Run and eSupplies are all incorporated in jurisdictions outside the state of New
York and therefore are subject to different laws which may be inconsistent with
New York laws.
11
<PAGE>
14. No Audited Financial Statements
cDemo, Engyro and eSupplies have not had their financial statements
audited. Although C Me Run is a US public entity, and has audited financial
statements as of September 30, 1999, the September 30, 1999 statements do not
reflect a business change effected in January 2000. The change was material. The
Company has taken the position that the transaction should be reflected as an
acquisition of minority interests and has not prepared a proforma compilation of
the combined financial statements of cDemo, Engryo, eSupplies and C Me Run.
15. Taxation
As a result of the transfer of assets and shares by Chell and Chell.com to
the Company taking place on a tax deferred basis, the tax cost of the acquired
assets to the Company will be nominal. As a result, the income or capital gain
realized by the Company on a subsequent sale of the assets or shares will be
calculated based on a nominal purchase price.
16. Escrow Agreements
The shares of Chell.com in cDemo and Engyro are subject to a time-release
escrow and will be restricted from resale. As a condition to the sale, the
Company will be required to enter into an escrow agreement on similar terms. The
480,000 shares in cDemo will be released 160,000 on July 1, 2001, 160,000 on
July 1, 2002, and 168,000 on July 1, 2003. The 875,000 shares in Engyro will be
released 291,666 on July 31, 2001, 291,666 on July 31, 2002, and 291,667 on July
31, 2002. The shares of Chell in eSupplies are subject to a time-release escrow
and will be restricted from resale. The 962,500 shares in eSupplies will be
released 240,625 six months after a Qualifying Offer, 240,625 twelve months
after a Qualifying Offer; and 481,250 twenty-four months after a Qualifying
Offer (See paragraph 1 of "Material Contracts of eSupplies" for definition of
Qualifying Offer).
Forward Looking Information
Statements made with respect to future expectations, plans, estimates and
beliefs may be regarded as "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and as that term is defined in Private Securities
Litigation Reform Act of 1995. Sentences which incorporate words such as
"believes," "intends," "expects," "predicts," "may," "will," "should,"
"contemplates," "anticipates," or similar statements are based upon our beliefs
and expectations using the most current information available to us. Such
statements are subject to changes and variations as future operations and events
actually occur and could differ materially from those discussed in the
forward-looking statements.
Information Relating to Engyro, cDemo, eSupplies and C Me Run
Attached hereto as Exhibit "C" is a summary of certain information with
respect to the business of each company. Each company has provided this
information and the Company has had to rely on the management of each company
for the accuracy of the information.
THE BOARD OF DIRECTORS RECOMMENDS RATIFICATION OF THE PURCHASE BY THE COMPANY
OF CERTAIN ASSETS AND SHARES OWNED BY CHELL.COM LTD.
AND CAMERON CHELL
12
<PAGE>
RATIFICATION OF AN AMENDMENT TO ARTICLE "1" OF THE COMPANY'S
CERTIFICATE OF INCORPORATION, WHICH PROVIDES FOR A CHANGE OF THE NAME
OF THE COMPANY TO CHELL CORP ORATION.
The Company's Board of Directors has unanimously adopted an amendment to
Article "1" of the Company's Certificate of Incorporation, which provides for a
change in the name of the Company from Networks North, Inc. to Chell
Corporation.
The Board believes that in view of Cameron Chell's increased ownership
interest in the Company that it would be in the Company's interest to change the
name of the Company to reflect Mr. Chell's close association with the Company.
THE BOARD OF DIRECTORS RECOMMENDS RATIFICATION OF THE AMENDMENT TO ARTICLE "1"
OF THE COMPANY'S CERTIFICATE OF INCORPORATION, WHICH PROVIDES FOR A CHANGE OF
THE NAME OF THE COMPANY TO CHELL CORPORATION
RATIFICATION OF THE ISSUANCE OF A NEW CLASS OF VOTING STOCK
The board has authorized the issuance of a new class of voting stock (the
"Special Voting Stock"), which would be required to carry out obligations of the
Company upon approval of the Agreement. Each outstanding share of Special Voting
Stock shall be entitled at any relevant date to the number of votes on all
matters presented to the stockholders equal to (i) the number of Exchangeable
Shares of NNAC then issued and outstanding and held by holders (other than the
Company or any of its subsidiaries) multiplied by (ii) the number of votes to
which a holder of one share of the Common Stock of the Company is entitled with
respect to such matter. Exchangeable Shares has the meaning as set forth in
Appendix "A" to the Agreement. No dividend or distribution of assets shall be
paid to the holders of Special Voting Stock. The Special Voting Stock is not
convertible into any other class or series of the capital stock of the Company
or into cash, property or other rights, and may not be redeemed. Any shares of
Special Voting Stock purchased or otherwise acquired by the Company shall be
deemed retired and shall be cancelled and may not thereafter be reissued or
otherwise disposed of by the Corporation. At such time as the Special Voting
Stock has no votes attached to it because there are no "Exchangeable Shares"
outstanding, the Special Voting Stock shall be cancelled. In respect of all
matters concerning the voting of shares, the Networks North Common Stock and the
Special Voting Stock shall vote as a single class and such voting rights shall
be identical in all respects.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
ISSUANCE OF A NEW CLASS OF VOTING STOCK
13
<PAGE>
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors is not
aware of any other matter that is to be presented for action at the Special
Meeting. If any matter other than those described above (i.e., approval of the
purchase by the Company of certain assets and shares owned by Chell.com Ltd.,
approval of an amendment of the Company's Certificate of Incorporation to
provide for a change of the name of the Company and approval of the issuance of
a new class of voting stock )does properly come before the Special Meeting, the
individuals named in the enclosed Proxy will, unless indicated otherwise, vote
the shares represented thereby in accordance with their best judgment.
EXCHANGE RATES
This Proxy Statement contains translations of certain amounts in Canadian
dollars ("CDN$") into United States dollars ("US$") based upon the exchange rate
in effect at the end of the period to which the amount relates, or the exchange
rate on the date specified. For such purposes, the exchange rate means the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). These translations should not be construed as
representations that the Canadian dollar amounts actually represent such U.S.
dollar amounts or that Canadian dollars could be converted into U.S. dollars at
the rate indicated or at any other rate. The Noon Buying Rate at the end of each
of the five years ended August 31, 1999, the average of the Noon Buying Rates on
the last day of each month during each of such fiscal years and the high and low
Noon Buying Rate for each of such fiscal year's were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Aug. 31,1999 1998 1997 1996 1995
------------ ---- ---- ---- ----
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At end of period......... CDN$1.496 CDN$1.5722 CDN$1.3885 CDN$1.3685 CDN$1.3432
Average for period....... 1.494 1.4390 1.3676 1.3634 1.3742
High for period.......... 1.513 1.5770 1.3942 1.3815 1.4193
Low for period........... 1.476 1.4100 1.3381 1.3401 1.3410
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL
The Company will pay all of the costs of preparing, assembling and mailing
the form of Proxy, Proxy Statement and other materials which may be sent to the
shareholders in connection with this solicitation, as well as any costs of
soliciting proxies in the accompanying form. Solicitation will be made by mail,
and officers and regular employees of the Company may also solicit proxies by
telephone, telegraph or personal interview for which they will receive no
additional remuneration. The Company expects to request brokers and nominees who
hold stock in their names to furnish this proxy material to their customers and
to solicit proxies from them. The Company will reimburse such brokers and
nominees for their out-of-pocket and reasonable clerical expenses in connection
therewith.
14
<PAGE>
WHILE YOU HAVE THE MATTER IN MIND, PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED
PROXY CARD.
BY ORDER OF THE BOARD OF DIRECTORS,
Mark Truman, Secretary
15
<PAGE>
PROXY PROXY
Networks North, Inc.
14 Meteor Drive, Toronto, Ontario, Canada MAW 1A4
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENT, that the undersigned shareholder of
Netwokrs North, Inc. (the "Company") hereby constitutes and appoints Don
Pagnutti and Mark Truman and each of them, the true and lawful attorneys, agents
and proxies of the undersigned, each with full power of substitution to vote all
of the shares of stock of the Company that the undersigned would be entitled, if
personally present, to vote at the meeting of shareholders of the Corporation to
be held on September 8, 2000 at 10:00 a.m. at the offices of the Company, 14
Meteor Drive, Toronto, Ontario, Canada M9W 1A4, and at any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR:
1. To approve the purchase by the Company of certain assets and shares owned
by Chell.com Ltd and Cameron Chell.
For ____ Against ____ Abstain ____
2. To consider and vote upon an Amendment to Article 1 of the Company's
Certificate of Incorporation, which provides for a change of the name of
the Company from Networks North, Inc to Chell Corporation.
For ____ Against ____ Abstain ____
3. To approve the issuance of a new class of voting stock which would be
required to carry out obligations of the Company upon completion of the
transaction described in paragraph (1) above.
For ____ Against ____ Abstain ____
4. Such other business as may properly come before the meeting.
Dated:___________, 2000
_______________________
Signature
16
<PAGE>
LIST OF ATTACHED EXHIBITS
Agreement of Purchase and Sale .............................. Exhibit "A"
Valuation of Chell.com Ltd. ................................. Exhibit "B"
Description of Companies .................................... Exhibit "C"
Financial Statements of Engyro .............................. Exhibit "D"
Financial Statements of eSupplies ........................... Exhibit "E"
Financial Statements of C Me Run ............................ Exhibit "F"
Financial Statements of cDemo ............................... Exhibit "G"
<PAGE>
EXHIBIT
"A"
<PAGE>
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT made the 4th day of August, 2000
A M O N G:
NETWORKS NORTH, INC., a corporation incorporated pursuant to the
laws of the State of New York ("Networks North")
and
NETWORKS NORTH INC. in trust for NETWORKS NORTH ACQUISITION CORP., a
corporation to be incorporated pursuant to the laws of the Province
of Ontario ("NNAC")
and
CHELL.COM LTD., a corporation incorporated pursuant to the laws of
the Province of Alberta ("Chell.com")
and
CAMERON CHELL, of the City of Calgary in the Province of Alberta
("Chell")
WHEREAS
A. Networks North is a public company which has engaged in the business of
developing new technology businesses;
B. Chell.com is a private company which has engaged in the business of
developing new technology businesses and is a significant shareholder of
Networks North;
C. Networks North plans to incorporated a wholly owned subsidiary, NNAC, for
the purposes of carrying out the transactions contemplated herein;
D. Chell.com and Chell (collectively the "Vendors" and when referring to each
in their own capacity the "Vendor") have agreed to sell certain assets and
shares to NNAC and Networks North and NNAC and Networks North have agreed
to buy such assets and shares, upon and subject to the terms and
conditions set out in this Agreement and in accordance with the rules set
out in subsections 85(1) and 85.1(3) of the Income Tax Act (Canada), as
amended;
E. Chell is Chairman of the Board of Directors of Networks North, Chief
Executive Officer of Chell.com and owns all of the outstanding shares of
Chell.com.
F. Chell has declared a conflict of interest to Networks North with respect
to the transactions contemplated herein. Networks North and Chell.com have
retained the services of Stanford Keene ("Stanford Keene") for the
purposes of preparing a valuation of the Assets and making a determination
as to the fairness of the transactions contemplated hereunder. In
addition, the board of directors has formed a committee of directors
comprising of Peter Rona, Don Pagnutti and Adrian Towning, or such persons
as may be added to or removed from the committee by the commitee (the
"Committee") to examine the transaction and conduct due diligence on
behalf of Networks North.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
covenants and agreements contained in this Agreement, the parties covenant and
agree with each other as follows:
<PAGE>
2
ARTICLE 1 - INTERPRETATION
1.01 Definitions. In addition to any other defined terms contained in this
Agreement, the following words and phrases have the following meanings:
(a) "Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of Networks North Common Stock
are entitled to vote, consent or otherwise act, the product of (i) the
number of Exchangeable Shares then issued and outstanding and held by
holders (other than Networks North and its Subsidiaries) multiplied by
(ii) the number of votes to which a holder of one share of Networks North
Common Stock is entitled with respect to such matter, proposition or
question;
(b) "Arm's length" shall have the same meaning as those words are defined in
the Income Tax Act (Canada) from time to time;
(c) "Assets" means the Chell.com Assets, the Chell.com US Shares, the Chell
Canadian Shares and the Chell US Shares;
(d) "Automatic Redemption Date" has the meaning provided in the NNAC Share
Provisions;
(e) "Business Day" means a day which is not a Saturday, a Sunday or a
statutory holiday;
(f) "Chell Canadian Shares" means 962,500 Class A Voting Shares of eSupplies
(Alberta) Ltd.
(g) "Chell US Shares" means 150,000 common shares of C Me Run Corp.
(h) "Chell.com Assets" means:
(i) the Leased Property;
(ii) all office equipment, servers, computers, office supplies (as well
as any leases pertaining thereto) and leasehold improvements
contained in the Leased Property or in the possession of employees
and contractors of Chell.com;
(iii) all contracts of insurance covering any of the Chell.com Assets to
the extent that such are assignable;
(iv) all contracts of employment or contracts for services with
independent contractors for the performance of personal services to
Chell.com;
(v) service agreements between Chell.com and C Me Run Corp. dated
November 15, 1999, Buyersangel.com Inc. (the former name of cDemo
Inc.) dated March 1, 2000, R Home Funding Co. Ltd. ("enGyro") dated
January 17, 2000 and with eSupplies (Alberta) Ltd. dated February 8,
2000;
(vi) goodwill;
(i) "Chell.com's Counsel" means Morrison Brown Sosnovitch LLP or such other
firm of lawyers as may be designated by Chell.com;
(j) "Chell.com US Shares" means 875,000 common shares of enGyro, 480,000
common shares of cDemo Inc. and 60,000 common shares of Chell.com USA
Inc., a wholly owned subsidiary of Chell.com Ltd.;
(k) "Closing Date" means August 31, 2000 or such other date as may be agreed
upon by the parties hereto;
(l) "Encumbrances" means any claim, lien, security interest, right, privilege,
restriction, demand or other encumbrance whatsoever affecting the property
in question, or any right capable of becoming such an encumbrance;
(m) "Exchange Put Right" has the meaning provided in the NNAC Share
Provisions;
<PAGE>
3
(n) "Exchangeable Share Consideration" has the meaning provided in the NNAC
Share Provisions;
(o) "Exchangeable Share Price" has the meaning provided in the NNAC Share
Provisions;
(p) "Interim Period" means the period of time between the date of this
Agreement and the Time of Closing;
(q) "Leased Property" means the premises of Chell.com's executive offices
located at Unit 11(east half) Suite 302, 630 8th Ave SW, Calgary, and Unit
13, Suite 500, 630 8th Ave SW, Calgary which property is subject to a
lease, a copy of which has been provided to Networks North;
(r) "Liquidation Call Purchase Price" has the meaning provided in Section
7.01;
(s) "Liquidation Call Right" has the meaning provided in Section 7.01;
(t) "Liquidation Date" has the meaning provided in the NNAC Share Provisions;
(u) "NASDAQ" means the NASDAQ Stock Exchange;
(v) "Networks North's Counsel" means Mintz & Fraade, P.C. or such other firm
of lawyers as may be designated by Networks North;
(w) "NNAC Common Shares" means the common shares in the capital of NNAC;
(x) "NNAC Share Provisions" means the rights, privileges, restrictions and
conditions attaching to the NNAC Shares, the terms and conditions of which
are as set forth in Appendix "A";
(y) "NNAC Shares" means the exchangeable shares in the capital of NNAC,
(z) "Redemption Call Purchase Price" has the meaning provided in Section 7.02;
(aa) "Redemption Call Right" has the meaning provided in Section 7.02;
(bb) "Subsidiary" has the meaning provided in the NNAC Share Provisions;
(cc) "Taxes" means all federal, provincial, state, municipal or other taxes,
imposts, rates, levies, assessments and government fees, charges or dues
lawfully levied, assessed or imposed against the party referred to or in
respect of their respective businesses including, without limitation, all
income, capital gains, sales, excise, use, property, payroll, capital,
goods and services, business, transfer, withholding and value added taxes,
and all customs and import duties, together with all interest, fines and
penalties with respect thereto;
(dd) "Tax Returns" means all reports, returns and other documents filed or
required to be filed by the party referred to in respect of Taxes or in
respect of, or pursuant to, any federal, provincial, state, municipal or
other taxing statute applicable to such party;
(ee) "Time of Closing" means 11:00 o'clock a .m. Eastern Standard Time on the
Closing Date or such other time on the Closing Date at which the
transaction is completed.
(ff) "Voting and Exchange Trust Agreement" and "Support Agreement" means those
agreements so entitled between Networks North, NNAC and (in the case of
the Voting Trust Agreement) the Trustee named therein to be dated as of
the effective date of the Agreement.
1.02 American Dollars. All dollar amounts referred to in this Agreement are in
American funds unless otherwise provided.
<PAGE>
4
1.03 Extended Meanings. In this Agreement, where the context requires, the
singular number includes the plural and vice versa, the masculine gender
includes the feminine and neuter genders and vice versa and the word
"person" is not limited to an individual but includes any entity
recognized by law.
1.04 Entire Agreement. This Agreement and the agreements executed pursuant
hereto constitute the entire agreement among the parties pertaining to the
subject matter of this Agreement and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of
the parties, and there are no warranties, representations or other
agreements between the parties in connection with the subject matter of
this Agreement except as specifically set out in this Agreement. No
supplement, modification, waiver or termination of this Agreement shall be
binding, unless executed in writing by the party or parties to be bound
thereby.
1.05 Headings. All headings are included solely for convenience of reference
and are not intended to be full or accurate descriptions of the contents
of any Article or section in this Agreement.
1.06 Accounting Terms. All accounting terms not specifically defined in this
Agreement are to be construed in accordance with United States generally
accepted accounting principles, consistently applied.
1.07 Schedules. The Schedules attached to this Agreement are incorporated in
and form part of this Agreement.
1.08 Recitals. Each of the parties acknowledges that the recitals of this
Agreement, so far as they relate to such party, are true and correct in
substance and in fact.
ARTICLE 2.00 - PURCHASE AND SALE
2.01 Purchase and Sale. Based upon the warranties, representations and
covenants, and subject to the terms and conditions set out in this agreement,
NNAC agrees to purchase the Chell.com Assets and the Chell Canadian Shares from
the Vendors and the Vendors agree to sell such to NNAC. Based upon the
warranties, representations and covenants, and subject to the terms and
conditions set out in this agreement, Networks North agrees to purchase the
Chell US Shares and the Chell.com US Shares from the Vendors and the Vendors
agree to sell such to Networks North.
2.02 Price. The purchase price for the Assets (the "Purchase Price") shall be
equal to the fair market value of the Assets as determined in the fairness
report of Stanford Keene dated July 7, 2000, namely, in respect of:
(a) the Chell.com Assets - $1,767,503
(b) the Chell.com US Shares - 19,459,583
(c) the Chell Canadian Shares - 5,775,000
(d) the Chell US Shares - 1,650,000
-----------
Total $28,652,086
2.03 Satisfaction of Purchase Price.
(a) The Purchase Price for the Assets listed in subsection 2.02 (a) and (c)
shall be paid and satisfied as follows:
(i) by the assumption by NNAC of the obligations of Chell.com pursuant
to any contracts transferred to NNAC as part of the Chell.com Assets
which, for the purposes of this agreement, the parties have agreed
have a nominal value;
(ii) by the partial assumption of indebtedness of Chell.com to Canadian
Advantage Limited Partnership II in the amount of $1,767,499;
<PAGE>
5
(iii) by the issuance by NNAC of 1,476,399 exchangeable shares, each of
which are convertible into one common share of Networks North (the
"NNAC Shares")to Chell;
(iv) by the issuance by NNAC of one (1) exchangeable share convertible
into one common share of Networks North to Chell.com
(b) The Purchase Price for the Assets listed in subsection 2.02 (b) and (d)
shall be paid and satisfied by the issuance by Networks North of 5,396,733
common shares (the "Networks North") as follows:
(A) to Chell.com - 4,974,904
(B) to Chell - 421,829
(c) Except with respect to the VC Advantage Fund Limited Partnership financing
which has already been approved by the Board of Directors of Networks
North and is subject to shareholder approval, the Purchase Price shall be
adjusted in the event that, at any time in the six months following the
Closing Date, Networks North completes a financing of greater than
$1,000,000 where shares are issued or debt is convertible into common
stock of Networks North at a price which is less than $3.91 per share. In
such a case, the Vendor's shall surrender for cancellation by Networks
North that number of shares which is:
$3.91 - A x 7,325,000
----------
$3.91
where A is the conversion price of such debt (or purchase price of the
shares, as the case may be) to a maximum of 1,500,000 shares. The Vendors
shall surrender such shares proportionately to the number of shares
received by each Vendor as consideration hereunder. Notwithstanding the
provisions of this subsection, in the event that there is a change of
control in Networks North, meaning a change in the board of directors such
that Chell or representatives approved by Chell do not form a majority of
the board, this subsection will not apply.
2.04 Elections. Each of the Vendors (in their own capacity with respect to their
own part of the Assets transferred in accordance with section 2.03(a)) and NNAC
in respect of each such Vendor acknowledge and agree that, for income tax
purposes, they shall jointly file the prescribed election pursuant to subsection
85(1) of the Income Tax Act (Canada) within the time period prescribed therein,
and shall agree in each such election, to cause the Assets to be transferred
from the Vendors to NNAC at an amount (the "Agreed Amount") for purposes of the
Income Tax Act (Canada), provided that:
(a) Where the property is depreciable property (of a class prescribed in
the Regulations to the Act) of the Vendor and the Agreed Amount is
less than the least of:
(i) the undepreciated capital cost to the Vendor of all property
of that class immediately before the disposition,
(ii) the cost to the Vendor of the property, and
(iii) the fair market value of the property at the time of
disposition,
the Agreed Amount shall be the least of the amounts described in
subparagraphs (i), (ii) and (iii);
(b) Where the property is inventory or capital property (other than
depreciable property of a prescribed class) of the Vendor, and the
Agreed Amount is less than the lesser of:
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6
(i) the fair market value of the property at the time of the
disposition, and
(ii) the cost amount to the Vendor of the property at the time of
disposition,
the Agreed Amount in respect of the property shall be the lesser of
the amounts described in subparagraphs (i) and (ii); and
(c) Where the property is eligible capital property in respect of a
business of the Vendor and the amount that would be the proceeds of
disposition therefor for the purposes of the Act is less than the
least of:
(i) three-halves (3/2) of the Vendor's cumulative eligible capital
in respect of the business immediately before the disposition,
(ii) the cost to the Vendor of the property, and
(iii) the fair market value of the property,
the Agreed Amount in respect of the property shall be the least of
the amounts described in subparagraphs (i) to (iii).
2.05 The parties agree that should it be necessary to file an amended election
pursuant to section 85 of the Act for the purpose of transferring the Assets for
revised elected amounts, any penalty assessed by the Minister of National
Revenue or a similar provincial authority shall be borne in equal parts by the
particular Vendor affected and NNAC and the party who remits the penalty shall
have a right of contribution against the other party.
2.06 Chell.com and NNAC agree to jointly execute and file, on a timely basis, an
election under Section 167 of the Excise Tax Act.
ARTICLE 3.00 - REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of Chell.com. Chell.com represents and
warrants to NNAC and to Networks North as follows and acknowledges that NNAC and
Networks North are relying upon such representations and warranties in
connection with the purchase by NNAC of the Chell.com Assets and by Networks
North with respect to the Chell.com US Shares:
(a) Schedules. The Chell.com Schedule attached contains complete and accurate
information regarding those matters to which such schedule pertains.
(b) Corporate Existence. Chell.com is duly incorporated, organized and validly
existing under the laws of the Province of Alberta.
(c) Authority. This Agreement, when executed and delivered by the parties,
will constitute a valid and binding agreement of Chell.com in accordance
with its terms. None of the execution and delivery of this Agreement, the
consummation of the transactions contemplated by this Agreement and the
compliance with or fulfilment of the terms and provisions of this
Agreement, will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under Chell.com's
constating documents or by-laws, any instrument, agreement, mortgage,
judgment, order, award, decree or other restriction to which it is a party
or by which it is bound or any regulatory provisions affecting it except
as set out on the Chell.com Schedule. Chell.com has full power and
authority to sell, assign, transfer and deliver the Chell.com Assets to
NNAC, and Chell.com US Shares to Networks North pursuant to this Agreement
and to do and perform all acts and things required to be done by it under
this Agreement.
<PAGE>
7
(d) Options and Calls. There are no outstanding agreements, calls,
commitments, options, or other rights or privileges, to acquire any of the
Chell.com Assets or the Chell.com US Shares except:
(i) with respect to options granted by Chell.com to Frank Killoran,
David Bolink and Gord Herman to acquire 142,988, 86,808 and 95,323
shares respectively of enGyro (or, in the event of a sale,
conversion or exchange of such shares by Chell.com the option
applies to shares received by Chell.com in exchange therefor) from
Chell.com at 1 cent per share;
(ii) escrow arrangements for timed release attaching to the Chell.com
Canadian Shares and the Chell.com US Shares to the extent that such
shares are held as founders shares;
(e) Condition of Chell.com Assets. The Chell.com Assets set out in paragraph
1.01(f)(ii) are in good operating condition and repair, reasonable wear
and tear excepted and all such assets are located in the Province of
Alberta.
(f) Title to Assets. Chell.com is the legal and beneficial owner (or will be
on the Closing Date) of all of the Chell.com Assets and the Chell.com US
Shares having good and marketable, legal and beneficial title thereto,
free and clear of all Encumbrances except as set out on the Chell.com
Schedule. The Chell.com US Shares are subject to escrow terms, the details
of which have been provided to Networks North.
(g) Real Property. None of the Chell.com Assets are real property owned by
Chell.com.
(h) Intellectual Property Rights. Chell.com does not own any trademarks,
patents or other intellectual property rights associated with any of the
Chell.com Assets
(i) Leases. In respect of the Leased Property, the leases:
(i) are in full force and effect and in good standing and constitute
legal, valid and binding obligations of the respective parties
thereto; and
(ii) will continue in effect notwithstanding the closing of the
transactions contemplated by this Agreement upon obtaining the
consent of the landlords.
(j) Insurance. All policies of fire and other insurance against casualty and
other losses and public liability insurance carried by Chell.com in
connection with the Chell.com Assets are in full force and effect and in
accordance with customary insurance requirements for the industry. All
premiums in respect of such policies for which premium notices have been
received have been paid in full. Chell.com has not failed to give any
notice or present any claim under any such insurance policy in due and
timely fashion. There are no actual or threatened material claims against
Chell.com which would come within the scope of such coverage nor are any
such policies currently threatened with cancellation. There are no
outstanding requirements or recommendations by any insurance company that
issued a policy with respect to any of the Chell.com Assets or by any
Board of Fire Underwriters or other body exercising similar functions or
by any governmental authority requiring or recommending any repairs or
other work to be done on, or with respect to, any of the Chell.com Assets
or requiring or recommending any equipment or facilities to be installed
on any premises in connection with any of the Chell.com Assets. Chell.com
has no knowledge of any material proposed increase in applicable insurance
rates or of any conditions or circumstances applicable to the Chell.com
Assets which might result in such increases. No such policy is terminable
by virtue of the transactions contemplated by this Agreement.
(k) No Defaults under Agreements; No Violation of Laws. Chell.com has not
received notice of, and has no knowledge of, the existence of any default
or event of default or the occurrence of any event which with notice or
lapse of time, or both, would constitute a default, and which is
continuing, under the terms or provisions, express or implied, of any
agreement to which any of the Chell.com Assets or the Chell.com US Shares
are subject. Chell.com has not received notice of, and has no knowledge
of, a violation of any applicable federal, provincial or municipal law,
ordinance, regulation, order or requirement relating to
<PAGE>
8
the Chell.com Assets or the Chell.com US Shares which may have a material
adverse effect on the Chell.com Assets or the Chell.com US Shares.
(l) Litigation. No claim, action, suit, proceeding, litigation, arbitration or
investigation has been commenced or threatened against the Chell.com and
no basis therefore is known to Chell.com. None of Chell.com, the Chell.com
Assets or the Chell.com US Shares is subject to any continuing injunction,
judgment or other order of any court, arbitrator or governmental agency
which would prohibit the transactions hereunder from taking place.
Chell.com is not in default under any order, licence, regulation, or
demand of any federal, provincial, municipal or other governmental agency
or regulatory body or with respect to any order, writ, injunction or
decree of any court.
(m) Resident of Canada. Chell.com is not a non-resident of Canada under the
Income Tax Act (Canada).
(n) Insolvency. Chell.com and Chell.com USA Inc. are not insolvent, nor have
they committed an act of bankruptcy, proposed a compromise or arrangement
of its creditors generally, had any petition or receiving order in
bankruptcy filed against it, taken any proceedings with respect to a
compromise or arrangement or to have a receiver appointed over any part of
its assets, had an encumbrancer take possession of any of its property, or
had an execution or distress become enforceable or levied upon any of its
property. With respect to enGyro and C Demo Inc., each of the companies
are start-up companies. They currently have no revenue and, without
additional financing, will not be able to properly develop their products
or businesses.
(o) Potential Conflicts of Interest. No officer, director or shareholder of
Chell.com, and no person directly or indirectly controlling or controlled
by, or under the direct or indirect control of, any of the foregoing
persons:
(i) owns, directly or indirectly, any interest in, or is an officer,
director, employee or consultant of, any of enGyro, C Me Run Corp.,
eSupplies (Alberta) Ltd., cDemo Inc. or Chell.com USA Inc. except as
follows:
(A) Chell is Chairman of the Board and a director in each of the
above companies except for eSupplies. It is anticipated that
he will become a director of eSupplies. Chell.com is retaining
60,000 warrants to purchase common shares of cDemo Inc. at
$5.00 per and rights to acquire 60,000 addition warrants at
the same price in the event that VC Advantage Fund Limited
Partnership completes its second round of financing with
cDemo. He also owns 85,000 warrants to purchase Class A Voting
Shares of eSupplies (Alberta) Ltd. at $7.00 per share and
500,000 options at $7.00. Chell will retain 495,000 options to
purchase shares of C Me Run (Alberta) Ltd. at $5.00 per share.
The options are exchangeable for options of C Me Run Corp. or
C Me Run Acquisition Corp. upon completion of a contemplated
takeover bid. Chell also holds 1,001,000 common shares of C Me
Run Corp. inclusive of those being transferred to Networks
North hereunder and 725,000 exchangeable shares of C Me Run
(Alberta) Ltd. which are exchangeable into shares of C Me Run
Acquisition Corp. upon completion of a contemplated takeover
bid and which can be converted to C Me Run Corp. common shares
thereafter. Chell.com Ltd. will retain 200,000 options to
purchase shares of enGyro for $5.00 and warrants for 97,500
shares at $5.00. Chell is a director and officer of Chell.com
USA Inc. a wholly owned subsidiary of Chell.com.
(B) Frank Killoran is a director and shareholder of cDemo Inc. and
he and members of his immediate family hold 264,000 common
shares in the company. He is also President of Chell.com. He
holds the options in enGyro as disclosed in Subsection
3.01(d), 50,000 shares of C Me Run (Alberta) Ltd. and 50,000
options to purchase shares of C Me Run Corp at $5.00 per
share;
<PAGE>
9
(C) Gordon Herman is President and a shareholder of cDemo Inc., is
a managing director of Chell.com, a consultant to eSupplies
(Alberta) Ltd. and receives compensation therefor. It is
anticipated that he will become a director of eSupplies
(Alberta) Ltd. He holds the options in enGyro as disclosed in
Subsection 3.01(d) and 75,996 common shares of cDemo;
(D) David Bolink is a managing director of Chell.com, holds
250,000 shares of C Me Run (Alberta) Ltd. which are
exchangeable into 250,000 exchangeable shares of C Me Run
acquisition Corp. or 250,000 common shares of C Me Run Corp.
He is a consultant to eSupplies (Alberta) Ltd. and receives
compensation therefor. He holds the options in enGyro as
disclosed in Subsection 3.01(d). He also owns 20,000 options
to purchase shares of C Me Run (Alberta) Ltd. at $1.00 per
share, 150,000 options to purchase shares of C Me Run
(Alberta) Ltd. at $5.00 per share which are exchangeable for
similar options of C Me Run Corp. upon completion of a
contemplated takeover bid;
(E) Chell.com, Chell.com employees and consultants hold 325,000
options to purchase shares of C Me Run (Alberta) Ltd. at $1.00
per share and 1,250,000 options to purchase shares of C Me Run
(Alberta) Ltd. at $5.00 per share which are exchangeable for
similar options of C Me Run Corp. upon completion of a
contemplated takeover bid.
(ii) holds a beneficial interest in any contract or other agreement to
which Networks North or any subsidiary will become a party or by
which it will be bound except that Chell is part owner of the
building containing the Leased Premises and part owner of the
building that leases premises to eSupplies (Alberta) Ltd. Chell is a
director and shareholder of VC Advantage Limited the general partner
of VC Advantage Limited Partnership which will earn fees on loans
and equity financings made to each of enGyro, C Me Run Corp.,
eSupplies (Alberta) Ltd. and cDemo Inc as well as the financing of
Networks North to be approved by the shareholders at the annual
meeting of Networks North on August 31, 2000;
(iii) owns, directly or indirectly, in whole or in part, any tangible or
intangible property which Networks North will be using following
closing except for the trademark, domain name and Web site for
"Chell.com" and the trademark "Chell Corporation" which will be
licensed by Chell to Networks North for $1.00 per year for so long
as Cameron Chell is on the board of directors for Networks North; or
(iv) has any cause of action or other claim whatsoever against Networks
North or any of its subsidiaries, except for claims in the ordinary
course of business, such as accrued directors fees.
(p) Governmental Filings. No consent, approval, order or authorization of, or
registration, declaration or filing with any governmental entity is
required to be obtained or made by Chell.com in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this agreement except:
(i) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the
securities or antitrust laws including the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"); and
(ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a
material affect on the Chell.com Assets or the Chell.com US Shares
or have a material adverse effect on the ability of the parties
hereto to consummate the transactions contemplated in this
Agreement.
<PAGE>
10
(q) Authorized and Issued Capital. R Home Funding Co. Ltd. is a company
incorporated in accordance with the laws of the State of Nevada. It is
expected that prior to the Closing Date it will be merged with its wholly
owned subsidiary, enGyro Inc. and continue as a Delaware Corporation under
the name Engyro Inc. The authorized capital of R Home Funding Co Ltd..
consist of 5,000,000 common shares. Prior to the closing of a financing
transaction, 1,585,000 common shares or rights to acquire such shares will
be issued and outstanding as fully paid and non-assessable. It is expected
that a closing of a financing prior to the Closing Date will result in the
issuance of an additional 975,000 Series A Preference Shares, with voting
rights, which will reduce the percentage of voting shares held by the
Company from a pre-financing 55.2% to 34.1%. cDemo Inc. is a company
incorporated pursuant to the laws of the State of Delaware. The authorized
capital of cDemo Inc. consists of 20,000,000 common shares and 10,000,000
preferred shares of which 2,088,000 common shares are issued and
outstanding as fully paid and non-assessable. It is expected that a
closing of a financing prior to the Closing Date will result in the
issuance of additional shares which will reduce the percentage of voting
shares held by the Company from a pre-financing 22.9% of voting shares to
16.39%. Chell.com USA Inc. is a company incorporated in accordance with
the laws of the State of Delaware. The authorized capital of Chell.com USA
Inc. consists of 100,000 shares of common stock with a par value of .01 of
which 60,000 shares are issued to Chell.com. The details of the expected
financing have been provided to Networks North and are contained in
Exhibit "C" in the proxy circular filed with the Securities and Exchange
Commission with respect to the Special Meeting of Shareholders to approve
the transactions contemplated herein.
(r) Absence of Certain Changes or Events. Since the effective date of the
Stanford Keene Fairness Valuation on May 31, 2000 to the date hereof, (to
the best of knowledge only with respect to enGyro and cDemo Inc.) there
has not been:
(i) any Material Adverse Effect on enGyro, cDemo Inc. or the Chell.com
Assets,
(ii) any declaration, setting aside or payment of any dividend on, or
other distribution (whether in cash, stock or property) in respect
of the Chell.com US Shares, or any purchase, redemption or other
acquisition by enGyro, cDemo Inc., or Chell.com USA Inc. of their
capital stock or any other securities of enGyro, cDemo Inc., or
Chell.com USA Inc. or any options, warrants, calls or rights to
acquire any such shares or other securities;
(iii) any material change by enGyro, cDemo Inc., or Chell.com USA Inc. in
their accounting methods, principles or practices, except as
required by concurrent changes in the relevant GAAP; or
(iv) any diminution of assets of enGyro, cDemo Inc., or Chell.com USA
Inc. including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable
other than in the ordinary course of business.
For the purposes of this section, "Material Adverse Effect" means any
change, event, violation, inaccuracy, circumstance or effect that is
materially adverse to the business, assets (including intangible assets),
capitalization, financial condition or results of operations of such
entity and its subsidiaries taken as a whole, except for those changes,
events, violations, inaccuracies, circumstances and effects that (i) are
caused by conditions affecting the Canadian or United States economy as a
whole or affecting the industry in which such entity competes as a whole
or (ii) are related to or result from announcement or pendency of the
transactions contemplated by this Agreement provided, however, that in the
case of each of the exceptions set forth in (i) and (ii) above, the entity
relying upon such exception to demonstrate that a Material Adverse Effect
has not occurred shall bear the burden of proof, by a preponderance of the
evidence, that such exception is applicable.
(s) Tax Matters. Subject to any requirement to file arising from, or in
connection with, the transactions contemplated in this Agreement,
Chell.com, Chell.com USA Inc. and, to the best of knowledge of Chell.com,
enGyro and cDemo Inc. have:
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11
(i) prepared and filed with the appropriate governmental authorities by
the required filing date all Tax Returns required to be filed by it
under all applicable laws or regulations, which Tax Returns, were
prepared in conformity with such applicable laws and regulations and
properly reflect, and do not understate, the taxable income and the
liability for Taxes of such corporation in the relevant taxation
year;
(ii) paid all Taxes as they have become due and payable; and
(iii) made sufficient provision in their financial statements (or
accounting records in the case where no financial statements have
been prepared) for all accrued but unpaid Taxes, if any, whether or
not disputed, for all relevant periods.
There are no actions, suits, tax audits or other proceedings or
investigations or claims in progress, pending or threatened against
Chell.com, Chell.com USA Inc., and to the best of knowledge of Chell.com,
enGyro, or cDemo Inc. (the "Taxable Parties") in respect of any Taxes and,
in particular, there are no currently outstanding reassessments or written
inquiries which have been issued or raised by any governmental authority
relating to Taxes nor is Chell.com aware of any contingent liabilities for
Taxes or any reasonable grounds for an assessment or reassessment of any
Tax Return filed by the Taxable Parties, and has not received any
indication from any taxing authorities that an assessment or reassessment
is proposed in respect of any Taxes, regardless of the merits. Neither
Chell.com, Chell.com USA Inc., and to the best of knowledge of Chell.com,
enGyro nor cDemo Inc. have executed or filed with any taxing authority any
agreement extending the period for assessment, reassessment or collection
of Taxes, or any waiver or agreement regarding statutes of limitations
relating to Taxes and all Taxes which are required to be withheld or
collected by the Taxable Parties from payments made to their respective
present and former employees, officers and directors, and to all persons
who are not residents of Canada for purposes of the Income Tax Act have
been duly withheld or collected and, to the extent required, have been
duly remitted to the proper taxing authorities. Each of Chell.com,
Chell.com USA Inc. and to the best of knowledge of Chell.com, enGyro and
cDemo Inc have properly withheld all Canada Pension Plan contributions,
unemployment insurance premiums, employer health taxes and other Taxes
payable by it in respect of its employees and has remitted, or will remit
such amounts to the proper taxing authorities within the time required by
the applicable legislation if such time is prior to the Closing Date.
Chell.com is properly registered under the Excise Tax Act (Canada) for the
purposes of the goods and services tax (GST), if required pursuant to the
provisions of the Excise Tax Act (Canada), and has charged, collected and
remitted, in the time and manner required under the said Act, all Taxes
required to be charged, collected and remitted pursuant to the Excise Tax
Act (Canada) in respect of any "taxable supply" (as such term is defined
under the applicable sections of the said Act) made by each of them.
(t) Chell.com USA Inc. has no assets and is a party to two employment
agreements for US based employees of Chell.com. Chell.com USA Inc. will
have no liabilities on the Closing Date.
3.02 Representations and Warranties of Chell. Chell represents and warrants to
NNAC and Networks North as follows and acknowledges that NNAC and Networks North
are relying upon such representations and warranties in connection with the
purchase by NNAC of the Chell Canadian Shares and Networks North of the Chell US
Shares:
(a) Authority. None of the execution and delivery of this Agreement, the
consummation of the transactions contemplated by this Agreement and the
compliance with or fulfilment of the terms and provisions of this
Agreement, will conflict with or result in a breach of the terms,
conditions or provisions of any instrument, agreement, mortgage, judgment,
order, award, decree or other restriction to which Chell is a party or by
which he is bound. Chell has full power and authority to sell, assign,
transfer and deliver the Chell Canadian Shares and Chell US Shares to NNAC
and Networks North, respectively pursuant to this Agreement and to do and
perform all acts and things required to be done by him under this
Agreement;
<PAGE>
12
(b) Options and Calls. There are no outstanding agreements, calls,
commitments, options, subscriptions, warrants or other rights or
privileges to acquire the Chell Canadian Shares or Chell US Shares from
Chell except as disclosed in 3.01(d) which will, following closing attach
to consideration shares received by Chell and will no longer affect the
Chell US Shares and except for escrow arrangements for timed release
attaching to the Chell Canadian Shares and the Chell US Shares to the
extent that such shares are held as founders shares and a lock-up
agreement requiring the shareholders of eSupplies (Alberta) Ltd. to sell
their shares to eSupplies.com Inc. upon such company going public.
(c) Title to Shares. Chell is the registered and beneficial owner of the Chell
Canadian Shares and Chell US Shares registered on the books of the
relevant corporations in Chell's name and has good and marketable title to
the Shares owned by him, free and clear of all Encumbrances of any kind
and Chell has not received any notice of any adverse claim with respect to
the Shares. The Chell Canadian Shares and the Chell US Shares are subject
to escrow agreements, the details of which have been provided to Networks
North.
(d) Resident of Canada. Chell is not a non-resident of Canada under the Income
Tax Act (Canada).
(e) Insolvency. Chell is not insolvent, has not committed an act of
bankruptcy, proposed a compromise or arrangement of its creditors
generally, had any petition or receiving order in bankruptcy filed against
it, taken any proceedings with respect to a compromise or arrangement or
to have a receiver appointed over any part of its assets, had an
encumbrancer take possession of any of its property, or had an execution
or distress become enforceable or levied upon any of its property. With
respect to eSupplies (Alberta) Ltd. and C Me Run Corp., they are start-up
companies with limited revenue and, without additional financing, will not
be able to properly develop their products and services.
(f) Governmental Filings. No consent, approval, order or authorization of, or
registration, declaration or filing with any governmental entity is
required to be obtained or made by Chell in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this agreement except:
(i) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the
securities or antitrust laws including the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
(ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a
material affect on the Chell Canadian Shares or the Chell US Shares
or have a material adverse effect on the ability of the parties
hereto to consummate the transactions contemplated in this
Agreement.
(g) Authorized and Issued Capital. C Me Run Corp. is a company incorporated
pursuant to the laws of the State of Delaware. To the best of knowledge of
Chell, the authorized and issued capital of C Me Run Corp. is as listed in
C Me Run Corp.'s most recent SEC filing. C Me Run is in the process of a
takeover of a private company, C Me Run (Alberta) Ltd., (the details of
which have been provided to Networks North) which will result in
additional common shares of C Me Run being issued on a fully diluted
basis. eSupplies (Alberta) Ltd. is a company incorporated pursuant to the
laws of the Province of Alberta. The authorized capital of eSupplies
(Alberta) Ltd. consists of an unlimited number of common shares of which
3,550,000 common shares are issued and outstanding as fully paid and
non-assessable. The details of additional options and warrants to be
issued have been provided to Networks North and are contained in Exhibit
"C" in the proxy circular filed with the Securities and Exchange
Commission with respect to the Special Meeting of Shareholders to approve
the transactions contemplated herein
(h) Absence of Certain Changes or Events. To the best of the knowledge, since
the effective date of the Stanford Keene Fairness Valuation on May 31,
2000 to the date hereof, there has not been:
<PAGE>
13
(i) any Material Adverse Effect on eSupplies (Alberta) Ltd. or C Me Run
Corp.;
(ii) any declaration, setting aside or payment of any dividend on, or
other distribution (whether in cash, stock or property) in respect
of the Chell US Shares or the Chell Canadian Shares, or any
purchase, redemption or other acquisition by eSupplies (Alberta)
Ltd. or C Me Run Corp. of their capital stock or any other
securities of eSupplies (Alberta) Ltd. or C Me Run Corp. or any
options, warrants, calls or rights to acquire any such shares or
other securities;
(iii) any material change by eSupplies (Alberta) Ltd. or C Me Run Corp. in
their accounting methods, principles or practices, except as
required by concurrent changes in the relevant GAAP; or
(iv) any diminution of assets of eSupplies (Alberta) Ltd. or C Me Run
Corp. including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable
other than in the ordinary course of business.
For the purposes of this section, "Material Adverse Effect" means any
change, event, violation, inaccuracy, circumstance or effect that is
materially adverse to the business, assets (including intangible assets),
capitalization, financial condition or results of operations of such
entity and its subsidiaries taken as a whole, except for those changes,
events, violations, inaccuracies, circumstances and effects that (i) are
caused by conditions affecting the Canadian or United States economy as a
whole or affecting the industry in which such entity competes as a whole
or (ii) are related to or result from announcement or pendency of the
transactions contemplated by this Agreement provided, however, that in the
case of each of the exceptions set forth in (i) and (ii) above, the entity
relying upon such exception to demonstrate that a Material Adverse Effect
has not occurred shall bear the burden of proof, by a preponderance of the
evidence, that such exception is applicable.
(i) Tax Matters. To the best of knowledge of Chell, subject to any requirement
to file arising from, or in connection with the transactions contemplated
in this Agreement, eSupplies (Alberta) Ltd. or C Me Run Corp. have (and
with respect to C Me Run Corp. except where its public filings with the
SEC indicate otherwise):
(i) prepared and filed with the appropriate governmental authorities by
the required filing date all Tax Returns required to be filed by it
under all applicable laws or regulations, which Tax Returns, were
prepared in conformity with such applicable laws and regulations and
properly reflect, and do not understate, the taxable income and the
liability for Taxes of such corporation in the relevant taxation
year;
(ii) paid all Taxes as they have become due and payable; and
(iii) made sufficient provision in their financial statements (or
accounting records in the case where no financial statements have
been prepared) for all accrued but unpaid Taxes, if any, whether or
not disputed, for all relevant periods.
There are no actions, suits, tax audits or other proceedings or
investigations or claims in progress, pending or threatened in writing
against eSupplies (Alberta) Ltd. or C Me Run Corp. (the "Taxable Parties")
in respect of any Taxes and, in particular, there are no currently
outstanding reassessments or written inquiries which have been issued or
raised by any governmental authority relating to Taxes nor is Chell aware
of any contingent liabilities for Taxes or any reasonable grounds for an
assessment or reassessment of any Tax Return filed by the Taxable Parties,
and has not received any indication from any taxing authorities that an
assessment or reassessment is proposed in respect of any Taxes, regardless
of the merits. Neither eSupplies (Alberta) Ltd. nor C Me Run Corp. have
executed or filed with any taxing authority any agreement extending the
period for assessment, reassessment or collection of Taxes, or any waiver
or agreement regarding statutes of limitations relating to Taxes and all
Taxes which are required to be withheld or collected by the Taxable
Parties from payments made to their respective
<PAGE>
14
present and former employees, officers and directors, and to all persons
who are not residents of Canada for purposes of the Income Tax Act (with
respect to eSupplies (Alberta) Ltd.) have been duly withheld or collected
and, to the extent required, have been duly remitted to the proper taxing
authorities. Each of eSupplies (Alberta) Ltd. and C Me Run Corp. have
properly withheld all Canada Pension Plan contributions, unemployment
insurance premiums, employer health taxes and other Taxes payable by it in
respect of its employees and has remitted, or will remit such amounts to
the proper taxing authorities within the time required by the applicable
legislation if such time is prior to the Closing Date.
eSupplies (Alberta) Ltd. is properly registered under the Excise Tax Act
(Canada) for the purposes of the goods and services tax (GST), if required
pursuant to the provisions of the Excise Tax Act (Canada), and has
charged, collected and remitted, in the time and manner required under the
said Act, all Taxes required to be charged, collected and remitted
pursuant to the Excise Tax Act (Canada) in respect of any "taxable supply"
(as such term is defined under the applicable sections of the said Act)
made by each of them.
(j) Intellectual Property Rights. Chell is the owner of the domain name and
tradename and has applied for a trademark for the name "Chell.com" in
Canada and the United States. Chell is the owner of the tradename and has
applied for a trademark for the name "Chell Corp." in Canada and Chell
Corporation in Canada and the United States.
(k) Litigation. No claim, action, suit, proceeding, litigation, arbitration or
investigation has been commenced or threatened against the Chell with
respect to the Chell Canadian Shares or the Chell US Shares and no basis
therefor is known to Chell. None of the Chell US Shares or the Chell
Canadian Shares is subject to any continuing injunction, judgment or other
order of any court, arbitrator or governmental agency which would prohibit
the transactions hereunder from taking place. Chell, with respect to the
Chell Canadian Shares or the Chell US Shares, is not in default under any
order, licence, regulation, or demand of any federal, provincial,
municipal or other governmental agency or regulatory body or with respect
to any order, writ, injunction or decree of any court.
3.03 Representations and Warranties of NNAC and Networks North. NNAC and
Networks North jointly and severally represent and warrant to the Vendors,
except as otherwise set forth in Networks North's SEC filings, as follows
and acknowledge that the Vendors are relying upon such representations and
warranties in connection with the sale by the Vendors of the Assets:
(a) Schedules. The Networks North Schedule attached reference complete and
accurate information regarding those matters to which such schedule
pertains.
(b) Corporate Existence. NNAC is duly incorporated, organized and validly
existing under the laws of the Province of Ontario and Networks North is
duly incorporated, organized and validly existing under the laws of the
State of New York. NNAC will have and Networks North has the corporate
power and authority and does now possess all governmental and other
permits, licences and other authorizations required to own or lease its
properties, and to carry on its business.
(c) Authority. This Agreement, when executed and delivered by the parties
hereto, will constitute a valid and binding agreement of NNAC and Networks
North in accordance with its terms. Subject to shareholder approval and
applicable securities laws, none of the execution and delivery of this
Agreement, the consummation of the transactions contemplated by this
Agreement and the compliance with or fulfilment of the terms and
provisions of this Agreement, will conflict with or result in a breach of
the terms, conditions or provisions of or constitute a default under any
of NNAC's or Networks North's respective constating documents or by-laws,
any instrument, agreement, mortgage, judgment, order, award, decree or
other restriction to which it is a party or by which it is bound or any
regulatory provisions affecting it.
(d) Governmental Filings. To the best of knowledge on Networks North and NNAC,
no consent, approval, order or authorization of, or registration,
declaration or filing with any governmental entity is required to
<PAGE>
15
be obtained or made by Networks North in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this agreement except:
(i) the filing of a Registration Statement with the Securities and
Exchange Commission ("SEC") in accordance with the Securities Act of
1933;
(ii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the
securities or antitrust laws including the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
(iii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not be material to
Networks North or have a material adverse effect on the ability of
the parties hereto to consummate the transactions contemplated in
this Agreement.
(e) Authorized and Issued Capital. The authorized capital of Networks North
consists of 20,000,000 common shares and 1,500,000 shares of Preferred
Stock of which 2,894,653 common shares and 900,000 Preferred Stock are
issued and outstanding as fully paid and non-assessable to Networks
North.. The authorized capital of NNAC will consist of an unlimited number
of common shares of which 100 common shares will be issued to Networks
North .
(f) Options and Calls. There are no outstanding agreements, calls,
commitments, options, subscriptions, warrants or other rights or
privileges to require NNAC or Networks North to issue additional shares,
whether upon the conversion of other securities or otherwise except with
respect to the Employee Option Plan of Networks North which permits the
distribution of 1,000,000 options to employees and contractors of Networks
North and its subsidiaries and of which 874,985 options have been granted
as of July 14, 2000 and the Preferred Stock referred to in subsection
3.03(e) which is convertible into 300,000 common shares.
(g) Subsidiaries. NNAC will be a wholly-owned subsidiary of Networks North.
Other than NNAC, Networks North does not own any interest in or controls,
directly or indirectly, any corporation, business trust, partnership,
limited partnership, joint venture or other person save and except the
following directly or indirectly wholly-owned subsidiaries:
(i) NTN Interactive Networks Inc.;
(ii) 3484751 Canada Inc.
(iii) GalaVu Entertainment Network Inc.
(iv) Magic Lantern Communications Ltd.
(v) Interlynx Multimedia Inc.
(vi) 745695 Ontario Ltd.
(vii) B.C. Learning Connection Inc.
(viii) 1113659 Ontario Ltd.
Magic Lantern Communications Inc. is the owner of 75 common shares of the
100 common shares outstanding in Sonoptic Technologies Inc. while the
balance are held by the government of New Brunswick through Provincial
Holdings Inc.
(h) Financial Assistance. Except as set out on the Networks North Schedule and
except in the ordinary course of business, neither Networks North nor any
of its subsidiaries has, directly or indirectly, made any loans, provided
financial assistance in any form, or given any guarantees, to or in
respect of the obligations of any person, other than loans, financial
assistance or guarantees which are no longer outstanding.
(i) No Distributions on Shares. Networks North has not, since its most
recently completed fiscal year, purchased or redeemed any shares in the
capital of the Corporation, paid or declared any dividend, made
<PAGE>
16
or agreed to make any other distribution in respect of its capital or
passed any resolution authorizing any of such actions, or made or agreed
to make charitable contributions or donations out of the ordinary course
of business.
(j) SEC Filings - Networks North Financial Statements. Networks North has
filed all forms, reports and documents required to be filed by it with the
SEC and has made available to the Vendors such forms, reports and
documents in the form filed with the SEC. All such required forms, reports
and documents (including those that Network's North may file subsequent to
the date hereof) are referred to herein as the "Networks North SEC
Filings" As of their respective dates, the Networks North SEC Filings:
(i) were prepared in accordance with the requirements of the Securities
Act of 1933 or and the rules and regulations of the SEC thereunder
applicable to such Networks North SEC Filings, and
(ii) did not at the time they were filed (or if amended or superseded by
a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. NNAC is
not required to file any forms, reports or other documents with the
SEC.
Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Networks North SEC Filings
(the "Networks North Financials"), including any Networks North SEC
Filings filed after the date hereof until the Closing,
(A) complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto,
(B) was prepared in accordance with Canadian or United States GAAP, as
indicated on such statements applied on a consistent basis
throughout the periods involved (except as may be indicated in the
notes thereto or, in the case of unaudited interim financial
statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and
(C) fairly presented the consolidated financial position of Networks
North and its subsidiaries as at the respective dates thereof and
the consolidated results of Networks North's operations and cash
flows for the periods indicated, except that the unaudited interim
financial statements may not contain footnotes and were or are
subject to normal and recurring year-end adjustments. The balance
sheet of Networks North contained in the Networks North SEC Filings
as of February 29, 2000, is hereinafter referred to as the "Networks
North Balance Sheet."
(k) Absence of Certain Changes or Events. Since the date of the Networks North
Balance Sheet, there has not been:
(i) any Material Adverse Effect on Networks North other than substantial
losses incurred by Networks North as a result of its investment in
Interlynx Multimedia,
(ii) any declaration, setting aside or payment of any dividend on, or
other distribution (whether in cash, stock or property) in respect
of, Network North's capital stock, or any purchase, redemption or
other acquisition by Networks North of its capital stock or any
other securities of Networks North or any options, warrants, calls
or rights to acquire any such shares or other securities except for
repurchases from employees following their termination pursuant to
the terms of their pre-existing stock option or purchase agreements;
(iii) any material change by Networks North in its accounting methods,
principles or practices, except as required by concurrent changes in
the relevant GAAP; or
<PAGE>
17
(iv) any diminution by Networks North of any of its assets, including,
without limitation, writing down the value of capitalized inventory
or writing off notes or accounts receivable other than in the
ordinary course of business.
For the purposes of this section, "Material Adverse Effect" means any
change, event, violation, inaccuracy, circumstance or effect that is
materially adverse to the business, assets (including intangible assets),
capitalization, financial condition or results of operations of such
entity and its subsidiaries taken as a whole, except for those changes,
events, violations, inaccuracies, circumstances and effects that (i) are
caused by conditions affecting the Canadian or United States economy as a
whole or affecting the industry in which such entity competes as a whole
or (ii) are related to or result from announcement or pendency of the
transactions contemplated by this Agreement provided, however, that in the
case of each of the exceptions set forth in (i) and (ii) above, the entity
relying upon such exception to demonstrate that a Material Adverse Effect
has not occurred shall bear the burden of proof, by a preponderance of the
evidence, that such exception is applicable.
(l) Real Estate. At the time of Closing, NNAC and Networks North will not own
any real property. The only real property owned by subsidiaries of
Networks North are:
(i) Units 36, 37 and 38, 775 Pacific Road, Oakville, Ontario owned by
Magic Lantern Communications Inc.
(ii) 14 Meteor Drive, Toronto, Ontario owned by NTN Interactive Network
Inc.
(iii) 10 Meteor Drive, Toronto, Ontario owned by 3484751 Canada Inc.
To the best of knowledge of Networks North, with respect to the real
property (the "Real Property"):
(A) there are no outstanding work orders or other requirements against
the Real Property by any governmental authority, department or
agency;
(B) the Real Property and all of the buildings located upon it and
improvements thereto and the purposes for which any of them are
used, comply in all respects with the relevant zoning, building,
environmental and other governmental or municipal by-laws, laws,
requirements, regulations and ordinances (including municipal and
provincial fire regulations and pollution control regulations) and
with Fire Underwriters' regulations;
(C) all structures located on the Real Property (including all walls,
roofs, floors, sub-floors, foundations, partitions and ceilings) and
the pavement, sidewalks, driveways and parking areas situate upon
the Real Property are in good order and sound condition and free
from all defects (structural or otherwise), weaknesses and leakages,
and the chattels, elevators and equipment, if any, and all plumbing,
heating, ventilating, air conditioning, utility, sprinkler systems,
drainage, electrical systems and all wiring and mechanical equipment
and related accessories and installations, and other equipment
contained in, on, about or used in connection with the buildings
situated on the Real Property and the Real Property are in good
working order and repair, and sufficient for the use for which such
equipment and the Real Property is being employed;
(D) the Real Property is serviced by all required municipal, private and
public utility services including, without limitation, storm and
sanitary sewers, water, drainage, hydro, telephone and gas services,
and such services are adequate and sufficient for the buildings
located on the Real Property and serviced thereby, and have been
fully paid for and the cost thereof is not chargeable against the
Real Property by way of local improvement charges;
(E) there is full ingress and egress to and from the Real Property to
and from the public road(s) abutting or adjacent to the Real
Property for all pedestrian and vehicular traffic using the Real
<PAGE>
18
Property for the purposes of the Business, and such ingress and
egress is and has been uninterrupted along the full frontages of the
Real Property upon such public road(s);
(F) there has not been received by Networks North or anyone on behalf of
Networks North or its subsidiaries, any notice with respect to any
by-law change affecting the premises located on the Real Property,
the use of such premises, or relating to any threatened or pending
condemnation or expropriation of such premises;
(G) the structures, fixtures and improvements on the Real Property do
not encroach in any manner on property of others, and the Real
Property is not encroached upon in any manner by structures or
improvement of others;
(H) neither Networks North, its subsidiaries or anyone on behalf of them
has received any notice from any insurance carrier of defects or
inadequacies in any buildings situated on the Real Property, which,
if not corrected, could result in termination of insurance coverage
or an increase in the cost of coverage;
(I) there is no request or application pending or threatened proceeding
to alter or restrict the zoning or other use restrictions applicable
to any of the Real Property;
(J) to the best of the knowledge of Networks North and its subsidiaries,
neither the Real Property nor any lands adjacent to it has ever been
used for the purpose of a waste disposal site;
(K) no hazardous substance, including, without limitation, asbestos,
urea formaldehyde foam insulation, radon gas and PCBs, is or has
been located, stored or incorporated in or on the Real Property or
any of the buildings situated on it. Networks North has complied
with all federal, provincial and municipal orders, regulations and
by-laws relating to environmental and occupational health and safety
matters, including the disposal of hazardous substances;
(L) no excavation has been made in or upon the Real Property, nor any
fill placed in or about the Real Property, during the period of
ownership or control of the Real Property by Networks North or any
associated or affiliate corporation;
(M) Networks North has complied with all federal, provincial and
municipal orders, regulations and by-laws relating to environmental
matters, and without limitation, there have been no "spills" of
"pollutants", as those terms are defined in the Environmental
Protection Act, R.S.O. 1980 c. 141, or such applicable legislation
in the jurisdiction where the Real Property is located, for which
Networks North is responsible either as the "owner of the
pollutant", or "person having control of a pollutant" as those terms
are defined in such Act, nor have there been any other events,
accidents or episodes of a similar nature that would impose duties
and obligations on Networks North or its subsidiaries under
environmental legislation of other governmental authority having
jurisdiction; and
(N) the processing, storage, and handling, and disposal of chemicals,
hazardous substances and other products harmful to the environment
on and from the Real Property are being conducted in accordance with
all applicable municipal, provincial and federal legislation.
(m) Leases. All leased property of Networks North or its subsidiaries is
listed in the Networks North Schedule. Each lease and/or offer or
agreement to lease:
(i) is in full force and effect and in good standing and constitutes a
legal, valid and binding obligation of Networks North or its
subsidiary which is a party thereto, and, without limiting the
generality of the foregoing, there has been no default thereunder by
the tenant, or to the best of the knowledge Networks North or its
subsidiary, by the landlord, and neither Networks North or
<PAGE>
19
its subsidiaries have received notice of termination or threat by
the landlord to terminate such lease or agreement to lease; and
(ii) except where consent, approval or act of any party is required
pursuant to the terms of leases or agreements to lease, copies of
which have been delivered to Chell.com's Counsel, will continue in
full force and effect notwithstanding the closing of the
transactions contemplated by this Agreement without the consent,
approval or act of any party under such lease or agreement to lease;
for greater certainty, NNAC and Networks North will obtain any
required consents prior to the Closing Date;
With respect to all Leased Property:
(A) to the best of Networks North's knowledge, the premises and
improvements thereto and the purposes for which any of them are
used, comply in all respects with the relevant zoning, building,
environmental and other governmental or municipal by-laws, laws,
requirements, regulations and ordinances (including municipal and
provincial fire regulations and pollution control regulations) and
with Fire Underwriters' regulations;
(B) there has not been received by Networks North, its subsidiaries or
anyone on behalf of them, any notice with respect to any by-law
change affecting the premises or relating to any threatened or
pending condemnation or expropriation of such premises;
(C) none of Networks North, its subsidiaries or anyone on behalf of them
has received any notice from any insurance carrier of defects or
inadequacies in any of the premises, which, if not corrected, could
result in termination of insurance coverage or an increase in the
cost of coverage;
(n) Proprietary Rights. Networks North and its subsidiaries own no copyrights,
uncopyrighted works, registered or unregistered trade marks, certification
marks, trade names, industrial designs, patents, patent applications,
unpatented inventions, trade secrets, know-how and other proprietary
rights except the trademarks Videobase, Profis and Networks North (the
"Proprietary Rights"). The use of such Proprietary Rights by NNAC or
Networks North in the conduct of their business does not infringe or
violate any proprietary rights belonging to third parties, including
proprietary rights owned by a third party to any computer software
programs now used in the conduct of the business, all of which computer
software programs are properly licensed by the NNAC and Networks North.
(o) Absence of Certain Changes or Events. Except as set out on the Networks
North Schedule, since the date of the Networks North Financials, Networks
North has not:
(i) incurred any fixed or contingent obligation, liability or commitment
except trade or business obligations incurred in the ordinary course
of business, none of which is materially adverse or was entered into
for inadequate consideration;
(ii) discharged or satisfied any Encumbrance or paid or satisfied any
fixed or contingent obligation or liability, except for current
obligations or liabilities incurred in the ordinary course of
business;
(iii) mortgaged, pledged or subjected any of the assets of the business to
any Encumbrance, other than liens, if any, for current taxes not yet
due and payable;
(iv) entered into any lease or rental agreement or transferred, leased,
licensed or disposed of any of the assets of the business other than
renewals of any existing leases in accordance with the renewal
rights contained therein;
<PAGE>
20
(v) waived, released, cancelled or compromised any debt, claim or right,
other than in the ordinary course of business;
(vi) transferred or granted any right under any lease, license or other
agreement or with respect to any intangible asset other than in the
ordinary course of business;
(vii) paid or agreed to pay any bonus to any executive of Network North or
its subsidiaries;
(viii) suffered any material casualty loss (whether or not covered by
insurance) or any material operating or other loss;
(ix) suffered any adverse change in, or any event or events which have
had or will have a material adverse effect on, the assets or the
liabilities of Network's North or any of its subsidiaries, the
conduct of their respective businesses or the condition (financial
or otherwise) or prospects of Networks North taken as a whole;
(x) made any loan to or entered into any other transaction with any of
its officers, directors, employees or shareholders giving rise to
any claim or right of, by, or against any such person and, except as
disclosed in the Parent Financials. None of Networks North or its
subsidiaries is indebted to any of its officers, directors,
employees or shareholders or any other person not dealing at arms'
length with such corporation;
(xi) made or entered into any contract or commitment to make any capital
expenditures out of the ordinary course of business other than
approximately $500,000 Canadian dollars which have been committed to
capital expenditures for Gala Vu Entertainment Network Inc.;
(xii) declared or paid any dividend or made or agreed to make any payment
or distribution to any shareholder;
(xiii) issued, sold or granted any options, rights or warrants to
purchase, or subscribe for, any shares of any corporation;
(xiv) sold or otherwise disposed of any fixed or capital assets except in
the ordinary course of business;
(xv) amended or terminated any contract or agreement which is material to
the business of Networks North or any of its subsidiaries; or
(xvi) entered into any agreement or commitment to do or cause any of the
matters described above to occur.
(p) No Defaults under Agreements; No Violation of Laws. None of Networks North
or any of its subsidiaries has received notice of, or has knowledge of,
the existence of any material default or event of default or the
occurrence of any event which with notice or lapse of time, or both, would
constitute a material default, and which is continuing, under the terms or
provisions, express or implied, of any agreement to which any of the
assets, shares, or the conduct of the business are subject. None of
Network's North or any of its subsidiaries has received notice of, or has
any knowledge of, a violation of any applicable federal, provincial, state
or municipal law, ordinance, regulation, order or requirement relating to
the assets, shares, or the conduct of the business which may have a
material adverse effect on the assets, shares, or the conduct of the
business. Networks North and its subsidiaries are conducting the business
in material compliance with all applicable laws, regulations, by-laws and
ordinances of each jurisdiction in which the business is carried on;
(q) Litigation. No claim, action, suit, proceeding, litigation, arbitration or
investigation has been commenced or threatened in writing against Networks
North or any of its subsidiaries, except as set out
<PAGE>
21
in Networks North SEC Filings (and no basis therefor is known to Networks
North). No matter which is set out in the Networks North SEC Filings
would, if decided adversely against Networks North or its subsidiaries,
have a material adverse effect on the conduct of their business or upon
their assets or shares. None of Networks North or its subsidiaries is
subject to any continuing injunction, judgment or other order of any
court, arbitrator or governmental agency. None of Networks North or its
subsidiaries is in material default under any order, licence, regulation,
or in any default of any demand of any federal, provincial, municipal or
other governmental agency or regulatory body or with respect to any order,
writ, injunction or decree of any court.
(r) Tax Matters. Subject to any requirement to file arising from, or in
connection with, the transactions contemplated in this Agreement, Networks
North and its subsidiaries have:
(i) prepared and filed with the appropriate governmental authorities by
the required filing date all Tax Returns required to be filed by it
under all applicable laws or regulations, which Tax Returns, were
prepared in conformity with such applicable laws and regulations and
properly reflect, and do not understate, the taxable income and the
liability for Taxes of such corporation in the relevant taxation
year;
(ii) paid all Taxes as they have become due and payable; and
(iii) made sufficient provision in the Financial Statements for all
accrued but unpaid Taxes, if any, whether or not disputed, for all
relevant periods.
Except as disclosed in the Networks North SEC Filings, there are no
actions, suits, tax audits or other proceedings or investigations or
claims in progress, pending or threatened in writing against Networks
North or any of its subsidiaries in respect of any Taxes and, in
particular, there are no currently outstanding reassessments or written
inquiries which have been issued or raised by any governmental authority
relating to Taxes. Networks North is not aware of any contingent
liabilities for Taxes or any reasonable grounds for an assessment or
reassessment of any Tax Return filed by Networks North or any of its
subsidiaries, and has not received any indication from any taxing
authorities that an assessment or reassessment is proposed in respect of
any Taxes, regardless of the merits. Neither Networks North or its
subsidiaries has executed or filed with any taxing authority any agreement
extending the period for assessment, reassessment or collection of Taxes,
or any waiver or agreement regarding statutes of limitations relating to
Taxes. Except as disclosed in the Networks North SEC Filings all Taxes
which are required to be withheld or collected by Networks North and each
of its subsidiaries from payments made to their respective present and
former employees, officers and directors, and to all persons who are not
residents of Canada for purposes of the Income Tax Act have been duly
withheld or collected and, to the extent required, have been duly remitted
to the proper taxing authorities. Each subsidiary of Networks North has
properly withheld all Canada Pension Plan contributions, unemployment
insurance premiums, employer health taxes and other Taxes payable by it in
respect of its employees and has remitted, or will remit such amounts to
the proper taxing authorities within the time required by the applicable
legislation if such time is prior to the Closing Date.
(s) GST. Each subsidiary of Networks North is properly registered under the
Excise Tax Act (Canada) for the purposes of the goods and services tax
(GST), if required pursuant to the provisions of the Excise Tax Act
(Canada), and each has charged, collected and remitted, in the time and
manner required under the said Act, all Taxes required to be charged,
collected and remitted pursuant to Part IX of the Excise Tax Act (Canada)
in respect of any "taxable supply" (as such term is defined under the
applicable sections of the said Act) made by each of them.
(t) Potential Conflicts of Interest. No officer, director or shareholder of
Networks North or any subsidiary, and no person directly or indirectly
controlling or controlled by, or under the direct or indirect control of,
any of the foregoing persons:
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22
(i) owns, directly or indirectly, any interest in, or is an officer,
director, employee or consultant of, any person which is a
competitor, lessor, lessee, customer or supplier of Networks North
or any of its subsidiaries;
(ii) holds a beneficial interest in any contract or other agreement to
which Networks North or any subsidiary is a party or by which it is
obligated or bound;
(iii) owns, directly or indirectly, in whole or in part, any tangible or
intangible property (including, without limitation, any Proprietary
Rights) which any of NNAC and Networks North are using or the use of
which is necessary for their business; or
(iv) has any cause of action or other claim whatsoever against NNAC and
Networks North, except for claims in the ordinary course of
business, such as for accrued vacation pay.
All purchases and sales or other transactions, if any, between any of NNAC
and Networks North and any such persons have been made on the basis of
prevailing market rates and all such transactions have been made on terms
no less favorable to NNAC and Networks North than those which would have
been available from unrelated third parties.
(u) Payments to Directors, Officers and Employees. Since the date of the
Networks North Financials, no payments have been made or authorized by
Networks North or its subsidiaries to its officers, directors,
shareholders or employees, except in the ordinary course of the business
and at the regular rates or salary or remuneration payable to such
persons, or as otherwise specifically disclosed or contemplated by this
Agreement.
(v) Amounts Due from Officers. Except as set out in the Networks North
Schedules, as of this date, there are no accounts receivable, notes
receivable or any other amounts due to Networks North or any of its
subsidiaries from officers, directors or shareholders of Networks North or
its subsidiaries.
(w) Insolvency. Networks North, on a consolidated basis with its subsidiaries
is not insolvent, has not committed an act of bankruptcy, proposed a
compromise or arrangement of its creditors generally, had any petition or
receiving order in bankruptcy filed against it, taken any proceedings with
respect to a compromise or arrangement or to have a receiver appointed
over any part of its assets, had an encumbrancer take possession of any of
its property, or had an execution or distress become enforceable or levied
upon any of its property.
(x) Full Disclosure. The information furnished to Chell.com by Networks North
in connection with this Agreement and the transactions contemplated by
this Agreement does not contain any untrue statement of a material fact
and does not omit to state any material fact necessary to make the
statements made, in the context in which made, not false or misleading.
ARTICLE 4.00 - COVENANTS
4.01 Covenants of NNAC and Networks North During Interim Period. Networks North
hereby covenants that, during the Interim Period, it shall and, where
applicable, it shall cause its subsidiaries to:
(a) carry on their business in the ordinary course; and
(b) give the Vendors and Chell.com's Counsel, and advisors, reasonable access
during normal business hours to the properties, books, contracts,
commitments and records Networks North and its subsidiaries;
(c) furnish the Vendors with all information concerning the affairs of
Networks North and its subsidiaries as the Vendors may reasonably request;
<PAGE>
23
(d) instruct and authorize the auditors of Networks North to cooperate with
the Chell.com's Counsel and the Vendors advisors and instruct them to give
them reasonable access during such period to their files and working
papers to their audit and tax files with respect to Networks North and its
subsidiaries;
(e) obtain all consents and approvals reasonably required by the Vendors
pursuant to the terms of any leases, contracts or rights of Networks North
or any of its subsidiaries;
(f) set forth for approval in its circular to shareholders for the annual
meeting of shareholders of Networks North, a resolution approving the
transactions contemplated hereby and a resolution to amend the company's
employee option plan whereby the amount of common stock available for
grant pursuant to the plan will be a rolling 20% of the issued and
outstanding common stock of Networks North at any time;
(g) enter into a licence agreement with Chell with respect to the trademark,
domain names and stylized logo for Chell.com and Chell Corporation which
license will include those terms set out in section 3.01(o)(iii);
(h) treat in confidence all documents, materials and other information and
findings which it or any of its authorized representatives, has obtained
concerning Chell.com, the Chell.com Assets, enGyro, cDemo Inc., eSupplies
(Alberta) Ltd., or C Me Run Corp., during the Interim Period in the course
of its investigations and
(i) bring forth a resolution before the board of directors of Networks North
approving of the business combination set out herein and thereby waiving
restrictions imposed by section 912 of the New York Business Corporation
Law;
(j) promptly advise the Vendors in writing of any material adverse change in
the condition, financial or otherwise, of Networks North or any of its
subsidiaries.
(k) promptly cause NNAC to be incorporated with Networks North being the only
shareholder of 100 common shares and to cause NNAC to pass a resolution
adopting this Agreement and agreeing to be bound by the terms hereof.
4.02 Covenants of the Vendors During Interim Period. The Vendors hereby
covenants that, during the Interim Period, they shall:
(a) give Networks North, Networks North's counsel and its advisors, reasonable
access during normal business hours to the properties, books, contracts,
commitments and records of Chell.com and Chell pertaining to the Assets
and make arrangements for access to same with respect to enGyro, eSupplies
(Alberta) Ltd. and cDemo Inc. With respect to C Me Run Corp., Chell will
make arrangements for meetings and correspondence to take place with
management;
(b) furnish Networks North with all information concerning the Assets as
Networks North may reasonably request;
(c) obtain all consents and approvals reasonably required by Networks North
for the transfer of the Assets;
(d) treat in confidence all documents, materials and other information and
findings which it or any of its authorized representatives, has obtained
concerning Networks North and NNAC during the Interim Period in the course
of its investigations; and
(e) promptly advise Networks North in writing of any material adverse change
in the condition, financial or otherwise, of the Assets.
<PAGE>
24
4.03 Covenants on Closing.
(a) To the extent that such are within Networks North's power and control,
Networks North covenants that at the Time of Closing it will satisfy, or
cause to be satisfied, all conditions precedent to the obligations of the
Vendors set out in this Agreement.
(b) To the extent that such are within the Vendors power and control, the
Vendors covenant that at the Time of Closing they will satisfy, or cause
to be satisfied, all conditions precedent to the obligations of Networks
North set out in this Agreement.
4.04 Post-Closing Covenants
(a) The Vendors severally agree that, subsequent to the Time of Closing, they
will, at the request and expense of Networks North, execute and deliver
such additional conveyances, transfers and other assurances as, in the
opinion of the Networks North's Counsel, are reasonably required to carry
out the intent of this Agreement and to transfer the Assets to Networks
North and NNAC;
(b) Chell.com and Chell agree, subsequent to the Time of Closing, they will at
the request and expense of Networks North, take all steps reasonably
required by Networks North to assist Networks North in retaining the
goodwill of Chell.com; and perform all of their obligations to be
performed under this Agreement after the Time of Closing.
(c) Networks North agrees that, subsequent to the Time of Closing, they will,
at the request and expense of the Vendor making such request, execute and
deliver such additional conveyances, transfers and other assurances as, in
the opinion of the particular Vendor or Chell.com's Counsel, are
reasonably required to carry out the intent of this Agreement.
(d) Networks North covenants to submit a registration statement in accordance
with the Securities Act of 1933, and to declare such registration
effective, which registration statement shall include all shares of
Networks North issued to the Vendors and shares of Networks North into
which the shares of NNAC to be issued in accordance with this Agreement
are convertible, within six (6) months of the Closing Date. The Vendors
acknowledge that any registration is subject to approval of the Securities
and Exchange Commission.
(e) The parties agree to file, if available, any applicable GST elections
under the Excise Tax Act which would permit the transfer of the Assets on
an exempt basis.
(f) Networks North covenants to change its name to Chell Corporation and to
apply to NASDAQ for a change in its ticker symbol.
ARTICLE 5.00 - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE VENDORS
5.01 Conditions Precedent. The obligations of the Vendors under this Agreement
are subject to the fulfillment, at or before the Time of Closing, of the
following conditions. All of the following conditions have been included for the
sole benefit of the Vendors and each is a condition of the closing of the
transactions provided for in this Agreement. Any of the following conditions may
be waived by the Vendors, in whole or in part, at or at any time prior to the
Time of Closing, provided that no such waiver shall constitute a waiver by the
Vendors of any of their other rights or remedies in connection with any other
condition or conditions, and any waiver will only be binding upon the Vendors if
made by the Vendors in writing:
(a) No Misrepresentations or Breach of Covenants and Warranties. All of the
representations and warranties of each of NNAC and Networks North
contained in this Agreement are true and correct in all respects at the
Time of Closing with the same effect as though such representations and
warranties had been made at and as of such time and there has been
compliance by each of NNAC and Networks North with, and no
<PAGE>
25
breach by any of them of, any of their covenants in this Agreement
including, without limiting the foregoing, the approval of the
shareholders of Networks North;
(b) No Changes in Operations. During the Interim Period, there has been no
material adverse change in the business or in the affairs, liabilities, or
condition (financial or otherwise), or prospects of Networks North or any
of its subsidiaries, or other event or development which would, in the
sole discretion of the Vendors, affect the decision of a prudent purchaser
in similar circumstances to complete the transactions contemplated hereby,
and there has been no material adverse legislative or regulatory change
affecting the business of Networks North or its subsidiaries;
(c) Officer's Declaration of Networks North. The Vendors shall have received a
statutory declaration of a senior executive officer of Networks North
that, except as set out in Networks North's SEC filings:
(i) there are not any applications or filings outstanding which would in
any way alter the constating documents or corporate status of
Networks North or any of its subsidiaries;
(ii) no resolutions or by-laws have been passed, enacted, consented to or
adopted by the directors or the shareholders of Networks North or
any of its subsidiaries, except those contained in the minute books
of such corporation;
(iii) there are no agreements with shareholders or otherwise which
restricts, in whole or in part, the powers of the directors of
Networks North to manage or supervise the management of the business
and affairs of the Networks North or any of its subsidiaries; and
(iv) such person has no knowledge of any action, suit or proceeding by
any governmental body or authority, or by any private third party,
seeking to restrain the transactions contemplated by this Agreement
or its consummation which has been threatened or instituted against
any of Networks North or its subsidiaries and remains pending at the
Time of Closing.
(d) Restraint of Transactions. No order of any court of competent jurisdiction
is effective restraining the transactions contemplated by this Agreement.
(e) Agreements and Consents. All consents of any persons, which are necessary
to be obtained by Networks North for the consummation of the transactions
contemplated by this Agreement and for the continuance of all contracts,
agreements, licenses, permits and authorizations material to the business
and operations of Networks North or its subsidiaries have been obtained by
Networks North at its sole cost and expense, and delivered to the Vendors
at, or before, the Time of Closing.
(f) Opinion Letter of Networks North's Counsel. The Vendors shall have
received from Networks North's Counsel an opinion, dated the Closing Date,
in form and substance mutually agreed upon by the parties hereto, acting
reasonably. In giving such opinion, the Networks North's Counsel may rely,
as to matters of fact, upon certificates of senior executive officers of
Networks North and a certificate of an official of the jurisdiction
governing the status of Networks North provided that the Networks North's
Counsel states that they believe that they are justified in relying upon
such certificate and deliver copies of all certificates relied upon to the
Vendors prior to, or at, the Time of Closing.
(g) Voting and Exchange Trust Agreement and Support Agreement. Networks North
and the Vendors shall take all steps and execute all documents and
agreements necessary to give effect to the terms of the NNAC Shares
Provisions, including entering into a Voting and Exchange Trust Agreement
with a trustee and whereby Networks North will agree to authorize and
issue a new class of special voting share with that number of votes
attached thereto equal to the Aggregate Equivalent Vote Amount, which
generally is equal to the number of shares of NNAC issued and outstanding
to the Vendors. The Vendors shall be permitted, pursuant to such Voting
and Exchange Trust Agreement to cause the trustee to vote the special
shares at meetings of Networks North's shareholders. Networks North shall
further enter into a Support agreement with NNAC whereby Networks North
shall agree to fund any distributions which are made to
<PAGE>
26
shareholders of Networks North on the same basis to the shareholders of
NNAC. Both agreements shall be satisfactory to the Vendors, acting
reasonably.
(h) Escrow Agreement. Networks North and NNAC shall agree to be bound by any
escrow or lock-up term which applies to the Chell Canadian Shares, Chell
US shares or Chell.com US shares.
(i) Employment Agreement Networks North shall enter into an employment
agreement with Chell hiring Chell as CEO of Networks North with
compensation which shall not be less than that being paid to the current
CEO of Networks North. The contract will also include an obligation to
provide Chell with a personal assistant and to allow Chell to continue
using the services of the CFO of Chell.com for a reasonable period of time
following Closing;
(j) Waivers Networks North shall obtain waivers from all directors, officers
or employees who may have increased compensation as a result of a change
of control, waiving such rights (if such exist) with respect to the
transactions contemplated hereby or an acknowledgment from such parties
that waivers previously executed by them with respect to the purchase of
shares of Networks North on April 4, 2000 by Chell.com apply to the
transactions contemplated hereunder.
(g) Additional Closing Deliveries. In addition to any other instruments and
documents required to be delivered by Networks North pursuant to this
Agreement, Networks North shall deliver or caused to be delivered, at or
before the Time of Closing, the certificates representing the NNAC Shares
registered in the name of the appropriate Vendor and such other documents
as are requested by the Vendors in order to give effect to the
transactions contemplated hereby.
5.02 Result of Failure to Satisfy Condition Precedent. If any of the foregoing
conditions precedent to the obligations of the Vendors have not been
satisfied at the Time of Closing, and have not be waived by the Vendors
at, or at any time prior to, the Time of Closing, the Vendors may:
(a) refuse to complete the transactions contemplated in this Agreement by
giving written notice to Networks North and, in such event, all parties
shall be released from their obligations under this Agreement; or
(b) complete the transactions provided for in this Agreement, it being
expressly understood and agreed that the completion of such transactions
shall not constitute a waiver of any rights or remedies the Vendors may
have in connection with any misrepresentation or breach of warranty or
covenant herein
ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATIONS OF NETWORKS NORTH AND NNAC
6.01 Conditions Precedent. The obligations of each of Networks North and NNAC
under this Agreement are subject to the fulfilment, at or before the Time of
Closing, of the following conditions. All of the following conditions have been
included for the sole benefit of Networks North and NNAC and each is a condition
of the closing of the transactions provided for in this Agreement. Any of the
following conditions may be waived by Networks North and NNAC, in whole or in
part, at or at any time prior to the Time of Closing, by a waiver in writing
signed by Networks North and NNAC, provided that no such waiver shall constitute
a waiver by Networks North and NNAC of any of their rights or remedies in
connection with any other condition or conditions, and any waiver will only be
binding upon Networks North and NNAC if made in writing by Networks North and
NNAC:
(a) No Misrepresentations or Breach of Covenants and Warranties. All of the
representations and warranties of the Vendors contained in this Agreement
are true and correct in all respects at the Time of Closing with the same
effect as though such representations and warranties had been made at and
as of such time and there has been compliance by the Vendors with, and no
breach by the Vendors of, any of its covenants in this Agreement.
<PAGE>
27
(b) No Changes in Operations. During the Interim Period, there has been no
material adverse change in the business or in the affairs, liabilities, or
condition (financial or otherwise), or prospects of Chell.com, Chell.com
USA Inc., eSupplies (Alberta) Ltd., enGyro, C Me Run Corp., or cDemo Inc.,
or other event or development which would, in the sole discretion of
Networks North, affect the decision of a prudent purchaser in similar
circumstances to complete the transactions contemplated hereby, and there
has been no material adverse legislative or regulatory change affecting
the business of Chell.com, Chell.com USA Inc., eSupplies (Alberta) Ltd.,
enGyro, C Me Run Corp., or cDemo Inc.;
(c) Officer's Declaration of Each Seller. Networks North shall have received a
statutory declaration of a senior officer of Chell.com and from Chell in
his individual capacity that with respect only to the parts of this
agreement applicable to them:
(i) all representations and warranties pertaining to them and contained
in this Agreement are true and correct at the Time of Closing as
though then made;
(ii) there has been compliance with each of the covenants and obligations
applicable to them and required to be complied with at or before the
Time of Closing;
(iii) the sale of such Vendor's part of the Assets has been authorized by
all necessary actions;
(d) Restraint of Transactions. No order of any court of competent jurisdiction
is effective restraining the transactions contemplated by this Agreement;
(e) Agreements and Consents. All consents of any persons, which are necessary
to be obtained by the vendors for the consummation of the transactions
contemplated by this Agreement and for the continuance of all contracts,
agreements, licenses and leases which form a material part of the Assets
have been obtained by the Vendors at their sole cost and expense;
(f) Additional Closing Deliveries. In addition to any other instruments and
documents required to be delivered by the Vendors to Networks North or
NNAC pursuant to this Agreement, the Vendors shall have delivered to the
Sellers, at or before the Time of Closing, the following:
(i) certificates representing the Chell Canadian Shares, the Chell US
Shares, the Chell.com Canadian Shares, the Chell.com US Shares
registered in the name of the relevant Vendor;
(ii) an assignment of all employment agreements, leases and other
contracts being transferred as part of the Chell.com Assets;
(iii) a bill of sale for the Chell.com Assets listed in paragraph
1.01(f)(ii);
(iv) confirmation from Frank Killoran, Gordon Herman and David Bolink
that the options held by them as outlined in subsection 3.01(d) do
not affect Networks North's or NNAC's title to the Chell.com US
Shares being transferred to Networks North;
(v) an agreement with the holder of debt being assumed by NNAC in
accordance with subsection 2.03(a)(ii) to accept 451,868 NNAC Shares
in full settlement of the debt.
(g) Opinion Letter of Counsel for the Vendors. Networks North and NNAC shall
have received from Chell.com's Counsel and other Vendor's counsel
opinions, dated the Closing Date, in form and substance mutually agreed
upon by the parties hereto, acting reasonably. In giving such opinion
Chell.com's Counsel and other Vendor's counsel may rely, as to matters of
fact, upon certificates of senior executive officers of Chell.com or
Chell, or a certificate of an official of the jurisdiction governing the
status of such parties as to the corporate status of the such party,
provided that Chell.com's Counsel and other Vendor's counsel state that
they believe that they are justified in relying upon such certificate and
deliver
<PAGE>
28
copies of all certificates relied upon to the Networks North and NNAC
prior to, or at, the Time of Closing.
(h) Release of Security. All Encumbrances affecting the Assets have either
been released and discharged by on or before the Closing Date.
(i) Due Diligence. Networks North and the Committee shall have completed
satisfactory due diligence and the Committee shall have decided to proceed
with the transaction
6.02 Result of Failure to Satisfy Condition Precedent . If any of the foregoing
conditions precedent to the obligations of the Vendors have not been satisfied
at the Time of Closing, and have not been waived by Networks North and NNAC at,
or at any time prior to, the Time of Closing, Networks North and NNAC may:
(a) refuse to complete the transactions contemplated in this Agreement by
giving written notice to the Vendors and, in such event, all parties shall
be released from their obligations under this Agreement; or
(b) complete the transactions provided for in this Agreement, it being
expressly understood and agreed that the completion of such transactions
shall not constitute a waiver of any of the Networks North's or NNAC's'
rights or remedies in connection with any misrepresentation or breach of
warranty or covenant herein.
ARTICLE 7.00
CERTAIN RIGHTS AND OBLIGATIONS OF NETWORKS NORTH TO
ACQUIRE EXCHANGEABLE SHARES
7.01 Networks North Liquidation Call Right
(a) Networks North shall have the overriding right (the "Liquidation Call
Right"), in the event of and notwithstanding the proposed liquidation,
dissolution or winding-up of NNAC as referred to in Article 5 of the NNAC Share
Provisions, to purchase from all but not less than all of the holders (other
than Networks North or any subsidiary thereof) of NNAC Shares on the Liquidation
Date all but not less than all of the NNAC Shares held by such holders on
payment by Networks North to each holder of the Exchangeable Share Price
applicable on the last Business Day prior to the Liquidation Date (the
"Liquidation Call Purchase Price") in accordance with subsection 7.01(c) hereof.
In the event of the exercise of the Liquidation Call Right by Networks North,
each holder shall be obligated to sell all the NNAC Shares held by such holder
to Networks North on the Liquidation Date on payment by Networks North to the
holder of the Liquidation Call Purchase Price for each such share.
(b) To exercise the Liquidation Call Right, Networks North must notify the
holders of the NNAC shares and the secretary of NNAC in writing of Networks
North's intention to exercise such right at least 55 days before the Liquidation
Date in the case of a voluntary liquidation, dissolution or winding-up of NNAC
and at least five Business Days before the Liquidation Date in the case of an
involuntary liquidation, dissolution or winding-up of NNAC. The corporate
secretary of NNAC will notify the holder(s) of NNAC Shares as to whether or not
Networks North has exercised the Liquidation Call Right forthwith after the
expiry of the date by which the same may be exercised by Networks North. If
Networks North exercises the Liquidation Call Right, on the Liquidation Date,
Networks North will purchase and the holders will sell all of the NNAC Shares
then outstanding for a price per share equal to the Liquidation Call Purchase
Price.
(c) For the purposes of completing the purchase of the NNAC Shares pursuant to
the Liquidation Call Right, Networks North shall arrange with its transfer agent
to deposit with the secretary of NNAC, on or before the Liquidation Date, the
Exchangeable Share Consideration representing the total Liquidation Call
Purchase Price. Provided that such Exchangeable Share Consideration has been so
deposited with the secretary of NNAC, on and after the Liquidation Date, the
right of each holder of NNAC Shares will be limited to receiving such holder's
proportionate part of the total Liquidation Call Purchase Price payable by
Networks North, without interest, upon presentation and surrender by the holder
of certificates representing the NNAC Shares held by such holder and the
<PAGE>
29
holder shall, on and after the Liquidation Date, be considered and deemed for
all purposes to be the holder of the Networks North Common Stock delivered to
such holder. Upon surrender to the secretary of NNAC of a certificate or
certificates representing NNAC Shares, together with such other documents and
instruments as may be required to effect a transfer of NNAC Shares under the
Business Corporations Act (Ontario), the by-laws of NNAC or as the transfer
agent of Networks North may reasonably require, the holder of such surrendered
certificate or certificates shall be entitled to receive in exchange therefor,
and the secretary of NNAC shall deliver to such holder, the Exchangeable Share
Consideration to which such holder is entitled. If Networks North does not
exercise the Liquidation Call Right in the manner described above on the
Liquidation Date, the holders of the NNAC Shares will be entitled to receive in
exchange therefor the liquidation price otherwise payable by NNAC in connection
with the liquidation, dissolution or winding-up of NNAC pursuant to Article 5 of
the NNAC Share Provisions. Notwithstanding the foregoing, until such
Exchangeable Share Consideration is delivered to the holder, the holder shall be
deemed to still be a holder of NNAC Shares for purposes of all voting rights
with respect thereto under the Voting and Exchange Trust Agreement.
7.02 Networks North Redemption Call Right
(a) Networks North shall have the overriding right (the "Redemption Call
Right"), notwithstanding the proposed redemption of the NNAC Shares by NNAC
pursuant to Article 7 of the NNAC Share Provisions, to purchase from all but not
less than all of the holders (other than Networks North or any subsidiary
thereof) of NNAC Shares on the Automatic Redemption Date all but not less than
all of the NNAC Shares held by each such holder on payment by Networks North to
the holder of the Exchangeable Share Price applicable on the last Business Day
prior to the Automatic Redemption Date (the "Redemption Call Purchase Price") in
accordance with subsection 7.02(c) hereof. In the event of the exercise of the
Redemption Call Right by Networks North, each holder shall be obligated to sell
all the NNAC Shares held by the holder to Networks North on the Automatic
Redemption Date on payment by Networks North to the holder of the Redemption
Call Purchase Price for each such share.
(b) To exercise the Redemption Call Right, Networks North must notify the
holders of NNAC Shares, and NNAC of Networks North's intention to exercise such
right not later than the date by which NNAC is required to give notice of the
Automatic Redemption Date. The secretary of NNAC will notify the holders of the
NNAC Shares as to whether or not Networks North has exercised the Redemption
Call Right forthwith after the date by which the same may be exercised by
Networks North. If Networks North exercises the Redemption Call Right, on the
Automatic Redemption Date, Networks North will purchase and the holders will
sell all of the NNAC Shares then outstanding for a price per share equal to the
Redemption Call Purchase Price.
(c) For the purposes of completing the purchase of the NNAC Shares pursuant to
the Redemption Call Right, Networks North shall deposit with the secretary of
NNAC, on or before the Automatic Redemption Date, the Exchangeable Share
Consideration representing the total Redemption Call Purchase Price. Provided
that such Exchangeable Share Consideration has been so deposited with the
secretary of NNAC, on and after the Automatic Redemption Date, the rights of
each holder of NNAC Shares will be limited to receiving such holder's
proportionate part of the total Redemption Call Purchase Price payable by
Networks North upon presentation and surrender by the holder of certificates
representing the NNAC Shares held by such holder and the holder shall on and
after the Automatic Redemption Date be considered and deemed for all purposes to
be the holder of the Networks North Common Stock delivered to such holder. Upon
surrender to the secretary of NNAC of a certificate or certificates representing
NNAC Shares, together with such other documents and instruments as may be
required to effect a transfer of NNAC Shares under the Business Corporation Act
(Ontario), the by-laws of or as the transfer agent of Networks North may
reasonably require, the holder of such surrendered certificate or certificates
shall be entitled to receive in exchange therefor, and the secretary of NNAC
shall deliver to such holder, the Exchangeable Share Consideration to which such
holder is entitled. If Networks North does not exercise the Redemption Call
Right in the manner described above, on the Automatic Redemption Date, the
holders of the NNAC Shares will be entitled to receive in exchange therefor the
redemption price otherwise payable by NNAC in connection with the redemption of
the NNAC Shares pursuant to Article 7 of the NNAC Share Provisions.
Notwithstanding the foregoing, until such Exchangeable Share Consideration is
delivered to the holder, the holder shall be deemed to still be a holder of NNAC
Shares for purposes of all voting rights with respect thereto under the Voting
and Exchange Trust Agreement.
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30
7.3 Exchange Put Right. Upon and subject to the terms and conditions contained
in the NNAC Share Provisions and the Voting and Exchange Trust Agreement, a
holder of NNAC Shares shall have the Exchange Put Right.
<PAGE>
31
ARTICLE 8.00 - SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.01 Survival of the Representations, Warranties and Covenants. The
representations, warranties and covenants of each of the parties contained in
this Agreement shall, unless otherwise expressly provided in this Agreement,
survive the closing of the transactions provided for in this Agreement and,
notwithstanding such closing and notwithstanding any investigations made with
respect thereto, shall continue in full force and effect:
(a) with respect to those representations and warranties relating to Taxes,
for so long as the party making the representation may be assessed or
reassessed, or any action or proceeding may be brought against such party
in connection with Taxes;
(b) with respect to all representations and warranties with respect to title
of the Assets; and
(c) with respect to all other representations and warranties and the
covenants, for a period of two (2) years after the Time of Closing.
ARTICLE 9.00 -INDEMNIFICATION
9.01 Scope of Indemnification. In the event that the transactions provided for
in this Agreement are completed and it is subsequently determined that any of
NNAC and Networks North or the Vendors or any agent, employee, affiliate,
successor or nominee of NNAC and Networks North or the Vendors, or any of the
officers, directors, shareholders, subsidiaries, affiliates, employees and
agents of any of the aforesaid (collectively the "Indemnified Parties") has or
is subject to any loss, damage, liability, deficiency, claim, cost, recovery,
expense (including interest, penalties and reasonable legal fees), assessment or
re-assessment (collectively the "Claims") arising from the incorrectness,
failure, non-compliance or other breach of any representation, warranty or
covenant made by one party (the "Indemnifying Party") to the other pursuant to
this Agreement, the Indemnifying Party unconditionally agrees to indemnify and
save harmless the Indemnified Parties (except in the case where for the
Indemnifying Party is a Vendor in which case the Vendors shall act severally and
only with respect to those representations, warranties and covenants applicable
to them) for such Claims but only if the amount of such Claims, in the
aggregate, exceed $100,000. Any claim under this section shall be in writing and
shall be made within one hundred and twenty (120) days of the date on which such
representation or warranty ceases to survive according to the provisions of this
Agreement.
ARTICLE 10.00 - MISCELLANEOUS
10.01 Bulk Sales Act. To the extent that the Bulk Sales Act of Ontario is
applicable to the transactions outlined herein, the parties agree to waive
compliance with the act and Chell.com shall indemnify Networks North or NNAC, as
the case may be, with respect to any claims from creditors of Chell.com with
respect to the Chell.com Assets.
10.02 Public Announcement. The parties to this Agreement agree that, except if
required by securities laws, no public announcement of this Agreement or the
transactions herein contemplated shall be made without the prior written consent
of all of the parties hereto, such consent not to be unreasonably withheld.
10.03 Notices. All notices, requests, demands or other communications required
or desired to be given or made by one party to another shall be given in writing
by personal delivery or prepaid registered mail or by facsimile transmission or
other means of instantaneous transmission in regular commercial usage at such
time, verified by a transmission report, as follows:
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32
(a) to the Vendors: Chell.com Ltd.
#500, 630 8th Ave SE
Calgary, Alberta
T2P 1G6
Attention: Blair Layton
(Fax - 403-303-2380)
with a copy to: Morrison, Brown, Sosnovitch
One Toronto Street
Suite 910
P.O. Box 28
Toronto, Ontario
M5J 2V6
Attention: Kevin Gallagher
(Fax - 416-368-6068)
(b) to Networks North or NNAC at :
Networks North Inc.
14 Meteor Drive
Toronto, Ontario
M9W 1A4
Attention: Peter Rona
(Fax - 416-675-8838)
with a copy to: Mintz & Fraade, P.C.
488 Madison Avenue
New York, New York 10022
Attention: Alan Fraade
(Fax - 212-486-0701)
or at such other address as may be given by any of them to the others. Any
notice or other communication so given or made shall be conclusively deemed to
have been given and received when delivered personally, if delivered personally,
or when transmitted, if given by facsimile transmission, provided that if it is
delivered or transmitted on a day which is not a Business Day then the notice or
communication shall be deemed to have been given and received on the next
Business Day following such date, or on the fifth (5th) Business Day following
the date of mailing, if mailed by prepaid registered mail, except in the event
of disruption of mail services in which event any notice shall be delivered
personally or by facsimile transmission.
10.04 Expenses. The expenses incurred by each of the parties in connection with
the negotiation of this Agreement and the completion of the transactions
provided for in this Agreement, including, except as otherwise provided in this
Agreement, the fees of their respective accountants and solicitors in connection
with such transactions, shall be borne by such party. The cost of the valuation
and fairness report of Stanford Keene shall be borne $10,000 by Chell.com and
$50,000 by Networks North. Disbursements shall be prorated in the same
proportions.
10.05 Time of the Essence. Time is of the essence of this Agreement and every
part of this Agreement and no extension or variation of this Agreement shall
operate as a waiver of this provision.
10.06 Governing Law. This Agreement and any of the agreements required to be
executed pursuant to the provisions of this Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the Province of Ontario and of Canada applicable thereto and the
parties submit to the jurisdiction of the courts of the Province of Ontario.
<PAGE>
33
10.07 Severability. If any of the provisions contained in this Agreement are,
for any reason, held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement, but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision or provisions had never been
contained in this Agreement unless the deletion of such provision or provisions
would result in such a material change as to cause the completion of the
transactions contemplated in this Agreement to be unreasonable.
10.08 Further Assurances. The parties covenant and agree to execute such further
and other documents and undertake such other actions as may be reasonably
required to give effect to the terms and intent of the transactions contemplated
in this Agreement.
10.09 Counterparts and Facsimile Signatures. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement, and shall become a binding agreement when one or more counterparts
have been signed by each of the parties and delivered to each of the other
parties. This Agreement may be delivered by transmission of the signature pages
by facsimile in which event each such signature shall be deemed to be an
original signature and shall constitute execution and delivery of the entire
document. If any signatures are so transmitted by facsimile, the parties
undertake to forthwith thereafter to deliver the entire document with original
signatures to all parties.
10.10 Enurement. This Agreement shall be binding upon and enure to the benefit
of the parties hereto and their respective heirs, administrators, executors,
successors and permitted assigns, provided that the rights of any party hereto
may not be assigned without the prior written consent of all other parties
hereto.
10.11 Time Periods. When calculating the period of time within which or
following which any act is to be done or step taken pursuant to this Agreement,
the date which is the reference day in calculating such period shall be
excluded.
IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date
first above written.
Networks North, Inc.
Per:_________________________
Per:_________________________
Networks North, Inc. in trust for Networks North
Acquisition Corp. a corporation to be incorporated
Per:_________________________
Per:_________________________
Chell.com Ltd.
Per:_________________________
____________________________________ ) _________________________
Witness ) Cameron Chell
)
<PAGE>
Networks North Schedule
3.03 (h) Financial Assistance
Except as separately disclosed in filings with the SEC the only such assistance
is a loan provided to Brad Schroeder on November 28, 1994. The loan was to be
repaid November 28, 1995. The loan has not been repaid to date. The current
principal balance outstanding is CDN$38,000. Interest is paid monthly at prime
plus three quarters of one percent. There are no specific terms of repayment
currently in place.
3.03 (m) Leased Property
The following properties are leased by subsidiaries of Networks North Inc.:
(1) 560 Main Street
St. John, New Brunswick
- property leased by Sonoptic Technologies Inc.
- lease has expired and is being renegotiated.
(2) 8755 Ash Street
Vancouver, BC
- property leased by Magic Lantern Communications Ltd.
- lease is currently being renegotiated.
(3) 780 Windmill Road
Suite 302
Dartmouth, NS.
- property leased by GalaVu Entertainment Network Inc.
- lease has expired and is being paid month to month
(4) 3816A Victoria Park
Toronto, ON
- property leased by GalaVu Entertainment Network Inc.
3.03 (o) Absence of Certain Changes or Events
Except in the ordinary course of business and except as disclosed in the
financial statements and filings with the SEC, the only change of events of the
type enumerated in subsection 3.03 (o) is continued on-going operating losses in
Interlynx Multimedia Inc., the Magic Lantern Group of Companies and GalaVu
Entertainment Network Inc.
3.03 (v) Amounts Due From Officers
As disclosed in the financial statements:
1. Note receivable from Connolly-Daw Holdings Inc. - $160,000.
2. Note receivable from Peter Rona - US$70,000.
3. Note receivable from Brad Schroeder -CDN$38,000.
<PAGE>
Chell.com Schedule
3.01(c) and 3.01(f) General Security Agreements with Canadian Advantage
Limited Partnership II and VC Advantage Fund Limited
Partnership over the assets of Chell.com Ltd.
<PAGE>
APPENDIX "A"
PROVISIONS ATTACHING TO THE COMMON SHARES
The common shares ("Common Shares") in the capital of the
Corporation shall have attached thereto the following rights, privileges,
restrictions and conditions:
Dividends
Subject to the prior rights of the Exchangeable Shares and any other
shares ranking prior to the Common Shares, holders of Common Shares have a right
to receive dividends when declared by the Board of Directors out of property of
the Corporation legally available therefore.
Liquidation
Subject to the prior rights of the Exchangeable Shares and any other
shares ranking prior to the Common Shares, the holders of Common Shares shall,
upon any liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or other distribution of the assets of the Corporation
for the purpose of winding-up its affairs, be entitled to receive the remaining
property and assets of the Corporation.
Voting
The holders of the Common Shares shall be entitled to receive notice
of and to attend all meetings of shareholders (other than separate meetings of
other classes or series of shares), and shall be entitled to one vote for each
Common Share held.
PROVISIONS ATTACHING TO THE EXCHANGEABLE SHARES
The Exchangeable Shares in the capital of the Corporation shall have
the following rights, privileges, restrictions and conditions:
ARTICLE I
INTERPRETATION
1.1 For the purposes of these rights, privileges, restrictions and conditions:
"Act" means the Business Corporations Act (Ontario), as amended.
consolidated or reenacted from time to time.
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of Networks North Common Stock
are entitled to vote, consent or otherwise act, the product of (i) the
number of Exchangeable Shares then issued and outstanding and held by
holders (other than Networks North and its Subsidiaries) multiplied by
(ii) the number of votes to which a holder of one share of Networks North
Common Stock is entitled with respect to such matter, proposition or
question.
"Agreement of Purchase and Sale" means the contract involving and
affecting the Corporation, Networks North and the holders of common shares
of the Corporation by and among Networks North, the Corporation, Cameron
Chell and Chell.com Ltd. dated as of August 4, 2000, as amended and
restated from time to time.
<PAGE>
"Automatic Redemption Date" means the date for the automatic redemption by
the Corporation of Exchangeable Shares pursuant to Article 7 of these
share provisions, which date shall be the first to occur of (a) the 10th
anniversary of the Effective Date of the Arrangement or (b) the date
selected by the Board of Directors of the Corporation (such date to be no
earlier than the third anniversary of the Effective Date of the
Arrangement) at a time when less than 5% of the number of Exchangeable
Shares issuable on the Effective Date (other than Exchangeable Shares held
by Networks North and its Subsidiaries; and such number of shares may be
adjusted as deemed appropriate by the Board of Directors to give effect to
any subdivision or consolidation of or stock dividend on the Exchangeable
Shares, any issuance or distribution of rights to acquire Exchangeable
Shares or securities exchangeable for or convertible into or carrying
rights to acquire Exchangeable Shares, any issue or distribution of other
securities or rights or evidences of indebtedness or assets, or any other
capital reorganization or other transaction involving or affecting the
Exchangeable Shares) are outstanding.
"Board of Directors" means the board of directors of the Corporation and
any committee thereof acting within its authority.
"Business Day" means any day other than a Saturday, a Sunday or a
statutory holiday.
"Common Shares" means the common shares in the capital of the Corporation.
"Corporation" means Networks North Acquisition Corp., a corporation
organized and existing under the Act and includes any successor
corporation.
"Current Market Price" means, in respect of a share of Networks North
Common Stock on any date, the average of the closing sale prices per share
(computed and rounded to the third decimal point) of shares of Networks
North Common Stock during the period of 10 consecutive trading days ending
not more than five trading days before such date on the NASDAQ Exchange,
or, if Networks North Common Stock is not then traded on the NASDAQ
Exchange, on such other principal stock exchange or automated quotation
system on which the Networks North Common Stock is listed or quoted, as
the case may be, as may be selected by the Board of Directors for such
purpose; provided, however, that if, in the opinion of the Board of
Directors the public distribution or trading activity of Networks North
Common Stock during such period does not create a market which reflects
the fair market value of a share of Networks North Common Stock, then the
Current Market Price of a share of Networks North Common Stock shall be
determined by the Board of Directors based upon the advice of such
qualified independent financial advisors as the Board of Directors may
deem to be appropriate, and provided further that any such selection,
opinion or determination by the Board of Directors shall be conclusive and
binding.
"Exchange Put Date" has the meaning provided in Section 8.2.
"Exchange Put Right" has the meaning provided in Section 8. 1.
"Exchangeable Share Consideration" means, for any acquisition of or
redemption of Exchangeable Shares, or distribution of assets of the
Corporation in respect of or purchase pursuant to these share provisions,
the Agreement of Purchase and Sale, the Support Agreement or the Voting
and Exchange Trust Agreement:
a. certificates representing the aggregate number of shares of Networks
North Common Stock deliverable in connection with such action;
b. a cheque or cheques payable at par at any branch of the bankers of
the payor in the amount of all declared, payable and unpaid, and all
undeclared but payable, cash dividends deliverable in connection
with such action; and
c. such stock or other property constituting any declared and unpaid,
and all undeclared but payable, non-cash dividends deliverable in
connection with such action,
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provided that (i) that part of the consideration which represents (a)
above, shall be fully paid and satisfied by the delivery of one share of
Networks North Common Stock for each one Exchangeable Share, such share to
be duly issued as a fully paid and non-assessable share, (ii) that part of
the consideration which represents (c), above, unpaid shall be fully paid
and satisfied by delivery of such non-cash items, and (iii) any such
consideration shall be delivered free and clear of any lien, claim,
encumbrance, security interest or adverse claim or interest less any tax
required to be deducted and withheld therefrom and without interest.
"Exchangeable Share Price" means, for each Exchangeable Share, an amount
equal to the aggregate of:
a. the Current Market Price of a share of Networks North Common Stock;
plus
b. an additional amount equal to the full amount of all cash dividends
declared, payable and unpaid on such Exchangeable Share; plus
c. an additional amount equal to all dividends declared and payable on
Networks North Common Stock which have not been declared on
Exchangeable Shares in accordance herewith; plus
d. an additional amount representing non-cash dividends declared,
payable and unpaid on such Exchangeable Share.
"Exchangeable Shares" means the Exchangeable Shares of the Corporation
having the rights, privileges, restrictions and conditions set forth
herein.
"Liquidation Amount" has the meaning provided in Section 5.1.
"Liquidation Call Right" has the meaning provided in the Agreement of
Purchase and Sale.
"Liquidation Date" has the meaning provided in Section 5.1.
"NASDAQ Exchange" means the NASDAQ Exchange.
"Networks North" means Networks North Inc., a corporation organized and
existing under the laws of the State of New York and includes any
successor corporation.
"Networks North Call Notice" has the meaning provided in Section 6.3.
"Networks North Common Stock" means the shares of common stock of Networks
North, having voting rights of one vote per share, and any other
securities resulting from the application of Section 2.7 of the Support
Agreement.
"Networks North Dividend Declaration Date" means the date on which the
board of directors of Networks North declares any dividend on the Networks
North Common Stock.
"Networks North Special Share" means the one share of Special Voting Stock
of Networks North, and having voting rights at meetings of holders of
Networks North Common Stock equal to the Aggregate Equivalent Voting
Amount.
"Purchase Price" has the meaning provided in Section 6.3.
"Redemption Call Purchase Price" has the meaning provided in the Agreement
of Purchase and Sale.
"Redemption Call Right" has the meaning provided in the Agreement of
Purchase and Sale.
"Redemption Price" has the meaning provided in Section 7. 1.
"Retracted Shares" has the meaning provided in subsection 6.1 (a).
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"Retraction Call Right" has the meaning provided in subsection 6.1 (c).
"Retraction Date" has the meaning provided in subsection 6.1 (b).
"Retraction Price" has the meaning provided in Section 6.1.
"Retraction Request" has the meaning provided in Section 6.1.
"Subsidiary", in relation to any person, means any body corporate,
partnership, joint venture, association or other entity of which more than
50% of the total voting power of shares of stock or units of ownership or
beneficial interest entitled to vote in the election of directors (or
members of a comparable governing body) is owned or controlled, directly
or indirectly, by such person.
"Support Agreement " means the Support Agreement between Networks North
and the Corporation, made as of August 31, 2000.
"Transfer Agent" means the duly appointed transfer agent for the time
being of the Exchangeable Shares, and, if there is more than one such
transfer agent, then the principal Canadian transfer agent.
"Trustee" means the Trustee appointed under the Voting and Exchange Trust
Agreement, and any successor trustee.
"Voting and Exchange Trust Agreement" means the Voting and Exchange Trust
Agreement among the Corporation, Networks North and the Trustee, made as
of August 31, 2000.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the Common
Shares and any other shares ranking junior to the Exchangeable Shares,
with respect to the payment of dividends and the distribution of assets in
the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution
of the assets of the Corporation among its shareholders for the purpose of
winding-up its affairs.
ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Networks
North Dividend Declaration Date, declare a dividend on each Exchangeable
Share:
(a) in the case of a cash dividend declared on the Networks North Common
Stock, in an amount in cash for each Exchangeable Share equal to the
cash dividend declared on each share of Networks North Common Stock;
(b) in the case of a stock dividend declared on the Networks North
Common Stock to be paid in Networks North Common Stock, in such
number of Exchangeable Shares for each Exchangeable Share as is
equal to the number of shares of Networks North Common Stock to be
paid on each share of Networks North Common Stock;
(c) in the case of a dividend declared on the Networks North Common
Stock in property other than cash or securities of Networks North,
in such type and amount of property for each
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Exchangeable Share as is the same as the type and amount of property
declared as a dividend on each share of Networks North Common Stock;
or
(d) in the case of a dividend declared on the Networks North Common
Stock to be paid in securities of Networks North other than Networks
North Common Stock, in such number of either such securities or
economically equivalent securities of the Corporation, as the Board
of Directors determines, for each Exchangeable Share as is equal to
the number of securities of Networks North to be paid on each share
of Networks North Common Stock. Such dividends shall be paid out of
money, assets or property of the Corporation properly applicable to
the payment of dividends, or out of authorized but unissued shares
of the Corporation.
3.2 Cheques of the Corporation payable at par at any branch of the bankers of
the Corporation shall be issued in respect of any cash dividends
contemplated by subsection 3.1 (a) hereof and the sending of such a cheque
to each holder of an Exchangeable Share (less any tax required to be
deducted and withheld from such dividends paid or credited by the
Corporation) shall satisfy the cash dividends represented thereby unless
the cheque is not paid on presentation. Certificates registered in the
name of the registered holder of Exchangeable Shares shall be issued or
transferred in respect of any stock dividends contemplated by subsections
3.1 (b) or (d) hereof and the sending of such a certificate to each holder
of an Exchangeable Share shall satisfy the stock dividend represented
thereby or dividend payable in other securities represented thereby. Such
other type and amount of property in respect of any dividends contemplated
by subsection 3.1 (c) hereof shall be issued, distributed or transferred
by the Corporation in such manner as it shall determine and the issuance,
distribution or transfer thereof by the Corporation to each holder of an
Exchangeable Share shall satisfy the dividend represented thereby. In all
cases, any such dividends shall be subject to any reduction or adjustment
for tax required to be deducted and withheld from such dividends paid or
credited by the Corporation. No holder of an Exchangeable Share shall be
entitled to recover by action or other legal process against the
Corporation any dividend which is represented by a cheque that has not
been duly presented to the Corporation's bankers for payment or which
otherwise remains unclaimed for a period of six years from the date on
which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any
dividend declared on the Exchangeable Shares under Section 3.1 hereof
shall be the same dates as the record date and payment date, respectively,
for the corresponding dividend declared on the Networks North Common
Stock.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all
of the Exchangeable Shares then outstanding, any such dividends which
remain unpaid shall be paid on a subsequent date or dates determined by
the Board of Directors on which the Corporation shall have sufficient
moneys, assets or property properly applicable to the payment of such
dividends.
3.5 Except as provided in this Article 3, the holders of Exchangeable Shares
shall not be entitled to receive dividends in respect thereof.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the Corporation
shall not at any time without, but may at any time with, the approval of
the holders of the Exchangeable Shares given as specified in Article 10 of
these share provisions:
a. pay any dividends on the Common Shares, or any other shares ranking
junior to the Exchangeable Shares;
b. redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the Exchangeable
Shares with respect to the payment of dividends or on any
liquidation distribution;
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c. redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect of the payment of
dividends or on any liquidation distribution; or
d. amend the articles or by-laws of the Corporation, in either case in
any manner that would affect the rights or privileges of the holders
of the Exchangeable Shares.
The restrictions in subsections 4.1 (a), 4.1 (b) and 4.1 (c) above shall
not apply if all dividends on the outstanding Exchangeable Shares
corresponding to dividends declared with a record date on or following the
effective date of the Agreement of Purchase and Sale on the Networks North
Common Stock shall have been declared on the Exchangeable Shares and paid
in full. Nothing herein shall be interpreted to restrict the Corporation
from issuing additional Common Shares.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation
among its shareholders for the purpose of winding-up its affairs, a holder
of Exchangeable Shares shall be entitled, subject to applicable law, to
receive from the assets of the Corporation in respect of each Exchangeable
Share held by such holder on the effective date of such liquidation,
dissolution or winding-up (the "Liquidation Date"), before any
distribution of any part of the assets of the Corporation to the holders
of the Common Shares or any other shares ranking junior to the
Exchangeable Shares, an amount equal to the Exchangeable Share Price
applicable on the last Business Day prior to the Liquidation Date (the
"Liquidation Amount") in accordance with Section 5.2. In connection with
payment of the Liquidation Amount, the Corporation shall be entitled to
liquidate some of the Networks North Common Stock which would otherwise be
deliverable as Exchangeable Share Consideration to Exchangeable Shares in
order to fund any statutory withholding tax obligation.
5.2 On or promptly after the Liquidation Date, and subject to the exercise by
Networks North of the Liquidation Call Right, the Corporation shall cause
to be delivered to the holders of the Exchangeable Shares the Liquidation
Amount for each such Exchangeable Share upon presentation and surrender of
the certificates representing such Exchangeable Shares, together with such
other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under applicable law and the by-laws of the
Corporation and such additional documents and instruments as the Transfer
Agent may reasonably require, at the registered office of the Corporation
or at any office of the Transfer Agent as may be specified by the
Corporation or by notice to the holders of the Exchangeable Shares.
Payment of the total Liquidation Amount for such Exchangeable Shares shall
be made by delivery to each holder, at the address of the holder recorded
in the securities register of the Corporation for the Exchangeable Shares
or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by
the Corporation or by notice to the holders of Exchangeable Shares, on
behalf of the Corporation of the Exchangeable Share Consideration
representing the total Liquidation Amount. On and after the Liquidation
Date, the holders of the Exchangeable Shares shall cease to be holders of
such Exchangeable Shares and shall not be entitled to exercise any of the
rights of holders in respect thereof, other than the right to receive
their proportionate part of the total Liquidation Amount, unless payment
of the total Liquidation Amount for such Exchangeable Shares shall not be
made upon presentation and surrender of share certificates in accordance
with the foregoing provisions, in which case the rights of the holders
shall remain unaffected until the total Liquidation Amount has been paid
in the manner hereinbefore provided. The Corporation shall have the right
at any time on or after the Liquidation Date to deposit or cause to be
deposited the Exchangeable Share Consideration in respect of the
Exchangeable Shares represented by certificates that have not at the
Liquidation Date been surrendered by the holders thereof in a custodial
account or for safe keeping, in the case of non-cash items, with any
chartered bank or trust company in Canada. Upon such deposit being made,
the rights of the holders of Exchangeable Shares after such deposit shall
be limited to receiving their proportionate part of the total Liquidation
Amount for such Exchangeable Shares so deposited, against presentation and
surrender of the said certificates held by them, respectively, in
accordance with the foregoing provisions. Upon such payment or deposit of
such Exchangeable Share Consideration, the holders of the Exchangeable
Shares shall thereafter be considered and deemed for all purposes to be
the holders of the Networks North Common Stock delivered to them.
Notwithstanding the foregoing, until such payment or
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deposit of such Exchangeable Share Consideration, the holder shall be
deemed to still be a holder of Exchangeable Shares for purposes of all
voting rights with respect thereto under the Voting and Exchange Trust
Agreement.
5.3 After the Corporation has satisfied its obligations to pay the holders of
the Exchangeable Shares the Liquidation Amount per Exchangeable Share,
such holders shall not be entitled to share in any further distribution of
the assets of the Corporation.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject to
the exercise by Networks North of the Retraction Call Right and otherwise
upon compliance with the provisions of this Article 6, to require the
Corporation to redeem any or all of the Exchangeable Shares registered in
the name of such holder for an amount equal to the Exchangeable Share
Price applicable on the last Business Day prior to the Retraction Date
(the "Retraction Price") in accordance with Section 6.4. In connection
with payment of the Retraction Price, the Corporation shall be entitled to
liquidate some of the Networks North Common Stock that would otherwise be
deliverable as Exchangeable Share Consideration to the particular holder
of Exchangeable Shares in order to fund any statutory withholding tax
obligation. To effect such redemption, the holder shall present and
surrender at the registered office of the Corporation or at any office of
the Transfer Agent as may be specified by the Corporation or by notice to
the holders of Exchangeable Shares the certificate or certificates
representing the Exchangeable Shares which the holder desires to have the
Corporation redeem, together with such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under
applicable law and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require,
together with a duly executed statement (the "Retraction Request") in such
form as may be acceptable to the Corporation:
a. specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by the
Corporation;
b. stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "Retraction Date"),
provided that the Retraction Date shall be not less than five
Business Days nor more than 10 Business Days after the date on which
the Retraction Request is received by the Corporation and further
provided that, in the event that no such Business Day is specified
by the holder in the Retraction Request, the Retraction Date shall
be deemed to be the tenth Business Day after the date on which the
Retraction Request is received by the Corporation; and
c. acknowledging the overriding right (the "Retraction Call Right") of
Networks North to purchase all but not less than all the Retracted
Shares directly from the holder and that the Retraction Request
shall be deemed to be a revocable offer by the holder to sell the
Retracted Shares in accordance with the Retraction Call Right on the
terms and conditions set out in Section 6.3 below.
6.2 Subject to the exercise by Networks North of the Retraction Call Right,
upon receipt by the Corporation or the Transfer Agent in the manner
specified in Section 6.1 hereof of a certificate or certificates
representing the number of Exchangeable Shares which the holder desires to
have the Corporation redeem, together with a Retraction Request, and
provided that the Retraction Request is not revoked by the holder in the
manner specified in Section 6.7, the Corporation shall redeem the
Retracted Shares effective at the close of business on the Retraction Date
and shall cause to be delivered to such holder the total Retraction Price
with respect to such shares in accordance with Section 6.4 hereof. If only
a part of the Exchangeable Shares represented by any certificate are
redeemed or purchased by Networks North pursuant to the Retraction Call
Right, a new certificate for the balance of such Exchangeable Shares shall
be issued to the holder at the expense of the Corporation.
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6.3 Upon receipt by the Corporation of a Retraction Request, the Corporation
shall immediately notify Networks North thereof. In order to exercise the
Retraction Call Right, Networks North must notify the Corporation in
writing of its determination to do so (the "Networks North Call Notice")
within two Business Days of such notification. If Networks North does not
so notify the Corporation within such two Business Days, the Corporation
will notify the holder as soon as possible thereafter that Networks North
will not exercise the Retraction Call Right. If Networks North delivers
the Networks North Call Notice within such two Business Days, and provided
that the Retraction Request is not revoked by the holder in the manner
specified in Section 6.7, the Retraction Request shall thereupon be
considered only to be an offer by the holder to sell the Retracted Shares
to Networks North in accordance with the Retraction Call Right. In such
event, the Corporation shall not redeem the Retracted Shares and Networks
North shall purchase from such holder and such holder shall sell to
Networks North on the Retraction Date the Retracted Shares for a purchase
price per share (the "Purchase Price") equal to the Retraction Price. For
the purposes of completing a purchase pursuant to the Retraction Call
Right, Networks North shall deposit with the Transfer Agent, on or before
the Retraction Date, the Exchangeable Share Consideration representing the
total Purchase Price. Provided that such Exchangeable Share Consideration
has been so deposited with the Transfer Agent, the closing of the purchase
and sale of the Retracted Shares pursuant to the Retraction Call Right
shall be deemed to have occurred as at the close of business on the
Retraction Date and, for greater certainty, no redemption by the
Corporation of such Retracted Shares shall take place on the Retraction
Date. In the event that Networks North does not deliver a Networks North
Call Notice within two Business Days or otherwise comply with these
Exchangeable Share provisions in respect thereto, and provided that
Retraction Request is not revoked by the holder in the manner specified in
Section 6.7, the Corporation shall redeem the Retracted Shares on the
Retraction Date and in the manner otherwise contemplated in this Article
6.
6.4 The Corporation or Networks North, as the case may be, shall deliver or
cause the Transfer Agent to deliver to the relevant holder, at the address
of the holder recorded in the securities register of the Corporation for
the Exchangeable Shares or at the address specified in the holder's
Retraction Request or by holding for pick up by the holder at the
registered office of the Corporation or at any office of the Transfer
Agent as may be specified by the Corporation or by notice to the holders
of Exchangeable Shares, the Exchangeable Share Consideration representing
the total Retraction Price or the total Purchase Price, as the case may
be, and such delivery of such Exchangeable Share Consideration to the
Transfer Agent shall be deemed to be payment of and shall satisfy and
discharge all liability for the total Retraction Price or total Purchase
Price, as the case may be, except as to any cheque included therein which
is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder of
the Retracted Shares shall cease to be a holder of such Retracted Shares
and shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive such holder's
proportionate part of the total Retraction Price or total Purchase Price,
as the case may be, unless upon presentation and surrender of certificates
in accordance with the foregoing provisions, payment of the total
Retraction Price or the total Purchase Price, as the case may be, shall
not be made, in which case the rights of such holder shall remain
unaffected until the Exchangeable Share Consideration representing the
total Retraction Price or the total Purchase Price, as the case may be,
has been paid in the manner hereinbefore provided. On and after the close
of business on the Retraction Date, provided that presentation and
surrender of certificates and payment of the Exchangeable Share
Consideration representing the total Retraction Price or the total
Purchase Price, as the case may be, has been made in accordance with the
foregoing provisions, the holder of the Retracted Shares so redeemed by
the Corporation or purchased by Networks North shall thereafter be
considered and deemed for all purposes to be a holder of the Networks
North Common Stock delivered to it. Notwithstanding the foregoing, until
such payment of such Exchangeable Share Consideration to the holder, the
holder shall be deemed to still be a holder of Exchangeable Shares for
purposes of all voting rights with respect thereto under the Voting and
Exchange Trust Agreement.
6.6 Notwithstanding any other provision of this Article 6, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in
a Retraction Request to the extent that such redemption of Retracted
Shares would be contrary to liquidity or solvency requirements or other
provisions of applicable law. If the Corporation believes that on any
Retraction Date it would not be permitted by any of such provisions to
redeem the Retracted Shares tendered for redemption on such date, and
provided that Networks North shall not have exercised the Retraction Call
Right with respect to the Retracted
8
<PAGE>
Shares, the Corporation shall only be obligated to redeem Retracted Shares
specified by a holder in a Retraction Request to the extent of the maximum
number that may be so redeemed (rounded down to a whole number of shares)
as would not be contrary to such provisions and shall notify the holder at
least two Business Days prior to the Retraction Date as to the number of
Retracted Shares which will not be redeemed by the Corporation. In any
case in which the redemption by the Corporation of Retracted Shares would
be contrary to liquidity or solvency requirements or other provisions of
applicable law, the Corporation shall redeem Retracted Shares in
accordance with Section 6.2 of these share provisions on a pro rata basis
and shall issue to each holder of Retracted Shares a new certificate, at
the expense of the Corporation, representing the Retracted Shares not
redeemed by the Corporation pursuant to Section 6.2 hereof. Provided that
the Retraction Request is not revoked by the holder in the manner
specified in Section 6.7, the holder of any such Retracted Shares not
redeemed by the Corporation pursuant to Section 6.2 of these share
provisions as a result of liquidity or solvency requirements or applicable
law shall be deemed by giving the Retraction Request to require Networks
North to purchase such Retracted Shares from such holder on the Retraction
Date or as soon as practicable thereafter on payment by Networks North to
such holder of the Purchase Price for each such Retracted Share, all as
more specifically provided in the Voting and Exchange Trust Agreement, and
Networks North shall make such purchase.
6.7 A holder of Retracted Shares may, by notice in writing given by the holder
to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request
in which event such Retraction Request shall be null and void and, for
greater certainty, the revocable offer constituted by the Retraction
Request to sell the Retracted Shares to Networks North shall be deemed to
have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Subject to applicable law, and if Networks North does not exercise the
Redemption Call Right, the Corporation shall on the Automatic Redemption
Date redeem the whole of the then outstanding Exchangeable Shares for an
amount equal to the Exchangeable Share Price applicable on the last
Business Day prior to the Automatic Redemption Date (the "Redemption
Price") in accordance with Section 7.3. In connection with payment of the
Redemption Price, the Corporation shall be entitled to liquidate some of
the Networks North Common Stock which would otherwise be deliverable as
Exchangeable Share Consideration to the particular holder of Exchangeable
Shares in order to fund any statutory withholding tax obligation.
7.2 In any case of a redemption of Exchangeable Shares under this Article 7,
the Corporation, or the Transfer Agent on behalf of the Corporation,
shall, at least 45 days before an Automatic Redemption Date or before a
possible Automatic Redemption Date which may result from a failure of the
holders of Exchangeable Shares to take necessary action as described in
clause (d) of the definition of Automatic Redemption Date send or cause to
be sent to each holder of Exchangeable Shares a notice in writing of the
redemption or possible redemption by the Corporation or the purchase by
Networks North under the Redemption Call Right, as the case may be, of the
Exchangeable Shares held by such holder. Such notice shall set out the
formula for determining the Redemption Price or the Redemption Call
Purchase Price, as the case may be, the Automatic Redemption Date and, if
applicable, particulars of the Redemption Call Right. In the case of any
notice given in connection with a possible Automatic Redemption Date, such
notice will be given contingently and will be withdrawn if the contingency
does not occur.
7.3 On or after the Automatic Redemption Date and subject to the exercise by
Networks North of the Redemption Call Right, the Corporation shall cause
to be delivered to the holders of the Exchangeable Shares to be redeemed
the Redemption Price for each such Exchangeable Share upon presentation
and surrender at the registered office of the Corporation or at any office
of the Transfer Agent as may be specified by the Corporation in such
notice of the certificates representing such Exchangeable Shares, together
with such other documents and instruments as may be required to effect a
transfer of Exchangeable Shares under applicable law and the by-laws of
the Corporation and such additional documents and instruments as the
Transfer Agent may reasonably require. Payment of the total Redemption
Price for such Exchangeable Shares shall be made by delivery to each
holder, at the address
9
<PAGE>
of the holder recorded in the securities register or at any office of the
Transfer Agent as may be specified by the Corporation in such notice, on
behalf of the Corporation, of the Exchangeable Share Consideration
representing the total Redemption Price. On and after the Automatic
Redemption Date, the holders of the Exchangeable Shares called for
redemption shall cease to be holders of such Exchangeable Shares and shall
not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the
total Redemption Price, unless payment of the total Redemption Price for
such Exchangeable Shares shall not be made upon presentation and surrender
of certificates in accordance with the foregoing provisions, in which case
the rights of the holders shall remain unaffected until the total
Redemption Price has been paid in the manner hereinbefore provided. The
Corporation shall have the right at any time after the sending of notice
of its intention to redeem the Exchangeable Shares as aforesaid to deposit
or cause to be deposited the Exchangeable Share Consideration with respect
to the Exchangeable Shares so called for redemption, or of such of the
said Exchangeable Shares represented by certificates that have not at the
date of such deposit been surrendered by the holders thereof in connection
with such redemption, in a custodial account or for safe keeping, in the
case of non-cash items, with any chartered bank or trust company in Canada
named in such notice. Upon the later of such deposit being made and the
Automatic Redemption Date, the Exchangeable Shares in respect whereof such
deposit shall have been made shall be redeemed and the rights of the
holders thereof after such deposit or Automatic Redemption Date, as the
case may be, shall be limited to receiving their proportionate part of the
total Redemption Price for such Exchangeable Shares so deposited, against
presentation and surrender of the said certificates held by them,
respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of such Exchangeable Share Consideration, the holders
of the Exchangeable Shares shall thereafter be considered and deemed for
all purposes to be holders of the Networks North Common Stock delivered to
them. Notwithstanding the foregoing, until such payment or deposit of such
Exchangeable Share Consideration is made, the holder shall be deemed to
still be a holder of Exchangeable Shares for purposes of all voting rights
with respect thereto under the Voting and Exchange Trust Agreement.
ARTICLE 8
EXCHANGE PUT RIGHT
8.1 Upon and subject to the terms and conditions contained in these share
provisions and the Voting and Exchange Trust Agreement:
a. a holder of Exchangeable Shares shall have the right (the "Exchange
Put Right") at any time to require Networks North to purchase all or
any part of the Exchangeable Shares of the holder; and
b. upon the exercise by the holder of the Exchange Put Right, the
holder shall be required to sell to Networks North, and Networks
North shall be required to purchase from the holder, that number of
Exchangeable Shares in respect of which the Exchange Put Right is
exercised, in consideration of the payment by Networks North of the
Exchangeable Share Price applicable thereto (which shall be the
Exchangeable Share Price applicable on the last Business Day prior
to receipt of notice required under section 8.2) and delivery by or
on behalf of Networks North of the Exchangeable Share Consideration
representing the total applicable Exchangeable Share Price. In
connection with payment of the Exchangeable Share Consideration, the
Corporation shall be entitled to liquidate some of the Networks
North Common Stock which would otherwise be deliverable to the
particular holder of Exchangeable Shares in order to fund any
statutory withholding tax obligation.
8.2 The Exchange Put Right provided in section 8.1 hereof and in Article 5 of
the Voting and Exchange Trust Agreement may be exercised at any time by
notice in writing given by the holder to and received by the Trustee (the
date of such receipt, the "Exchange Put Date") and accompanied by
presentation and surrender of the certificates representing such
Exchangeable Shares, together with such documents and instruments as may
be required to effect a transfer of Exchangeable Shares under the Act and
the by-laws of the Corporation and such additional documents and
instruments as the Trustee may reasonably require, at the principal
transfer offices in Calgary, Alberta and Toronto, Ontario of the Trustee,
or at such other office or offices of the Trustee or of other persons
designated by the Trustee for that purpose
10
<PAGE>
as may from time to time be maintained by the Trustee for that purpose.
Such notice may be (i) in the form of the panel, if any, on the
certificates representing Exchangeable Shares, (ii) in the form of the
notice and election contained in any letter of transmittal distributed or
made available by the Corporation for that purpose, or (iii) in other form
satisfactory to the Trustee (or such other persons aforesaid), shall
stipulate the number of Exchangeable Shares in respect of which the right
is exercised (which may not exceed the number of shares represented by
certificates surrendered to the Trustee), shall be irrevocable unless the
exchange is not completed in accordance herewith and with the Voting and
Exchange Trust Agreement and shall constitute the holder's authorization
to the Trustee (and such other persons aforesaid) to effect the exchange
on behalf of the holder.
8.3 The completion of the sale and purchase referred to in section 8.1 shall
be required to occur, and Networks North shall be required to take all
actions on its part necessary to permit it to occur, not later than the
close of business on the third Business Day following the Exchange Put
Date.
8.4 The surrender by the holder of Exchangeable Shares under section 8.2 shall
constitute the representation, warranty and covenant of the holder that
the Exchangeable Shares so purchased are sold free and clear of any lien,
encumbrance, security interest or adverse claim or interest.
8.5 If a part only of the Exchangeable Shares represented by any certificate
are to be sold and purchased pursuant to the exercise of the Exchange Put
Right, a new certificate for the balance of such Exchangeable Shares shall
be issued to the holder at the expense of the Corporation.
8.6 Upon receipt by the Trustee of the notice, certificates and other
documents or instruments required by section 8.2, the Trustee shall
deliver or cause to be delivered, on behalf of Networks North and subject
to receipt by the Trustee from Networks North of the applicable
Exchangeable Share Consideration, to the relevant holder at the address of
the holder specified in the notice or by holding for pick-up by the holder
at the registered office of the Corporation or at any office of the
Trustee (or other persons aforesaid) maintained for that purpose, the
Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price, within the time stipulated in section 8.3.
Delivery by Networks North to the Trustee of such Exchangeable Share
Consideration shall be deemed to be payment of and shall satisfy and
discharge all liability for the total applicable Exchangeable Share Price,
except as to any cheque included therein which is not paid on due
presentation.
8.7 On and after the close of business on the Exchange Put Date, the holder of
the Exchangeable Shares in respect of which the Exchange Put Right is
exercised shall not be entitled to exercise any of the rights of a holder
in respect thereof, other than the right to receive the total applicable
Exchangeable Share Price, unless upon presentation and surrender of
certificates in accordance with the foregoing provisions, payment of the
Exchangeable Share Consideration shall not be made, in which case the
rights of such holder shall remain unaffected until such payment has been
made. On and after the close of business on the Exchange Put Date provided
that presentation and surrender of certificates and payment of the
Exchangeable Share Consideration has been made in accordance with the
foregoing provisions, the holder of the Exchangeable Shares so purchased
by Networks North shall thereafter be considered and deemed for all
purposes to be a holder of the Networks North Common Stock delivered to
it. Notwithstanding the foregoing, until payment of the Exchangeable Share
Consideration to the holder, the holder shall be deemed still to be a
holder of Exchangeable Shares for purposes of all voting rights with
respect thereto under the Voting and Exchange Trust Agreement.
11
<PAGE>
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law and the provisions hereof, the
holders of the Exchangeable Shares shall not be entitled as such to
receive notice of or to attend any meeting of the shareholders of the
Corporation or to vote at any such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but, except as
hereinafter provided, only with the approval of the holders of the
Exchangeable Shares given as hereinafter specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching
to the Exchangeable Shares or any other matter requiring the approval or
consent of the holders of the Exchangeable Shares shall be deemed to have
been sufficiently given if it shall have been given in accordance with
applicable law subject to a minimum requirement that such approval be
evidenced by resolution passed by not less than 66 2/3% of the votes cast
on such resolution by persons represented in person or by proxy at a
meeting of holders of Exchangeable Shares (excluding Exchangeable Shares
beneficially owned by Networks North or its Subsidiaries) duly called and
held at which the holders of at least 25% of the outstanding Exchangeable
Shares at that time are present or represented by proxy. If at any such
meeting the holders of at least 25% of the outstanding Exchangeable Shares
at that time are not present or represented by proxy within one-half hour
after the time appointed for such meeting, then the meeting shall be
adjourned to such date not less than 10 days thereafter and to such time
and place as may be designated by the Chairman of such meeting. At such
adjourned meeting, the holders of Exchangeable Shares present or
represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the
affirmative vote of not less than 66 2/3% of the votes cast on such
resolution by persons represented in person or by proxy at such meeting
(excluding Exchangeable Shares beneficially owned by Networks North or its
Subsidiaries) shall constitute the approval or consent of the holders of
the Exchangeable Shares. For the purposes of this section, any spoiled
votes, illegible votes, defective votes and abstinences shall be deemed to
be votes not cast.
ARTICLE 11
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
11.1 The Corporation will take all such actions and do all such things as shall
be necessary or advisable to perform and comply with and to ensure
performance and compliance by Networks North with all provisions of the
Support Agreement, the Voting Trust and Exchange Agreement and Networks
North's Amended and Restated Certificate of Incorporation applicable to
the Corporation and Networks North, respectively, in accordance with the
terms thereof including, without limitation, taking all such actions and
doing all such things as shall be necessary or advisable to enforce to the
fullest extent possible for the direct benefit of the Corporation all
rights and benefits in favour of the Corporation under or pursuant
thereto.
11.2 The Corporation shall not propose, agree to or otherwise give effect to
any amendment to, or waiver or forgiveness of its rights or obligations
under, the Support Agreement, the Voting Trust and Exchange Agreement or
Networks North's Amended and Restated Certificate of Incorporation without
the approval of the holders of the Exchangeable Shares given in accordance
with Article 10 of these share provisions other than such amendments,
waivers and/or forgiveness as may be necessary or advisable for the
purpose of:
12
<PAGE>
a. adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares; or
b. making such provisions or modifications not inconsistent with such
agreement or certificate as may be necessary or desirable with
respect to matters or questions arising thereunder which, in the
opinion of the Board of Directors, it may be expedient to make,
provided that the Board of Directors shall be of the opinion, after
consultation with counsel, that such provisions and modifications
will not be prejudicial to the interests of the holders of the
Exchangeable Shares; or
c. making such changes in or corrections to such agreement or
certificate which, on the advice of counsel to the Corporation, are
required for the purpose of curing or correcting any ambiguity or
defect or inconsistent provision or clerical omission or mistake or
manifest error contained therein, provided that the Board of
Directors shall be of the opinion, after consultation with counsel,
that such changes or corrections will not be prejudicial to the
interests of the holders of the Exchangeable Shares.
ARTICLE 12
LEGEND
12.1 The certificates evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions of the
Agreement of Purchase and Sale relating to the Liquidation Call Right, the
Retraction Call Right and the Redemption Call Right, and the Voting and
Exchange Trust Agreement (including the provisions with respect to the
voting rights and exchange provisions thereunder).
ARTICLE 13
MISCELLANEOUS
13.1 Any notice, request or other communication to be given to the Corporation
by a holder of Exchangeable Shares shall be in writing and shall be valid
and effective if given by mail (postage prepaid) or by telecopy or by
delivery to the registered office of the Corporation and addressed to the
attention of the President. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall only be
deemed to have been given and received upon actual receipt thereof by the
Corporation.
13.2 Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing
Exchangeable Shares in connection with the liquidation, dissolution or
winding-up of the Corporation or the retraction, redemption or exchange of
Exchangeable Shares shall be made by registered mail (postage prepaid) or
by delivery to the registered office of the Corporation or to such office
of the Transfer Agent as may be specified by the Corporation, in each case
addressed to the attention of the President of the Corporation. Any such
presentation and surrender of certificates shall only be deemed to have
been made and to be effective upon actual receipt thereof by the
Corporation or the Transfer Agent, as the case may be, and the method of
any such presentation and surrender of certificates shall be at the sole
risk of the holder.
13.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing
and shall be valid and effective if given by mail (postage prepaid) or by
delivery to the address of the holder recorded in the securities register
of the Corporation or, in the event of the address of any such holder not
being so recorded, then at the last address of such holder known to the
Corporation. Any such notice, request or other communication, if given by
mail, shall be deemed to have been given and received on the fifth
Business Day following the date of mailing and, if given by delivery,
shall be deemed to have been given and received on the date of delivery.
Accidental failure or omission to give any notice, request or other
communication to one or more holders of
13
<PAGE>
Exchangeable Shares shall not invalidate or otherwise alter or affect any
action or proceeding to be or intended to be taken by the Corporation.
13.4 For greater certainty, the Corporation shall not be required for any
purpose under these share provisions to recognize or take account of
persons who are not so recorded in such securities register.
13.5 All Exchangeable Shares acquired by the Corporation upon the redemption or
retraction thereof shall be canceled.
13.6 There shall be no amendment, waiver or forgiveness of the Agreement of
Purchase and Sale, Support Agreement or Voting and Exchange Trust
Agreement or Networks North's Amended and Restated Certificate of
Incorporation without the approval of the holders of the Exchangeable
Shares given in accordance with Article 10 of these share provisions other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purpose of-
a. adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares; or
b. making such provisions or modifications not inconsistent with such
agreement or certificate as may be necessary or desirable with
respect to matters or questions arising thereunder which, in the
opinion of the Board of Directors, it may be expedient to make,
provided that the Board of Directors shall be of the opinion, after
consultation with counsel, that such provisions and modifications
will not be prejudicial to the interests of the holders of the
Exchangeable Shares; or
c. making such changes in or corrections to such agreement or
certificate which, on the advice of counsel to the Corporation, are
required for the purpose of curing or correcting any ambiguity or
defect or inconsistent provision or clerical omission or mistake or
manifest error contained therein, provided that the Board of
Directors shall be of the opinion, after consultation with counsel,
that such changes or corrections will not be prejudicial to the
interests of the holders of the Exchangeable Shares.
14
<PAGE>
eSupplies (Alberta) Ltd.
BALANCE SHEET
As At May 31, 2000
<TABLE>
<CAPTION>
April 30, 2000 May 31, 2000
---------------------- --------------------
Assets
<S> <C> <C>
443,579 Bank 35,161
250,000 Short-term deposits --
-- Restricted cash (note 2) 300,000
660,210 Trade receivables 511,348
137,999 Other receivables 182,087
36,637 Inventory 36,637
904,634 Prepaid expenses and other assets 852,186
---------------------- --------------------
2,433,060 Total current assets 1,917,419
1,802,200 Capital assets (note 3) 2,186,294
3,500,000 Intangibles (note 4) 3,441,667
428,158 Goodwill (note 4) 421,022
---------------------- --------------------
8,163,418 Total assets 7,966,401
====================== ====================
Liabilities
215,698 Trade payables 613,721
142,070 Other payables 131,719
9,476 Payroll accruals 15,564
7,703 Taxes payable 9,780
---------------------- --------------------
374,947 Current liabilities 770,783
9,044,110 Long-term debt (notes 4 and 5) --
---------------------- --------------------
9,419,057 Total liabilities 770,783
---------------------- --------------------
1,000 Common shares (note 6) 9,045,110
(1,234,743) Retained earnings (1,827,597)
---------------------- --------------------
(1,255,639) Total equity 7,195,618
---------------------- --------------------
8,163,418 Total liabilities and equity 7,966,401
====================== ====================
Commitments (note 8)
</TABLE>
<PAGE>
[EXHIBIT]
"B"
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Valuation
of Chell.com Ltd.
as of May 31, 2000
By
Stanford Keene
July 14, 2000
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene.
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Table of Contents
Certification..................................................................2
General Assumptions and Limiting Conditions....................................4
Introduction...................................................................5
Summary of Findings............................................................6
Value of Networks North Shares.................................................8
Discounted Cash Flow Analysis for C Me Run.....................................9
Business Summary for eSupplies................................................10
Business Summary for enGyro...................................................12
Business Summary for cDemo....................................................16
ASP Industry Outlook - Melissa Zahniser, Director, Stanford Keene.............19
IT Outsourcing Industry - Barry Gant, Research Analyst, Stanford Keene........22
Online Automobile Services - Barry Gant, Research Analyst, Stanford Keene....24
B-2-B Office Supplies - Barry Gant, Research Analyst, Stanford Keene..........25
Valuation Section.............................................................27
Valuation Methods for eSupplies...............................................29
Valuation Methods for enGyro..................................................33
Valuation Methods for cDemo...................................................37
Valuation Adjustments.........................................................41
Correlation of Valuation Results and Conclusion for eSupplies.................49
Correlation of Valuation Results and Conclusion for enGyro....................50
Correlation of Valuation Results and Conclusion for cDemo.....................51
Stanford Keene Personnel......................................................52
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 1
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Certification
We certify that, to the best of our knowledge and belief:
- The statements of facts contained in this report are true and correct.
- The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our unbiased
professional analyses, opinions, and conclusions.
- Stanford Keene, nor any Stanford Keene employee, has no present or
prospective interest in the properties that are the subject of this
report, and we have no personal interest or bias with respect to the
parties involved.
- We have no bias with respect to the property that is the subject of this
report or to the parties involved with this assignment.
- Our compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in, or the use of, this report.
- Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice and other widely accepted and recognized
valuation methods.
- No one provided significant professional assistance to the persons signing
this report except as indicated in the General Assumptions and Limiting
Conditions.
______________________________
David Homard, CFA
Research Associate
Stanford Keene
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 2
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 3
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
General Assumptions and Limiting Conditions
The valuation is subject to the following assumptions and limiting conditions:
- This report is intended for use only by our client and those intended
users applying our valuation in accordance with its intended use. Use of
this report by others is not intended by the analyst. This report contains
certain proprietary and confidential information relating to each party's
business. We do not intend to have proprietary and confidential
information disseminated, published, photocopied, or disclosed to others
without our prior written consent or knowledge.
- All financial statements, financial forecasts, operating results, and
other data pertaining to Chell.com Ltd., otherwise known as "Chell.com,"
or "The Company" have been accepted and reviewed by Stanford Keene, and
with the assumption that the statements have been prepared in conformity
with generally accepted accounting principles consistently applied, except
as may be specified in this report. The financial assumptions were
reviewed against market growth projections where applicable. The following
report reflects some of management's assertions.
- The financial information presented herein includes normalized adjustments
made solely to assist in the development of the value conclusions
presented in this report. Normalization adjustments are hypothetical in
nature and are not intended to present restated historical results or
forecasts of the future. This information should not be used for any other
purpose other than to assist in this valuation, and we express no opinion
or any other assurances on this presentation.
- All reported facts, comments, estimates, opinions, and statistical
information set forth in this report have been obtained from sources
believed to be accurate, reliable, and knowledgeable, but no liability is
assumed for the content or accuracy of data furnished by others.
- All claims to property have been assumed to be valid and no investigation
or consideration of legal title or any existing liens or encumbrances
which may be against the assets was undertaken except as may be stated in
this report.
- The contents of this valuation are an opinion of value for the purpose as
stated. In no way should this be construed as a recommendation to buy or
sell the underlying security. Furthermore, this valuation is not intended
to establish a formula for the value of the security. Stanford Keene and
these persons support only the opinion stated in this report and assumes
no responsibility for the use of formulas and other approaches based on
these conclusions in the future.
- No responsibility is assumed for matters of a legal nature or character.
- No consideration has been given to the existence of potential
environmental liabilities that may or may not be present on the underlying
property. This includes real estate either owned or leased by Chell.com
Ltd.. Therefore, no responsibility can be taken for hidden or unapparent
conditions of the property or potential claims against Chell.com Ltd.
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 4
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Introduction
Purpose
The purpose of this report is to present our opinion of the value of assets
which may be used in exchange for Networks North common stock. Among other
things, Stanford Keene was requested to evaluate, the value of 480,000 shares of
cDemo, Inc., 875,000 shares of enGyro, Inc., and 962,500 shares of eSupplies
(Alberta) Ltd., 150,000 shares of C Me Run Corp. and the value of Chell.com Ltd.
as a whole in a buyout situation. No limitations were imposed upon Stanford
Keene by Chell.com Ltd. management with respect to the investigations made or
the procedures followed by Stanford Keene in rendering its opinion.
The assets reviewed in this report are owned by Chell.com and Cameron Chell,
which herein will be referred to as Chell.com.
Definition of Fair Market Value
The definition of fair market value for purposes of this report is the price at
which the property would change hands between a willing buyer and a willing
seller, neither being under a compulsion to buy or sell and both having
reasonable knowledge of relevant facts. It is also generally assumed that fair
market value represents a transaction between hypothetical persons dealing at
arms-length, with both parties having the ability as well as the willingness to
buy or sell. It is further assumed that both parties are well informed about the
property and concerning the market(s) for such property. Our valuation process
will determine a most probable value for interests in Chell.com Ltd. assets
based upon generally accepted valuation techniques.
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Copyright 2000, Stanford Keene. All Rights Reserved.
Summary of Findings
The Networks North, Inc. board of directors and the board of directors of
Chell.com retained Stanford Keene to render an opinion as to the value of assets
of Chell.com to be exchanged for Networks North common stock. As of May 31, 2000
Stanford Keene believes that:
o The value of 480,000 shares of cDemo is between $2.31 and $2.71
million based discounted cash flow analysis.
o The value of 875,000 shares of enGyro is between $16.18 and $17.72
million based on an analysis of projected cash flows.
o The value of 962,500shares of eSupplies is $5.78 million based on
prior transaction.
o The value of 150,000 shares of C Me Run (NASDAQ: CMER) is $1.65
million based on public market trading.
o The value of the above assets of Chell.com Ltd. would be between
$25.91 and $27.85 million in aggregate. Combining these assets with
the physical assets being transferred in the proposed transaction
with Networks North yields a total asset value between $27.68 and
$29.62 million.
Stanford Keene's opinion is directed to the Network North board of directors and
relates only to the value as of May 31, 2000.
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Copyright 2000, Stanford Keene. All Rights Reserved.
Correlation of Valuation Results and Conclusion for Chell.com Ltd.
The underlying asset approach was used to determine a value for a buyout of the
assets of Chell.com Ltd. While other methods were available, this approach is
believed to be the most reliable and accurate in this situation. Based on our
investigation and analysis, the fair market value of the transferred assets, as
of May 31, 2000:
Value of eSupplies Considered $5,775,000 $5,775,000
Value of cDemo Considered $2,311,605 $2,705,345
Value of ENGYRO Considered $16,177,714 $17,724,500
Value of C Me Run Stock $1,650,000 $1,650,000
Value of Chell.com Assets $1,767,503 $1,767,503
Value of Chell.com USA, Inc. $1 $1
Total Value of Assets Being Transferred $27,681,823 $29,622,349
Based on our analysis, we believe that the value of the assets being transferred
in this transaction would be worth between $27.68 million and $29.62 million.
All figures are in US Dollars.
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Value of Networks North Shares
For the transaction, we looked at the trading history of Networks North for the
10 and 30-day periods prior to the valuation of the assets in the proposed
transaction. For the 10 days ending May 31, 2000 the average close of Networks
North stock on the NASDAQ market was $3.91 per share, while for the 30 day
period ending May 31, 2000, the average close for Networks North common stock
was $3.92 per share.
Based on these averages, we feel that the payment of 7,325,000 shares of
Networks North common stock for the assets discussed in this report is fair.
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Copyright 2000, Stanford Keene. All Rights Reserved.
Discounted Cash Flow Analysis for C Me Run
Analysis of Valuation Procedure
When evaluating the fairness of the proposed transaction, Stanford Keene
considered the following issues in regard to C Me Run:
o The nature of the business and the history of the enterprise from
its inception;
o The economic outlook in general and the condition and outlook of the
specific industry in particular;
o The book value of the stock and the financial condition of the
business;
o The earnings capacity of the company;
o The dividend paying capacity of the company;
o Whether or not the enterprise has goodwill or other intangible
value;
o Sales of the stock and the size of the block of the stock to be
valued;
o The market price of the stocks of corporations engaged in the same
or similar line of business having their stocks actively traded in a
free and open market, either on an exchange or over-the-counter.
C Me Run is expected to generate a stream of income or other anticipated
benefits expressed in monetary terms in the forms of net cash flow, dividends,
and various forms of earnings to shareholders. Anticipated benefits are
estimated considering such items as the nature, capital structure, and
historical performance of C Me Run and expected future outlook for C Me Run, the
industry, and the economy. Anticipated benefits are converted to a value using
procedures that consider the expected growth and timing of the benefits, the
risk profile of the benefit stream and the time value of money. The conversion
of anticipated benefits to value normally requires the determination of a
capitalization rate or discount rate. In determining the appropriate rate, the
interest rate, rates of return on relevant investments, and the risk
characteristics of the benefits are considered. The capitalization rate or
discount rate is raised or lowered to reflect the risk associated with the
entity's ability to achieve the projected income and the expected growth rate.
The discounted cash flow method, along with related capitalized cash flow
method, is frequently used in the context of mergers and acquisitions. However,
it may serve a wide variety of valuation purposes, including the valuation of
both controlling and minority interests. Applying the discounted cash flow
method utilizes net cash flow as a measure of the earnings capacity in
determining the value of a company's stock. Net cash flow or free cash flow
available to minority equity holders is defined as follows: net income
after-tax, plus depreciation & amortization expenses, less capital expenditures,
less additional working capital requirements less net debt. The analyst then
discounts these benefits to present value at an appropriate rate known as a
discount rate.
In this instance, we have projected earnings over the next ten years to a
stabilized growth rate for C Me Run and discounted the earnings stream back to
today's value. Certain assumptions were made for projection purposes and are
reasonable based on industry averages. The present value of the cash flows was
calculated using discount rates ranging from 22% to 24.5%, which takes into
consideration the lack of operating history of C Me Run. This analysis indicated
that, after adjusting for after-tax corporate expenses, the following implied
aggregate equity reference range for C Me Run, as compared to the closing price
of C Me Run's Class A common stock per share on May 31, 2000 was $10.11 to
$17.11. This compares with a closing price of $11.00 on May 31, 2000 for the
common stock of C Me Run.
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Copyright 2000, Stanford Keene. All Rights Reserved.
Business Summary for eSupplies
eSupplies (Alberta) Ltd. was incorporated in October 1999. eSupplies are
headquartered in Calgary, AB. eSupplies was formed to acquire the business and
underlying assets of Willson Stationers Ltd., which was a 108-year old office
supply company. In August 1999, Willson's was placed under voluntary credit
protection and subsequently receivership. Under eSupplies' direction, the
Willson's business format has been completely restructured to become a sales and
marketing company serving the small to medium enterprises (SME) market - by
closing down the unprofitable retail and warehousing operations and
strategically aligning itself with third parties to warehouse and distribute its
products. ESupplies.com Inc., a Deleware corporation has entered into an
agreement with eSupplies to acquire the shares of eSupplies and to go public in
the United States.
As the Internet and e-commerce invade almost every market niche, companies of
all types are trying to right size themselves to compete in this new environment
and this is especially true in the SME market. These companies (which have
between 5 and 49 employees) need service providers who can address their need
for speedy delivery, one-stop shopping and are price competitive. It is this
market that eSupplies (and ultimately eSupplies USA) aims to offer its new
services to allow it to clearly differentiate itself from its competitors and
thus rapidly gain market share in key North American markets.
eSupplies is a sales and marketing company that specializes in the small to
mid-size business market via the Internet and a traditional outside and
telesales organization. The small to mid-size business market customers' want
the ability to procure office supplies and other related services such as legal,
accounting, and janitorial services online in an easy-to-use and cost-effective
manner.
eSupplies is one of the first virtual office supply companies. eSupplies carries
no inventory instead it relies upon its partners including United Stationers
(NASDAQ: USTR) as its office supply supplier and Canadian Freightways as its
courier company to deliver the customer's packages either directly or indirectly
(eSupplies delivers within the Calgary marketplace) to most major business
centers the next business day. Currently eSupplies services the Calgary
marketplace, but plans to rapidly enter the United States within the next few
months.
eSupplies' management is projecting that it will generate $5.2 million (USD) in
revenue in fiscal 2000 and this will increase to $109.4 million (USD), with a
net operating profit of $5.4 million (USD) by 2002.
The vision for eSupplies (Alberta) Ltd. has the following key attributes that
serve to describe the elements of success eSupplies (Alberta) Ltd. wishes to
institutionalize going forward. This business plan is dedicated to the
realization of these attributes:
o A sales culture that is customer focused, fact-based and
sales/marketing driven;
o Insistence on the acquisition of the best people;
o Focus on the intangibles in the market that create value and
minimize the capital deployed in the business that are not directly
related to eSupplies (Alberta) Ltd.'s core competency;
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o Introduction of new customer service and relationship dimensions
that specialize, tantalize and help to lock-in customers - at the
limit of customer perceived value; and
o Profitability that meets or exceeds industry expectations (3%).
This vision has been condensed into five strategic pillars, which will support
eSupplies (Alberta) Ltd. in its drive to achieve the $100 million plateau within
three years. These pillars are as follows:
o Profitable Growth;
o Customers First;
o Sales Culture;
o Competitive Operations; and
o Professional Excellence;
These pillars are used to drive the goals, objectives, actions and key
performance indicators ("KPIs") of the business plan that are used by the
management team to move the business forward.
One of eSupplies differentiating strategies will be to offer one-hour delivery
in select markets. eSupplies (Alberta) Ltd. will carry the top 1,000
stock-keeping units (SKUs) in local warehouses. The one-hour delivery service
will be based on a minimum order of $100. For items not included in the top 1000
SKUs, the customer will have the choice of receiving their whole or partial
order the next day as usual or placing two separate orders. Customers will be
able to place their one-hour orders via either eSupplies (Alberta) Ltd.'s
website or through its telesales department. eSupplies (Alberta) Ltd. will only
offer its one-hour service from 9AM to 4PM Monday to Friday, with a 3PM local
time cutoff for all orders. Initially, eSupplies will test market this service
in select markets. Markets will be chosen based on: close proximity to a United
Stationers distribution center (for product quick replenishment), have
population of 1 million people, and the number of SMEs in the area. The depots
will carry no more than two days of inventory on hand. Each depot will have
between 2 - 5 pickers and packers, a Comptroller, and 5+ drivers. The depots
will average 4,000 sq. ft., and have at least two delivery docks. eSupplies
(Alberta) Ltd. will lease the space, the vehicles, and all appropriate
equipment.
Management
Cameron Chell, Chairman and Director
Mr. Chell is recognized as one of the founders of the ASP industry, and is the
Chairman and CEO of Chell.com Ltd., is also a Founder and President of the ASP
Consortium, Founder of FutureLink Distribution Corp. (Nasdaq: FTRL), and
co-founder and chairman of C Me Run (NASDAQ OTC BB: CMER).
Robert (Bob) Burpee, President and CEO
Prior to joining eSupplies, Mr. Burpee was the VP of Lubricants Division of
PETRO- CANADA, from 1991-1999, which is one of the world's largest facilities
using severe hydrocracking technology. Mr. Burpee was responsible for over $350
million (USD) in revenue and approximately 600 employees. From 1988-1991, Mr.
Burpee was the President and CEO of CANBRA FOODS, a $100 million food processing
company.
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CANBRA FOODS is a division of James Richardson International (JRI) a private
Canadian company. Prior to CANBRA, Mr. Burpee, was the President of Knott's
Berry Farm Foods Ltd, of Placentia, CA, which is a $50 million family-owned
regional food business. Under Mr. Burpee's direction the company created a
freestanding business separating the food operations from its amusement park
operations.
Lawrence H. Lee, CA, CFA, VP Finance and CFO
Prior to joining eSupplies, Mr. Lee was the Corporate Controller and Acting CFO
for Novatel Wireless Inc., (NWI) a privately held San Diego, CA-based company.
Novatel Wireless is a leading edge developer and manufacturer of wireless
Internet solutions. From 1992 to 1996, Mr. Lee was a Senior Manager of Ernst &
Young Calgary office, where he provided accounting, auditing and financial
reporting consultation services for Canadian and US-based public and planning to
go public companies. In 1995, Mr. Lee was also a Secondment to the Alberta
Securities Commission.
Larry Putnam, VP Sales
Prior to joining eSupplies, Mr. Putnam ran his own non-grocery food-based
brokerage, and strategic consulting service. His clients included Cadbury
Schweppes, Dole Canada, Sun Ripe Foods, etc. From 1983 to 1987, was the VP of
Sales and Marketing for Cadbury Schweppes, which trades on the New York Stock
Exchange as American Depositary Shares ("ADS"). From 1980 to 1983, Mr. Putnam
was the VP of Sales for Cadbury Foods, and was part of the acquisition team that
acquired Mott's Clamato business. He grew business from $15 million to $120
million over those three years. Prior to that, Mr. Putnam was National Sales
Manager, Coffee Division for General Foods, which is a $150 million a year
division.
Rodger Moody, Business Development Team Leader
Mr. Moody joined eSupplies in December 1999 with a background concentrating on
customer service, having worked with Future Shop and Earl's Restaurants. While
exposed to the high-quality training in both companies, he learned the
philosophies and customer vision needed to compete in today's business world.
Also, Mr. Moody worked as a restaurant consultant, giving him first-hand
experience in operations of business ventures.
Directors
Riaz Mamdani, Director
Mr. Mamdani is the Director of Business Development for Jaws Technologies Inc.
where he has assisted the company with numerous financing and significant legal
matters. From May 1996 to August 1998, Mr. Mamdani was a Barrister and Solicitor
with Beaumont Church, a Calgary-based law firm, where his practice focused in
the areas of Corporate, Commercial and Securities law.
Business Summary for enGyro
enGyro aims to be the dominant provider of financial transaction solutions to
the Application Service Provider (ASP) Industry. enGyro wishes to foster growth
of the ASP ecosystem with an enabling platform, which simplifies the management
of the complex billing, payment and disbursement arrangements associated with
ASP service. enGyro will guarantee the process and remit fully reconciled
postings of the multiple components, delivery channels and revenue streams.
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enGyro will allow Independent Software Vendors (ISVs) to rapidly adapt to the
ASP model (scaling down to the end-user level) and allow ASPs to offer more
applications to their consumer base (scaling up). This will ensure proper
financial remuneration to any resale channel or supplier network that is
utilized in the delivery of an application. enGyro's customizable service will
make it easy for everyone to participate in the ASP experience.
enGyro seeks:
o To enable ISVs to transition to the ASP model by helping to remove the
barriers of entry surrounding the economic considerations.
o To provide to the ASPs a valuable administrative outsource service which
permits concentration on their core services and scalability for their
growing financial management needs.
o To provide a value added service to ASP enablers (data centers, operating
platforms, ISPs, NSPs, Progress) to support the industry growth.
o To provide the customer with flexibility in their payment terms and
confidence in what they received and are paying for.
o To provide to ASPs and their suppliers a simplified method to receive
their revenue derived from ASP transactions.
o To enhance the ASP customer relationship by enabling choices in payments
and applications.
o To provide certainty to the ISVs in the ASP revenue and service delivery
model, and allow deployment of multiple revenue models.
enGyro is uniquely positioned at this inflection point of ASP development to
provide one of the fundamental infrastructure components to stimulate the ASP
environment. enGyro will take the strategic position of `Friend to all, threat
to none' so as to maximize the partnering / alliance opportunities and to help
develop standards within the ASP Industry.
enGyro will enable the access of ISVs to the ASPs and their customers and the
ASPs to the applications for their customers. Additionally, enGyro will provide
a platform that allows all parties of the ASP transaction to be confident in the
backend of the delivery of the application, payment and disbursement.
enGyro aims to accomplish this by:
1. Managing the bill presentment and payment process with account
reconciliation and posting directly to the Accounting system.
2. Partnering with software metering/monitoring providers.
3. Working with ISVs to help them move to the ASP revenue model with
confidence.
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Copyright 2000, Stanford Keene. All Rights Reserved.
4. Providing this functionality thereby helping ISVs to transition to the ASP
distribution model and reach more customers.
5. Reconciling all data points to the billing and payment, as well as the
disbursement and settlement stream. enGyro will guarantee the process and
create a trusted environment of accurate customer billing and revenue
assurance.
The Company has made considerable progress in the development of technology and
development of the management team since the initial round of seed funding in
January. enGyro anticipates that it will begin Beta testing of the product early
in the third quarter of 2000 with a full rollout of the product in the fourth
quarter of 2000. enGyro does not expect to show an operating profit until the
third quarter of 2002. enGyro expects gross profit will be positive in the first
quarter of 2002.
On May 31, 2000, enGyro had $1,330,478 in liabilities on the balance sheet.
Management
Cameron Chell - Chairman of the Board
Mr. Chell's business experience has focused on the development and financing of
high-technology corporations. Prior to establishing Chell.com Ltd., Mr. Chell
was the founder, Chairman, and CEO of FutureLink Distribution Corp. (NASDAQ:
FTRL), where his primary responsibilities were to assemble a leading-edge
technology and business team, as well as to arrange financing for the
corporation. Previously, Mr. Chell worked in the corporate finance arena. He was
lead broker for several corporations through their initial financing and
start-up phases, and public offerings. Before launching FutureLink, Mr. Chell
co-founded JAWS Technologies Inc. (NASDAQ OTC BB: JAWZ), a provider of
encryption software, where he served as Vice President of Technology. Mr. Chell,
a former top-10 competitor in the National Canadian decathlon, has been a
fundraiser for the Children's Wish Foundation and a representative for Calgary's
Designated Driver campaign, which targets Canadian youth.
Rich Okun, CEO
From 1996 to 1999, Mr. Okun was the President and CEO of American Payment
Systems (APS), the largest provider of outsourced walk-in payment services for
the utility industry. APS is a wholly owned subsidiary of The United
Illuminating Company, an operating electric utility. In 1999, APS moved over
$8.5 Billion through its 1,500 Banking relationships and processes over 80
Million transactions annually with a distribution channel of over 6000 retail
locations in 42 states.
Prior to that in 1991 Mr. Okun was Vice President of JWP Credit Corp, an early
stage captive leasing company. (JWP was a $2 Billion services company at the
time). He grew the leasing arm to over $100 Million in equipment revenues for
JWP in a little more than one year. He created and maintained multi-million
dollar recurring leasing arrangements with Time Warner, Aetna, CIGNA, ITT
Hartford, Prudential, American Express, MassMutual, Digital Corp, and many
others.
Mr. Okun was in the U.S. Air Force as a fighter pilot (F-15) and Transport pilot
with global missions (C-141). He graduated from Syracuse University in 1974 with
Bachelors of Science (Industrial and Personal Relations) and a Bachelors of Arts
(Illustration), and completed advanced studies in Law in 1974.
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Phil Viscomi, President & COO
Mr. Viscomi comes from a very rich background and one that is both unique and
key to enGyro's service delivery. Mr. Viscomi was the Director of Business
Development (1998 -1999) at Compaq Computer Corp. (NYSE: CPQ) where he grew
revenue by $375 million over five months, and designed and implemented the
company's initial global customer E-business function. From 1987 - 1997, Mr.
Viscomi held various senior management positions with Digital Equipment Corp
(since acquired by Compaq), including Director of Global Business Development
(1994 - 1998) where he developed and implemented innovative strategic sales
programs including the developments of Digital's global E-business solutions,
National Channel Sales Manager (1993 - 1994) and Global Account Manger (1987 -
1993).
John Martin II, CFO
Mr. Martin is a senior financial executive with a broad experience base. Mr.
Martin was the CFO, VP, Treasurer and Secretary (1995 - 1998) for TRANSPRO INC.
(NYSE: TPR), where he was responsible for the company's spin-off, "Road Show",
M&A strategy, and financial operations. Prior to TRANSPRO, Mr. Martin was the VP
and Treasurer of THE ALLEN GROUP (NYSE: ALN), where he was responsible for all
corporate financing requirement, and oversaw the company's $130 million captive
leasing company. In addition, Mr. Martin participated in and arranged financing
for six acquisitions, four divestitures and the TRANSPRO spin-off.
Andrew W. Quinn, Jr., Interim CTO, and EVP of Business Development
Mr. Quinn was the Business Development Manager at FutureLink (NASDAQ: FTRL) from
July 1999 to January 2000 where he developed strategic relations in the
connectivity, hardware and software markets. From 1998 to 1999, Mr. Quinn was a
consultant to Coinet, an e-commerce and Application Service Provider. Prior to
that, Mr. Quinn was the co-founder of both Learningstation.com and Learning
Information Network, Inc., which where Application Service Provider's (then
called thin-client/server computing) dedicated to education marketplace.
In addition from 1993 to 1994, Mr. Quinn was the Vice President of Sales and
Service for Computer Communications Company, which is the largest Novell
Platinum Dealer in the Northeast, where he installed over 450 servers annually,
and established four new customers with annual purchases of over $4 million, in
addition to core revenues of over $15 million. In 1991 - 1993, Mr. Quinn was the
Account Executive for Dataflex, where he achieved 120% of first year goal. Mr
Quinn created the largest new customer order for the company with $2.75M
purchase, and in 1989 - 1991, was the National Account Manager for Computerland.
Mr. Quinn was the top-producing representative in New England with 50% of the
local branch revenues of $32M.
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Business Summary for cDemo
cDemo has designed a new business model that will establish a nationwide
electronic vehicle demonstration and Internet listing service of used cars at no
cost to the consumer. cDemo's one-of-a-kind, low-cost service will revolutionize
the way all used cars are sold. Because research has shown that most people get
an oil change before selling their car, cDemo will initially form partnerships
with the existing nationwide infrastructure of oil change companies, of which
there are over 14,000 in the United States. The cDemo service will enhance the
experience of both buyers and sellers of cars by providing an independent, third
party listing of the features and condition of used vehicles for sale, including
a series of interior and exterior photos.
Once the electronic demonstration has been performed on the seller's vehicle, at
no cost to them with a paid oil change, the information can be easily uploaded
to the websites of their choice. Anywhere a cDemo-enhanced advertisement
appears, it is accompanied by the cDemo logo and a unique six-digit alpha code,
enabling potential buyers to view the details about the car on the Internet. As
a neutral, third party information service provider, cDemo is a highly effective
tool for both buyer and seller, providing an accurate, fair, and trusted
description of the vehicle's condition.
cDemo will provide the comprehensive content free of charge to its co-branding
media partners, on condition that they provide extensive advertising promoting
the cDemo service to "drive" their customers to cDemo's listing partners. When a
consumer calls a newspaper or a photo buy publication to place an advertisement,
a sales representative will inform the consumer of the benefits of cDemo's
service and where it can be accessed.
When a seller of a car visits a website that lists used cars for sale,
advertising will promote cDemo's free electronic demonstration and Internet
listing service. Sellers will be prompted to key in their zip codes, and will
then be directed to the nearest cDemo-listing center. Print media partners must
place large ads (in every publication -- every day) in their automotive
classified ad section detailing cDemo's service, as well as all of the local
listing centers' addresses. Internet Media partners will do much the same on
their Websites on an "around-the-clock" basis.
cDemo's detailed, accurate, and independent third-party information will also
revolutionize the way consumers trade in their vehicles and access related
services, such as financing, insurance and extended warranties. Consumers will
no longer need to have their vehicle inspected at each dealership or dot-com
before getting a quote for their trade-in. This applies to the purchase of
related services as well, because a cDemo electronic demonstration provides all
the necessary information.
Sources of Revenue
1. Revenue-sharing agreements with multiple extended warranty, finance
and insurance companies, each of which will offer buyers competitive
rates.
2. Advertising from manufacturers and automotive related dot-com
companies.
3. cDemo provides a "Best Offer" program, which gives cDemo sellers the
opportunity to receive online trade-in quotes for their used vehicle
when getting bids on a new vehicle from cDemo's
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partner network. The service is free to the consumer, but the
dealers will pay cDemo a $50 fee. The quality of these leads is
vastly superior to anything available today, because the dealer
knows exactly what the consumer wants and also has an accurate
assessment of the consumer's trade-in.
4. An extremely valuable database of used vehicle transactions, which
will become the most accurate source of information on the value of
used cars, and will be sold to generate revenue.
5. cDemo is creating a standardized Tier II full mechanical inspection
program to be implemented by mobile and fixed location certified
inspection partners. A cDemo authorized partner will perform this
inspection. The service will take approximately one hour and cost
the buyer approximately $100.00, of which cDemo will collect a
commission of $15.00.
It should be noted that cDemo's media partners would retain 100% of their
existing fees; they will not be shared with cDemo.
Revenues are anticipated to be generated beginning in 2001. Management has laid
out a very aggressive business plan and projected income statement that shows
revenue rising to $61 million in 2004 from $11 million in 2001.
On May 31, 2000, cDemo had $1,069,497 in debt on their balance sheet.
Board of Directors
Cameron Chell, Chairman
Mr. Chell is recognized as one of the founders of the ASP industry, and is the
Chairman and CEO of Chell.com Ltd.. He is also a founder and President of the
ASP Consortium, founder of FutureLink Distribution Corp. (NASDAQ: FTRL), and
cofounder and chairman of C Me Run (NASDAQ OTC BB: CMER).
Frank Killoran, Interim President and CEO
Over his 19 years in business, Mr. Killoran has developed strong operational and
financial skills. He was a senior partner with Coopers and Lybrand (now
PriceWaterhouseCoopers) and led their corporate turnaround practice. He was
later the President and CEO of Taro Industries Ltd., an oil and gas services
company. In addition to his other duties, Mr. Killoran is the President, CEO,
and majority shareholder of National Process Equipment (NPE), the largest
independent distributor of pumps and compressors in Canada.
Allan Chell, VP of Strategic Development and Director
Mr. Chell is a founding member of the North American Automobile Trade
Association, which manages governmental, customs, environmental and safety
issues and regulations on behalf of its members. As President of NAFTA Trading
Corp., Allan has positioned the company to exponentially grow the business
through strategic alliances and target acquisitions over the next 12 to 24
months. In 1992, Mr. Chell started NAFTA Trading Corp., an automobile
import/export company servicing Western Canada and the Northwestern United
States. In 1990, Mr. Chell managed and/or co-managed the wholesale department,
used car department, and finally the business office for Davis Pontiac of
Lethbridge, AB.
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Bernie Knaus, VP of Strategic Development and Director
Mr. Knaus graduated from California State University, Chico, in 1990 with a
Bachelor of Science degree in Business marketing. He then started North American
Vehicle Export (NAVEX) in 1990 exporting cars from the United States to Germany
& Japan. In addition, Mr. Knaus co-developed NAVEX's internal and proprietary
custom database system to manage all processes specific to international vehicle
exportation and tax reclamation.
Stuart Dalgleish, MBA, General Manager and Corporate Secretary
From 1988 to 1989 and from 1990 to 2000, Mr. Dalgleish worked with the City of
Calgary focusing on business renewal by standardizing processes, developing
alignments among related business areas, and implementing technology solutions.
Mr. Dalgleish is currently leading a project for the City of Calgary to
introduce document management technology to their operations, effectively
creating a paperless Internet-based environment for over 300,000 Calgary
property and business accounts.
From 1989 to 1990, Mr. Dalgleish worked with the Alberta Workers' Compensation
Board (an insurance-based Crown corporation), involved in the design and
development of new forecasting and strategic planning processes. Mr. Dalgleish
is a member of the Board of Directors of the Calgary chapter of the Juvenile
Diabetes Foundation.
Michael Burnyeat, C.A, Interim CFO and Director
Prior to joining cDemo, Mr. Burnyeat was the Assistant Controller at MetroNet
Communications Corp., which was recently acquired by AT&T Canada Inc. (NASDAQ:
ATTC). While at MetroNet, Mr. Burnyeat was responsible for the day-to-day
operations of the Calgary finance department, and preparation of consolidated
financial statements for shareholders and the various regulatory and security
commissions in Canada and the United States.
From 1996 to 1997, Mr. Burnyeat was the Assistant Manager Corporate Accounting
for Canadian Pacific Ltd., (TSE: CP and NYSE: CP), responsible for overseeing
the day-to-day accounting and monthly financial reporting for the corporate
entity and numerous corporate subsidiary companies, as well as acting as a
liaison with the treasury and legal departments. From 1990 to 1996, Mr. Burnyeat
was the Manager, Business Assurance at Coopers & Lybrand - Calgary, Canada and
Edinburgh, Scotland, where he was responsible for the management of staff on a
variety of projects and provided financial advisory service.
Mr. Burnyeat was the 1999 recipient of the CFO Recognition Award; 1998 recipient
of the Corporate Award of Merit and nominee for the President's Club; and the
recipient of the Canadian Petroleum Tax Society Scholarship.
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ASP Industry Outlook - Melissa Zahniser, Director, Stanford Keene
Five years from now, if you are a CIO with a head for business, you won't
be buying computers anymore. You won't buy software either. You'll rent
all your resources from a service provider.
- Scott McNealy, Sun Microsystems
WHAT IS AN ASP?
This one proclamation by Sun Microsystems captures the philosophy behind the
development of the ASP market.
With technology becoming an increasing expense for companies of all sizes and
statures, it is easy to recognize a need for a new approach to computing. While
many companies will continue to maintain some in-house resources of their own,
most, over the next few years, will outsource from outside providers. The
providers offering these services have become known as application service
providers (ASPs).
The ASP marketplace is still in its nascent stages, but has so quickly emerged
at an astonishing rate to become a leading, driving force of the IT industry
today. Due to the recency of the ASP phenomenon, there is not a definitive ASP
definition to date. However, various working definitions exist to facilitate a
general understanding of this new business model:
o International Data Corporation (IDC) defines an ASP broadly as a
one-to-many service, delivering a packaged software product,
typically licensed from the vendor, and bundling related services
ranging from IT consulting to information content.
o Dataquest defines the ASP marketplace as the provision and
servicing of business process-enabling applications delivered over a
network via a subscription-based outsourcing contract.
o ASP News defines an ASP as an independent third-party provider of
software-based services, which are delivered to customers across a
wide area network
o The ASP Industry Consortium defines the functions of an ASP as an
entity that deploys, hosts and manages access to a packaged
application to multiple parties from a centrally managed facility.
The applications are delivered over networks on a subscription
basis. This delivery model speeds implementation, minimizes the
expenses and risks incurred across the application life cycle, and
overcomes the chronic shortage of qualified technical personnel
available in-house.
MARKET SIZING
Although the ASP market is young and somewhat ambiguous, it is nevertheless
growing at a rapid rate. Currently, the competitive ASP market has an extremely
favorable outlook, and is luring new application vendors from a vast spectrum of
the IT industry into the ASP market daily. These include established telecom
service providers, systems integrators (SIs), value-added resellers (VARs),
next-generation service
[THE FOLLOWING WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
Application Outsourcing Market Growth
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------------------------------------------------------------------------------
Apps Operation $0.83 $1.80 $3.52 $4.80 $5.55
--------------------------------------------------------------------------------
End-to-End $0.22 $0.42 $1.21 $3.75 $9.13
--------------------------------------------------------------------------------
Apps Rental $0.01 $0.09 $0.39 $1.88 $6.37
--------------------------------------------------------------------------------
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providers (NSPs), electronic service providers (ESPs), independent software
vendors (ISVs), Internet service providers (ISPs) and pure-play ASPs. Although
some projections are more ambitious than others, there is a general consensus
among industry analysts that the ASP revolution is by all indications an upward
trend. Forrester Research projects rapid growth from outsourcing of enterprise
applications with the total market more than doubling each year to reach $21
billion in 2001. Within that, Forrester projects over 400% average annual growth
in the applications rental market, reaching over $6 billion by 2001. Dataquest
offers a forecast of the ASP market over the period 1998 to 2003, estimating a
total worldwide ASP market to be slightly under $890 million at the end of 1998,
and $22.7 billion by 2003. Dataquest bases these forecasts on the assumption
that up to 30% of the market for enterprise application software has been sold
through an ASP channel.
Current modest revenue figures may be explained by the ASP market's incubation
stage, marked by an increasingly aggressive collection of venture capital. VCs
pumped $145 million into ASPs last year, up from just $10 million in 1998,
according to venture capital research firm Venture Economics. This year promises
a substantial increase in VC spending. Among the ASPs that have landed funding
by the end of Q1 are Surebridge ($36 million), Jamcracker ($42 million), and
Loudcloud ($68 million). These three alone have pulled in a total of $146
million. Aggressively lending support are top-tier investors, including
Benchmark Capital, Internet Capital, Kleiner Perkins Caufield & Byers, Goldman
Sachs, and Morgan Stanley Dean Witter.
--------------------------------------------------------------------------
Table 1
ASP Market, Worldwide and Regions, 1998 to 2003
($Millions)
==========================================================================
CAGR (%)
Region 1998 2003 1998-2003
==========================================================================
==========================================================================
North America 398.6 9,811.0 89.7
==========================================================================
==========================================================================
Europe 293.1 7,145.5 89.4
==========================================================================
==========================================================================
Rest of World 197.5 5774.8 96.4
==========================================================================
==========================================================================
Grand Total 889.3 22,731.3 91.2
==========================================================================
==========================================================================
Source: Dataquest (November 1999)
==========================================================================
ASP Drivers/enablers/Inhibitors
There have been various enablers and drivers spurring the growth of the ASP
market, as well as inhibitors that could slow down its growth:
Market drivers:
o Lack of skilled technical labor
o Shorter technology life cycles and increasingly complex and costly
environments
o Desire for reduced risk and simplified and complete solutions
o The relatively untapped market of small and medium-sized businesses
Market enablers:
o Emergence of the Internet as a secure and reliable network
o Declining cost of bandwidth
o Increase in shared applications in client/server-based computing
environment
o Standardizing business process templates around packaged software
Market inhibitors:
o Confusing marketing messages and outsourcing skepticism
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o Security issues and the resistance to handing over mission-critical
operations
o Reliability concerns over technology and infrastructure
o Service level and liability concerns
ASP BENEFITS
The current shift toward the ASP model will provide the following benefits to
both the emerging and middle market in the short-term, and the larger
enterprises in the longer term:
o Reduced cost of ownership
o IT resources are freed up to focus on the company's core business
o Reduced downtime
o No needed upgrades
o Reduced administrative tasks
o Scalability
o Rapid implementation
o Better cost allocation
o Usage monitoring
o No support overhead
o Customer and suppliers accessibility
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IT Outsourcing Industry - Barry Gant, Research Analyst, Stanford Keene
Information technology (IT) outsourcing is the transfer of components or large
segments of an organization's internal IT infrastructure, staff, processes or
applications to an external resource/service provider. Outsourcing encompasses
the most rudimentary to the most sophisticated IT infrastructure, processes or
applications. The convergence of software and IT infrastructure toward an
Internet-centric environment has enabled innovative companies to develop
extended outsourcing capabilities. The IT outsourcing market can be segmented
into three main subgroups:
Application Service Providers (ASP) manage and maintain software applications.
An ASP remotely hosts and delivers a packaged application to the client from an
off-site location. The client does not claim ownership of the application but
instead rents the application from the ASP. (enGyro's target markets are ASPs.)
Business Process Outsourcing (BPO) providers focus on economic and efficient
outsourcing solutions for complex but repetitive daily business processes. The
processes could be as sophisticated as finance and accounting business functions
or more repetitive processes, such as disbursements and payroll. The provider
assumes all responsibilities associated with the entire business process.
(enGyro participates in this market.)
Platform IT Outsourcing providers offer a range of data center services,
including hardware facilities management, onsite and offsite support services,
server-vaults and data security disaster recovery capabilities. Platform
outsourcing typically involves the transfer of IT facilities, staff or hardware.
The IT outsourcing industry is clearly in the embryonic stages of its life
cycle. According to IDC, the worldwide spending for outsourcing services was $89
billion in 1997 and should reach $142 billion by 2002, a 10% compounded annual
growth rate (CAGR). Furthermore, IDC estimates the ASP market specifically will
grow to $16.2 billion in 2003 from $7.0 billion in 1998, a 19% CAGR.
Key Business Drivers
o Minimize total cost of ownership - The outsourcing alternative
translates into a 30% to 50% annual cost savings depending on the
complexity of the application.
o Predictability of cash flows - Outsourcing eliminates the
uncertainties of post-implementation software related expenditures.
o Focus on core competencies and strategic objectives - Third party
implementation and management of an application or business process
enables the organization to focus on developing its core
competencies.
o Improve coordination efforts on a global basis - Outsourcing
providers can equip organizations with the latest technology and
systems to coordinate global operations and expansion.
Key Technical Drivers
o Shortage of skilled IT labor - Many small to mid-size enterprises
cannot afford the time and expense associated with recruiting,
training and retaining IT professionals.
o Obtain technical expertise - Most IT outsourcers are focused on a
particular vertical market, business function or application.
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o Utilization of emerging technologies and "best-of-breed"
applications - The outsourcing model allows small to mid-size
companies to employ sophisticated applications cost effectively.
o Accelerated application deployment - META research indicates
utilizing an ASP can reduce ERP implementation from over 12 months
to several weeks as compared to more traditional channels.
o Rapidly changing and increasing complexity of technology - Internal
IT departments have traditionally struggled to keep pace with the
rapid change in IT development and its increasing complexity.
Outsourcing resolves the uncertainty by assuming the
responsibilities and costs.
Barriers to IT Outsourcing Acceptance
o Security of information - One of the central challenges to the IT
outsourcing concept is the uncertainty regarding the security of
proprietary information.
o Overall quality of service and support - Some of the performance
concerns include issues surrounding availability, scalability,
bandwidth capacity, and data and network redundancy.
o Adaptability of software - Most software today is not truly
web-enabled.
enGyro is uniquely positioned at this inflection point of IT outsourcing to
provide one of the fundamental infrastructure components to stimulate the ASP
environment. Not only is enGyro providing a critical business component to a
nascent high growth industry, but it also is participating in the burgeoning BPO
market. According to Robertson, Stevens and Company, Internet-based Electronic
Bill Presentment & Payment (EBP&P) is one of the most important emerging
technologies today. It estimates the current market to be at least $1 billion,
with rapid growth projected in the coming years.
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Online Automobile Services - Barry Gant, Research Analyst, Stanford Keene
New and used cars account for nearly $600 billion in annual sales nationwide,
making the industry one of the economy's biggest drivers. Auto sales dwarf
consumer markets such as books, music and travel, which have dominated online
consumer sales to date. Sales of new and used automobiles over the Internet have
stalled during the last few years, but the market is beginning to heat up now.
According to IDC, automobile sales revenue generated will accelerate past the
$2.1 billion generated in 1999 and by 2004, it is expected that:
o The market for Internet vehicle sales will be worth $27.3 billion.
o 80% of all car buyers will use the Internet for at least part of the
car buying process.
o 500,000 new and 200,000 used vehicles will be sold over the
Internet.
Reducing the cost of any good increases the product's consumption, and there is
a lot of room for the Internet to reduce the cost of car buying. For consumers,
costs involve the time and patience it takes to wade through a complex process
made even more so by the artificial complications introduced by the automobile
distribution system.
The technology and opportunity exists to dilute the complications, and the
online auto sales industry is more aggressively exploiting online marketing
channels. Instead of being merely adjuncts to car dealers' marketing, online
firms have begun to change the sales process by simplifying the consumer
experience. Online referral systems, which were popular in the past, are falling
out of favor. Instead firms that promise online, up-front, no-haggle pricing are
increasing in popularity.
The continual development of new formats, partners and strategies clearly
indicates that the Internet auto industry is both immature and unstable at this
point. Experimentation will continue, but what has yet to be determined is which
model will win.
cDemo is uniquely positioned to become the conduit between the seller and the
buyer of any used auto. In 1999, two-thirds of the vehicles sold were used - 40
million units totaling $324 billion. Furthermore, the popularity of the Internet
as a convenient marketplace and research tool makes it a natural venue for used
car sales.
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B-2-B Office Supplies - Barry Gant, Research Analyst, Stanford Keene
The Internet economy surged 63% last year to nearly $524 billion from $322
billion in 1998. According to a study conducted by the University of Texas at
Austin's Center for Research in E-commerce, if current trends continue, the
Internet will generate $850 billion in electronic commerce transactions this
year alone.
A year ago business-to-consumer (B2C) companies were the undisputed darlings of
the Web. But in recent months, business-to-business (B2B) companies have stolen
the spotlight from their B2C counterparts as venture capital has migrated to
potentially more lucrative opportunities.
It's not hard to see why these companies are eager to grab a piece of the B2B
pie. While Gartner projects that electronic commerce transactions for personal
and household users in North America will grow at a 49% compound annual growth
rate (CAGR) from $29 billion this year to almost $141 billion in 2004.
Non-financial goods and services sold through B2B e-commerce in North America
will skyrocket from $237 billion this year to $2.85 trillion in 2004, an 86%
CAGR.
The online purchasing process continues to become more efficient and is primed
to meet the unique needs of the small to midsize business market. There are
about 7.2 million small businesses in the United States. According to the Small
Business Association, small businesses account for half of the Gross Domestic
Product and their numbers grow by nearly 1 million a year.
The 19th annual Dun & Bradstreet Small Business Survey, conducted in February
and March 2000, found that US small businesses continue to proceed cautiously
onto the Internet. Nonetheless, they are definitely increasing their online
presence. When compared to the previous survey, the basic shifts noted this year
include:
o 70% of small businesses now have net access, up from 57% during the
previous survey
o 38% have web pages or sites; a 10% gain over 1999
o Of those small businesses with web sites, 38% have commerce enabled
websites; a modest gain from 33% last year
Dun & Bradstreet also found notable changes in how small businesses are using
the web. Business (as opposed to personal) purchasing online was the only
activity that gained in popularity from one year to the next. Email remained the
most used function, but dropped five percentage points while researching, either
for business or personal reasons, dropped substantially.
eMarketer puts the number of small businesses online at 4.5 million in 2000,
accounting for 60% of all small businesses. It is important to note, however,
Internet usage by businesses falls along a continuum -- they are not all equally
active on the web. Although 60% of small businesses have websites, eMarketer
estimates that only 37% are engaging in e-commerce, and fewer, 34%, have active
websites. By 2002, 82% of small businesses will be online, 63% will be engaged
in e-commerce and 57% will have active websites.
Business Products International Association estimates that the United States
business products market, which consists of office supplies, business machines
and office furniture, generates over $250 billion in revenue in
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1999. According to Forrester Research, the online office supply market will grow
from $2.9 billion in 1999 to $65 billion in 2003. Most of the growth will be
cannibalization of off-line sales from retail outlets.
The top five business products retailers, which are Office Depot, Staples,
OfficeMax, Boise Cascade Office Products and US Office Products, control
approximately 15% of the total on and off-line business products market. The top
three market leaders (OfficeMax, Office Depot, and Staples) have transitioned to
the Internet to facilitate and leverage electronic transactions.
Continued investment in site functionality and distribution partnerships by the
big three online office supply companies continues to prevent serious
competitors from entering this retail category. Each of the three major players
has leveraged its existing servicing infrastructure (i.e., phone, fax, and
retail outlets) by embracing channel-agnostic marketing strategies. The players
have continued to invest in advertising strategies beyond their portal
placements; for example, Staples has launched a significant television campaign
promoting its Web site functionality. While some pure-plays have attempted to
enter the space, the branded players have retained the majority of the online
sales.
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Valuation Section
Analysis of Valuation Procedure
Our valuation of these companies' common stock as of May 31, 2000 was performed
in a matter consistent with the guidelines set forth in Revenue Ruling 59-60.
Although this Revenue Ruling was originally formulated for federal estate and
gift tax purposes, its generic approaches, methods, and factors to be considered
embody the operational characteristics that willing buyers and willing sellers
consider in buying or selling stock in most closely held businesses.
There are many factors that might be considered when valuing a company. Revenue
Ruling 59-60 recites eight "fundamental" factors to consider in valuing the
stock of a closely-held corporation. These factors are:
1. The nature of the business and the history of the enterprise from
its inception;
2. The economic outlook in general and the condition and outlook of the
specific industry in particular;
3. The book value of the stock and the financial condition of the
business;
4. The earnings capacity of the company;
5. The dividend paying capacity of the company;
6. Whether or not the enterprise has goodwill or other intangible
value;
7. Sales of the stock and the size of the block of the stock to be
valued;
8. The market price of the stocks of corporations engaged in the same
or similar line of business having their stocks actively traded in a
free and open market, either on an exchange or over-the-counter.
The factors, guidelines, techniques and considerations outlined in Revenue
Ruling 59-60 are often categorized into three distinct approaches for valuing
the stock of closely held companies which are described as follows:
Asset-based or Cost Approach - In this approach all the assets and
liabilities are adjusted to reflect their fair market value. The assets
and liabilities are stated on the financial statements at their "book
value" which is generally based on historical cost or historical costs
less accumulated depreciation. The book value of an asset often bears no
relationship to what its current fair market value is. The fair market
value of the Subject Company's equity will be the fair market value of the
assets less the fair market value of the liabilities. This approach is
most appropriately applied to asset-heavy business in a control valuation
(e.g., holding companies, finance companies, some manufacturing
businesses, some distribution businesses, and non-profit organizations).
The limitations of the asset approach include: 1) many intangibles
(particularly goodwill); 2) most (asset-light) service business; 3) some
(asset-light) distribution businesses (asset-light businesses can have a
large amount of intangible value and it is often difficult to value these
intangibles separately-either through the market or income approaches);
and, 4) minority interests. Methods based directly on the value of the
underlying assets of the business less its liabilities. With respect to
real estate this usually means obtaining appraisals of the subject
properties. The market values of securities are usually derived for
marketable securities under this approach.
Market Approach - In this approach a group of guideline publicly traded or
acquired companies can be examined to derive valuation guidance
(multiples) that may be applied to the subject company data. A comparative
analysis of both qualitative and quantitative similarities and differences
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between guideline companies and the Subject Company must be made to assess
the investment attributes of the guideline companies relative to the
Subject Company. This approach can be used for both minority and control
valuations as well as almost all types of companies. Methods that compare
the subject to similar businesses, business ownership interests, or
securities that have been sold primarily in the public markets. Also
includes previous arms-length transactions in the Subject Company's stock.
Income Approach - In this approach income or other anticipated benefits
are expressed in monetary terms in the forms of net cash flow, dividends,
and various forms of earnings. Anticipated benefits are estimated
considering such items as the nature, capital structure, and historical
performance of the Subject Company and expected future outlook for the
Subject Company, industry, and economy. Anticipated benefits are converted
to a value using procedures that consider the expected growth and timing
of the benefits, the risk profile of the benefit stream and the time value
of money. The conversion of anticipated benefits to value normally
requires the determination of a capitalization rate or discount rate. In
determining the appropriate rate, the interest rate, rates of return on
relevant investments, and the risk characteristics of the benefits are
considered. The capitalization rate or discount rate is raised or lowered
to reflect the risk associated with the entity's ability to achieve the
projected income and the expected growth rate.
Other factors to consider when valuing the stock of a corporation include: lack
of control, and lack of marketability or liquidity, all of which warrant a
discount. Additionally, lack of management succession, over-reliance on a
particular individual, or the personal nature of a particular business could
also indicate the appropriateness of a discount. With all of the private
companies being considered in this transaction, there are a material number of
options and warrants which have been issued in previous rounds of financing. For
purposes of our calculations, we have used the basic number of shares
outstanding. Due to the lack of marketability of the warrants and options of
these private companies and the uncertainty as to the timing or profitability of
exercise of the options and warrants, we have chosen not to include these in
calculating price per share.
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Valuation Methods for eSupplies
There are numerous market approaches, including: the identification of
comparable publicly-traded companies whose securities sell on a free and open
market; the examination of definitive and verifiable transaction data available
on actual sales of similar privately-held concerns; the existence of actual or
potential markets for a security such as buy/sell or shareholder agreements; and
past transactions in eSupplies shares.
The application of the market approach method depends on the selection of
publicly traded comparative companies that are similar enough to eSupplies so as
to provide a meaningful comparison. We identified four companies as guideline
companies for eSupplies: Office Depot, Staples, Office Max, and Onvia. The
pricing multiples for these companies tend to cluster around the
price-to-current fiscal year sales ratio of 1.09x. Multiplying this factor by
the subject company's figure results in a value of approximately $5.5 million.
Another multiple that showed a cluster was the price-to-next fiscal year sales
ratio of 0.51x. Multiplying this factor by the subject company's figure results
in a value of approximately $16.9 million, before appropriate discounts and/or
premiums for control, comparability and marketability.
Income Approach - The income approach serves to estimate value by considering
the income (benefits) generated by eSupplies over a period of time. The
discounted cash flow method, along with related capitalized cash flow method, is
frequently used in the context of mergers and acquisitions. However, it may
serve a wide variety of valuation purposes, including the valuation of both
controlling and minority interests. Applying the discounted cash flow method
utilizes net cash flow as a measure of the earnings capacity in determining the
value of a company's stock. Net cash flow or free cash flow is defined as
follows: net income after-tax, plus depreciation & amortization expenses, less
capital expenditures, less additional working capital requirements. The analyst
then discounts these benefits to present value at an appropriate rate known as a
discount rate.
In this instance, we have projected earnings over the next ten years to a
stabilized growth rate for eSupplies and discounted the earnings stream back to
today's value. Certain assumptions were made for projection purposes and are
reasonable based on industry averages. The assumption calculations are shown
here in summary:
Business Assumptions:
1 - No significant general economic changes, including recessions or
accelerations;
2 - No significant market changes;
Financial Assumptions:
3 - Net Sales were projected through 2004 by management. The remaining
years' growth rate was slowed gradually to a normalized rate of 4 percent
per annum. For the 10 year period as a whole is estimated to have a
compound average annual growth rate of approximately 124 percent;
4 - Gross margins are expected to be 18.2 percent of net sales for all
projection periods and in perpetuity (based on management discussions and
historic performance);
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5 - Operating margins are expected to be negative through 2001. With the
assistance of management we have estimated that the operating margins will
approach 13 percent over the lifetime of eSupplies;
6 - Taxes are assumed at the corporate effective rate of 44.0 percent for
all projection periods and in perpetuity (reflects a buyer universe that
includes individuals, S-corporations, and C-corporations faced with
federal and provincial taxes in Canada);
7 - Working capital additions are expected to be 8.0 percent of sales
following the maturing of eSupplies after the initial start-up phase
(based on management discussions and industry analysis);
8 - The final years' projections are used in the terminal value
calculation with margins, growth rates, and capital structure remaining
constant in perpetuity.
The next step in a discounted cash flow analysis is the derivation of the cost
of capital. A firm's cost of capital has three conceptual meanings. On the asset
side of the balance sheet, it represents the discount rate that should be used
to reduce future values to their present values. On the liability side, it is
the economic cost to the firm of attracting and retaining capital in a
competitive environment where investors carefully analyze and compare all return
generating opportunities. To the investor, it is the opportunity cost of an
investment or the expected return that would be earned on the next-best
investment.
After the cost of capital is derived, the benefit stream (cash flow) must be
discounted or capitalized depending upon the circumstance. To capitalize, the
cash flow per share is treated as perpetuity and is capitalized to an indicated
value by dividing the cash flow figure by the capitalization rate (discount rate
less the long-term growth rate). The discount rate is represented by the
required rate of return from the market for an investment with similar
characteristics and risks. The discount rate is developed using the Capital
Asset Pricing Model (CAPM) in which a risk-free rate with an investment horizon
equal to the subject, a beta coefficient (beta is a measure of the risk inherent
for a particular company vis-a-vis the stock market as a whole), an equity risk
premium, a small company premium, and a specific company premium are summed to
produce a required rate of return that the market requires for investments of
this nature. The capitalization rate used in the terminal value calculation is
the discount rate less the sustainable long-term growth rate. The equation for
the CAPM required rate of return follows:
Re = Rf1 + B * (E(Rm-Rf2)) + SCP + SCA
Where: Re = Required return on equity
Rf1 = Risk-free rate with an investment horizon to mirror
the expected holding period of a typical
closely-held security
B = beta
(E(Rm-Rf2)) = Expected return on the market in excess of the
risk-free rate
SCA = Specific Company Additional Premium
The risk-free rate for the short-term was approximated by the yield on the
30-year Treasury bond that was 6.00 percent on 5/31/00. The beta coefficient was
estimated at 1.00 based on market (the market's beta is
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<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
1.0 by definition; with the selected comparison companies mean relevered beta of
1.14). The beta of 1.14 was chosen due based on the comparable companies.
One of the key variables in the CAPM method is the market risk premium. This
premium is especially difficult to estimate in the case of a closely-held
business because of the lack of trading activity, which makes relative
comparisons with the market, proxied by the S&P 500, difficult. One reasonable
way of estimating the future market risk premium is by using the long-run
historical market risk premium. In their Stock, Bonds, Bills, and Inflation
(SBBI) 1998 Yearbook, Ibbotson and Sinquefield concluded that the arithmetic
mean for the long-horizon equity risk premium (large company stock total returns
minus long-term government bond yield return) was 7.8 percent for the period
1926-1997. We believe this is a reasonable approach to determine a rate which
compensates for volatility inherent in any business and reflects the additional
premium the shareholder would demand for risk above that of a Treasury issue
especially with the added demands of debt service, etc. SBBI also provides a
size premium that represents the risk premium for low capitalization stocks over
and above the risk premium for the equity market as a whole. The size premium
calculated by SBBI is 3.3 percent for expected capitalization below $261
million. The specific company risk premium encompasses risk adjustments made for
factors other than size. These factors include eSupplies's industry, eSupplies's
financial risk, diversification of eSupplies's operations, and other operational
characteristics.
The Start-Up Nature of eSupplies. While Willson had been in operation
before the buyout of assets in late 1999, eSupplies is essentially a
start-up with considerable business risks.
eSupplies's Financial Risk. eSupplies is currently supporting a large
amount of debt relative to projected 2000 sales. Additionally, eSupplies
is projected to be EBITDA negative until the end of 2001.
Diversification of eSupplies's Operations. eSupplies provides products to
small and medium businesses. A major factor on the success of eSupplies
will be the ability to penetrate the market that is dominated by
established brand names and the continued growth of the North American
economy.
Based on the above analysis of the risks specific to eSupplies, and particularly
due to the uncertainty of eSupplies's ability to penetrate the established
marketplace, we believe a company specific risk premium of 17.00 percent is
appropriate however, eSupplies inherits a strong management team in Chell.com.
The management team has access to financial resources, industry contacts, and
has experience building taking companies from the start-up phase to operating as
a public company. Thus, we feel that a more appropriate specific company premium
would be 15.00 percent. We estimated the growth of eSupplies to be 4.0 percent
over the long-term due to coincide with the long-term growth rate of the
economy. The weighted average cost of capital is estimated to be between 29.5
and 31.1 percent.
Also considered in the valuation of eSupplies were prior transactions in the
stock. In particular, in May 2000, a party holding convertible debentures of
eSupplies converted the debt to equity at a price of $6 per share. In the
transaction, $6 million of debt was retired, which reduced the risk involved
with the Company's business model.
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<PAGE1
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The tax rate was assumed at 44.0 percent (due to the estimated federal and
provincial taxes in Canada). Using the discussed assumptions, the value of
eSupplies' equity before appropriate discounts ranged between $19.88 million and
$23.34 million.
Other methods for the valuation of eSupplies, which were considered but not used
include the following:
I. Net Book Value Adjusted to Market Value, or adjusted net worth of a company
should be given adequate consideration in determining the value of a business.
However, the adjusted net worth is most appropriate when determining the
liquidation value of a business or the value of a holding/investment company. In
these situations, the most common adjustments are made to reflect the market
value of inventory, investments, and fixed assets. Therefore, since the
valuation of eSupplies is based on the assumption that it will continue as a
going concern, this method is not considered appropriate for the valuation of
eSupplies.
II. The Discount of Dividends method was considered but not utilized in this
valuation. The models indicating value as a sole function of dividends prove to
be highly subjective. Dividends are not paid, nor are expected to be paid in the
future, therefore, this method is not considered appropriate for the valuation
of eSupplies.
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report without the prior written consent of Stanford Keene. 32
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Valuation Methods for enGyro
There are numerous market approaches, including: the identification of
comparable publicly-traded companies whose securities sell on a free and open
market; the examination of definitive and verifiable transaction data available
on actual sales of similar privately-held concerns; the existence of actual or
potential markets for a security such as buy/sell or shareholder agreements; and
past transactions in enGyro shares.
We compiled a list of comparable companies to enGyro with the use of proprietary
databases developed by Stanford Keene with the use of estimates provided by
I/B/E/S. Analyzing the industry as a whole often yields information that may be
useful in the final value determination of a private company. The application of
the market approach method depends on the selection of publicly traded
comparative companies that are similar enough to enGyro so as to provide a
meaningful comparison. We identified six companies as guideline companies for
enGyro: Automated Data Processing, Cybersource Corp., Daleen Technologies,
Convergys, BottomLine Technologies, and First Data. For these selected companies
the price-to-current fiscal year sales ratio and price-to-forward sales ratios
had averages of 6.22x and 4.33x, respectively. An interpretation of these
metrics is that the investing public is willing to pay $6.22 and $4.33,
respectively, for each $1.00 of current fiscal year and next fiscal year sales
produced by the average company in this selection. Using the price-to-current
fiscal year sales ratio and price-to-forward sales ratios, the value of enGyro,
on a minority basis is approximately $373 thousand and $10.8 million,
respectively, before appropriate discounts and/or premiums for control,
comparability and marketability.
Income Approach - The income approach serves to estimate value by considering
the income (benefits) generated by enGyro over a period of time. The discounted
cash flow method, along with related capitalized cash flow method, is frequently
used in the context of mergers and acquisitions. However, it may serve a wide
variety of valuation purposes, including the valuation of both controlling and
minority interests. Applying the discounted cash flow method utilizes net cash
flow as a measure of the earnings capacity in determining the value of a
company's stock. Net cash flow or free cash flow is defined as follows: net
income after-tax, plus depreciation & amortization expenses, less capital
expenditures, less additional working capital requirements. The analyst then
discounts these benefits to present value at an appropriate rate known as a
discount rate.
In this instance, we have projected earnings over the next ten years to a
stabilized growth rate for enGyro and discounted the earnings stream back to
today's value. Certain assumptions were made for projection purposes and are
reasonable based on industry averages. The assumption calculations are shown
here in summary:
Business Assumptions:
1 - No significant general economic changes, including recessions or
accelerations;
2 - No significant market changes;
Financial Assumptions:
3 - Net Sales were projected through 2004 by management. The remaining
years' growth rate was slowed gradually to a normalized rate of 4 percent
per annum. For the 10-year
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<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
period as a whole is estimated to have a compound average annual growth
rate of approximately 313 percent;
4 - Gross margins are expected to be negative for the first two years of
operations before accelerating to 77 percent of net sales by 2004(based on
management projections). Between 2004 and 2010 we anticipate that gross
margins will fall as the competitive landscape increases for enGyro to a
final level of 55 percent in perpetuity;
5 - Operating margins are expected to be negative through 2001. Management
estimates that the operating margins will rise to 64 percent in 2004.
Following the rise through 2004, we believe that the competitive nature of
the industry will drive margins for enGyro down to 43 percent. It should
be noted that we feel that these estimates are very aggressive.
6 - Taxes are assumed at the corporate effective rate of 40.0 percent for
the all projection periods and in perpetuity (reflects a buyer universe
that includes individuals, S-corporations, and C-corporations);
7 - Working capital additions are expected to fall throughout time to 2.0
percent of sales for the maturing of enGyro after the initial start-up
phase (based on management discussions and industry analysis);
8 - The final years' projections are used in the terminal value
calculation with margins, growth rates, and capital structure remaining
constant in perpetuity.
The next step in a discounted cash flow analysis is the derivation of the cost
of capital. A firm's cost of capital has three conceptual meanings. On the asset
side of the balance sheet, it represents the discount rate, which should be used
to reduce future values to their present values. On the liability side, it is
the economic cost to the firm of attracting and retaining capital in a
competitive environment where investors carefully analyze and compare all return
generating opportunities. To the investor, it is the opportunity cost of an
investment or the expected return that would be earned on the next-best
investment.
After the cost of capital is derived, the benefit stream (cash flow) must be
discounted or capitalized depending upon the circumstance. To capitalize, the
cash flow per share is treated as perpetuity and is capitalized to an indicated
value by dividing the cash flow figure by the capitalization rate (discount rate
less the long-term growth rate). The discount rate is represented by the
required rate of return from the market for an investment with similar
characteristics and risks. The discount rate is developed using the Capital
Asset Pricing Model (CAPM) in which a risk-free rate with an investment horizon
equal to the subject, a beta coefficient (beta is a measure of the risk inherent
for a particular company vis-a-vis the stock market as a whole), an equity risk
premium, a small company premium, and a specific company premium are summed to
produce a required rate of return that the market requires for investments of
this nature. The capitalization rate used in the terminal value calculation is
the discount rate less the sustainable long-term growth rate. The equation for
the CAPM required rate of return follows:
Re = R(f1) + B * (E(R(m)-R(f2))) + SCP + SCA
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 34
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Where: Re = Required return on equity
R(f1) = Risk-free rate with an investment horizon to mirror
the expected holding period of a typical
closely-held security
B = beta
(E(R(m)-R(f2))) = Expected return on the market in excess of the
risk-free rate
SCP = Small Company Premium (Ibbotson - micro
capitalization)
SCA = Specific Company Additional Premium
The risk-free rate for the short-term was approximated by the yield on the
30-year Treasury bond that was 6.00 percent on 5/31/00. The beta coefficient was
estimated at 1.00 based on market comparison (the market's beta is 1.0 by
definition; with the guideline companies mean beta of 1.64). The beta of 1.64
was chosen due to the guideline companies. One of the key variables in the CAPM
method is the market risk premium. This premium is especially difficult to
estimate in the case of a closely-held business because of the lack of trading
activity, which makes relative comparisons with the market, proxied by the S&P
500, difficult. One reasonable way of estimating the future market risk premium
is by using the long-run historical market risk premium. In their Stock, Bonds,
Bills, and Inflation (SBBI) 1998 Yearbook, Ibbotson and Sinquefield concluded
that the arithmetic mean for the long-horizon equity risk premium (large company
stock total returns minus long-term government bond yield return) was 7.8
percent for the period 1926-1997. We believe this is a reasonable approach to
determine a rate which compensates for volatility inherent in any business and
reflects the additional premium the shareholder would demand for risk above that
of a Treasury issue especially with the added demands of debt service, etc. SBBI
also provides a size premium that represents the risk premium for low
capitalization stocks over and above the risk premium for the equity market as a
whole. The size premium calculated by SBBI is 3.3 percent for expected
capitalization below $261 million. The specific company risk premium encompasses
risk adjustments made for factors other than size. These factors include
enGyro's industry, enGyro's financial risk, diversification of enGyro's
operations, and other operational characteristics.
enGyro's Industry. The industry segment that enGyro operates in is showing
growth much above the growth of the population as a whole. There are low
barriers to entry for the ASP industry as a whole. There is risk with
enGyro that the business model is unproven from both a corporate and an
industry standpoint.
enGyro's Financial Risk. enGyro will need to access the capital markets in
the coming two years as enGyro moves from start-up to growth phase. It is
unknown at this point how enGyro will access these markets or the costs.
Diversification of enGyro's Operations. enGyro provides services to
Internet based companies and consumers. While services provided are
related, they are not dependent on one another. A major factor on the
success of the services is the continuing adaptation of the Internet on a
business and personal basis, and the adaptation of the Application Service
Provider model as a delivery method for software applications, both of
which would have a positive impact on enGyro in the short and intermediate
term. Although the industry factors are positive, it is unknown how
enGyro's products will be accepted in the industry or whether enGyro will
have the pricing leverage that management projects.
It is unlawful to photocopy or otherwise reproduce all or any portion of this
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<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Based on the above analysis of the risks specific to enGyro, we believe a
company specific risk premium of 28.00 percent is appropriate. We estimated the
growth of enGyro to be 4.0 percent over the long-term due to coincide with the
long-term growth rate of the economy. The weighted average cost of capital is
estimated to be between 43.0 and 44.5 percent. The tax rate was assumed at 40.0
percent.
In January 2000, enGyro received seed money to assist enGyro in the early stage
development of the business plan and in hiring proper management and support
staff for the Company. The Company's business plan has developed considerably
and the technology has advanced from development stages to beta testing stages.
While it is necessary to consider all transactions in a stock when evaluating
the fair market value, significant value of enGyro has been created in the last
3 months with the development of technologies and the hiring of a management
team which has experience in the public market and in particular, the ASP
industry.
Using the discussed assumptions, the value of enGyro's equity before appropriate
discounts is between $33.56 and $35.67 million.
Other methods for the valuation of enGyro which were considered but not used
include the following:
I. Net Book Value Adjusted to Market Value, or adjusted net worth of a company
should be given adequate consideration in determining the value of a business.
However, the adjusted net worth is most appropriate when determining the
liquidation value of a business or the value of a holding/investment company. In
these situations, the most common adjustments are made to reflect the market
value of inventory, investments, and fixed assets. Therefore, since the
valuation of enGyro is based on the assumption that it will continue as a going
concern, this method is not considered appropriate for the valuation of enGyro.
II. The Discount of Dividends method was considered but not utilized in this
valuation. The models indicating value as a sole function of dividends prove to
be highly subjective. Dividends are not paid, nor are expected to be paid in the
future, therefore, this method is not considered appropriate for the valuation
of enGyro.
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 36
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Valuation Methods for cDemo
There are numerous market approaches, including: the identification of
comparable publicly-traded companies whose securities sell on a free and open
market; the examination of definitive and verifiable transaction data available
on actual sales of similar privately-held concerns; the existence of actual or
potential markets for a security such as buy/sell or shareholder agreements; and
past transactions in cDemo shares.
We compiled a list of comparable companies to cDemo with the use of proprietary
databases developed by Stanford Keene. Analyzing the industry as a whole often
yields information that may be useful in the final value determination of a
private company. The application of the market approach method depends on the
selection of publicly traded comparative companies that are similar enough to
cDemo so as to provide a meaningful comparison. We identified four companies as
guideline companies, which, while none has a product that is comparable to
cDemo, as an aggregate we feel that they could assist in placing a fair
valuation on cDemo. These companies are: eBay, Autobytel.com, Autoweb.com,
LendingTree, AutoNation, and e-Loan. When applying market valuations derived
from these companies to cDemo, we see that cDemo would have a public market
value of $16.4 million based on a price-to-next year's sales value of 1.13x. An
interpretation of these metrics is that the investing public is willing to pay
$1.13 for each $1.00 of sales in the next fiscal year produced by the average
company in this selection. The valuation derived for cDemo is before appropriate
discounts and/or premiums for control, comparability and marketability.
Income Approach - The income approach serves to estimate value by considering
the income (benefits) generated by cDemo over a period of time. The discounted
cash flow method, along with related capitalized cash flow method, is frequently
used in the context of mergers and acquisitions. However, it may serve a wide
variety of valuation purposes, including the valuation of both controlling and
minority interests. Applying the discounted cash flow method utilizes net cash
flow as a measure of the earnings capacity in determining the value of a
company's stock. Net cash flow or free cash flow is defined as follows: net
income after-tax, plus depreciation & amortization expenses, less capital
expenditures, less additional working capital requirements. The analyst then
discounts these benefits to present value at an appropriate rate known as a
discount rate.
In this instance, we have projected earnings over the next ten years to a
stabilized growth rate for cDemo and discounted the earnings stream back to
today's value. Certain assumptions were made for projection purposes and are
reasonable based on industry averages. The assumption calculations are shown
here in summary:
Business Assumptions:
1 - No significant general economic changes, including recessions or
accelerations;
2 - No significant market changes;
Financial Assumptions:
3 - Net Sales were projected through 2004 by management. The remaining
years' growth rate was slowed gradually to a normalized rate of 4 percent
per annum;
4 - Gross margins are expected to be between 70 and 77 percent during the
period which
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 37
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
management has projected. As the margins had been slipping from 2001 to
2004, we pushed margins down to 55 percent in 2010, where they remained in
perpetuity;
5 - Operating margins are expected to be negative until 2002. Management
estimates that the operating margins will rise to 43.8 percent in 2004.
Following the rise through 2004, we believe that operating margins will
slip gradually through 2010 with a perpetual rate of 30 percent being used
for the cash flow modeling;
6 - Taxes are assumed at the corporate effective rate of 40.0 percent for
the all projection periods and in perpetuity (reflects a buyer universe
that includes individuals, S-corporations, and C-corporations);
7 - Working capital additions are expected to fall throughout time to 2.0
percent of sales for the following the maturing of cDemo after the initial
start-up phase (based on management discussions and industry analysis);
8 - The final years' projections are used in the terminal value
calculation with margins, growth rates, and capital structure remaining
constant in perpetuity.
The next step in a discounted cash flow analysis is the derivation of the cost
of capital. A firm's cost of capital has three conceptual meanings. On the asset
side of the balance sheet, it represents the discount rate that should be used
to reduce future values to their present values. On the liability side, it is
the economic cost to the firm of attracting and retaining capital in a
competitive environment where investors carefully analyze and compare all return
generating opportunities. To the investor, it is the opportunity cost of an
investment or the expected return that would be earned on the next-best
investment.
After the cost of capital is derived, the benefit stream (cash flow) must be
discounted or capitalized depending upon the circumstance. To capitalize, the
cash flow per share is treated as perpetuity and is capitalized to an indicated
value by dividing the cash flow figure by the capitalization rate (discount rate
less the long-term growth rate). The discount rate is represented by the
required rate of return from the market for an investment with similar
characteristics and risks. The discount rate is developed using the Capital
Asset Pricing Model (CAPM) in which a risk-free rate with an investment horizon
equal to the subject, a beta coefficient (beta is a measure of the risk inherent
for a particular company vis-a-vis the stock market as a whole), an equity risk
premium, a small company premium, and a specific company premium are summed to
produce a required rate of return that the market requires for investments of
this nature. The capitalization rate used in the terminal value calculation is
the discount rate less the sustainable long-term growth rate. The equation for
the CAPM required rate of return follows:
Re = R(f1) + B * (E(R(m)-R(f2))) + SCP + SCA
Where: Re = Required return on equity
R(f1) = Risk-free rate with an investment horizon to mirror
the expected holding period of a typical
closely-held security
B = beta
It is unlawful to photocopy or otherwise reproduce all or any portion of this
report without the prior written consent of Stanford Keene. 38
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
(E(R(m)-R(f2))) = Expected return on the market in excess of the
risk-free rate
SCP = Small Company Premium (Ibbotson - micro
capitalization)
SCA = Specific Company Additional Premium
The risk-free rate for the short-term was approximated by the yield on the
30-year Treasury bond that was 6.00 percent on 5/31/00. The beta coefficient was
estimated at 1.00 based on market comparison (the market's beta is 1.0 by
definition; with the guideline companies mean beta of 1.69). The beta of 1.69
was chosen due to the guideline companies with an emphasis on Internet companies
who derive their revenues via a referral model. One of the key variables in the
CAPM method is the market risk premium. This premium is especially difficult to
estimate in the case of a closely-held business because of the lack of trading
activity, which makes relative comparisons with the market, proxied by the S&P
500, difficult. One reasonable way of estimating the future market risk premium
is by using the long-run historical market risk premium. In their Stock, Bonds,
Bills, and Inflation (SBBI) 1998 Yearbook, Ibbotson and Sinquefield concluded
that the arithmetic mean for the long-horizon equity risk premium (large company
stock total returns minus long-term government bond yield return) was 7.8
percent for the period 1926-1997. We believe this is a reasonable approach to
determine a rate which compensates for volatility inherent in any business and
reflects the additional premium the shareholder would demand for risk above that
of a Treasury issue especially with the added demands of debt service, etc. SBBI
also provides a size premium that represents the risk premium for low
capitalization stocks over and above the risk premium for the equity market as a
whole. The size premium calculated by SBBI is 3.3 percent for expected
capitalization below $261 million. The specific company risk premium encompasses
risk adjustments made for factors other than size. These factors include cDemo's
industry, cDemo's financial risk, diversification of cDemo's operations, and
other operational characteristics.
cDemo's Start-Up Nature. cDemo has yet to sign up any partners and has
received little funding at this point. There is significant risk in the
business model and the likelihood of success can be considered low at this
point.
cDemo's Financial Risk. cDemo will need several rounds of financing during
the next two years to continue operations and roll out the proposed
product.
Acceptance of cDemo's Business Model. It has yet to be seen whether
consumers will utilize the Internet to its fullest when purchasing big
ticket items such as cars. While this is a risk, analysts believe that
consumers are using the Internet as a source of information for these
purchases, which is the central concept behind the cDemo business model.
Based on the above analysis of the risks specific to cDemo, we believe a company
specific risk premium of 35.00 percent is appropriate, however, cDemo has a
stronger management team than other companies in a similar position in
technology development. The management team has access to financial resources,
industry contacts, and has experience building/taking companies from the
start-up phase to operating as a public company. Thus, we feel that a more
appropriate specific company premium would be 33.00 percent. We estimated the
growth of cDemo to be 4.0 percent over the long-term due to coincide with the
long-term growth rate of the economy. The weighted average cost of capital for
this discussion was estimated to fall between 41.5 and 43.8 percent.
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report without the prior written consent of Stanford Keene. 39
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
The tax rate was assumed at 40.0 percent. Using the discussed assumptions, the
value of cDemo's equity before appropriate discounts is between $13.23 million
and $15.84 million.
Other methods for the valuation of cDemo which were considered but not used
include the following:
I. Net Book Value Adjusted to Market Value, or adjusted net worth of a company
should be given adequate consideration in determining the value of a business.
However, the adjusted net worth is most appropriate when determining the
liquidation value of a business or the value of a holding/investment company. In
these situations, the most common adjustments are made to reflect the market
value of inventory, investments, and fixed assets. Therefore, since the
valuation of cDemo is based on the assumption that it will continue as a going
concern, this method is not considered appropriate for the valuation of cDemo.
II. The Discount of Dividends method was considered but not utilized in this
valuation. The models indicating value as a sole function of dividends prove to
be highly subjective. Dividends are not paid, nor are expected to be paid in the
future, therefore, this method is not considered appropriate for the valuation
of cDemo.
The value of cDemo relies heavily on the ability to secure financing in the
future. For our purposes, we valued cDemo in the financial state in which it
existed on May 31, 2000. When management of cDemo secures financing to ensure
that the projections outlined in the business plan are attainable in the short
term, the risk premium assigned to cDemo will be reduced, which will yield a
higher enterprise value for cDemo.
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report without the prior written consent of Stanford Keene. 40
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Valuation Adjustments
Lack of Control (minority interest)
Due to a lack of control, a non-control discount can be applied to the value
indication of an entity's Discounted Cash Flow to remove the value associated
with the benefits of such control. Every condition that limits the power of the
shareholder is reason to impose a discount in order to arrive at fair market
value for the interest. This is driven by the fact that the only recourse to
unfair treatment as a minority shareholder would be through expensive legal
remedies that could decrease value even further. The inability of the minority
members to help make key decisions, such as business policy, distribution
payments, compensation matters, etc., reduces what an investor might pay for an
interest in the companies. The minority member has no ability to force
liquidation or dissolution except under certain circumstances when all the
members agree to dissolution entitling them to their pro rata share of the
Company's net assets.
One method used to determine the amount of adjustment for a non-controlling
interest is to examine information from the public markets. The Mergerstat
Review annually presents statistics on control premiums paid for public
companies above their pre-takeout trading price. These studies can then be
adjusted to derive the implied non-controlling discounts that were inherent in
the trading non-control interest. During the nineteen-year epoch the non-control
discounts have ranged from a low of 21.5 percent to a high of 30.8 percent with
an average of 24.72 percent. Over the past five years the non-control discounts
have averaged between 21.5 percent and 25.9 percent with the 1997 average at
21.6 percent and the five-year average at 23.3 percent. The results derived from
these and other studies verify a discount, it is not usually determinative of
the proper discount to be applied in a given case.
<TABLE>
<CAPTION>
Year of Number of Average Premium Paid over Median Premium Paid Implied Minority Discount
Buyout transactions Mkt (%) (%) (%)
<S> <C> <C> <C> <C>
1980 169 49.9 44.6 30.8
1981 166 48.0 41.9 29.5
1982 176 47.4 43.5 30.3
1983 168 37.7 34.0 25.4
1984 199 37.9 34.4 25.6
1985 331 37.1 27.7 21.7
1986 333 38.2 29.9 23.0
1987 237 38.3 30.8 23.5
1988 410 41.9 30.9 23.6
1989 303 41.0 29.0 22.5
1990 175 42.0 32.0 24.2
1991 137 35.1 29.4 22.7
1992 142 41.0 34.7 25.8
1993 173 38.7 33.0 24.8
1994 260 41.9 35.0 25.9
1995 324 44.7 29.2 22.6
1996 381 36.6 27.3 21.5
1997 487 35.7 27.5 21.6
---- ---- ----
Mean ==> 40.73 33.04 24.72
Median ==> 39.85 31.45 23.90
</TABLE>
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<TABLE>
<S> <C> <C> <C>
STD ==> 4.36 5.36 2.90
</TABLE>
Source: Mergerstat Review 1997. (Los Angeles: Houlihan Lokey Howard
& Zurkin, 1998.) Discount calculated by Willamette Management
Associates and Financial Research, Inc.
Notes: 1) The premium paid over market is a percentage based on the
buyout price over the market price of the seller's stock five
business days prior to the announcement date.
2) Formula: 1 - ( 1 / ( 1 + Median Premium Paid )).
3) STD equals Standard Deviation.
In the case of the block of the privately held stock in cDemo, we believe that
the discount for lack of control should be minimal considering the amount of
stock being transferred in each case. For this reason we have chosen to apply a
discount of 5 percent to each block.
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<PAGE>
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Discount for Lack of Marketability (liquidity)
The Internal Revenue Service as well as traders in non-public securities have
long recognized that ownership in a closely-held entity is far less attractive
to investors than shares in a similar entity whose ownership interests have
ready access to the general public. Lack of marketability discounts exists
because there are few buyers who are willing to pay full value for shares in a
business that is non-marketable or carries restrictions/limitations on transfer.
As a result, it is appropriate to mark down the value to reflect the disinterest
on the open market for such an asset. Although the IRS acknowledges in its own
valuation guide that a discount is proper, every situation is unique and there
are no firm guidelines in determining the extent of this discount.
Research attempting to quantify lack of marketability discounts has followed two
approaches: 1) studies of transactions in the restricted stock of
publicly-traded companies; and 2) studies of private transactions in stock of
companies which subsequently had initial public offerings (IPO's). Restricted
stock is issued through the private placement by a publicly traded company. The
stock has not been registered with the Securities and Exchange Commission (SEC)
and is thus "restricted" from trading in the public market for a certain period
of time. Purchasers of this type of security require a discount from the issuing
company's publicly-traded stock due to the lack of marketability or illiquidity.
Many studies have been performed since the 1960's attempting to quantify this
discount for marketability. Discounts have ranged between 0.0 percent and 90.0
percent with an average of 35.0 percent.
Summary of Restricted Stock Studies
Study Period Average Discount%
SEC, Overall Average 1966-1969 25.8
SEC, Nonreporting OTC Companies 1966-1969 32.6
Gelman 1968-1970 33.0
Trout 1668-1972 33.5*
Moroney NA 35.6
Maher 1968-1973 35.4
Standard Research Consultants 1978-1982 45.0*
Willamette Management Associates, Inc. 1981-1984 31.2*
Silber 1981-1988 33.8
FMV Opinions, Inc. 1979-1992 23.0
Management Planning, Inc. 1980-1995 27.7
----
* Median Discounts Mean ==> 32.4
Median ==> 33.0
STD ==> 5.8
As delineated by the table above, the average discount varies from a low of 23.0
percent in the FMV Opinions, Inc. study to a high of 45.0 percent in the
Standard Research Consultants study. The mean of these
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studies dating back to 1966 through 1995 is 32.4 percent with the median at 33.0
percent. The Management Planning, Inc. study is the most recent study (completed
in 1995) with a mean of 27.7 percent that signifies that the discounts are
becoming slightly smaller through time. However, this is just one series of
surveys; a more indicative measure would be to replicate the other studies for
more current time periods for comparison to past periods.
IPO studies have analyzed stock transactions of companies when they were private
that subsequently had an initial public offering. The marketability discount is
usually determined as the difference between the stock price at the time of the
public offering and the price of the stock in an arm's length transaction prior
to the IPO. The two well-recognized studies which examine IPO's are the Baird
studies which indicated a discount of 40.0 to 45.0 percent and the Willamette
Management Association studies which indicated a range of 40.0 to 50.0 percent.
Summary of Private Transaction Studies
Median
Study Period # of trans. Discount%
Baird 1995-1997 91 42.0
Baird 1995-1994 46 45.0
Baird 1992-1993 54 44.0
Willamette 1993 110 53.3
Willamette 1992 75 52.4
Baird 1990-1992 35 40.0
Willamette 1991 34 31.8
Willamette 1990 23 48.5
Baird 1989-1990 23 40.0
Willamette 1989 19 50.4
Baird 1987-1989 27 45.0
Willamette 1988 19 51.8
Willamette 1987 40 43.8
Willamette 1986 74 47.5
Baird 1985-1986 21 43.0
Willamette 1985 25 43.2
Willamette 1984 33 74.4
Willamette 1983 214 60.7
Willamette 1982-1980 113 55.5
Baird 1980-1981 13 66.0
Willamette 1979 17 62.9
Willamette 1975-1978 31 54.7
----
Mean ==> 49.8
Median ==> 48.0
STD ==> 9.8
In each of the above studies the lack of marketability discounts determined were
for minority interests, not a controlling interest. In this valuation, we are
valuing a minority interest. Factors that specifically affect the discount for
lack of marketability are as follows:
Size of the Subject Block. As discussed above, controlling interests and
minority interests in
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closely-held companies are affected by marketability in distinct ways. While
both interests are subject to marketability considerations, the appropriate
discount for lack of marketability for a 70.0 percent controlling interest is
likely to be less than that for a 3.0 percent minority interest. The interest
under consideration in each case is a minority position that is significantly
more difficult to sell than a controlling interest in these privately-held
company. This fact would increase the lack of marketability discount.
Payment of Dividends. This factor tends to have a large impact on the
appropriate discount, with higher distribution pay outs linked to lower
discounts for marketability. This makes intuitive sense as total returns to an
investor come from both dividends plus sale of principal, and dividends are not
affected by the illiquidity of the underlying holding. The companies being
considered do not pay dividends. This fact would increase the lack of
marketability discount.
Restrictions on Marketability. Restrictions on transferability can increase
marketability discounts while put rights or other contractual obligations can
reduce them substantially. There are no restrictions that Stanford Keene has
been made aware of for these companies.
Size of the Subject Entity. The size of the entity is inversely related to the
size of the discount. This may be credited to the ability of larger companies to
continue to survive in the long run and through economic downturns. The fair
market value of these companies fall in the microcap category (i.e., small)
before discounts and/or premiums and thus indicates greater volatility and risk
than in a typical situation. This fact would have a neutral effect on the lack
of marketability discount.
Creditworthiness of the Firm. This consideration is negatively related to the
discount size as the risk of long-term holding may be significantly reduced.
Also, in the case of operating companies, the liquidity/creditworthiness of the
firm would increase the ability/probability of the firm to redeem its shares.
The companies are considered creditworthy. The possible exception to this would
be eSupplies, which purchased the assets of Willson out of receivership.
eSupplies may demand a higher than average discount factor while the other
companies would be below average.
Prospects of Future Public Offering. The likelihood of a future public offering
would decrease the illiquidity discount while the lack of any future offering
may increase the discount for lack of marketability. Some of the companies being
analyzed have plans to file an Initial Public Offering in the coming two years.
This fact would have a decrease the lack of marketability discount. Listed below
are the National Association of Security Dealers Automated Quotation system
(NASDAQ) minimum initial requirements.
<TABLE>
<S> <C>
NASDAQ Requirements Initial Listing
Net Tangible Assets $6.0 million
Pretax Income in the latest Fiscal Year or 2 of last 3 fiscal years $2.0 million
Public Float $1.1 million
Market Value of Public Float $8.0 million
Minimum Bid Price $5.00
Shareholders: Round Lot Holders 400
</TABLE>
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Copyright 2000, Stanford Keene. All Rights Reserved.
Market Makers 3
In David B. H. Chaffe, III's article, Option Pricing as a Proxy for Discount for
Lack of Marketability in Private Company Valuations," in the December 1993
edition of the Business Valuation Review, he purported that estimating the cost
of a put option as a proxy for measuring discounts for marketability. Chaffe
gives the following explanation for this approach:
When provided with an option to sell, otherwise non-marketable shares are
given marketability. (For instance, we see this type of provision in
Employee Share Ownership Plans where, in such cases, marketable level
values are found.)
Following this logic, the cost or price of the option to sell (a put
option) represents all (or a major portion) of the discount to be taken
from the marketable price to price the nonmarketable shares.
To summarize, if one holds restricted or nonmarketable stock and purchases
an option to sell those shares at the free market price, the holder has,
in effect, purchased marketability for the shares. The price of the put is
the discount for lack of marketability.
The article goes on to present empirical results of a study of the cost of such
options. He concludes, "A range of put prices of approximately 28% to 41% of the
marketable price of the marketable price is shown at the two-year intercept."
This is supportive of the discounts concluded in restricted stock studies, where
restrictions usually lapse in two years or less. Chaffe goes on to disclose, "At
the four-year intercept, these ranges are 32% to 49%, after which time increases
do not substantially change the put price." This range is supportive of the
higher discounts concluded in the Baird and Willamette studies, where there was
no guaranteed market within two years.
A US Tax Court case, Bernard Mandelbaum, et al v. Commissioner of Internal
Revenue (T.C. Memo 1995-255 (June 13, 1995)), raised issues concerning specific
factors to be considered in determining the level of marketability discounts
applicable to a specific interest.
The Court started with the "benchmark" ranges of discounts as the starting
factor out of ten in total and adjusted the discount range up or down (or none)
based on its assessment of whether the specific factor under consideration made
the interest less or more marketable. In that effort, we have assessed these
same factors below as they relate (or not) to the shares of the companies of
Chell.com Ltd.:
1. The value of the subject company's privately traded securities
vis-a-vis its publicly traded securities, or, if the subject company does
not have stock that is traded both publicly and privately, the cost of a
similar company's public and private stock. To determine a marketability
discount for unlisted stock, sales of similar interests in like companies
are frequently considered. Numerous studies have been made with respect to
this factor. Studies have found that the average marketability discount
for a public company's transfer of restricted stock is 35 percent, and
that the average discount for IPO's is 45 percent, we use these figures as
benchmarks of the marketability discount for these interests at hand.
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2. An analysis of the subject company's financial statement. Investors
normally regard the analysis of a company's financial statements as a
significant factor in determining the worth of a company's stock. Consider
the results of annual operations, balance sheet, type of financial
statement opinion by an independent CPA, quality of earnings, ratio
analysis, etc. The companies are start-ups and have no historical
statements to base this analysis on. This would result in an above average
discount for lack of marketability.
3. The company's dividend-paying capacity, its history of paying
dividends, and the amount of its prior dividends. Critical to this factor
is whether an investor will receive a fair rate of return on his or her
investment. The fact that a company pays small or no dividends will not
always negatively affect the company's marketability. Even if the company
seldom pays dividends, an investor may aim to participate in the company's
success mainly through the appreciation in the value of his or her stock
brought on by retained earnings and the possibility of a future return.
The shares being considered do not pay dividends. This indicates an above
average discount for the lack of marketability.
4. Nature of the company, its history, its position in the industry, and
its economic outlook. These companies are start-ups. They have little
operating history, and in some cases they have assets and a concept which
needs to be developed. This would increase the lack of marketability
discount.
5. The company's management. The current management is well trained and
attuned to the industry and customers. This would indicate a below average
discount for the lack of marketability for these interests.
6. The degree of control transferred with the block of stock to be valued.
Control reflects a shareholder's ability to direct a company through his
or her dictation of its policies, procedures, or operations. Control of a
closely held company represents an element of value that justifies a
higher value for a controlling block of stock that is merely a minority
interest in the company. There is little control inherent in the minority
position being valued. This indicates an above average discount for the
lack of marketability for these interests.
7. Any restriction on the transferability of the company's stock. There
are no restrictions on the transferability of each company's stock that
Stanford Keene has been made aware of. This would decrease the discount
for the lack of marketability for these interests.
8. The period of time for which an investor must hold the subject stock to
realize a sufficient profit. An interest is less marketable if an investor
must hold it for an extended period of time in order to reap a sufficient
profit. Market risk tends to increase (and marketability tends to
decrease), as the holding period gets longer. The shares do not pay
dividends, nor are they expected to in the future, therefore, this
indicates an above average discount for the lack of marketability for
these interests.
9. The Company's redemption policy. Shares cannot be sold back to the
Company. This indicates an above average discount for the lack of
marketability for these interests.
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10. The cost of effectuating a public offering of the stock to be valued
(e.g., legal, accounting, and underwriting fees). An above average
discount is warranted if the buyer completely bears the cost of
registering the purchased stock. The discount is lessened, however, to the
extent that the buyer has the ability to minimize his or her registration
costs. Registration costs may be minimal to the buyer, for example, if he
or she has the right to compel the company to register (or otherwise
`piggyback') the unlisted shares at its expense. A public offering is
likely in this situation. This indicates a below average discount for the
lack of marketability for these interests.
In the case of the interest being valued in enGyro, there is control being
transferred in this transaction, but the shares in question are restricted for 6
to 24 months following the initial public offering of the Company. We feel that
the restrictions add to the small discount for the lack of marketability which
otherwise may be used, and thus a 10 percent discount should be used.
For the 480,000 shares of cDemo being considered we feel that the desire to take
this Company public in the coming two to three years and the significance of the
block being transferred is outweighed by the start-up nature of the company, the
lack of operating assets and the numerous questions which still surround the
Company in regards to the future partnerships and the lack of a revenue stream
until 2002. With these factors in mind, we feel that the appropriate
marketability discount is 20 percent.
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<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Correlation of Valuation Results and Conclusion for eSupplies
With a transaction occurring in eSupplies' common stock in the month prior to
our valuation date of $6, we feel that this accurately represents the fair
market value of the stock at this time. While other methods were available, this
approach is believed to be the most reliable and accurate in this situation.
Based on our investigation and analysis, the fair market value of 962,500 shares
of the Class-A common stock of eSupplies, on a minority basis, as of May 31,
2000 with 3,550,000 shares outstanding, is$5,775,000.
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<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Correlation of Valuation Results and Conclusion for enGyro
We considered the transaction that was entered into in January by enGyro and a
venture capital fund, but felt that advancements in the company warranted that
we utilize the discounted cash flow approach to account for the value created in
the development of technology. While other methods were available, this approach
is believed to be the most reliable and accurate in this situation. Based on our
investigation and analysis, the fair market value of 875,000 shares of enGyro,
as of May 31, 2000 with 1,585,000 shares outstanding, is:
Discounted Cash Flow Method Value $ 32,560,859 $ 35,674,073
less: Marketability Discount (10%) $ 3,256,086 $ 3,567,407
Fair Market Value of non-marketable shares $ 29,304,773 $ 32,106,666
Shares Outstanding 1,585,000 1,585,000
Shares Considered 875,000 875,000
FMV of Shares Considered $ 16,177,714 $ 17,724,500
Based on our analysis, we believe that 875,000 shares of enGyro is worth between
$16.18 million and $17.72 million. All figures are in US Dollars.
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report without the prior written consent of Stanford Keene. 50
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Correlation of Valuation Results and Conclusion for cDemo
We utilized the discounted cash flow approach in our analysis of cDemo. While
other methods were available, this approach is believed to be the most reliable
and accurate in this situation. Based on our investigation and analysis, the
fair market value of 480,000 shares of the Class-A common stock of cDemo, on a
minority basis, as of May 31, 2000 with 2,088,000 shares outstanding, is:
<TABLE>
<S> <C> <C>
Discounted Cash Flow Method Value $13,230,896 $15,484,541
less: Control Discount (5%) $ 661,545 $ 774,227
Value of Non-Controlling Shares $12,569,351 $14,710,314
less: Marketability Discount (20%) $ 2,513,870 $ 2,942,063
Fair Market Value of non-controlling, non-marketable shares $10,055,481 $11,768,251
Shares Outstanding 2,088,000 2,088,000
Shares Considered 480,000 480,000
FMV of Shares Considered $ 2,311,605 $ 2,705,345
</TABLE>
Based on our analysis, we believe that 480,000 shares of cDemo is worth between
$2.31 million and $2.71 million. All figures are in US Dollars.
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report without the prior written consent of Stanford Keene. 51
<PAGE>
Copyright 2000, Stanford Keene. All Rights Reserved.
Stanford Keene Personnel
The following Stanford Keene personnel participated in this valuation:
Barry P. Gant, Jr. - Research Analyst
Education Qualifications:
B.S. in Finance and Banking - Appalachian State University
David W. Homard - Research Associate
Education and Professional Qualifications:
B.S. in Economics--George Mason University
Chartered Financial Analyst, Awarded September 1997
Melissa Zahniser - Research Director
Education Qualifications:
MBA in Finance - R.H. Smith School of Business, University of Maryland
B.A. in Russian Studies - University of Pittsburgh
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report without the prior written consent of Stanford Keene. 52
<PAGE>
EXHIBIT
"C"
<PAGE>
DESCRIPTION OF THE COMPANIES
ENGYRO Inc.:
Brief Description
Engyro, Inc. will be the surviving legal entity resulting from the merger
of R Home Funding Co. Ltd., a Nevada corporation and its wholly owned Delaware
subsidiary, Engyro Inc. Its headquarters are in Shelton, Connecticut. Engyro
intends to build a financial transaction engine that will support the high
demands created by rapid growth in the Application Service Provider (ASP)
industry. ASP's are independent third-party providers of application
software-based services, which are delivered to customers via the Internet.
Engyro's Goals
o To enable Independent Service Providers ("ISP") to transition to the ASP
model by helping to remove the barriers of entry surrounding the economic
considerations.
o To provide to the ASPs a valuable administrative outsource service which
permits concentration on their core services and scalability for their
growing financial management needs.
o To provide a value added service to ASP enablers (data centers, operating
platforms, ISPs, NSPs, Progress) to support the industry growth.
o To provide the contracted parties with flexibility in their payment terms
and confidence in what they received and are paying for.
o To provide to ASPs and their suppliers a simplified method to receive
their revenue derived from ASP transactions.
o To enhance the ASP customer relationship by enabling choices in payments
and applications.
o To provide certainty to the independent software vendors (ISVs) in the ASP
revenue and service delivery model, and allowing deployment of multiple
revenue models.
Strategy
Engyro intends to be the first to market to provide the critical back end
administrative services for the ASP industry. This will allow integration of the
billing, payment, disbursement, and settlement functions for ASP companies.
Engyro is custom designing its system to enable simplification of the complex
economic variables of delivery, measurement and payment, with full
reconciliation and posting directly to the accounting systems of all parties in
the ASP transaction. Engyro's ability to support the various marketing programs
encouraging customer usage should provide customers with a strategic
differentiator and should not limit the creativity of the offers. Engyro will
deploy its platform of transaction servers with the data centers, to give
efficient and flexible local service to the ASPs, Independent Software Vendors
(ISVs) and Network Service Providers (NSPs). Engyro's platform is flexible
enough to allow it to grow into other market areas such as business-to-business
and e-commerce.
Engyro plans to accomplish its goals of allowing all parties to the ASP
transaction to be confident in the backend of the delivery of the application,
payment and disbursement by:
1
<PAGE>
o Integrating the bill presentment and payment process with the account
reconciliation and posting to the Accounting system.
o Business alliances with software metering/monitoring providers;
o Working with Internet Service Vendors (ISVs) to help them move to the ASP
revenue model with confidence.
o Providing this functionality thereby helping ISVs to transition to the ASP
distribution model and reach more customers;
o Reconciling all data points to the billing and payment, as well as the
disbursement and settlement stream.
Engyro believes that it will enable ASPs to:
o Concentrate on their core competencies of delivering applications and
services to their customers in a more cost-effective method, while Engyro
manages the payment/settlement and disbursement process.
o Provide an environment for creating customer and supplier confidence.
o Provide support for marketing programs and promotions.
o Guarantee the contractual obligations between the ASP, their suppliers,
and the end-customer.
o Utilize incentive marketing program-could allow the ASP's suppliers to
reach the ASP customer base with more products or services.
o Enable multiple and mixed cost structured-companies to use different ASPs
for different reasons, operating systems applications, security needs and
telecommunications company's (Telco's) requirement, Provide an audit trail
through the payment stream
Engyro believes that it will enable ISVs to
o Partner with metering and monitoring companies, increasing the confidence
and accuracy in their ASP revenue streams
o Place accountability with a neutral third party
o Have confidence in their contractual relationships
o Receive simplified and reconciled payments
o Receive simplified and reconciled payments
o Receive payment form multi-currency sources
o Access an audit trail
Engyro believes that it will enable ASP customers to:
o Have confidence in the billing/payment process
o Receive a simple statement
o Have flexibility in payment arrangements: - The customers may wish to
change from billing period to billing period (i.e. seasonality could
affect timing), to have a different account to be charged, or a have a
different account to be debited, etc.
o Have more choice of application services.
o Receive indirect cost savings
o Have an audit trail.
2
<PAGE>
Service Offering
By forming partnerships with software metering and monitoring companies,
Engyro believes that it will be able to offer a modular Java-based solution that
will manage the customers' movement of funds, including:
o Automated collection process from customer(s).
o Disbursement and settlement to all appropriate partners and vendors (the
ASPs' integrators, (Telcos), ISVs, and hardware and software vendors,
etc.).
o Reconciliation from and to all data points.
o Posting directly to Accounts Receivables.
o Guaranteeing the process through accountability and bonding.
o Fraud detection and a risk and credit management component,
o Customer service center, where Engyro representatives will be able to
respond to inquiries from the ASPs', their suppliers, and their customers'
accounting representatives.
Revenue Model
Engyro intends to charge a monthly minimum contract fee, and a percentage
of the transaction fee of approximately 1.75% of the billing, however, this
revenue model remains untested.
In future versions, Engyro intends to integrate customer relationship
management (CRM) capabilities, which will enable advanced customer support, and
marketing support for instant customer couponing and the ability to offer
multi-tiered commission/rewards structures.
Target Market
The primary market that Engyro will go after is the ASP marketplace. Most
ASPs have yet to develop sophisticated and integrated accounting systems and
backroom capabilities, and because of the industry they are in, they understand
the financial and operational advantages to outsourcing non-core operations. It
is this market that Engyro will first target. Engyro intends to reach its target
market through a direct sales force, which will call upon potential customers
and work with them to design creative solutions for their billing and payment
needs. The direct sales force will approach the ISVs to sell them on Engyro's
ability to enable them to transition to an e-commerce platform and take
advantage of the new distribution channel in the ASPs. The direct sales force
will approach ISPs and NSPs and seek to assist them in their provision of ASP
value added services to their core offering. Engyro will attempt to reach its
target market:
o Indirectly by offering ISVs a secure method to enable ASPs alternative
subscription software rental-models through the remote management of the
payment process. Engyro believes that the larger ISVs will only move to an
ASP software subscription model if they are (1) completely confident in
the capabilities of the metering, monitoring and payment process, and (2)
that they can increase their revenue yield through this process.
o Through Strategic Relationships. Engyro intends to create strategic
partnerships/marketing relationships with software metering/monitoring
companies, billing companies, accounting software
3
<PAGE>
providers, Data Centers, and other components of the community of ASP
elements, as all are looking for value add services to sell to their
customer base.
Future Markets
Engyro plans to develop an extension able infrastructure that could be
utilized in other markets such as Vertical/B2B, Web Portals and B2C. Expanding
services into these markets will require additional funding and pose additional
risk.
Sales and Marketing Strategy
Engyro's sales and marketing strategy is to generate sales and marketing buzz
by:
o Deploying account managers who will work with the ISVs, and ASPs in
developing solutions for their unique payment situations.
o Utilizing partnership companies and alliance marketing strategies
promoting value added components to strengthen the service offering to
each other's customers.
o Sponsoring and attending industry trade shows, which Engyro will use to
heighten its business proposition, develop sales leads and create
strategic partnerships.
o Utilizing senior management as industry experts, and having them speak at
related events.
Communication Strategy
Engyro intends to advertise, market and promote its services, and build its
brand name by:
o Cross-promoting Engyro's services with its partners.
o Purchasing advertising space in leading ASP portals.
o Meeting with industry analysts (e.g., IDC, Yankee Group, Forrester
Research, Gartner Group, etc.) to build Engyro third party endorsements.
o Working with technology magazines and newspapers to create features or
stories on Engyro.
o Promoting Engyro's Web site and related links.
Marketing and Promotion
For the fiscal year end 2000, Engyro has allocated $1.25 million for its
marketing (advertising and promotional strategies). The major portion of this
will be allocated to public relations and investor relations. In 2001, Engyro
intends to spend $1.4 million on marketing activities, and in 2002, Engyro
intends to spend $1.7 million on marketing activities.
Technology Overview
Engyro plans to deploy a solution that is a complete end-to-end solution
for the ASP marketplace. It will combine powerful database transaction engines,
and a customized application suite. Engyro intends to partner with leading edge
technology companies who will assist them in developing a solution with a rapid
time-to-delivery. The solution will allow scalable transactions for growing
businesses, and sophisticated analysis of customer, ASP and ISVs customized
business rules.
4
<PAGE>
Engyro intends to deploy high-end application server clusters,
high-capacity remote storage devices, high-speed routers and hubs, and secure
access to a top-tier Internet backbone supplier to handle high-speed
connectivity. Engyro plans to install a dedicated transaction server in each of
its customers' data centers with a virtual private network (VPN) connection back
to its server farm.
Engyro is using the following companies to provide core components of our
software infrastructure, (this list is not exclusive, as Engyro will utilize the
technology from other hardware and software companies):
Informix Corporation (NASDAQ:IFMX) specializes in advanced information
management technologies that help enterprises in the i.Economy get to market
quickly, generate new revenue, build a unique strategic advantage, and solve
their most complex business problems. Informix offers customers a complete
software infrastructure for the Web that delivers highly scalable transaction
processing, personalized content management, integrated business intelligence,
full multi-media capabilities and complete e-commerce solutions. Informix
Corporation designs, develops, manufactures, markets and supports relational
database management systems, connectivity interfaces and gateways, and
application development tools for graphical and character-based software
applications. Engyro's primary product is its Informix Dynamic Server, a high
performance, enterprise capable online transaction processing database server
featuring parallel data processing capability, replication and connectivity
options built into its core. The Informix Dynamic Server enables customers to
fully exploit the power of uniprocessor and multiprocessor hardware for superior
performance, extensibility and scalability. Other products include DataBlade
modules, which combine new data types, new functions or methods, and new
indexing operations, which, taken together, extend Informix Dynamic Server and a
variety of database application development tools designed to allow users to
build applications.
I.Sell In addition to the Informix Dymanic Server, Engyro intends to
deploy the I.Sell platform. I.Sell integrates Informix's powerful database and
application server technology with an ecommerce application suite, tools,
enterprise consulting, and global services and support to provide complete,
rapidly deployable e-commerce solutions. Included in this platform is analytical
merchandising which enables more targeted selling, to improve customer loyalty
and increases sales.
Techlogix uses a sophisticated project execution methodology which will
assists Engyro in developing products that are built within budget, delivered
on-time, and fit for the purpose they are built for. State-of-the-art design and
development tools are utilized to achieve an optimal solution.
Directors and Officers
Cameron Chell - Chairman: Cameron Chell is the sole shareholder, Chairman
and Chief Executive Officer of Chell.com. Mr. Chell is founder of the ASP
Consortium and Futurelink Corp. ("FutureLink") (NASDAQ:FTRL). He served as
FutureLink's President, CEO and Chairman from 1997-1999. Mr. Chell is also a
Director and Shareholder of VC Advantage Limited, the general partner of VC
Advantage Fund Limited Partnership. He is Chairman and founder of C Me Run Corp.
and is a cofounder of JAWS Technologies Inc. (NASDAQ:JAWZ). He is also Chairman
of the Board of Directors of Engyro and cDemo. Previously, Mr. Chell worked in
corporate finance in the private sector. Mr. Chell worked as a stockbroker at Mc
Dermid St. Lawrence Securities Ltd. from 1994 to 1997. On November 6, 1998 Mr.
Chell entered into a Settlement Agreement with the Alberta Stock Exchange to
resolve a pending investigation into Mr. Chell's alleged breaches of Alberta
Stock Exchange rules and bylaws. As part of the Settlement Agreement, Mr. Chell
acknowledged that he had breached certain duties of supervision, disclosure or
compliance relating to various offers and sales of securities, and Mr. Chell was
prohibited
5
<PAGE>
from receiving Alberta Stock Exchange approval in any capacity for a five year
period, subjected to a fine of CDN$25,000 and a three year period of enhanced
supervision.
Richard Okun - CEO: former CEO and President of American Payment Systems
Inc.("APS"), from 1996-1999, the worlds largest outsourced provider of Utility
walk-in payments. Mr Okun also held several positions with APS starting in May
1993. He was also a founder of JWP Credit Corp, a leading provider of financing
and leasing programs for Fortune 100 clients and was Vice President starting in
1991.
Mark Bilger - President and COO: former Executive Vice-President Worldwide
Product Development at Acclaim Entertainment. From 1997 to 1999 he was the
Senior Vice-President Product Development at Hyperion Corporation and oversaw
worldwide research and development and assumed responsibilities for worldwide
support and information technology services. Mr. Bilger also oversaw the Merger
of the Hyperion Software and Arbor Software Product Development. He also served
in a number of positions with IBM from 1982-1997.
Andy Quinn - Executive Vice President, Acting CTO: Business Development
Manager at FutureLink from July 1999 to January 2000. From December 1998 to July
1999 was the owner of Coinet Consulting Company servicing the e-commerce and ASP
markets. From February 1998 to December 1998 Mr. Quinn was co-founder of
LearningStation.com and Learning Information Network, both first movers in the
educational ASP market. From April 1997 to February of 1998 Mr. Quinn was
Director of the Strategic Selling Unit for Rumarson Technologies Incorporated
specializing in the acquisition, re-certification and distribution of high
quality technology. From 1994 through to April of 1997 Mr. Quinn held positions
at Packard-Bell NEC, in both the NEC and ZDS business units and during 1996 was
the most successful representative for the Campus Z-Station program, a joint
effort between Microsoft and ZDS to provide computing solutions the higher
education marketplace.
John Martin III - CFO: acted as CFO, Vice President and Secretary of
TransPro Inc. in New Haven, CT from 1995 to November, 1998. Mr. Martin was VP
and Treasurer of The Allen Group from 1988 to 1995 and was instrumental in
redefining the business model and transition from automotive electronics to
telecommunication products.
Business Relationships
Engyro has formed strategic business relationships with the following:
o Chell.com Ltd., a strategy bank.
o Thomson Kernaghan & Co. Limited ("Thomson Kernaghan"), a 50-year old
Canadian, independent, employee-owned investment banking firm. Its head
office is in Toronto, Ontario with branches in Vancouver, B.C, Calgary,
Alberta and Montreal, Quebec. Thomson Kernaghan is a member of each of
Toronto, Montreal and CDNX exchanges; the Canadian Investor's Protection
Fund and the Investment Dealers Association of Canada.
o GPC Communications, a division of GPC International, is a worldwide
government and public relations consulting firm.
o Mellon Financial Corporation, formerly Mellon Bank (NYSE: MEL) provides
trust, global custody, and other financial services.
o Informix Corporation (NASDAQ: IFMX) makes database management systems and
connectivity tools that let users store, retrieve, and correlate
information across global computer networks.
6
<PAGE>
o Techlogix a private San Jose, CA, company that specializes in innovative,
turnkey IT integration solutions.
Employees
In addition to the executives listed above, Engyro has one additional
employee in sales and marketing.
Offices
Engyro is currently negotiating for leased office space in and around
Shelton, Connecticut
Capital of Engyro
The authorized capital of R Home Funding Co. Ltd. consists of 5,000,000
common shares. Prior to the closing of a financing transaction, the issued and
outstanding shares will consist of 1,585,000 common shares or rights to acquire
such shares. R Home Funding Co. Ltd. expects to merge with its wholly owned
Delaware subsidiary, Engyro, Inc. prior to the closing of the financing and the
closing of the sale of the shares of Engyro to the Company. At such time, it is
expected that Engyro Inc will have authorized capital consisting of 20,000,000
common shares and 10,000,000 preferred shares of which 1,950,000 will be
designated as Series A Convertible Preferred Shares. Pursuant to the Agreement,
the Company will purchase 875,000 common shares, representing 55.2% of Engyro's
outstanding stock. Upon completion the financing, there will be 975,000 Series A
Preferred Shares outstanding thereby reducing the control position of the
Company and leaving the Company with a minority position of 34.1%. The terms of
the Series A Convertible Preferred Stock will be:
(i) dividends - 10% per annum - cumulative - paid quarterly, if
possible;
(ii) dividends payable in cash or stock at the option of Engyro. If paid
in stock it shall be on the basis of the lower of: (a) initial price
($3.84/share); and (b) 80% of the average closing bid price for 15
consecutive trading days prior to quarter end with a floor of
$1.92/share ;
(iii) dividend restriction with respect to common shares or classes junior
to Series A;
(iv) liquidation preference;
(v) non-participating right on liquidation. After repayment of
redemption amount - ($3.84). The holders of the Series A Preferred
Stock will not participate with common stockholders on distribution
of remaining assets;
(vi) anti-dilution protection - additional stock consists of shares and
or deemed shares (options, warrants or convertible securities) which
is issued for less than Series A price ($3.84). Formula $3.84 times
fraction (numerator is the number of issued and outstanding plus
number of shares at strike price which could be bought with
consideration received by the company)(denominator is the number of
issued and outstanding plus all of the shares/options etc as if they
were fully exercised). This is adjusted if there are price
increases/cancellations. The stock is reduced if the terms of the
warrants provide that there are increases in price over time or that
there are unexercised or expired warrants.;
(vii) voting - 1:1 with common;
(viii) redemption - 120% 3 years;
(ix) rights to convert to common stock. The conversion price to be the
lower of: (A) strike price ($3.84); and (b) 80% of the average
closing bid price for 15 consecutive trading days subject to a floor
of $1.92/share.
7
<PAGE>
Chell.com entered into an option agreement with Dave Bolink, Gordon Herman and
Frank Killoran in January, 2000, whereby Dave Bolink, Gordon Herman and Frank
Killoran may acquire shares from Chell.com in Engyro or shares of any company
which the shares of Engyro are exchanged or substituted for. Dave Bolink, Gordon
Herman and Frank Killoran will, as a result of the sale of Engyro shares to the
Company, acquire rights from Chell.com to acquire an equivalent value of the
Company's shares from Chell.com in substitution for their rights to acquire
shares of Engyro.
Options/Warrants/Rights to Acquire Stock
The following table sets out Engyro's proposed options allocation to acquire
shares.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Name Price Total Options Vesting from July 31, 2000
------------------------------------------------------------------------------------------------------------------------
12 months 24 months 36 months 48 months
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chell.com Ltd. $5.00 200,000 50,000 50,000 50,000 50,000
------------------------------------------------------------------------------------------------------------------------
Rich Okun $5.00 195,000 48,750 48,750 48,750 48,750
------------------------------------------------------------------------------------------------------------------------
Andy Quinn $5.00 130,000 32,500 32,500 32,500 32,500
------------------------------------------------------------------------------------------------------------------------
Mark Bilger $5.00 100,000 25,000 25,000 25,000 25,000
------------------------------------------------------------------------------------------------------------------------
John Martin $5.00 50,000 12,500 12,500 12,500 12,500
------------------------------------------------------------------------------------------------------------------------
Unallocated $5.00 390,000
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Subtotal 1,065,000
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The unallocated options have been approved by VC Advantage Limited Partnership.
The following table sets out the warrants entitling the holders to purchase
common shares that will be outstanding as of the closing of the pending
financing.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Name # of Warrants Price Expiry Date
(US)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VC Advantage Limited Partnership 97,500 $5.00 July 30, 2003
---------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited 97,500 $5.00 July 30, 2003
---------------------------------------------------------------------------------------------
Chell.com Ltd. 97,500 $5.00 July 30, 2003
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
SUB-TOTAL: 292,500
---------------------------------------------------------------------------------------------
</TABLE>
VC Advantage Limited Partnership has entered into an agreement to acquire
975,000 Series A Preferred Shares which are convertible into Common Shares (See
"Material Contracts of Engyro").
Materials Contracts of Engyro
Engyro has the following material contracts:
8
<PAGE>
1. Escrow Agreements. By separate agreements, each of the founding shareholders
will have, prior to the sale of the Engyro shares to the Comany enter into
escrow agreements that restrict the resale of shares of the initial 1,585,000
shares of common stock. The agreements provide that "Shares" shall mean the
shares of Engyro of each shareholder together with any shares issued to any
particular shareholder in exchange for the shares in Engyro and any additional
shares of either Engyro or any public corporation issued by way of a dividend
paid in shares which accrues to the shares, and the certificate or certificates
representing such shares. The shares of each of the initial shareholders will be
released as to one third of their holdings on July 31, 2001, July 31, 2002 and
July 31, 2003.
The agreement provides that each Shareholder places and deposits in escrow
with the Escrow Agent the shares of Engyro referred to opposite his name as set
out above and agrees to deliver forthwith to the Escrow Agent those Shares
(including any replacement shares or certificates if and when issued) to the
Escrow Agent for deposit in escrow. The Escrow Agent is required to release the
shares to the respective shareholder in the numbers and on the dates described
above; subject to Engyro's rights to re-purchase the shares of Richard Okun,
Andy Quinn, Mark Bilger and John Martin III as described below.
Engyro shall be entitled to repurchase for cancellation the shares of
Richard Okun, Andy Quinn, Mark Bilger and John Martin III (treated on an
individual and not collective basis) in the following circumstances:
(a) if Richard Okun, Andy Quinn, Mark Bilger and/or John Martin III
voluntarily terminates their employment (other than Good Reason as
defined in their employment agreements) prior to the release dates
as set out above, Engyro may purchase for cancellation the shares
yet to be released for $1.00;
(b) if Richard Okun, Andy Quinn, Mark Bilger and/or John Martin III are
terminated by Engyro for Cause or for a material failure to meet
Annual Performance Goals (each as defined in their respective
employment agreements), Engyro may purchase for cancellation all
shares yet to be released for $1.00;
(c) If Richard Okun, Andy Quinn, Mark Bilger and/or John Martin III are
terminated by the employer without Cause, or Richard Okun, Andy
Quinn, Mark Bilger and/or John Martin III terminate their agreements
for Good Reason (as defined in their employment agreements), then
Engyro shall not be entitled to repurchase the shares;
(d) In the event of the termination of Richard Okun, Andy Quinn, Mark
Bilger and/or John Martin III following a "change of control" (as
defined in their employment agreements), then Engyro shall not be
entitled to repurchase the shares;
(e) If Richard Okun, Andy Quinn, Mark Bilger and/or John Martin III are
terminated because of death and/or disability, Engyro may purchase
for cancellation the shares yet to be released for $1.00.
The shares of Richard Okun, Andy Quinn, Mark Bilger and John Martin III are
subject to cancellation and, as such, the shares and the beneficial ownership or
any interest in them shall not be sold, assigned, hypothecated, alienated,
released from escrow, transferred within escrow, or otherwise in any manner
dealt with unless the conditions have been met and complied with except as may
be required by reason of the death or bankruptcy of any Shareholder, in which
case the Escrow Agent shall hold the Shares subject to this Agreement, for
whatever person, firm, or corporation shall be legally entitled to be or become
the registered owner thereof.
9
<PAGE>
2. VCALP Subscription Agreement. Based on a term sheet dated March, 2000,
Engyro entered into a subscription agreement with VC Advantage Limited
Partnership whereby VC Advantage Limited Partnership will invest
$3,750,000 into Engyro. VC Advantage Limited Partnership subscribed for
975,000 Series A Convertible Preferred shares of Engyro at $3.84 per share
($3,750,000). The subscription agreement alters the terms of the Series A
Convertible Share terms as follows:
(i) VCALP would waive anti-dilution rights for 100,000 shares of
industry deal stock;
(ii) Registration rights - would be set out in a separate agreement
which would provide that Engyro would be required to file a
registration statement:
(A) Within 180 days from first advance;
(B) Have it declared effective within 120 days thereafter;
(C) Failing which there would be a penalty (1% per month
times the number of registerable securities multiplied
by $3.84 payable in common stock);
(D) Engyro would be required to keep the registration
effective for the "Effectiveness Period" as defined
below.
(iii) There would be restrictive covenants with respect to:
(A) use of proceeds;
(B) other usual commercial terms.
(iv) There would be consents required:
(A) prior to entering into mergers, etc
(B) other usual commercial terms
(v) Engyro will issue 97,500 Common Share Purchase Warrants to VC
Advantage Limited Partnership. The terms are:
(A) 3 years;
(B) exercise price $5.00 per share;
(C) No reset rights (No floating rate);
(D) Anti-dilution rights (same formula as Series A
convertible share terms);
(E) registration rights - by separate agreement which
provides:
(I) registration within 180 days;
(II) effective for 3 years or until all warrants are
exercised.
(vi) Engyro will issue 97,500 Common Share Purchase Warrants to
Thomson Kernaghan & Co. Limited as Agent. The terms are:
(A) 3 years;
(B) exercise price $5.00 per share;
(C) No reset rights (no floating rate);
(D) Anti-dilution rights (same as formula for Series A);
(E) registration rights - by separate agreement which
provides:
(I) registration within 180 days from first advance;
(II) effective for 3 years or until all warrants
exercised
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<PAGE>
3. Registration Rights Agreement. Engyro will enter into 3 separate registration
rights agreements (the Registration Rights Agreement) as part of the proposed
financing:
(a) one with VC Advantage Limited Partnership with respect to the common
shares underlying the conversion of the Series A Convertible Preferred Shares
into common shares and the common shares issuable upon exercise of the warrants;
(b) one with Thomson Kernaghan & Co. Limited with respect to their
warrants; and
(c) one with Chell.com with respect to their warrants.
The terms are as follows:
(a) Subject to Section 2.01(c) of the Registration Rights Agreement,
Engyro shall, prior to January 31, 2001 (the "Registration Date") file with the
Securities Exchange Commission, a Registration Statement (a "Registration
Statement") relating to the offer and sale of the Registrable Securities (as
defined in the Registration Rights Agreement) by the Holders Securities (as
defined in the Registration Rights Agreement) and, thereafter, shall use its
reasonable best efforts to cause such Registration Statement to be declared
effective under the Securities Act as soon as reasonably practicable after the
filing thereof; provided, however, that no Holder shall be entitled to have the
Registrable Securities held by it covered by such Registration Statement unless
such Holder is an Electing Holder Securities (as defined in the Registration
Rights Agreement).
(b) Subject to Section 2.01(c) Securities of the Registration Rights
Agreement, Engyro shall use its reasonable best efforts:
(i) To keep the Registration Statement continuously effective in
order to permit the Prospectus forming part thereof to be usable by
Electing Holders for a period of two years after the Registration
Statement is declared effective for the Effectiveness Period (as defined
below); and
(ii) During the Effective Period of the Registration Statement,
promptly upon the request of any Holder of Registrable Securities that is
not then an Electing Holder, take any action reasonably necessary to
enable such Holder to use the Prospectus forming a part thereof for offers
and resales of Registrable Securities, including, without limitation, any
action reasonably necessary to identify such Holder as a selling security
holder in the Shelf Registration Statement.
(c) Notwithstanding anything to the contrary contained in the Registration
Rights Agreement, Engyro shall be entitled, from time to time by providing
written notice to the Holders, to require the Holders to suspend the use of the
Prospectus for sales of Registrable Securities under the Registration Statement
for a reasonable period of time not to exceed 60 days in succession or 60 days
in the aggregate in any twelve month period (a "Suspension Period") if Engyro
shall determine that it is required to disclose in the Registration Statement a
financing, acquisition, corporate reorganization or other similar corporate
transaction or other material event or circumstance affecting Engyro or its
securities, and that such disclosure of such information at such time would be
seriously detrimental to Engyro and its stockholders. Immediately upon receipt
of such notice, the Electing Holders shall suspend the use of the Prospectus
until requisite changes to the Prospectus have been made as required below. Any
Suspension Period shall terminate at such time as the public disclosure of such
information. After the expiration of any Suspension Period and without any
further request from a Holder, Engyro shall as promptly as reasonably
practicable prepare a post-effective amendment or supplement to the Registration
Statement or the Prospectus, or any document incorporated therein by reference,
or file any other required document so that, as thereafter delivered to
purchasers of the Registrable Securities included therein, the
11
<PAGE>
Prospectus will not include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(d) After the Effective Period of the Registration Statement becomes
effective, Engyro shall, upon the request of any Holder of Registrable
Securities that is not then an Electing Holder, as promptly as practicable, send
a notice and questionnaire to such Holder. Following its receipt of such notice
and questionnaire, Engyro will as promptly as practicable include the
Registrable Securities covered thereby in the Registration Statement (if not
previously included).
(e) If (i) on or prior to the 30th day following the Registration Date,
Engyro has not filed with the Commission a Registration Statement with respect
to the Registrable Securities or (ii) on or prior to the 120th day following the
Registration Date the Registration Statement, if previously filed, has not been
declared effective by the Securities Exchange Commission (each, a "Registration
Default"), Engyro shall be required to pay liquidated damages ("Liquidated
Damages"), from and including the day following such Registration Default until
the Registration Statement is either declared effective or so filed and
subsequently declared effective, as applicable; provided, however, that Engyro
shall not be required to pay Liquidated Damages after the completion of the
Effectiveness Period with respect to such Registrable Securities. Such
Liquidated Damages shall be paid monthly in arrears on the first day of each
month and on the first business day after the Registration Statement has been
declared effective, with the first such payment due on the first such day
immediately after the occurrence of such Registration Default. Engyro shall pay
to the holder a penalty in common shares of Engyro calculated as follows:
multiply one percent (1%) per month (or pro-rated percentage thereof) times the
number of Registrable Securities then held by such Holder. In the event the
Registration Statement ceases to be effective (or the Holder is otherwise
prevented or restricted by Engyro from effecting sales pursuant thereto, for
more than 60 days, whether or not consecutive, during any twelve-month period
(an "Effective Failure"), then Engyro shall pay Liquidated Damages until such
Effective Failure is cured in the amount of and in the manner as described
above. For the purposes of determining an Effective Failure, days on which
Engyro has been obligated to pay liquidated damages in accordance with the
foregoing in respect of a prior Effective Failure within the applicable
twelve-month period shall not be included. The parties hereto agree that the
Liquidated Damages provided for in Section 2.01(e) of the Registration Rights
Agreement constitute a reasonable estimate of the damages that will be suffered
by the Holder by reason of the failure to file a Registration Statement, the
failure of a Registration Statement to be declared effective or the failure of a
Registration Statement to remain effective, as the case may be, in accordance
with this Agreement. The Liquidated Damages set forth in this Section 2.01(e)
shall be the exclusive monetary remedy available to the Holder for such
Registration Default or Effective Failure.
"Effectiveness Period" means the period of time commencing on the Closing
Date (as defined in the Registration Rights Agreement) and ending on the first
to occur of the following events: (A) a registration statement with respect to
the issuance or sale of such Registrable Securities shall have become effective
under the Securities Act and such Registrable Securities shall have been issued
and disposed of in accordance with such registration statement; (B) such
Registrable Securities have been sold or are available for sale in a transaction
which complies with the provisions of Rule 144(k) promulgated under the
Securities Act; (C) such Registrable Securities shall have been otherwise
transferred, new certificates for such Registrable Securities not bearing a
legend restricting further transfer shall have been delivered by Engyro and
subsequent disposition of such Registrable Securities shall not be subject to
registration or qualification under the Securities Act; (D) such Registrable
Securities shall have ceased to be outstanding; (E) as it relates to common
stock issuable upon conversion of the Series A Convertible Preferred Stock, 2
years from the date of registration; or (F) as it relates to common stock
issuable upon exercise of warrants, until 30 days after 90 % of the warrants
have been exercised or expired.
12
<PAGE>
4. Warrant Agreement. There are 3 separate warrant agreements between Engyro, VC
Advantage Limited Partnership, Thomson Kernaghan & Co. Limited and Chell.com
(the "Warrant Agreements"). The warrant agreements are identical in that the
exercise price in each case is $5.00/share (the "Exercise Price") and the expiry
date is August 2, 2003. The warrants contain anti-dilution provisions. The
Exercise Price may be adjusted if there are issuances of Additional Shares of
Common Stock (as defined in the Warrant Agreement) if the consideration per
share for an Additional Share of Common Stock issued or deemed to be issued by
Engyro is less than the Exercise Price for such Warrant Shares Stock (as defined
in the Warrant Agreement) in effect on the date of, and immediately prior to
such issue, for each Warrant Share. In the event that Engyro issues Options or
Convertible Securities Stock (as defined in the Warrant Agreement) then the
maximum number of issuable shares be deemed to have been issued, provided upon
the expiration or price increase of such Options or Convertible Securities over
time would reduce the adjustment. The Exercise Price shall be reduced,
concurrently with such issuance with respect to the Warrant Shares, to a price
determined by multiplying the Exercise by a fraction (x) the numerator of which
shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such issuance, plus the number of shares of Common Stock
which the aggregate consideration received by the Company for the total number
of Additional Shares of Common Shares so issued would purchase at such Exercise
Price and (y) the denominator of which shall be (1) the number of shares of
Common Shares outstanding immediately prior to such issuance plus (2) the number
of such additional shares of Common Shares so issued.
5. A product development and licensing agreement with Informix Corporation dated
May 15, 2000 but executed on June 8, 2000. Under the terms of the agreement,
Informix is developing Phase 1 of Engyro's technology for a fixed base price of
$1.04 million.
6. Service Agreement with Chell.com dated January 17, 2000 for the provision of
strategic advice with respect to financing, public relations, corporate
structure, technology, human resources and other services typically required by
start-up ventures. The fee is $720,000 per year. Engyro is also obliged to
reimburse Chell.com for any external fees including legal fees, accounting costs
and other services paid for by Chell.com. Chell.com may also lend funds to
Engyro. If Chell.com introduces to Engyro any party which completes an equity or
debt financing, Engyro is obliged to issue warrants to Chell.com equal to 10% of
the aggregate funding at the equity strike price or equivalent debt/equity
conversion price.
Description from Valuation Discounts
Stanford Keene used an income approach (discounted cash flow method) from
management projections. They calculated Engyro's equity to be $32.56 Million and
$35.67 Million before appropriate discounts. They deducted a marketability
discount of 10% to arrive at a $19.37/share value. The financial assumptions are
set out on page 46 of their report.
Conflicts/ Interest of Management in Material Contracts/Indebtedness of
Management
Cameron Chell, who is Chairman of the Board of Directors of Engyro is also a
director and shareholder of VC Advantage Limited, the general partner of VC
Advantage Limited Partnership which will earn fees on loans and equity
financings made to Engyro. Mr. Chell is also the sole shareholder of Chell.com
which has earned fees with respect to the Service Agreement. Chell.com will have
warrants to purchase stock at $5.00/share.
13
<PAGE>
Lawsuits
Management of Engyro is not aware of any existing litigation or any threat of
such.
Auditors
As Engyro is a start-up venture, which has not completed its first full year, it
has not yet appointed auditors.
Financial Statements
According to an unaudited financial statement of Engyro, attached as Exhibit
"D", as of May 31, 2000, Engyro's total assets were $451,450 and total
liabilities were $1,414,590. No revenues were generated in the six months ended
May 31, 2000, operating expenses were $964,590, resulting in a net loss of
$964,590.
Management Discussion of Operating Results
As Engyro is a start-up venture that is still in the process of product
development and has not yet started operations. As such management could not
comment on operating results.
Specific Risk Factors
1. Competition
There is a high level of competition in the intended business areas.
Competitors with superior resources may be able to provide better and cheaper
products and services to the market more quickly than Engyro can, thereby
gaining a competitive edge over it. Engyro believes that the quality of its
goods and services combined with the expertise of its management and the
relationships of its management with the ASP industry will give it a competitive
edge. However, there can be no assurance that it will be able to compete
successfully or that competitive pressures faced by it will not have a material
adverse effect on its businesses, operating results and financial condition.
There are currently many Internet-enabled bill presentment and bill payments
companies who offer companies and consumers the convenience, reduced cost and
anytime accessibility to manage and pay their bills electronically. Further,
APSs or ISVs could develop and deploy their own systems, which could provide
similar functionality to Engyro's service. Also, software metering/monitoring
companies could move into the billing and settlement area.
Engyro intends, to implement an aggressive marketing program to take
advantage of significant market opportunities. There can be no assurance that
the targeted market will accept Engyro's products or services, or even if
accepted, will be of sufficient volume to enable us to be profitable.
Significant expenditures, management resources and time shall be required to
develop broad market shares.
2. Additional Financing
Engyro will need additional financing to meet its capital requirements. If
Engyro requires additional funds, it shall be dependent upon sources such as:
o future earnings,
14
<PAGE>
o the availability of funds from private sources, including, but
not limited to, Engyro's shareholders, loans and additional
private placements; and
o the availability of funds from public sources including, but
not limited, an initial public offering of our securities.
Market conditions for private and public offerings are subject to
uncertainty and there can be no assurance when or whether a private and/or
public offering shall be successfully completed or that other funds shall be
made available to us. In view of Engyro's lack of operating history, its ability
to obtain additional funds is limited. Such financing may only be available, if
at all, upon terms which may not be advantageous to Engyro. If adequate funds
are not available from operations or additional sources of financing, Engyro's
business shall be materially adversely affected and the company may not be able
to continue operations or develop its business plan.
3. Management
Although management believes it has substantial expertise in the ASP
industry, management's expertise/skills may not be appropriate for a successful
start-up. Management intends to utilize its knowledge of the ASP industry to
guide Engyro to success. Engyro intends to enter into employment agreements with
each of its key employees in the future. The terms of these employment
agreements are subject to negotiation. There can be no assurance that the
employment agreements will be entered into upon acceptable terms.
4. Personnel
Engyro's success is dependent, among other things, upon its ability to
attract and retain highly qualified personnel. Competition for such personnel is
intense and there can be no assurance that it will be able to attract and retain
the personnel necessary for the development and operation of its business. The
loss of the services of any such personnel may have a material adverse effect
upon its financial condition and its existing or planned operations.
5. Minority Shareholder
The Company is acquiring a majority of Engyro's shares as of May 31,
however, as a result of an imminent financing (see Material Contracts with VC
Advantage Fund Limited Partnership) this position will be reduced to a minority
position of 34.1% on a fully diluted basis prior to the closing of the sale of
the Chell.com shares to the Company. The Company will not have absolute control
or the right to control the management and business activities of Engyro upon
the reduction of its stock position.
15
<PAGE>
eSupplies (Alberta) Ltd.
Brief Description
eSupplies (Alberta) Ltd. was incorporated in October 1999. eSupplies is
headquartered in Calgary, Alberta. eSupplies is one of the first virtual office
supply companies, in that eSupplies carries no inventory and instead relies upon
its alliance with United Stationers (NASDAQ:USTR) as its supplier and Canadian
Freightways as its courier. Currently eSupplies services the western Canadian
marketplace, but plans to enter the United States within the next few months.
eSupplies was formed to acquire the assets of Willson Stationers Ltd.
("Willson"), which was a 108-year old office supply company. In August 1999,
Willson's was placed under voluntary credit protection by its previous
management and shareholders in order for the company to restructure its
operations and financial obligations. In December 1999, Willson was put into
receivership by its principal secured creditor. In December 1999, eSupplies
purchased the assets of Willson from its receiver manager. Under eSupplies'
direction, the business of Willson has been completely restructured, to become a
sales and marketing company serving the small to medium enterprises market - by
closing down the unprofitable retail and warehousing operations and
strategically aligning itself with third parties to warehouse and distribute its
products. eSupplies provides small to mid-size companies with the ability to
procure office supplies and other related services such as legal, accounting and
janitorial services on or offline in a cost effective manner. eSupplies
currently offers over 25,000 items from which its customers can order either
online or through the eSupplies' telesales, customer service or outside sales
force. eSupplies.com, Inc. is a Delaware corporation, incorporated in February
1999. eSupplies.com Inc. has no assets and has not carried on business.
eSupplies.com, Inc. entered into an acquisition agreement with
eSupplies(Alberta) Ltd. to acquire all of the assets and outstanding shares of
eSupplies. The intent is that eSupplies.com will go public.
Services
eSupplies is a sales and marketing company that will specialize in complete
desk-top solutions for the small to mid-size business market. These companies
want the ability to be procure office supplies and other related services such
as legal, accounting and janitorial services on or offline in an easy-to-use and
cost-effective manner. As part of eSupplies' strategy to service this market,
eSupplies has teamed up with United Stationers to offer brand-name office
supplies at competitive prices, with next day delivery (in most major markets).
eSupplies currently offers over 25,000 items from which its customers can order
either online or through eSupplies' telesales (outbound), customer service
(inbound) or outside sale force.
Future Services
One of eSupplies differentiating strategies is a plan to offer one-hour
delivery in select markets. eSupplies plans to carry the top 1,000 stock-keeping
units (SKUs) in local warehouses. The one-hour delivery service will be based on
a minimum order of $100. For items not included in the top 1000 SKUs, the
customer will have the choice of receiving their whole or partial order the next
day as usual or placing two separate orders. Customers would be able to place
their one-hour orders via either eSupplies' website or through its telesales
department. eSupplies will only offer its one-hour service from 9AM to 4PM
Monday to Friday, with a 3PM local time cutoff for all orders. Initially,
eSupplies will test market this service in select markets. Markets will be
chosen based on: close proximity to a United Stationers distribution center (for
product quick replenishment), have population of 1 million people, and the
number of SMEs in the area. The depots will carry no more than two days of
inventory on hand. Each depot will have b etween 2 - 5 pickers and packers, a
Comptroller, and 5+ drivers. The depots will average
16
<PAGE>
4,000 sq. ft., and have at least two deliver docks. eSupplies will lease the
space, the vehicles, and all appropriate equipment.
eSupplies intends to incorporate a Request for Quote (RFQ) service whereby
service providers (accountants, lawyers, electricians, computer troubleshooters,
etc.), can bid on customer quotes. eSupplies intends to charge a sales
commission, which would average 15% of the contract value. eSupplies intends to
launch the service in the fourth quarter of this year, and it is eSupplies' goal
to attract 500 vendors in 2000, increasing to at least 7,000 vendors in at least
60 different industries by 2002.
Creating a "community" of United Stationers' dealers across North America,
eSupplies intends to be able to offer United Stationer's dealer an outsourced,
customized e-commerce solution based on eSupplies technology and infrastructure.
eSupplies intends to generate revenue through either a service fee or on a per
transaction basis.
eSupplies intends to create partnership programs whereby ISPs,
telecommunication, customer care or financial companies would offer discounts or
preferred service plans to eSupplies SME customers. eSupplies believes that
these services will provide incremental revenue, strengthen its position with
customers and attract new customers by offering a one-stop shopping experience.
Target Market
eSupplies targets companies that are:
o Classified as small to mid-size businesses (SIVIEs) with 5 to 49
employees,
o Are urban-based,
o Are in a vertical trade or profession (ex. legal and medical offices), and
o Have a good credit history.
This is an ideal market because they do not require onsite inventory
management systems, they normally do not rely on competitive bidding process,
and the "big box" stores do not directly cater to this market space. The big box
competitors target the small office/home office (SOHO) and contract market.
Sales Strategy
eSupplies is currently serving the western Canadian marketplace, but plans
to aggressively expand into Ontario, Canada, California, and the Pacific
Northwest. In order to enter these markets, eSupplies has a multi-prong sales
strategy:
1. To use its telesales and outside sales professionals to actively cold-call on
accounts. To expedite this program eSupplies has recently acquired a database of
15,000 businesses in western Canada that matches its target market criteria.
eSupplies has assigned 3,000 of these names to its outside sales force to
actively solicit, with the rest going to its telesales department. The telesales
department averages 400 - 500 scripted calls per day. eSupplies estimates that
it will convert 3% of the database into long-term commercial accounts. As
eSupplies enters the US market, it intends to refine this process and increase
its yield to 4%. eSupplies' Calgary telesales department will call upon all
potential accounts in North America.
2. To drive traffic through eSupplies' website. It is eSupplies' objective to
drive existing and future accounts to order online all goods and services due to
the cost savings that can be incurred. As part of this
17
<PAGE>
strategy eSupplies will use cash bonus incentives to push its sales force to
drive their customers to use this service over the order desk, which will allow
eSupplies' telesales and representatives to become much more efficient and
productive in acquiring new accounts, and will reduce eSupplies' need to hire
additional order desk personnel.
3. eSupplies will look to acquire existing office supplies companies as it
enters into each new geographic territory. eSupplies will then restructure into
its virtual sales and marketing operations, with the goal of retaining the
acquired company's customer list and their loyalty to said firm. As part of this
strategy, eSupplies expects to enter the Ontario marketplace by the 4th quarter
of 2000.
4. Its 1-hour Rush service, which should enable eSupplies to differentiate
itself from all its local and national competitors.
Sales Targets
For the calendar year end December 31, 2000, eSupplies is targeting:
o $2.5 million for its Canadian outside sales force, with a targeted
increase to $16.9 million by 2002, as eSupplies increases its sales
force from 9 to 18 outside reps by 2002.
o $0.2 million in US-based outside sales, with an increased target of
$18.1 million by 2002, as eSupplies increases its sales force from
12 reps in Q4 2000, to 30 outside reps by 2002.
o $1.8 million for its telesales department, with an increased target
to $10.8 million by 2002, as eSupplies increases its telesales force
from 12 to 66 telesales reps by 2002 to service all of North
America.
o $0.2 million in unique e-commerce sales, with an increased target
$14.0 million by 2002.
o $0.4 million for its 1-Hour Rush service, with an increased target
to $49.5 million by 2002, as eSupplies will offer this service in 20
cities throughout the United States.
As part of eSupplies' push into the United States, it intends to target
acquisitions in California and the Pacific Northwest markets and then enter into
other markets every six months thereafter. eSupplies intends to target companies
for acquisitions that have between $3 and $5 million in sales, have a strong
customer list, are profitable, see that their future is in creating a strong web
presence, and understand the need to dramatically pare back fixed and variable
costs. As part of eSupplies' push into the United States, it will only launch
its outside sales and 1-Hour Rush service, once an acquisition has been
completed.
Marketing Strategy
eSupplies' marketing strategy involves creating investor and public
relation campaigns, which are designed to differentiate eSupplies from its
competition. eSupplies will rely on GPC Communications to help define and
enhance this message.
Advertising and Promotion Strategy
eSupplies will rely on a national and local advertising and promotional
strategy to inform and drive customers to eSupplies related services. eSupplies'
national advertising and promotional strategy will consist of traditional and
web-based programs. The traditional advertising and promotional program will
consist of radio, cable television ads, along with public relation's activities
(PR). PR activities will include press releases and media placements.
18
<PAGE>
eSupplies' relationship with United Stationers (NASDAQ: USTR)
United Stationers ("United") is North America's largest wholesaler of
business products, with annual sales of $3.4 billion. The company operates 66
distribution centers across the US and Mexico (and is opening a center in
Toronto, Ont. to serve the Canadian marketplace by the third quarter of this
year). eSupplies' distribution centers cover a total area of 9 million sq. ft.,
handle a $550 million inventory investment and process over 35 million orders
each year.
Currently United Stationers does not carry Hewlett-Packard information
products (IP) -computer, printer and fax consumables (ie. laser cartridges), and
paper products for the Canadian market, but that will change by third quarter of
this year as eSupplies establishes its Canadian operations. As an interim step,
eSupplies has been able to source competitively priced products to service its
Canadian-based customers.
United's mandate is to create marketing and knowledge-base tools to allow
its independent dealer network (IDN) to compete effectively against the
superstore stores including: Just in Time (JIT) delivery, marketing tools
(catalogues), and web enabling e-commerce capabilities - the ability for an
eSupplies' customer to electronically place an order on its website, and have
United pick and pack and deliver that order direct from their warehouses to
eSupplies' customers (via eSupplies' courier partner) without the customer even
knowing that United was involved in process. In addition, eSupplies' believes
that its relationship with United provides it with the ability to service
substantially all major business centers with next business day service.
eSupplies' order fulfillment for western Canada is handled by United's
Seattle, Washington and Egan, Minnesota warehouses. Product is shipped FOB
(destination) to eSupplies main Canadian delivery centers (Vancouver, Calgary,
Edmonton and Winnipeg), from which Canadian Freightways takes over except in
Calgary (where eSupplies has its own fleet) and delivers to the customer the
next business day.
eSupplies uses several of United"s catalogues to promote its products, one
is the general catalogue which carries over 25,000 product items, and another is
the introduction (attack) catalogue, which carries only the top 1600 items.
eSupplies pays for most of the company's catalogue costs through co-op
advertising dollars provided by United. Even though eSupplies is a newly formed
company, it has already become United Stationers #1 western Canadian customer.
Directors and Officers
Robert (Bob) Burpee, President and CEO
Prior to joining eSupplies, Mr. Burpee was the VP of Lubricants Division
of PETROCANADA, from 1991-1999, which is one of the world's largest facilities
using severe hydrocracking technology. Mr. Burpee was responsible for over $350
million in revenue and approximately 600 employees. From 1988- to 1991, Mr.
Burpee was the President and CEO of CANBRA FOODS, a $100 million food processing
company. CANBRA FOODS is a division of James Richardson International (JRI) a
private Canadian company. Prior to CANBRA, Mr. Burpee, was the President of
Knott's Berry Farm Foods Ltd., of Placentia, CA, which is a $50 million
family-owned regional food business. Under Mr. Burpee direction the company
created a freestanding business separating the food operations from its
amusement park operations.
19
<PAGE>
Lawrence H. Lee, CA, CFA, VP Finance and CFO
Prior to joining eSupplies, Mr. Lee was the Corporate Controller and
Acting CFO for Novatel Wireless Inc., (NWI) a privately held San Diego, CA-based
company. Novatel Wireless is a leading edge developer and manufacturer of
wireless Internet solutions. From 1992 to 1996, Mr. Lee was a Senior Manager of
Ernst & Young Calgary office, where he provided accounting, auditing and
financial reporting consultation services for Canadian and US-based public and
planning to go public companies. In 1995, Mr. Lee was also a Secondment to the
Alberta Securities Commission.
Larry Putnam, VP Sales
Prior to joining eSupplies, Mr. Putnam ran his own non-grocery food-based
brokerage, and strategic consulting service. His clients included Cadbury
Schweppes, Dole Canada, Sun Ripe Foods, etc. From 1983 to 1987, was the VP of
Sales and Marketing for Cadbury Schweppes, which trades on the New York Stock
Exchange as American Depositary Shares (" ADS"). From 1980 to 1983, Mr. Putnam
was the VP of Sales for Cadbury Foods, and was part of the acquisition team that
acquired Motts Clamato business. He grew business from $15 million to $120
million over those three years. Prior to that, Mr. Putnam was National Sales
Manager, Coffee Division for General Foods, which is a $150 million a year
division.
Rodger Moody, Business Development Team Leader
Mr. Moody joined Willson's Stationers in December 1998 with a strong background
in customer service. He continued with eSupplies following the purchase of the
assets of Willson's Stationers. While exposed to the high-quality training in
both companies, he learned the philosophies and customer vision needed to
compete in today's business world. From February to November of 1998, Mr. Moody
was the Education Sales Manager for WestWorld Computers, Ltd., a Calgary based
distributor of computer hardware and software. Mr. Moody worked as an
independent restaurant consultant from1996 to 1998, giving him first-hand
experience in operations of business ventures.
Riaz Mamdani, Director
Mr. Mamdani, age 32, has been a director of eSupplies since November 1999. Mr
Mamdani has also been Chief Financial Officer of JAWS Technologies Inc.
(NASDAQ:JAWZ) since July 1999. Previously, he was their Director of Corporate
Finance from March 1999 to July 1999. Mr. Mamdani is responsible for the
development of operational financing including securities issuances, the
documentation needed to close these issuances, establishing and implementing
professional relationships and assisting in matters of corporate compliance as
well as company structure. From May 1996 to August 1998, Mr. Mamdani was
Barrister and Solicitor with Beaumont Church, a Calgary-based law firm, where
his practice focused in the areas of Corporate, Commercial and Securities law.
From May 1992 to April 1996, he was a Pharmacist at the Foothills Hospital in
Calgary while attending law school at the University of Calgary, from September
1993 to May 1996. Mr. Mamdani graduated with a Bachelor of Law degree from the
University of Manitoba with a Bachelor of Science degree in Pharmacy in 1992.
Employees
As of July 15, 2000, eSupplies had 45 employees.
20
<PAGE>
Offices
eSupplies' offices are located at 2340 Pegasus Way, N.E. Suite 123,
Calgary, AB, T2E 8M5. eSupplies occupies 12,000 square foot at this location and
pays an annual rent of $96,000, plus condominium fees of CDN$30,636.
Capital
The authorized capital consists of an unlimited number of Class "A" Common
Voting Shares. There are 3,550,000 issued and outstanding shares. Pursuant to
the Agreement, the Company will purchase 962,500 Class "A" Common Voting Shares,
representing 27.1% of eSupplies' outstanding Class "A" Shares.
Principal Holders. The following table sets out all of the shareholders of
eSupplies as of July 31, 2000.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Name Class # of Shares Capitalization
US $
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Striker Capital Ltd. Class "A" 1,062,500 $ 4,250
---------------------------------------------------------------------------------------------------
Cameron Chell Class "A" 962,500 3,850
---------------------------------------------------------------------------------------------------
Riaz Mamdani Class "A" 350,000 1,400
---------------------------------------------------------------------------------------------------
Robert E. Burpee Class "A" 125,000 500
---------------------------------------------------------------------------------------------------
VC Advantage Limited Partnership Class "A" 416,667 2,500,000
---------------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited Class "A" 600,000 3,600,000
---------------------------------------------------------------------------------------------------
Zeus Capital Corp. Class "A" 33,333 200,000
---------------------------------------------------------------------------------------------------
SUB-TOTAL: 3,550,000 $ 6,310,000
---------------------------------------------------------------------------------------------------
</TABLE>
Options/Warrants/Rights to Acquire Stock
The following table sets out the outstanding options:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Name Price Total Options Vesting
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chell.com Ltd. 7.00 500,000 Nov.1/2000 Nov.1/2001 Nov.1/2002
166,666 166,666 166,667
-----------------------------------------------------------------------------------------------------------------
Bob Burpee Nov.1/2001 Nov.1/200 Nov.1/2002
7.00 155,000 55,000 50,000 50,000
-----------------------------------------------------------------------------------------------------------------
Lawrence Lee 7.00 75,000 Nov.1/2000 Nov.1/2001 Nov.1/2002
25,000 25,000 25,000
-----------------------------------------------------------------------------------------------------------------
Larry Putnam 7.00 75,000 Nov.1/2000 Nov.1/2001 Nov.1/2002
25,000 25,000 25,000
-----------------------------------------------------------------------------------------------------------------
Karl Sigerist Jr. 7.00 75,000 Nov.1/2000 Nov.1/2001 Nov.1/2002
25,000 27,000 25,000
-----------------------------------------------------------------------------------------------------------------
Employee Base 620,000
Unallocated
-----------------------------------------------------------------------------------------------------------------
Board Unallocated 470,000
-----------
-----------------------------------------------------------------------------------------------------------------
Sub-Total 1,970,000
-----------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Pursuant to the terms of a convertible loan agreement VC Advantage Limited
Partnership is entitled to convert its debt into common stock at $6.00/share.
See "Material Contracts of eSupplies".
The following table sets out the outstanding warrants entitling holders to
purchase common shares as of July, 2000:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Name Price # of Warrants Expiry Date
US $
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VC Advantage Limited Partnership $7.00 85,000 May 24, 2003
--------------------------------------------------------------------------------------------
VC Advantage Limited Partnership $7.00 42,500 May 24, 2003
--------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited $7.00 120,000 May 24, 2003
--------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited $7.00 60,000 May 24, 2003
--------------------------------------------------------------------------------------------
Zeus Capital Ltd. $7.00 6,000 May 24, 2003
--------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited $7.00 3,000 May 24, 2003
--------------------------------------------------------------------------------------------
VC Advantage Limited Partnership $7.00 85,000 May 24, 2003
--------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited $7.00 85,000 May 24, 2003
--------------------------------------------------------------------------------------------
Chell.Com Ltd. $7.00 85,000 May 24, 2003
--------
--------------------------------------------------------------------------------------------
SUB-TOTAL: 571,500
--------------------------------------------------------------------------------------------
</TABLE>
In addition, eSupplies is negotiating a web site development agreement with
Critical Mass Inc., which, based on meeting certain performance standards can
result in the issuance of 175,000 Class A Voting shares to Critical Mass Inc.,
75,000 options to Critical Mass and 9,200 shares to Bob Burpee as a result of an
anti-dilution term in his employment contract.
Assuming the Critical Mass agreement is completed, on a fully diluted basis,
there will be 9,707,843 Class "A" Shares.
Material Contracts
eSupplies has entered into the following material contracts:
1. Escrow Agreement. The escrow agreement is between Cameron Chell, Striker
Capital Ltd., Riaz Mamdani and Robert Burpee dated February 8, 2000 as amended
on May 24, 2000.
It provides that "Shares" shall mean the shares of eSupplies held by each
shareholder, as set out in the schedule below, together with the Exchangeable
Shares issued to any particular shareholder in exchange for the shares in
eSupplies and/or the Pubco Shares (as defined in the Escrow Agreement) issued to
any particular Shareholder in exchange for the Shares or Exchangeable Shares and
any additional shares issued by way of a dividend paid in shares which accrues
to the Shares, and the certificate or certificates representing such Shares.
22
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Name Total Number of Shares Release #1 - Release #2 - Release #3 -
---- ------------ ------------ ------------
6 Months After Qualifying 12 Months After Qualifying 24 Months After Qualifying
Offer* Offer* Offer*
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert E. Burpee 125,000 31,250 31,250 62,500
-----------------------------------------------------------------------------------------------------------------------------------
Striker Capital Ltd. 1,062,500 265,625 265,625 531,250
-----------------------------------------------------------------------------------------------------------------------------------
Cameron Chell 962,500 240,625 240,625 481,250
-----------------------------------------------------------------------------------------------------------------------------------
Riaz Mamdani 350,000 87,500 87,500 175,000
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal: 2,500,000
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*"Qualifying Offer" is defined below.
Each Shareholder placed and deposited in escrow with the Escrow Agent the
Shares of eSupplies.
The parties agreed that the Shares and the beneficial ownership or any
interest in them shall not be sold, assigned, hypothecated, alienated, released
from escrow, transferred within escrow, or otherwise in any manner dealt with,
without the express consent in writing of Chell and Mark Valentine (and/or a
representative of VC Advantage Limited Partnership other than Chell) and upon
notice to the other Shareholders being first given, except as may be required by
reason of the death or bankruptcy of any Shareholder, in which case the Escrow
Agent shall hold the Shares subject to this Agreement, for whatever person,
firm, or corporation shall be legally entitled to be or become the registered
owner thereof. If any concession or compromise is made to one Shareholder, then
all of the other Shareholders shall be entitled to the same treatment.
A Qualifying Offer shall be an offer:
(a) made by eSupplies.com Inc. (or its corporate successor) and/or its
wholly owned subsidiary or such other person as it may designate in
writing;
(b) made by securities exchange takeover bid circular, share purchase
agreement or other form of business combination (acceptable to VC
Advantage Limited Partnership), to all of the holders of Class "A"
shares of eSupplies (other than US residents unless permitted by US
securities laws) and all holders of options to acquire Class "A"
shares of eSupplies (other than US residents unless permitted by US
securities laws);
(c) made on or before November 30, 2000 and closing on or before
November 30, 2000; and
(d) having the following provisions:
(i) the consideration to be received by each holder of a eSupplies
Class "A" share shall be $6.00 per share;
(ii) the consideration of eSupplies.com Inc. (or its corporate
successor) and/or its wholly owned subsidiary shall be either:
(A) the issuance of one (1) eSupplies.com Inc. (or its
corporate successor) common share; or
23
<PAGE>
(B) the issuance of one (1) eSupplies Exchangeable Share (or
wholly owned subsidiary exchangeable share) which may be
converted into one (1) eSupplies.com Inc. (or its
corporate successor) common share at any time within
four years of the eSupplies.com Inc. Closing Date and
which shall be automatically converted on the fourth
anniversary of the eSupplies Closing Date;
(iii) the consideration to be received by each holder of a eSupplies
option to acquire eSupplies Class "A" shares shall be the
receipt of a eSupplies.com Inc. (or its corporate successor)
option to acquire an eSupplies.com Inc. (or its successor)
common share for the same exercise price and under the same
terms and conditions as set out in any agreement between the
option holder and eSupplies.
The parties agreed that any Qualifying Offer will include and be subject
to customary conditions appropriate in the context. The date upon which
eSupplies.com Inc. accepts the tendered common shares under the Qualifying
Offer shall be referred to as the "Closing Date".
2. Loan Agreement with VC Advantage Limited Partnership. By agreement dated May
24, 2000, VC Advantage Limited Partnership agreed to establish a non-revolving
term loan (the "Loan") to eSupplies in the principal amount of up to Six Million
Dollars in the currency of the United States of America ($ 6,000,000). The sum
of $2,500,000 was advanced on May 24, 2000. The loan is repayable 390 days from
May 24, 2000. VC Advantage Limited Partnership is not obliged to advance any
funds and/or if certain funds are advanced to continue to advance funds to the
maximum of $6,000,000. eSupplies is obliged to pay interest to the Lender on the
outstanding and unpaid principal amount of the Loan at the rate of ten percent
(10%) per year, calculated on the basis of a year of 360 days based on the
actual number of days elapsed. Interest shall be payable upon any prepayment of
principal and at maturity, at the Lender's Principal Office. Any payments
received shall be applied first to interest and then to principal. As additional
consideration for the Loan, eSupplies shall issue the following Warrants:
(a) Issue warrants to the principals for whom the Lender is acting as
agent or the Lender (the "Lender's Warrants") to purchase up to
85,000 Class "A" shares (pro-rata to the advances on the Loan being
14 3/18 warrants for each $1,000 loaned) of eSupplies. The Lender's
Warrants shall be valid for a period of 3 years from the Closing
Date. The exercise price of the Lender's Warrants (the "Lender's
Warrant Exercise Price") will be $7.00 per share. eSupplies shall
have a right to cause mandatory call for the exercise of the
Lender's Warrants after the first anniversary of the Closing Date if
the average share price of eSupplies on any Canadian or US exchange
or The National Association of Securities Dealers Over-the-Counter
Bulletin Board ("OTC-BB") (or other electronic quotation system) for
30 consecutive trading days exceeds $9.00 per share. The holders of
the Lender's Warrants shall have 30 consecutive trading days to
exercise their warrants if called;
(b) Issue warrants to Thomson Kernaghan & Co. Limited, as agent, (the
"Agents' Warrants") to purchase up to 85,000 Class "A" shares (pro
rata to the advances on the Loan being 14 3/18 warrants for each
$1,000 loaned) of eSupplies. The Agents' Warrants shall be valid for
a period of 3 years from the Closing Date. The exercise price of the
Agents' Warrants (the "Agent Warrant Exercise Price") will be $7.00
per share. eSupplies shall have the right to cause mandatory call
for the exercise of the Agents' Warrant after the first anniversary
of the Closing Date if the average share price of eSupplies on any
Canadian or US exchange or OTC-BB (or other electronic quotation
system) for 30 consecutive trading days exceeds $9.00 per share. The
holders shall have 30 consecutive trading
24
<PAGE>
days to exercise their warrants if called; and
(c) Issue warrants to Chell.com Ltd., as advisor and consultant, (the
"Chell.com Warrants") to purchase up to 85,000 Class "A" shares (pro
rata to the advances on the Loan being 14 3/18 warrants for each
$1,000 loaned) of eSupplies. The Chell.com Warrants shall be valid
for a period of 3 years from the Closing Date. The exercise price of
the Chell.com Warrants (the "Chell.com Warrant Exercise Price") will
be $7.00 per share. eSupplies shall have the right to cause
mandatory call for the exercise of the Chell.com Warrant after the
first anniversary of the Closing Date if the average share price of
eSupplies on any Canadian or US exchange or OTC-BB (or other
electronic quotation system) for 30 consecutive trading days exceeds
$9.00 per share. The holders shall have 30 consecutive trading days
to exercise their warrants if called.
eSupplies was required to pay a fee equal to eight (8%) percent of the
gross amounts advanced under each draw to the Lender on the date of each such
advance. The fee shall be deducted from the advance. eSupplies acknowledges that
such fee shall be fully earned on the date of such draw and the fee shall be
non-refundable.
The Lender shall be granted the option, exercisable at any time and from
time to time prior to the Maturity Date as so extended, to convert, at the
eSupplies Conversion Rate (or eSupplies USA Conversion Rate), indebtedness
outstanding hereunder, in whole or in part, into fully paid and non-assessable
Class "A" shares of eSupplies (or common shares of eSupplies USA). The Lender
shall exercise such option by providing eSupplies/eSupplies USA with written
notice of such conversion and the calculation of the Current Market Price shall
be for a period of 10 consecutive trading days ending not more than three
trading days before such notice. As soon as practicable after receipt of such
notice, eSupplies/eSupplies USA shall issue, or cause to be issued, and deliver,
or cause to be delivered, to the Lender, a certificate for the number of Class
"A" shares of eSupplies (or common shares of eSupplies USA) deliverable upon
such conversion.
If eSupplies does not repay the Indebtedness due pursuant to this
Agreement on the Maturity Date, eSupplies shall issue on the first date of each
month after the Maturity Date warrants to purchase Class "A" of eSupplies ("Late
Payment Warrants") enabling the Lender to purchase an addition 2,500 Class "A"
shares of eSupplies for each $500,000 of Indebtedness outstanding. The Late
Payment Warrants shall be valid for a period of 3 years from the Maturity Date.
The exercise price shall be $7.00 per share during year 1 and year 2 and
$8.00/share in year 3. eSupplies shall have a right to cause mandatory call for
the exercise of the Late Payment Warrants after the first anniversary of the
Maturity Date if the average share price of eSupplies on any Canadian or US
exchange or OTC-BB (or other electronic quotation system) for 30 consecutive
trading days exceeds $9.00 per share, provided however when combined with other
terms of compensation the interest rate shall not exceed federal or provincial
usery rates. The holders of the Late Payment Warrants shall have 30 consecutive
trading days to exercise their warrants if called.
eSupplies (Alberta) Ltd. also covenanted to go public in the US on or
before November 30, 2000 through an initial public offering or by reverse
takeover of an existing public company. eSupplies (Alberta) Ltd. also undertook
to provide registration rights to VC Advantage Limited Partnership on terms
similar to those provided by cMeRun if the offeror under the reverse takeover
offeror was a public corporation or terms similar to enygro if the reverse
takeover offeror was not public corporation.
3. Warrant Agreement. There are 9 separate warrant agreements between eSupplies,
VC Advantage Limited Partnership, Thomson Kernaghan & Co. Limited, Chell.com
Ltd., and Zeus Capital Corp.(the
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"Warrant Agreements") The exercise price is $7.00/sharen (the "Exercise Price")
and the expiry date is May 24, 2003. The warrants contain anti-dilution
provisions. The Exercise may be adjusted if there are issuances of Additional
Shares of Common Stock if the consideration per share for an Additional Share of
Common Stock Price (as defined in the Warrant Agreement) issued or deemed to be
issued by eSupplies is less than the Exercise Price for such Warrant Shares in
effect on the date of, and immediately prior to such issue, for each Warrant
Share. In the event eSupplies issues Options or Convertible Securities Price (as
defined in the Warrant Agreement) then the maximum number of issuable shares be
deemed to have been issued, provided upon the expiration or price increase of
such Options or Convertible Securities over time would reduce the adjustment.
The Exercise Price shall be reduced, concurrently with such issuance with
respect to the Warrant Shares, to a price determined by multiplying the Exercise
by a fraction (x) the numerator of which shall be the sum of (1) the number of
shares of Common Shares outstanding immediately prior to such issuance, plus the
number of shares of Common Shares which the aggregate consideration received by
the Company for the total number of Additional Shares of Common Shares so issued
would purchase at such Exercise Price and (y) the denominator of which shall be
(1) the number of shares of Common Shares outstanding immediately prior to such
issuance plus (2) the number of such additional shares of Common Shares so
issued.
4. A web services development agreement with Critical Mass Inc. for the
development of eSupplies Web Site. Although Critical Mass started work on the
web site in May, a formal agreement has not yet been executed. Critical Mass
has, in addition to discounted fees earned on the services, been promised,
provided that certain performance standards are met, that:
(a) eSupplies shall issue 175,000 Class "A" shares from treasury
released over time based on performance standards, the amount, date
of release and standards of which have not yet been agreed to;
(b) options to purchase 75,000 Class "A" shares at $7.00 for 30 months
the vesting periods of which have not yet been agreed to;
(c) subject to escrow release;
(d) subject to lockup agreement; and
(e) if the web site is completed, eSupplies will issue to Bob Burpee
9,200 shares at nominal consideration as an anti-dilution
equalization payment;
5. eSupplies occupies leased premises at 2340 Pegasus Way, N.E. Suite 123,
Calgary, AB, T2E 8M5. eSupplies occupies 12,000 sq ft at this location and pays
an annual rent of CDN$ 96,000 plus condominium fees of CDN$30,636. The landlord
is Bankton Development Corp.
6. Service Agreement with Chell.com dated February 8, 2000 for the provision of
strategic advice with respect to financing, public relations, corporate
structure, technology, human resources and other services typically required by
start-up ventures. The agreement calls for fees of $720,000. The fee has been
paid in full.
Conflicts/ Interest of Management in Material Contracts/Indebtedness of
Management
Cameron Chell, who is Chairman of the Board of eSupplies, is also is a
director and shareholder of VC Advantage Limited the general partner of VC
Advantage Limited Partnership which will earn fees on loans and equity
financings made to eSupplies. Chell is also the sole shareholder of Chell.com,
which
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has earned fees with respect to the Service Agreement. He is also is a minority
shareholder of Bankton Development Corp., landlord of eSupplies and holds a
16.67% interest in the company. Chell.com holds warrants identified above on
pages 22-26.
Lawsuits
The management of eSupplies is not aware of any existing litigation nor
are they aware of any threat of litigation.
Auditors
eSupplies is a start-up company, and has not yet completed its first year
of operation, it has not yet appointed auditors.
Financial Statements
According to an unaudited financial statement of eSupplies, attached as
Exhibit "E", as of May 31, 2000, eSupplies total assets were valued at
CDN$7,966,401, total liabilities and stockholders' equity was CDN$7,966,401.
Gross profits year to date as of May 31, 2000 were CDN$174,849, operating
expenses were CDN$1,727,336, resulting in an operating loss of CDN$1,552,487.
Interest income was CDN$11,466 and financing costs were CDN$286,576, resulting
in a net loss of CDN$1,827,597.
Management Discussion of Operating Results
Management of eSupplies advised that the acquired revenues from the purchase of
the Willson assets are disappointing. The customer base from the acquisition
largely did not move over to eSupplies. Since April 1, 2000, management has
refocused the sales group's efforts on the acquisition and retention of new
customers. For the month of May 2000, 89 new accounts have been opened compared
with the 36 opened in April. New customers now account for 25 percent of the
company's business. These numbers should improve as the sales force gains
experience and is provided with additional automated sales tools. As anticipated
the gross margin is around the 30% mark. This is consistent with discussions
with United Stationers and the past experience with Willson. Management
anticipates that this margin will hold firm in future months.
Specific Risk Factors
1. Key Personnel
eSupplies is substantially dependent for a significant part on the
continued services of its key technical, sales and senior management personnel.
Losing one or more of these individuals could have a material adverse effect on
its business, results of operations and financial condition. eSupplies intends
to enter into employment agreements with each of its key employees in the
future. The terms of these employment agreements are subject to negotiation.
There can be no assurance that the employment agreements will be entered into
upon acceptable terms.
2. Additional Financing
eSupplies will need additional financing to meet its capital requirements.
If eSupplies requires additional funds, it shall be dependent upon sources such
as:
27
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o future earnings.
o the availability of funds from private sources, including, but
not limited to, our shareholders, loans and additional private
placements, and
o the availability of funds from public sources including, but
not limited, an initial public offering of our securities.
Market conditions for private and public offerings are subject to
uncertainty and there can be no assurance when or whether a private and/or
public offering shall be successfully completed or that other funds shall be
made available to us. In view of eSupplies lack of operating history, their
ability to obtain additional funds is limited. Such financing may only be
available, if at all, upon terms which may not be advantageous to us. If
adequate funds are not available from operations or additional sources of
financing, our business shall be materially adversely affected and the company
may not be able to continue operations or develop its business plan. In
addition, there is no assurance that eSupplies will be successful in its plans
to go public.
3. Competition
eSupplies is seeking to enter a market that is very competitive. eSupplies
faces strong competition from established and more well known companies such as
Office Depot, Staples and OfficeMax. The company will have to implement a
marketing strategy and public relations campaigns to differentiate the Company
from its competition and establish itself in this market. E supplies faces the
possibility that a better capitalized company may go after the eSupplies market.
4. Third Parties
eSupplies relies upon third parties for a supply of products and for
delivery to customers. eSupplies heavily relies on United Stationers as its
office supplier and Canadian Freightways as its courier company to deliver
packages to customers. Many of the business plans of eSupplies may not be
achieved without formal support from United Stationery and significant power may
rest with United Stationers, enabling it to dictate the terms of the
relationship with eSupplies.
5. Minority Shareholder
The Company is acquiring 27.1% of eSupplies outstanding shares, which is
only a minority interest in eSupplies. The Company will not have control or the
right to control the management and business activities of eSupplies.
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C ME RUN CORP.
C Me Run which is listed on the NASD OTC Bulletin Board (symbol:CMER), is
an Internet computing company that enables Internet Service Providers (ISPs) and
Web Portals to provide their customers with full use of brand-name software
titles (like Microsoft Works(C) and Money(C)) from any web browser. C Me Run is
an emerging company in the Application Service Provision ("ASP") industry.
C Me Run handles both back-end distribution and manages the delivery
systems required to provide application access to customers. C Me Run's core
competency is the design, building and maintenance of server-based computing
systems.
C Me Run's service offerings are built on a foundation of both
server-based computing technologies and cutting-edge hardware and software
solutions. C Me Run deploys high-end application server clusters, high-capacity
remote storage devices, high-speed routers and hubs, and secure, high-speed
access to more than 145 public and private Internet access points.
C Me Run (a development stage company) began as a Florida corporation,
known as Fundae Corp., formed with the contemplated purpose to sell chocolate
malts, flavoring and related products. The business concept and plan was based
upon information obtained by the incorporator several years before while working
for an unrelated company with the same concept and business plan. The
incorporator and sole shareholder was unable to obtain the cooperation and
assistance of workers and investors to implement the proposed plan. After
development of a business plan and efforts to develop the business failed, all
efforts were abandoned in 1996. In January 1999, Fundae Corp. became a
"reporting issuer" in the United States with express purpose was to locate and
consummate a merger or acquisition with a private entity. On December 2, 1999,
it entered into a series of transactions with respect to completing the
acquisition of C Me Run Corp., a private Delaware corporation and C Me Run
(Alberta) Ltd. On December 2, 1999, it was listed for trading on the OTC-BB
under the symbol FNDE. On December 2, 1999, it changed its name to cmerun, inc.,
and its trading symbol was changed to CMER. On December 29, 1999, cmerun, inc.
merged with its wholly owned subsidiary, Fundae Acquisition Corp., a Delaware
corporation, which merger served to re-incorporate in Delaware. Following the
merger, the corporate name became Fundae Acquisition Corp. and its common shares
continued to trade on the OTC-BB as CMER. On January 31, 2000, a wholly owned
subsidiary of Fundae Acquisition Corp., Fundae Merger Sub Inc., a Delaware
corporation, merged with C Me Run Corp., a Delaware corporation, the corporation
that had agreed to acquire the common shares of C Me Run (Alberta) Ltd.
resulting the creation of a new wholly owned subsidiary of Fundae Acquisition
Corp., also called C Me Run Corp. On January 31, 2000, Fundae Acquisition Corp.
merged with its wholly owned subsidiary, C Me Run Corp., to form C Me Run Corp.
C Me Run Corp., the surviving entity, continued to be traded on the OTC-BB under
the symbol CMER. The surviving entity became obliged to acquire the shares of C
Me Run (Alberta) Ltd.
C Me Run Corp. incorporated a wholly owned subsidiary, 856592 Alberta Ltd.
on December 2, 1999 for effecting the acquisition of C Me Run (Alberta) Ltd. On
January 24, 2000, 856592 Alberta Ltd. changed its name to C Me Run Acquisition
Corp. ("CAC"). C Me Run, directly or indirectly through CAC, has made an offer
to acquire all of the shares of C Me Run (Alberta) Ltd. on the basis of either:
(a) one C Me Run Common Share for each C Me Run (Alberta) Ltd. Common
Share; or
(b) one C Me Run Acquisition Corp. Exchangeable Share for each C Me Run
(Alberta) Ltd. common share and either:
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(i) one C Me Run option to purchase C Me Run Common Shares for
each C Me Run (Alberta) Ltd. option to purchase C Me Run
(Alberta) Ltd. common share; or
(ii) one CAC option for each C Me Run (Alberta) Ltd. option.
The CAC Exchangeable Shares could be converted into C Me Run Common
Shares.
The holders of CAC Exchangeable Shares will be entitled to dividends and
other economic rights equivalent to those of shares of C Me Run Common stock and
will be entitled through a voting trust to vote at meetings of the shareholders
of C Me Run. The CAC Exchangeable Shares are designed to provide an opportunity
for holders of C Me Run Alberta shares and C Me Run Alberta options to achieve a
Canadian tax deferral in certain circumstances. C Me Run will create a special
preferred share and enter into a support agreement and a voting trust and
exchange agreement which, in combination with the CAC Exchangeable Share terms,
will provide the exchange mechanism. All exchangeable shares must be exchanged
within 4 years. Lockup agreements are in place and therefore it is anticipated
that the transaction will close. If C Me Run/CAC takes up and pays for
securities validly deposited under the Offer and acquires not less than 90% of
the issued and outstanding securities of any class which is the subject of the
Offer, CAC/C Me Run intends, to the extent possible, to acquire the remaining
securities of any such class pursuant to the compulsory acquisition provisions
of the Alberta Business Corporations Act. If CAC/C Me Run takes up and pays for
securities validly deposited under the Offer and acquires less than such number
thereof or the compulsory acquisition provisions of the Alberta Business
Corporations Act are otherwise unavailable, CAC/C Me Run intends to consider
other means of acquiring, directly or indirectly, all of the outstanding C Me
Run Alberta Securities available in accordance with applicable law, including a
subsequent acquisition transaction. If the conditions precedent are satisfied,
subject to the exercise of certain options, CAC/C Me Run will own sufficient C
Me Run (Alberta) Ltd. securities to effect such subsequent acquisition
transaction.
Plan
C Me Run intends to operate the business concept being acquired from C Me
Run (Alberta) Ltd. through C Me Run. Its mission is to become known as "The
Internet Computing Company" which will enable consumers to access brand-name
software applications via a secured Web browser from their favorite Internet
portal or Internet Service Provider (ISP).
C Me Run plans to enable consumer ISP's, which currently specialize in
providing Internet access to their customers, to become consumer Application
Service Providers (ASPs). An ASP, according to the ASP Industry Consortium,
manages and delivers software applications to customers from data centers across
a wide-area network. An ASP may be a commercial entity, providing a paid service
to customers or, conversely, a not-for-profit or government organization
supporting end users. C Me Run is the ASP engine that enables ISP's to increase
the value of their offering to their consumer customer base.
Market Facts and Trends
Market Trends
o Internet Service Providers (ISP's) and Internet portals are being forced
to continually innovate and add functionality in order to acquire new
subscribers and stay competitive.
o The rise of the under $500 computer and alternative "thin client" personal
computing devices (without hard drives or floppy drives) is opening new
markets, and
o The increase in availability of high-speed network solutions will pave the
way for more sophisticated, convergent products and services.
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Social Themes
o As the Internet approaches critical mass, there is the potential for a new
class distinction between those who are connected, and those who are not.
o The increasing complexities of personal computing systems require an
aptitude and an investment in time and energy that many are unwilling or
unable to give.
Market Statistics
o International Data Corp. (IDC) Estimates that in the US market alone, 65
million households will be online by 2003. Of those, nearly 21 million
will be accessing the Internet with a broad band connection.The
application rental (application hosting) market brought in an estimated
$90 million in revenue in 1998, and is expected to reach $6.4 billion by
2001;(1)
o Shop.org estimates that Internet-only retailers spend an average of $42 in
marketing costs to attract a single new shopper.(2)(3)
o Forrester Research estimates that the ASP market, which now comprises just
2 per cent of all software application sales, will grow to $11 billion by
2003.(3) (4)
Direct Target Market
C Me Run's primary direct target market consists of consumer-oriented Internet
Service Providers (ISP's) and Internet portal sites. C Me Run's secondary direct
target market is manufacturers and marketers of Internet appliances and
(television) set-top boxes.
The direct target market includes the following types of companies:
o Pure ISP's and portals.
o Telecommunications and other companies with a major ISP focus.
o Traditional computer hardware manufacturers with a major focus on Internet
appliances and "thin client devices", and
o New entrants into the Internet appliance marketing market.
Indirect Target Market
C Me Run's indirect target consists of consumers who make personal use of
consumer applications. This includes:
o Consumers and/or the Small Office/Home Office ("SOHO") users. This
population wants to be able to access the latest software applications
without the hassle of constantly upgrading their hardware or software
requirements and/or maintaining their system;
o Individuals who have Internet-capable "thin clients", ranging from
hand-held devices to set-top devices, with a need to access applications
and content to expand the capabilities of their devices; and
--------
(1) "Rent Parties -- Service providers find rental apps an inviting
proposition", Tele.com, CMP Media Inc., January 25, 1999.
(3) Small firms balk at software hosting services, CNET News.com, November 29,
1999
(4) "Cyber merchants swap money for eyeballs" Inter@ctive week, November 16,
1999
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o People who travel extensively and would like the ability to access their
applications and files from anywhere and anytime they have access to the
Internet.
Product Offerings
C Me Run intends to act as both a subscription software distributor and a
technical services company. It will specialize in the design, deployment and
management of back-end solutions for Internet ISP's, portals and
telecommunication companies. The company has developed a solid infrastructure
design and provides a flexible licensing framework that enables channel partners
(ISP's) to offer applications and personal file storage services to their
consumer subscribers, the end-users of C Me Run's services.
C Me Run intends to offer the following services:
1. Co-branded Internet Computing Service - C Me Run's primary service offering
is the deployment of the Internet-based, web-accessed computing platform that
channel partners license, co-brand and market to their customers as an
integrated component of their Internet computing product and/or service.
o Channel partners can choose the application packages they wish to offer
their consumers. Subscriptions will automatically include upgrades to
future versions.
o Each time the end user wants access to the system they simply go to the
partner's home page and log in. The system can recall the users personal
settings and provide access to his/her files through a simple icon or link
on their start page. Clicking the link automatically launches the
application as an embedded element of the page or in a new browser window.
o The channel partner has the opportunity to present the interface to their
customers with maximum flexibility. They can create an experience whereby
a user can modify the appearance of their "desktop" (e.g., change colors,
change background, show personal pictures, remove/add features to their
"home page").
o Web and email-based customer support is included.
o C Me Run provides 25 MB of storage per user for basic file storage
(additional storage available for an incremental fee).
o 128-bit encryption (Secure Socket Layer - SSL) is included at no extra
charge.
o For the end user, the C Me Run will provide a free Web-based help desk and
email customer support service related to the C Me Run offering. Telephone
end user support is normally provided via the ISP's existing help desk. C
Me Run in turn provides service specific telephone support to key ISP
technical staff.
2. C Me Run USA Professional Services - C Me Run's professional services
division intends to provide, for a fee, consulting to channel partners to aid in
the planning, deployment and ongoing integration of our co-branded offerings.
The amount of consultation and customization will vary among partners.
Revenue Opportunities
The Company expects to generate revenue through multiple sources:
o Through per-user per-month software licensing fees paid to C Me Run by its
channel partners (ISP's, etc.)
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o Through monthly management and licensing service fees paid to C Me Run by
its channel partners.
o Through professional services fees paid to C Me Run by its channel
partners.
o As C Me Run increases its end-user subscriber base (over 100,000
end-users), the company anticipates the potential to charge an agency fee
from e-commerce and advertising programs generated through
hits/impressions related to the delivery of the Internet computing
services.
Service Benefits
End users of C Me Run's service will receive the following benefits:
o Using a C Me Run channel partner gives them the chance to pay for as many
or as few applications of the service as they want, for only as long as
they want them.
o There is no need to pay upgrade fees for new software versions or computer
components in order to run the latest version of software. The
applications run on C Me Run's servers instead of on the user's hard
drive.
o They can access their personal desktop, files, and applications anywhere,
anytime, and on almost any Internet-capable device, regardless of the
platform.
o They no longer need to make the initial $1500-$3500 investment in a new
computer that will be obsolete in 18 months in order to access the latest
and greatest applications.
o They do not need to have the aptitude or the expertise to manage system
updates or handle day-to-day maintenance to their computer system to
access new software applications.
The Web Portals, ASPs, ISPs and other C Me Run channel partners would benefit
by:
o Increasing the "stickiness" of their Web sites (i.e., the length of time a
visitor will spend viewing their content and it's advertising elements).
o Differentiating themselves from their competition.
o Increasing customer loyalty and attracting new subscribers with exciting
content that adds value to a customer's Internet experience.
o Capturing valuable new marketing intelligence from end customers, (in
particular, their work habits, preferred applications, etc.), to increase
the effectiveness and therefore the value of their site's targeted
advertising.
Software developers/vendors would benefit from this service by:
o Gaining a more reliable revenue stream.
o Reducing the investment in personnel and infrastructure required to
support legacy versions of software as their installed base slowly adopts
new versions of their product.
o Increasing their market potential through cross-platform expansion without
re-writing software code.
o Increasing customer loyalty as a result of the best possible deployment of
their products under the management of C Me Run personnel.
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o Capturing valuable information about how their products are used, and
who's using them, to better design subsequent releases.
o Effectively eliminating piracy of software products by end consumers. C Me
Run subscribers never download the software, so it cannot be copied and
distributed illegally.
High-speed Internet Access Providers (DSL or Cable Modem) would benefit from C
Me Run services by:
o Driving demand for their high-speed and premium priced connectivity
services, since the applications delivered perform best over high-speed
connections.
o Expanding the market for Internet usage and broadband access to people who
previously couldn't afford computers.
Manufacturers of Internet-enabled devices would benefit from C Me Run's service
by:
o Gaining access to a new distribution channel for their products.
o Increasing product demand created from the additional C Me Run service
content available through their devices.
C Me Run Strategic Advantages
o Industry Experience - The founders of C Me Run Alberta, who will be
employed or act as consultants to C Me Run, all have extensive experience
in the ASP industry, and bring a depth of management experience in
telecommunications, hosting, computer hardware, consumer applications
software and professional services.
o Speed to Market - C Me Run is one of the first companies to provide
brand-name consumer-based software to ISP's and Internet portal companies.
o Original Equipment Manufacturer (OEM) Neutral - C Me Run works with its
channel partners to provide customized interfaces, which partners can then
market and sell to their end users under their own well-known and trusted
brands.
o Security - C Me Run provides security for ISP's and consumers, through a
regime that utilizes 128-bit encryption secure socket layer (SSL) and
bastion server technology.
o Business Model - C Me Run leverages the existing consumer portals in order
to gain market penetration without incurring the expense of developing a
new Internet portal.
Marketing, Advertising & Promotion
C Me Run has a combined push and pull marketing and promotion strategy.
Push marketing - Through a North American campaign consisting of public
relations, symposium and trade show participation and sponsorship, and
advertising, C Me Run intends to create awareness of its brand and services to
its direct market: ISP's and Internet portal companies which are potential
channel partners.
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Pull marketing - C Me Run intends to sponsor cooperative advertising campaigns
with channel partners to promote Internet computing products and services. These
campaigns should help create consumer market awareness of its brand, similar to
the manner in which Intel created its "Intel inside" campaign to heighten brand
awareness both of its components and the brand of its partners.
Product Development Schedule
Proof of Concept (Alpha) - December 1999 - January 2000
The alpha test was a proof of concept demonstration of an application running
via the Internet, providing storage on a remote server and generating statistics
on a per-user basis. The software package Microsoft Office(TM) was made
available to Windows-only Web-based clients. A static HTML page with no
customizability options was presented to the end users.
Development: January 2000 - April 2000
This phase included the procurement, setup and configuration of hardware, the
installation and configuration of the development servers and documentation of
policies, procedures and standards that is used to establish the development
environment. It also included the development of the back-end software, Web site
design and integration accounting systems.
Beta: February 2000 - May 2000
Beta users were given access to a limited set of consumer applications hosted on
www.cmerun.com. In addition, focus groups were exposed to the service. This
phase tested the performance, functionality, design and overall user experience
of the service and its perceived value in C Me Run's market and included
refinement of the performance, design and functionality elements of the service.
Training: April - May 2000
In the training phase, the design, processes and procedures of the company were
documented and an operating manual was created. Additional technical resources
and customer support staff were recruited and trained on our design, maintenance
and service delivery to prepare for implementation.
Data Center Readiness: June 2000
C Me Run's initial data center in Seattle was supplemented with a second server
farm/data center in Waltham, MA to be able to handle 10,000 users. The data
center is designed to be highly scaleable. All servers will be housed in a
collocation arrangement.
Pilot Phase: July - September 2000
C Me Run plans to design and implement a controlled rollout of its service with
several selected ISP's.
Commercial Phase: September - December 2000
C Me Run plans to be in full-scale production with its initial customers, and in
rollout with one to two new customers per month.
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Competition
C Me Run has narrowed its direct competitors to those focused on enabling
the consumer market to use the Internet as a personal workspace. The following
companies are considered to be direct competitors to C Me Run, in that they have
announced or are already delivering software rental services potentially
targeted at the consumer market. Although these companies have similar business
models, the focus of C Me Run is to be the Internet Computing Company to the
consumer market using a "thin-client" mind set.
<TABLE>
<CAPTION>
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Competitor Offering Distribution Pricing C Me Run Difference
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Personable.com MS Office apps; 10MB Company Website Free access, $7 - $27 for Lower price, more
storage www.personable.com apps, extra storage storage, more apps,
------------------ $1/10MB/mo. Better Security
------------------------------------------------------------------------------------------------------------------------------------
On-line Office MS Office apps; no Company Website $25 + set up More apps, storage
storage www.onlineoffice.net $5 per month for MS
-------------------- Office only
------------------------------------------------------------------------------------------------------------------------------------
Thinkfree.com Proprietary apps; 20MB Company Website Free No Down Loads, Better
storage, additional www.thinkfree.com performance, more
storage if you fill out ----------------- storage, name brand apps
surveys
------------------------------------------------------------------------------------------------------------------------------------
NuoMedia Proprietary apps; 10MB Company Website Free No download, more
storage www.nuomedia.com storage, name brand apps
----------------
------------------------------------------------------------------------------------------------------------------------------------
MyFreeDisk Proprietary apps; 50MB Company Website Free Better performance, name
storage brand apps
------------------------------------------------------------------------------------------------------------------------------------
Yummy Promising 100s of apps, To be determined To be determined Definitive offering,
none avail or named on www.yummy.com real titles
site -------------
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Capital
As of July 19, 2000, C Me Run USA had 50,000,000 shares of Common Stock, $.0001
authorized (the "Common Stock") and 3,001,000 shares of Common Stock issued and
outstanding.
36
<PAGE>
As of July 19, 2000, C Me Run USA had 10,000,000 shares of Preferred Stock,
$.001 par value per share authorized (the "Preferred Stock"). 2,000,000 shares
of the Preferred Stock have been designated as Series A (the "Series A Stock")
all of which are issued and outstanding, and 2,833,333 shares of Preferred Stock
have been designated as Series B (the "Series B Stock"), all of which are issued
and outstanding.
The following is a general description of the material rights, privileges,
restrictions and conditions attaching to each class of shares:
Common Shares of C Me Run
Subject to the provisions of the Delaware General Corporate Law, the holders of
the C Me Run Common Shares are entitled to: (i) one non-cumulative vote for each
share held of record on all matters submitted to a vote of the shareholders of C
Me Run; (ii) participate equally and to receive any and all such dividends as
may be declared by the directors of C Me Run out of funds legally available; and
subject to the rights of the holders of preferred stock (iii) participate pro
rata in any distribution of assets available for distribution upon liquidation
of C Me Run. Shareholders of C Me Run have no pre-emptive rights to acquire
additional C Me Run Common Shares or any other securities. The C Me Run Common
Shares are not subject to redemption and carry no subscription or conversion
rights. All outstanding C Me Run Common Shares are fully paid and
non-assessable.
Preferred Shares of C Me Run
Preferred Shares of C Me Run may be issued from time to time in one or more
series as may be determined by the director's of C Me Run. The voting powers and
preferences, the relative rights of each such series and the qualifications,
limitations and restrictions shall be established by the directors, except that
no holder of Preferred Shares shall have pre-emptive rights. At the present time
the terms, conditions, limitations and preferences attaching to the two Series
of preferred shares are as follows:
(a) Series A Convertible Preferred
The number of authorized shares of Series A Convertible Preferred Stock shall be
2,000,000. The holders of the Series A Convertible Preferred Stock will be
entitled to receive, when, as and if, declared by the Board of Directors, at an
annual dividend rate of 12% of the Preference Value ($0.50 ) per share of Series
A Convertible Preferred Stock per annum, payable in cash or in shares of Common
Stock, at the election of C Me Run or holder, in quarterly instalments on March
31, June 30, September 30 and December 31. Dividends shall be cumulative from
the Preference Date. No dividends shall be declared or paid or set aside for
payment on any class or series of stock of C Me Run ranking, as to dividends, on
a parity with the Series A Convertible Preferred Stock, for any period, unless
full cumulative dividends have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment. No other stock ranking on a parity with the Series A Convertible
Preferred Stock as to dividends or upon liquidation, dissolution or winding up
shall be redeemed, purchased or otherwise acquired for any consideration by C Me
Run unless the cumulative dividends have been paid in full or set aside for
payment. At the election of C Me Run or the holder, any dividend may be made in
lieu of cash, in common stock. The number of shares of common stock payable in a
common stock dividend shall be such number of fully paid and non-assessable
shares of common stock as is determined by dividing (x) the aggregate amount of
such dividends payable with respect to all outstanding shares of Series A
Convertible Stock by (y) seventy-five percent (75%) of the average per share
closing bid price on NASDAQ (or any other securities market on which the common
shares are listed or traded) for the five (5) consecutive trading days ending on
the fifth day prior to the applicable Dividend Payment Date and then dividing
such quotient by (z) the number of shares of Series A Convertible Preferred
Stock
37
<PAGE>
outstanding on the applicable Dividend Payment Date. If the Company elects to
make a Common Stock Dividend, the Company shall deliver at least five (5) days
prior written notice of such election to the holders of the Series A Convertible
Preferred Stock entitled to receive such dividend.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of C Me Run, before any distribution or payment shall
be made to the holders of the Common Stock or any other series or class or
classes of stock of the corporation ranking junior to the Series A Convertible
Preferred Stock, each holder of Series A Convertible Preferred Stock then
outstanding shall be entitled to be paid, in respect of each share of Series A
Convertible Preferred Stock then held, out of the assets of C Me Run available
for distribution to its stockholders an amount in cash equal to the Preference
Value of such share of $0.50. After such distribution, any remaining assets
available for distribution shall be distributed to the holders of shares of
Series A Convertible Preferred Stock and holders of Common Stock pro-rata based
on the total number of shares held by each holder on a fully-converted basis. If
the assets are not sufficient to generate cash sufficient to pay in full the
Series A Convertible Stock Preference value ($0.50) and Series B Convertible
Stock Preference Value ($3.00), then the holders of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock shall be entitled to
share rateably in any distribution of cash generated by assets in accordance
with the respective amounts that would have been payable in such distribution if
the amounts to which the holders of the Series A Stock and Series B Stock are
paid in full.
Except as expressly provided in the following sentence, the holders of Series A
Convertible Preferred Stock shall not have any voting rights except as from time
to time required by law. Except as required by law, the holders of Series A
Convertible Preferred Stock and the holders of common stock shall be entitled to
notice of any stockholders meetings and to vote as a single class upon any
matter submitted to the stockholders for a vote, as follows: (i) each holder of
Series A Convertible Preferred Stock shall have 1 vote for each full share of
Common Stock into which respective shares of Series A Convertible Preferred
Stock would be convertible on the record date for the vote; and (ii) each holder
of common stock will have one vote per share of common stock.
Each Share of Series A Convertible Preferred shall be convertible, at the option
of the holder, at any time prior to the Redemption Date (January 11, 2003) into
such number of fully paid and non-assessable shares of common stock as is
determined by dividing the Preference Value by the Conversion Price ($0.50). Or
alternatively stated: 1 common share for each Series B Preferred Share. The
entire value of the Series A Stock has been allocated to the beneficial
conversion feature based on the difference between the conversion price of $0.50
per share and the estimated fair market value of the common stock at the date
that the Series A Preferred Stock was issued. This amount however was limited to
the value of the proceeds received from issuing the beneficial convertible
security. As the Series A Stock is immediately convertible, C Me Run also
recorded accretion of the entire amount to additional paid in capital. The
Conversion Price may be adjusted for diluting issues. No adjustment in the
Conversion Price will be made in respect of "Additional Shares of Common Stock"
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by C Me Run is less than the Conversion Price
($0.50/share) for such Shares of Series A Convertible Preferred Stock. If C Me
Run issues options or convertible securities, then the maximum number of shares
of common stock issuable upon exercise of such options or convertible securities
shall be deemed to be Additional Shares of Common Stock. If by their terms, the
options and/or convertible securities, increase in price or reduce in numbers,
by expiration or otherwise, the Conversion Price shall be adjusted. In the event
that C Me Run issues or is deemed to issue Additional Shares of Common Stock
without consideration or for consideration less than the Conversion Price of any
shares of Series A Convertible Preferred Stock, then the Conversion Price shall
be reduced, concurrently with such issue with respect to the Series A
Convertible Preferred Stock, to a price determined by multiplying the Conversion
Price by a fraction (x)
38
<PAGE>
the numerator of which shall be the sum of (1) the number of shares of common
stock outstanding immediately prior to such issuance, plus (2) the number of
shares of common stock which the aggregate consideration received by C Me Run
for the total number of Additional Shares of common stock so issued would
purchase at such Conversion Price and (y) the denominator of which shall be (1)
the number of shares of common stock outstanding immediately prior to such
issuance plus (2) the number of such Additional Shares of common stock so
issued. The consideration per share shall be deemed to be $0.01. In the event
that C Me Run shall pay a stock dividend on the common stock, or the outstanding
shares of common stock shall be subdivided; combined or consolidated, by
re-classification, stock split or otherwise, into a grater or lesser number of
common shares, the Conversion Price in effect immediately prior to such
dividend, subdivision, combination or consolidation shall concurrently with the
effectiveness of such dividend, subdivision, combination or consolidation, be
proportionately decreased or increased as appropriate.
If, on or after the Redemption Date, the Series A Convertible Preferred Stock
has not been converted to common stock, C Me Run shall redeem all shares of
Series A Convertible Preferred Stock, out of funds legally available therefore,
at a per share price equal to the Redemption Price $.50. Without the affirmative
vote or consent of the holders of the majority of all outstanding Series A
Convertible Preferred Stock outstanding at the time, the Series A Convertible
Preferred Stock may not be redeemed.
(b) Series B Convertible Preferred
The number of authorized shares of Series B Convertible Preferred Stock shall be
2,833,000. The holders of the Series B Convertible Preferred Stock will be
entitled to receive, when, as and if, declared by the Board of Directors, at an
annual dividend rate of 12% of the Preference Value ($3.00) per share of Series
B Convertible Preferred Stock per annum, payable in cash or in shares of common
stock, at the election of C Me Run or holder, in quarterly instalments on March
31, June 30, September 30 and December 31. Dividends shall be cumulative from
the Preference Date. No dividends shall be declared or paid or set aside for
payment on any class or series of stock of C Me Run ranking, as to dividends, on
a parity with the Series B Convertible Preferred Stock, for any period, unless
full cumulative dividends have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment. No other stock ranking on a parity with the Series B Convertible
Preferred Stock as to dividends or upon liquidation, dissolution or winding up
shall be redeemed, purchased or otherwise acquired for any consideration by C Me
Run unless the cumulative dividends have been paid in full or set aside for
payment. At the election of C Me Run or the holder, any dividend may be made in
lieu of cash, in common stock. The number of shares of common stock payable in a
common stock dividend shall be such number of fully paid and non-assessable
shares of common stock as is determined by dividing (x) the aggregate amount of
such dividends payable with respect to all outstanding shares of Series B
Convertible Stock by (y) seventy-five percent (75%) of the average per share
closing bid price on NASDAQ (or any other securities market on which the Common
Shares are listed or traded) for the five (5) consecutive trading days ending on
the fifth day prior to the applicable Dividend Payment Date and then dividing
such quotient by (z) the number of shares of Series B Convertible Preferred
Stock outstanding on the applicable Dividend Payment Date. If C Me Run elects to
make a common stock dividend, C Me Run shall deliver at least five (5) days
prior written notice of such election to the holders of the Series B Convertible
Preferred Stock entitled to receive such dividend.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of C Me Run , then before any distribution or payment
shall be made to the holders of the common stock or any other series or class or
classes of stock of C Me Run ranking junior to the Series B Convertible
Preferred Stock, each holder of Series B Convertible Preferred Stock then
outstanding shall be entitled to be paid, in respect of each share of Series B
Convertible Preferred Stock then held, out of the assets of C Me Run
39
<PAGE>
available for distribution to its stockholders an amount in cash equal to the
Preference Value of such share of $3.00. After such distribution, any remaining
assets available for distribution shall be distributed to the holders of shares
of Series B Convertible Preferred Stock and holders of Common Stock pro-rata
based on the total number of shares held by each holder on a fully-converted
basis. If the assets are not sufficient to generate cash sufficient to pay in
full the Series B Convertible Stock Preference Value ($3.00) then the holders of
the Series A Convertible Preferred Stock and the Series B Convertible Preferred
Stock shall be entitled to share rateably in any distribution of cash generated
by assets in accordance with the respective amounts that would have been payable
in such distribution if the amounts to which the holders of the Series A Stock
and Series B Stock are paid in full.
Except as expressly provided in the following sentence, the holders of Series B
Convertible Preferred Stock shall not have any voting rights except as from time
to time required by law. Except as required by law, the holders of Series B
Convertible Preferred Stock and the holders of common stock shall be entitled to
notice of any stockholders meetings and to vote as a single class upon any
matter submitted to the stockholders for a vote, as follows: (i) each holder of
Series B Convertible Preferred Stock shall have 1 vote for each full share of
common stock into which respective shares of Series B Convertible Preferred
Stock would be convertible on the record date for the vote; and (ii) each holder
of common stock will have one vote per share of common stock.
Each Share of Series B Convertible Preferred shall be convertible, at the option
of the holder, at any time prior to the Redemption Date (January 11, 2003) into
such number of fully paid and non-assessable shares of common stock as is
determined by dividing the Preference Value by the Conversion Price
($3.00/share). Or alternatively stated: 1 common share for each Series B
Preferred Share. The entire value of the Series A Stock has been allocated to
the beneficial conversion feature based on the difference between the conversion
price of $0.50 per share and the estimated fair market value of the common stock
at the date that the Series A Preferred Stock was issued. This amount however
was limited to the value of the proceeds received from issuing the beneficial
convertible security. As the Series A Stock is immediately convertible, C Me Run
also recorded accretion of the entire amount to additional paid in capital. The
Conversion Price may be adjusted for diluting issues. No adjustment in the
Conversion Price will be made in respect of "Additional Shares of Common Stock"
unless the consideration per share for an Additional Share of common stock
issued or deemed to be issued by C Me Run is less than the Conversion Price for
such Shares of Series B Convertible Preferred Stock. If C Me Run issues options
or convertible securities, then the maximum number of shares of common stock
issuable upon exercise of such options or convertible securities shall be deemed
to be Additional Shares of Common Stock. If by their terms, the options and/or
convertible securities, increase in price or reduce in numbers, by expiration or
otherwise, the Conversion Price shall be adjusted. In the event that C Me Run
issues or is deemed to issue Additional Shares of common stock without
consideration or for consideration less than the Conversion Price of any shares
of Series B Convertible Preferred Stock, then the Conversion Price shall be
reduced, concurrently with such issue with respect to the Series B Convertible
Preferred Stock, to a price determined by multiplying the Conversion Price by a
fraction (x) the numerator of which shall be the sum of (1) the number of shares
of common stock outstanding immediately prior to such issuance, plus (2) the
number of shares of common stock which the aggregate consideration received by C
Me Run for the total number of Additional Shares of common stock so issued would
purchase at such Conversion Price and (y) the denominator of which shall be (1)
the number of shares of common stock outstanding immediately prior to such
issuance plus (2) the number of such Additional Shares of common stock so
issued. The consideration per share shall be deemed to be $0.01. In the event
that C Me Run shall pay a stock dividend on the common stock, or the outstanding
shares of Common Stock shall be subdivided; combined or consolidated, by
re-classification, stock split or otherwise, into a grater or lesser number of
common shares, the Conversion Price in effect immediately prior to such
dividend, subdivision,
40
<PAGE>
combination or consolidation shall concurrently with the effectiveness of such
dividend, subdivision, combination or consolidation, be proportionately
decreased or increased as appropriate.
If, on or after the Redemption Date, the Series B Convertible Preferred Stock
has not been converted to Common Stock, C Me Run shall redeem all shares of
Series B Convertible Preferred Stock, out of funds legally available therefore,
at a per share price equal to the Redemption Price ($3.00). Without the
affirmative vote or consent of the holders of the majority of all outstanding
Series B Convertible Preferred Stock outstanding at the time, the Series B
Convertible Preferred Stock may not be redeemed.
As part of the acquisition of C Me Run (Alberta) Ltd., a new class of Preference
Stock will be created and will have the following provisions. Each outstanding
share of C Me Run Preferred Stock shall be entitled at any relevant date to the
number of votes (including for purposes of determining the presence of a quorum)
determined in accordance with the terms and conditions of the "CAC Exchangeable
Shares", "Voting Trust and Exchange Agreement" and the "CAC Exchangeable Share
Support Agreement" as such terms are defined in any takeover bid offers made by
CAC to the Securityholders of an offeree issuer (the "Share Purchase Agreement")
as defined in related agreements on all matters presented to the holders of
common stock of C Me Run , with all C Me Run Special Preferred Stock and common
stock voting together as a single class. Each Special Preferred Stock shall have
no other voting rights except as required by law. No dividend shall be paid to
the holder of C Me Run Special Preferred Stock. The shares of C Me Run Special
Preferred Stock shall be entitled to $1.00 on liquidation of C Me Run in
preference to any shares of common stock of C Me Run USA, but only after the
liquidation preference of any other shares of Preferred Stock of C Me Run has
been paid in full. The C Me Run Special Preferred Stock is not convertible into
any other class or series of the capital stock of C Me Run or into cash,
property or other rights, and may not be redeemed, except pursuant to the last
sentence of this Section 1. Once the shares of C Me Run Special Preferred Stock
have been purchased or otherwise acquired by C Me Run they shall be deemed
retired and shall be cancelled and may not thereafter be reissued or otherwise
disposed of by C Me Run . So long as any CAC Exchangeable Shares shall be
outstanding, the number of shares comprising the C Me Run Special Preferred
Stock shall not be increased or decreased and no other term of the C ME Run
Special Preferred Stock shall be amended, except upon the approval of the holder
of the outstanding shares of C Me Run Special Preferred Stock. At such time as
no CAC Exchangeable Shares shall be outstanding, each Special Preferred Stock
shall automatically be redeemed, with the $1.00 liquidation preference due and
payable upon such redemption. So long as any shares of C Me Run Special
Preferred Stock are outstanding, C Me Run shall (i) fully comply with all terms
of the CAC Exchangeable Shares and with all contractual obligations of C Me Run
associated with such CAC Exchangeable Shares and (ii) not amend, change or
repeal this Section 2 except upon the unanimous approval of the holder of the
outstanding share of C Me Run Special Preferred Stock effected by the amendment
or change.
B. Consolidated Capitalization Of C Me Run
The following table sets out the capitalization of C Me Run as at March 31, 2000
(as per audited financial statements) and the pro forma consolidated
capitalization of C Me Run as at July 24, 2000 assuming the completion by CAC of
the acquisition (the "C Me Run Alberta Acquisition") of all of the issued and
outstanding C Me Run Alberta Securities pursuant to the Offer.
41
<PAGE>
<TABLE>
<CAPTION>
Outstanding as at July, 2000 after giving
Outstanding as at March 31, 2000 effect to C Me Run Acquisition Agreement
Capital Authorized (audited) (unaudited)(1)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long Term Debt Not Applicable NIL NIL
Common Stock 50,000,000 $34,500 $37,150
(3,001,000 shares) (5,651,000 shares)
Series A Preferred Shares 10,000,000 $1,000,000 $1,000,000
(2,000,000 shares) (2,000,000 shares)
Series B Preferred Shares $6,999,000 $8,500,000
(2,333,333 shares) (2,833,333 shares)
</TABLE>
Notes:
(1) Assumes all of the CAC Exchangeable Shares are converted into C Me Run USA
Common Shares.
Principal Holders Of C Me Run Common Shares
To the knowledge of management, the parties or entity which owns 5% or
more of the issued and outstanding C Me Run Common Shares, as at July 31, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Name # of Shares Percentage
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cameron B. Chell 1,001,000 33%
Calgary, Alberta
-----------------------------------------------------------------------------------------------------------------------------
Hampton Park 500,000 16.6%
British Virgin Islands
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a table of C Me Run Alberta Shareholders. Upon the completion
of the acquisition of C Me Run Alberta, the principal holders of shares will be:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Name # of Shares Percentage
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cameron B. Chell 1,726,000 30.54%
Calgary, Alberta
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
C Me Run Stock Options
The following options have been granted by C Me Run (all options are for a
period of 10 years from date of grant):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Name Number of Shares Vesting Price ($)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Paula M. Hunter 75,000 25,000 25,000 25,000
Dec. 1/2000 Dec.1/2001 Dec. 1/2002 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Barbara A. DeGuise 100,000 33,333 33,333 33,334
Dec. 1/2000 Dec.1/2001 Dec. 1/2002 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Gerald J. McGovern 100,000 33,333 33,333 33,334
Apr. 1/2001 Apr.1/2002 Apr. 1/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
J.P. Gallagher 25,000 8,333 8,333 8,334
Feb. 7/2001 Feb.7/2002 Feb. 7/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Steve Harrington 25,000 8,333 8,333 8,334
Feb.21/2001 Feb.21/2001 Feb.21/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Polo Dam 3,000 1,000 1,000 1,000
Mar.20/2001 Mar.20/2002 Mar.20/2001 $5.00
-------------------------------------------------------------------------------------------------------------------------------
James S. Lovie 350,000 116.666 116,667 1116,667
Dec.1/2000 Dec.1/2001 Dec.1/2002 $5.00
-------------------------------------------------------------------------------------------------------------------------------
David W. Myers 210,000 70,000 70,000 70,000
Dec.1/2000 Dec.1/2001 Dec.1/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Rebecca Warriner 7,000 7,000
Jan1/2000 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Ian Hurri 3,500 3,500
Jan.1/2001 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Mary Lou Boise 10,000 3,333 3,333 3,333
Jan.31/2001 Jan.31/2002 Jan.31/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Dan Gilbert 10,000 3,333 3,333 3,333
Jan.13/2001 Jan.13/2002 Jan.13/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Frank Killoran 50,000 16,666 16,667 16,667
Apr.20/2001 Apr.20/2002 Apr.20/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Chad K. Corneil 50,000 16,666 16,667 16,667
Apr.21/2001 Apr.21/2002 Apr.21/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Richard A. Hronicek 50,000 16,666 16,667 16,667
Apr.19/2001 Apr.19/2002 Apr.19/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
David C. Hayden 50,000 16,666 16,667 16,667
Apr.27/2001 Apr.27/2002 Apr.27/2003 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Kari Golec 2,000 666 667 667
Apr.3/2001 Apr.3/2002 Apr.3/2001 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Jerry Shea 4,000 1,333 1,333 1,334
Apr.21/2001 Apr.21/2001 Apr.21/2001 $5.00
-------------------------------------------------------------------------------------------------------------------------------
Total 1,183,700
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
The following options will be granted upon completion of acquisition of C Me Run
Alberta:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Name Total Options Vesting Expiry Date Price ($)
US
------------------------------------------------------------------------------------------------------------------------------------
June 1/2000 June 1/2001 Dec. 1/2001
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James S. Lovie 50,000 12,500 18,750 18,750 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Rob Klein 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Bruce Elliot 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Blair Layton 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Arian Hopkins 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Rob Pike 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Dale Kirkwood 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
1396505 Ontario Inc. 22,500 5,625 8437 8438 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Ibrahim Karaibrahimovic 2,500 625 937 938 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Dave Bolink 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Kevin Sebastian 6,250 6,250 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Glen Lachoweiz 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Mitzi Murray 25,000 6,250 9,375 9,375 1/12/2002 1.00
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 306,250 81,250 112,409 112,501
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Name Number of Shares Vesting Expiry Date Price ($)
------------------------------------------------------------------------------------------------------------------------------------
Dec. 1/2000 Dec. 1/2001 Dec. 1/2002
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cameron B. Chell 495,000 165,000 165,000 165,000 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Colin B.Curwen 150,000 50,000 50,000 50,000 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Warren Talbot 150,000 50,000 50,000 50,000 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Dave Bolink 150,000 50,000 50,000 50,000 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Kevin Sebastian 150,000 50,000 50,000 50,000 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Pamela Hunter 50,000 16,666 16,667 16,667 1/12/2003 $5.00
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
June 1/2000 June 1/2001 Dec. 1/2002
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Klein 20,000 5,000 7,500 7,500 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Bruce Elliott 20,000 5,000 7,500 7,500 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Blair Layton 20,000 5,000 7,500 7,500 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Glenn Lachowicz 10,000 2,500 3,750 3,750 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Linda Lomow 10,000 2,500 3,750 3,750 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Mitzi Murray 10,000 2,500 3,750 3,750 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Arian Hopkins 20,000 5,000 7,500 7,500 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Rob Pike 10,000 2,500 3,750 3,750 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Dale Kirkwood 10,000 2,500 3,750 3,750 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Marilyn Schaefer 20,000 5,000 7,500 7,500 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
1396505 Ontario Inc. 15,000 3,750 5,625 5,625 1/12/2002 $5.00
------------------------------------------------------------------------------------------------------------------------------------
Ibrahim Karaibrahimovic 5,000 1,750 1,875 1,875 1/12/2002 $5.00
----- ----- ----- -----
------------------------------------------------------------------------------------------------------------------------------------
Total 1,295,000 418,750 438,125 438,125
========= ======= ======= =======
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
The following table sets out the warrants entitling holders to purchase common
shares as of July 24, 2000:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Name # of Warrants Price Expiry Date
US $
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VC Advantage Limited Partnership 1,400,000 $3.00 January 28, 2004
---------------------------------------------------------------------------------------------------------------
Hammock Group Ltd. 1,000,000 $1.00 January 11, 2004
---------------------------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited 400,000 $3.00 January 28, 2004
---------------------------------------------------------------------------------------------------------------
Small Caps Online Group, LLC 115,000 $5.00
---------------------------------------------------------------------------------------------------------------
Sub-Total: 2,915,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
C Me Run has an obligation to issue 75,000 common shares to IBC and 115,000
warrants to purchase common shares to Small Caps On Line Group. See "Material
Contracts of C Me Run". On a fully diluted basis there will be 16,193,833
Shares.
Indebtedness Of C Me Run's Directors And Senior Officers
Since incorporation there has not existed, and other than as noted below
there currently does not exist, any indebtedness of the directors or officers of
C Me Run or any of their associates or affiliates to C Me Run. James S. Lovie is
indebted to C Me Run in the amount of $250,000. The terms of the loan provide
that the loan will be forgiven as to a third on the anniversary dates of his
employment.
Escrowed Shares of C Me Run
There are no escrow agreements relating to shares of C Me Run. There is an
escrow agreement between the holders of shares of C Me Run (Alberta) Ltd. which
provides that the shares will be released as to a third on each anniversary date
commencing December 2, 1999.
Material Contracts of C Me Run
The only material contracts entered into by C Me Run since incorporation
which can reasonably be regarded as presently material are as follows:
1. An acquisition agreement dated December 2, 1999 between C Me Run Corp. and C
Me Run (Alberta) Ltd. The terms are described elsewhere in this Circular.
2. Subscription Agreement between C Me Run and Hammock dated January 12, 2000
pursuant to which Hammock agreed to subscribe for 2,000,000 Series A Preferred
Shares of $0.50 /share.
3. Registration Rights Agreement between C Me Run and Hammock dated January 11,
2000. Pursuant to this Agreement, C Me Run agreed subject to availability of the
use of a Form S-3 to file with the SEC a Registration Statement providing for an
offering to be made on a continuous basis pursuant to Rule 415 under the US
Securities Act of 1933 on Form S-3 prior to April 19, 2000. C Me Run agreed to
use best efforts to cause such Shelf Registration Statement (as defined) to be
declared effective under the Securities Act for and "Effectiveness Period" which
is defined as the period from the Closing Date and ending on the date on which
is the earlier of: (A) 2 years from the date from the date after the
Registration Statement is declared effective; (B) a registration statement with
respect to the issuance or sale of such registerable securities shall have
become effective and such Registerable Securities have been
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disposed of; (C) such Registerable Securities have been sold or are available
for sale in a transaction which complies with the provisions of Rule 144(k)
promulgated under the US Securities Act; (D) such Registerable Securities have
been transferred without any legend restricting further transfer; and (E)
subsequent disposition of such Registerable Securities are not subject to
registration or qualification under the US Securities Act or such registerable
securities shall have ceased to be outstanding. C Me Run agreed that if on or
prior to the 30th day following the Shelf Registration Statement with respect to
the Registerable Securities; or (ii) on or prior to the 120th day following the
Registration Date the Shelf Registration Statement, if previously filed, has not
been declared effective by the Commission (each, a "Registration Default") C Me
Run shall be required to pay liquidated damages from and including the day
following such Registration Default until the Shelf Registration Statement is
either declared effective or so filed and subsequently declared effective, as
applicable, provided, however that C Me Run shall not be required to pay
liquidated damages after the completion of the Effectiveness Period with respect
to such Registerable Securities. Such liquidated damages shall be paid monthly
in arrears and will accrue at the rate of One (1%) Percent per month of the
product of the number of Registerable Securities then held by such holder
multiplied by the price paid to C Me Run by the initial investment of each such
Registerable Security. In the event the Shelf Registration Statement ceases to
be effective (or the Holder is otherwise prevented or restricted by C Me Run
from effecting sale thereto, including pursuant to Section 2.01(c) for more than
60 days, whether or not consecutive, during any 12 month period (an "Effective
Failure")) then C Me Run shall pay Liquidated Damages until such Effective
Failure is cured in the amount of and in the manner as described above. If at
any time following the Effective Time C Me Run proposes to file a Registration
Statement other than the Shelf Registration Statement (an "Incidental
Registration") under the Securities Act with respect to an offering of Common
Stock: (i) for its own account (other than a Registration Statement or Form S-4
or S-8); or (ii) on account of any Holder of Common Stock, the holder may be
entitled to register such number of Registerable Securities as such Holder
requests, subject to an underwriter's override. All expenses incurred in
connection with the Registration Statement, including reasonable fees and
disbursements of one counsel chosen by the Holder shall be paid by C Me Run .
The agreement contains mutual indemnification provisions.
4. Warrant Agreement between C Me Run and Hammock Group Ltd. dated January 11,
2000. Pursuant to this agreement, C Me Run agreed to permit Hammock Group Ltd.
the right to acquire 1,000,000 Common Shares of C Me Run for $1.00/share up
until January 11, 2004. The warrants contains anti-dilution provisions. The
Exercise Price may be adjusted if there are issuances of Additional Shares of
Common Stock if the consideration per share for an Additional Share of Common
Stock (as defined) issued or deemed to be issued by C Me Run is less than the
Exercise Price for such Warrant Shares in effect on the date of, and immediately
prior to such issue, for each Warrant Share. In the event C Me Run issues
options or Convertible Securities then the maximum number of issuable shares be
deemed to have been issued, provided upon the expiration or price increase of
such Options or Convertible Securities over time would reduce the adjustment.
The Exercise Price shall be reduced, concurrently with such issuance with
respect to the Warrant Shares, to a price determined by multiplying the Exercise
by a fraction (x) the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issuance, plus the
number of shares of Common Shares which the aggregate consideration received by
the Company for the total number of Additional Shares of Common Shares so issued
would purchase at such Exercise Price and (y) the denominator of which shall be
(1) the number of shares of Common Shares outstanding immediately prior to such
issuance plus (2) the number of such additional shares of Common Shares so
issued.
5. Registration Rights Agreement between C Me Run and Hammock Group Ltd. dated
January 12, 2000. Pursuant to this Agreement, C Me Run agreed that it shall, on
or prior to the later of April 19, 2000 to file with the SEC a registration
statement to register the Common Stock issuable upon exercise of the
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Hammock warrant. The registration rights are identical to the registration
rights set out in paragraph 3 above.
6. Agreement between Fundae Corp, Cameron Chell and a group of 18 shareholders
of Fundae Corporation dated December 12, 1999. Pursuant to this Agreement, 18
shareholders agreed to sell to Cameron Chell 800,000 shares post 5:1 roll
forward and to cancel 4,000,000 common shares upon completion of the business
combination between Fundae Corp. and C Me Run .
7. Subscription Agreement between C Me Run and VC Advantage Limited Partnership
dated January 28, 2000 pursuant to which VC Advantage Limited Partnership
subscribed for 2,333,333 Series B Convertible Preferred Shares for $3.00/share.
8. Registration Rights Agreement between C Me Run and VC Advantage Limited
Partnership dated January 28, 2000. Pursuant to this Agreement, C Me Run agreed
to register the Common Stock issuable upon exercise of the conversion of the
Series B Convertible Preferred Stock into Common Shares.
Pursuant to this Agreement, C Me Run agreed subject to availability of the use
of a Form S-3 to file with the SEC a Registration Statement providing for an
offering to be made on a continuous basis pursuant to Rule 415 under the US
Securities Act of 1933 on Form S-3. C Me Run agreed to use best efforts to cause
such Shelf Registration Statement to be declared effective under the Securities
Act for and "Effectiveness Period" which is defined as the period from the
Closing Date and ending on the date on which is the earlier of: (A) 2 years from
the date from the date after the Registration Statement is declared effective;
(B) a registration statement with respect to the issuance or sale of such
registerable securities shall have become effective and such Registerable
Securities have been disposed of; (C) such Registerable Securities have been
sold or are available for sale in a transaction which complies with the
provisions of Rule 144(k) promulgated under the US Securities Act; (D) such
Registerable Securities have been transferred without any legend restricting
further transfer and subsequent disposition of such Registerable Securities are
not subject to registration or qualification under the US Securities Act or such
registerable securities shall have ceased to be outstanding. C Me Run agreed
that if on or prior to the 30th day following the Shelf Registration Statement
with respect to the Registerable Securities; or (ii) on or prior to the 120th
day following the Registration Date the Shelf Registration Statement, if
previously filed, has not been declared effective by the Commission (each, a
"Registration Default") C Me Run shall be required to pay liquidated damages
from and including the day following such Registration Default until the Shelf
Registration Statement is either declared effective or so filed and subsequently
declared effective, as applicable, provided, however that C Me Run shall not be
required to pay liquidated damages after the completion of the Effectiveness
Period with respect to such Registerable Securities. Such liquidated damages
shall be paid monthly in arrears and will accrue at the rate of One (1%) Percent
per month of the product of the number of Registerable Securities then held by
such holder multiplied by the price paid to C Me Run by the initial investment
of each such Registerable Security. In the event the Shelf Registration
Statement ceases to be effective (or the Holder is otherwise prevented or
restricted by C Me Run from effecting sale thereto, including pursuant to
Section 2.01(c) for more than 60 days, whether or not consecutive, during any 12
month period (an "Effective Failure")) then C Me Run shall pay Liquidated
Damages until such Effective Failure is cured in the amount of and in the manner
as described above. If at any time following the Effective Time C Me Run
proposes to file a Registration Statement other than the Shelf Registration
Statement (an "Incidental Registration") under the Securities Act with respect
to an offering of Common Stock: (i) for its own account (other than a
Registration Statement or Form S-4 or S-8); or (ii) on account of any Holder of
Common Stock, the holder may be entitled to register such number of Registerable
Securities as such Holder requests, subject to an underwriter's override. All
expenses incurred in connection with the Registration Statement, including
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reasonable fees and disbursements of one counsel chosen by the Holder shall be
paid by C Me Run. The agreement contains mutual indemnification provisions.
9. Warrant Agreement between C Me Run and VC Advantage Limited Partnership dated
January 28, 2000 (the "Warrant Agreements"). Pursuant to this agreement, C Me
Run agreed to permit VC Advantage Limited Partnership the right to acquire
1,400,000 Common Shares of C Me Run for $2.50/share (the "Exercise Price") up
until January 28, 2004. The warrants contains anti-dilution provisions. The
Exercise Price may be adjusted if there are issuances of Additional Shares of
Common Stock (as defined in the Warrant Agreements) if the consideration per
share for an Additional Share of Common Stock (as defined) issued or deemed to
be issued by C Me Run is less than the Exercise Price for such Warrant Shares in
effect on the date of, and immediately prior to such issue, for each Warrant
Share. In the event C Me Run issues Options or Convertible Securities (as
defined in the Warrant Agreements) then the maximum number of issuable shares be
deemed to have been issued, provided upon the expiration or price increase of
such Options or Convertible Securities over time would reduce the adjustment.
The Exercise Price shall be reduced, concurrently with such issuance with
respect to the Warrant Shares, to a price determined by multiplying the Exercise
by a fraction (x) the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issuance, plus the
number of shares of Common Shares which the aggregate consideration received by
the Company for the total number of Additional Shares of Common Shares so issued
would purchase at such Exercise Price and (y) the denominator of which shall be
(1) the number of shares of Common Shares outstanding immediately prior to such
issuance plus (2) the number of such additional shares of Common Shares so
issued.
10. Registration Rights Agreement between C Me Run and VC Advantage Limited
Partnership dated January 28, 2000. Pursuant to this Agreement, C Me Run agreed
that it shall, on or prior to the later of April 19, 2000 to file with the SEC a
registration statement to register the Common Stock issuable upon exercise of
the Warrant. The registration rights are identical to the provisions set out in
paragraph 3.
11. TK Warrant Agreement between C Me Run and Thomson Kernaghan & Co. Limited
dated January 28, 2000. Pursuant to this agreement, C Me Run agreed to permit
Thomson Kernaghan & Co. Limited the right to acquire 400,000 Common Shares of C
Me Run for $3.00/share up until January 28, 2004. The warrants contains
anti-dilution provisions. The Exercise Price may be adjusted if there are
issuances of Additional Shares of Common Stock if the consideration per share
for an Additional Share of Common Stock (as defined) issued or deemed to be
issued by C Me Run is less than the Exercise Price for such Warrant Shares in
effect on the date of, and immediately prior to such issue, for each Warrant
Share. In the event C Me Run issues options or Convertible Securities then the
maximum number of issuable shares be deemed to have been issued, provided upon
the expiration or price increase of such Options or Convertible Securities over
time would reduce the adjustment. The Exercise Price shall be reduced,
concurrently with such issuance with respect to the Warrant Shares, to a price
determined by multiplying the Exercise by a fraction (x) the numerator of which
shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such issuance, plus the number of shares of Common Shares
which the aggregate consideration received by C Me Run for the total number of
Additional Shares of Common Shares so issued would purchase at such Exercise
Price and (y) the denominator of which shall be (1) the number of shares of
Common Shares outstanding immediately prior to such issuance plus (2) the number
of such additional shares of Common Shares so issued.
12. Thomson Kernaghan & Co. Limited Registration Rights Agreement between C Me
Run and Thomson Kernaghan & Co. Limited dated January 28, 2000. Pursuant to this
Agreement, C Me Run agreed that it shall, on or prior to the later of April 19,
2000 to file with the SEC a registration statement
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to register the Common Stock issuable upon exercise of the Warrant. The
registration rights are identical to the provisions contained in paragraph 3.
13. Subscription Agreement between C Me Run and VC Advantage Limited Partnership
dated January 28, 2000 pursuant to which VC Advantage Limited Partnership
subscribed for 500,000 Series B Convertible Preferred Shares for $3.00/share.
14. By an agreement dated January 28, 2000 between C Me Run and Interactive
Business Channel Inc. ("IBC Agreement"), C Me Run agreed to pay for conduct of a
public awareness program. The compensation was the issuance of 50,000 Rule 144
restricted common shares of which 25,000 would have piggyback registration
rights. If C Me Run renewed the contract for 6 months it could do so upon
issuing an additional 75,000 Rule 144 restricted common shares. To date, no
shares have been issued as a result of alleged non-performance of the contact.
15. By an agreement dated February 1, 2000 between C Me Run and Small Caps
Online Group LLC ("Small Caps Agreement"), C Me Run agreed to pay for
introductions to financial partners. The consideration payable is as: fee of
$9,000 per month and 115,000 warrants (with cashless exercise provisions) to
purchase common shares at $5.00, with registration for 50% of the total by June
30, 2000, and the remaining 50% by December 31, 2000. In the event a corporate
finance transaction is completed with any party small caps identified,
approached, or negotiated with on behalf of C Me Run, C Me Run will pay Small
Caps a success fee for its advisory services in accordance with the following
schedule:
--------------------------------------------------------------------------------
Aggregate Value Level Percentage Fee Applicable to Value Level
--------------------------------------------------------------------------------
First $5 Million 5.0%
--------------------------------------------------------------------------------
From $5 Million through $10 Million 3.75%
--------------------------------------------------------------------------------
From $10 Million and above 2.5%
--------------------------------------------------------------------------------
In addition C Me Run will pay a success fee of 7% (plus warrant coverage at sale
price of the common stock of 10%) of the Aggregate Value of the transaction.
16. By a consulting agreement dated November 15, 1999 between Chell.com Inc. and
C Me Run , C Me Run agreed to pay for strategic banking services. The agreement
was for a 1 year term and the consideration was $720,000. The fee has been paid
in full.
17. By Agreement dated December 9, 1999 between cmerun, inc. (formerly Fundae
Corp.) and Fundae Acquisition Corp. ("Merger #1 Agreement"), Fundae agreed to
merge with its wholly owned Delaware subsidiary on December 13, 1999 or as soon
as practicable thereafter. The certificate of incorporation of Fundae
Acquisition Corp. became the certificate of incorporation for the merged entity.
The bylaws of Fundae Acquisition Corp. became the bylaws of the merged entity.
On the effective date: (I) each outstanding share of cmerun, inc. common stock,
$0.0001 par value was converted into 5 shares of Fundae Acquisition Corp. common
stock, $0.0001 par value; and (ii) each outstanding share of cmerun, inc. common
stock was cancelled and its status resumed as authorized and issued Fundae
Acquisition Corp. Common Stock. Upon the effective date, the officers and
directors of Fundae Acquisition Corp. became the officers and directors of the
merged entity.
18. By agreement dated January 31, 2000 between C Me Run Corp. and Fundae Merger
Sub Inc. ("Merger #2 Agreement"), C Me Run agreed to merge with Fundae Merger
Sub to form C Me Run Corp. The certificate of incorporation of C Me Run became
the certificate of incorporation of the merged entity. The bylaws of C Me Run
became the bylaws of the merged entity. On the effective date, each
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outstanding share of C Me Run, $0.01 par value, was converted into 1 common
share of C Me Run, $0.001 par value; and (ii) each outstanding share of C Me Run
common stock was cancelled. On the effective date, the Series A Preferred Stock
of C Me Run was converted into Series A Preferred Stock of C Me Run and the
Series B Preferred Stock of C Me Run was converted into Series B Preferred Stock
of C Me Run. Any warrants of C Me Run were converted into warrants of C Me Run.
18. By agreement dated January 31, 2000 between C Me Run and Fundae Acquisition
Corp., C Me Run agreed to merge with Fundae Acquisition Corp. to form C Me Run.
The certificate of incorporation of C Me Run became the certificate of
incorporation of the merged entity. The bylaws of C Me Run became to be the
bylaws of the merged entity. On the effective date, each outstanding share of C
Me Run, $0.001 par value, was converted into 1 common share of C Me Run, $0.01
par value, and each outstanding share of Fundae Acquisition Corp., $0.01 par
value, was converted into 1 common share of C Me Run, $0.01 par value, and their
status resumed as authorized and issued C Me Run common stock. On the effective
date, the Series A Preferred Stock of C Me Run was converted into Series A
Preferred Stock of C Me Run and the Series B Preferred Stock of C Me Run was
converted into Series B Preferred Stock of C Me Run. Any warrants of C Me Run
were converted into warrants of C Me Run. Upon the effective date, the officers
and directors of C Me Run became the officers and directors of the merged
entity.
19. By agreement dated July 14, 2000 between C Me Run and Phoenix Networks, C Me
Run agreed to implement a solution to offer consumer applications to Phoenix `s
residential broadband end users. The agreement also calls for Phoenix to
implement a solution to offer DSL services to C Me Run's end users
Interests Of C Me Run's Management And Others In Material Transactions
Except with respect to Cameron Chell, there are no material interests,
direct or indirect, of directors, senior officers or any shareholders who
beneficially own, directly or indirectly, more than 10% of the outstanding C Me
Run Common Shares or any known associates or affiliates of such persons, in any
transaction since incorporation or in any proposed transaction which has
materially affected or would materially affect CAC except as disclosed herein.
Cameron Chell is the largest shareholder of C Me Run and C Me Run Alberta.
Cameron Chell is a director of C Me Run. Cameron Chell is an officer and
director of C Me Run Alberta. Cameron Chell owns 100% of Chell.com Inc.
Chell.com Inc. has a consulting agreement with C Me Run (see "C Me Run Material
Contracts"). Cameron Chell is a shareholder, officer and director of VC
Advantage Limited, which is the general partner of VC Advantage Limited
Partnership which subscribed for the Series B Convertible Preferred Shares.
Trading Of C Me Run Common Shares
The following sets out the monthly trading summary of the Common Shares of C Me
Run since February, 2000.
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
# of Shares Price Price Value
Low High
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January, 2000
-----------------------------------------------------------------------------------------------------------------------------------
February 2000 4,089,400 US$5.75 US$44.00 US$61,341,000(1)
-----------------------------------------------------------------------------------------------------------------------------------
March, 2000 861,900 US$20.75 US$33.75 US$19,823,700(1)
-----------------------------------------------------------------------------------------------------------------------------------
April, 2000 467,600 US$12.50 US$23.00 US$7,014,000(1)
-----------------------------------------------------------------------------------------------------------------------------------
May 2000 312,235 US$10.50 US$22.50 US$4,683,525(1)
-----------------------------------------------------------------------------------------------------------------------------------
June, 2000 294,500 US$11.50 US$22.60 US$4,417,500(1)
-----------------------------------------------------------------------------------------------------------------------------------
July, 2000 57,600 US$13.75 US$16.50 US$806,400(1)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes: (1)Value based on average price of $15.00 per share, true aggregate value
may vary.
Lawsuits Against C Me Run
There are no lawsuits against C Me Run. On January 20, 2000, FutureLink
Corp., FutureLink Distribution Corp. and FutureLink Micro Visions Corp., had
filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary,
Action #0001-01111 alleged that C Me Run Corp., C Me Run Alberta and certain
former employees had conspired to appropriate a corporate opportunity from the
plaintiffs and use it to their own advantage. The Plaintiffs alleged that C Me
Run Corp. was the same business concept, which was developed by the individuals
named in the lawsuit while they were in the plaintiffs employment and using the
plaintiffs facilities. The Plaintiffs were seeking a permanent injunction
restraining C Me Run Corp. and its subsidiaries from carrying on business
related to said project. As well, the Plaintiffs were seeking judgment in the
amount of CDN $80,000,000 and the ownership of all shares of C Me Run and C Me
Run Alberta held by the defendants. The lawsuit was defended and counterclaims
were filed against the plaintiffs, for CDN $126 Million. On April 26, 2000, all
parties in the above action entered into a settlement agreement which included a
non-disclosure clause. C Me Run does not expect to make any payment in
connection with the settlement agreement.
Auditors
C Me Run has appointed Deloitte Touche LLP as auditors.
Description from Valuation Discounts
Stanford Keene used a market approach from trading values of C Me Run on the
OTC-BB as of May 31, 2000, to arrive at a value of $11.00/share. The assumptions
are set out in its Valuation Report.
Directors and Officers
Cameron B. Chell, Chairman of the Board
Please see page 5 for discussion of Mr. Chell's background.
James S. Lovie, Director, Chief Executive Officer: Mr. Lovie became Chief
Executive Officer of C Me Run in January 2000. From October 1998 to January
2000, Mr. Lovie was the President and Chief Executive Officer of Bell
Distribution Inc., the leading Canadian-based integrated services retail
organization in telecommunications for the Bell Family of products. At Bell
Distribution Inc., Mr. Lovie
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provided management and strategic direction in the creation and execution of the
company's distribution and retail operations. From June 1995 to October 1998,
Mr. Lovie was Senior Vice-President - Sales, Marketing and Distribution for Bell
Mobility. He previously held the position of Vice-President - Western Region
with the company. From January 1991 to June 1995Mr. Lovie was Vice President of
Integrated Customer Services at Xerox Canada. Mr. Lovie holds a Bachelor in
Business Administration from Algonquin College in Ottawa, Canada.
David C. Hayden, Director: Mr. Hayden founded Critical Path (Nasdaq: CPTH)
in February 1997 and served as its Chairman, President and Chief Executive
Officer from inception until November 1998. He continues to serve as the
Company's Chairman and provides strategic business and product vision. From
August 1993 to February 1997, Mr. Hayden was Chairman, President, Chief
Executive Officer and co-founder of The McKinley Group, creators of Magellan,
the highly popular Internet search engine, which was sold to Excite in August
1996. Between 1991 and 1993, Mr. Hayden held board positions at Spectrum
Holobyte and Research On Demand. Mr. Hayden was recently recognized by Forbes as
a member of the "E-Gang", New Digital Entrepreneurs, in the July 26, 1999 issue.
Hayden was also a finalist for the Northern California's 1999 Ernst & Young
Entrepreneur Of the Year. In June of 1998 he was named one of Sm@rt Reseller
magazine's "Sm@rt 50" influential decision-makers in the Internet. Mr. Hayden
holds a B.A. in Political Science from Stanford University.
Frank J. Killoran, Director, Audit Committee Chair: Mr. Killoran became
President of Chell.com in July 2000. From March 1997 to present, Mr. Killoran
has been President, CEO and majority shareholder of National Process Equipment
Ltd. National Process Equipment Ltd. is the largest independent distributor of
industrial pumping systems in Canada. It operates from 8 cities with fabrication
facilities in 5 cities, has 125 employees, and exclusively represents an
extensive cross-section of high-quality pumps and related equipment, covering a
wide variety of applications. Its major markets are mining and mineral
processing, petrochemical and chemical, power and refining, pulp and paper,
industrial, commercial and municipal. From May 1993 to March 1997, Mr. Killoran
was President and CEO, of Taro Industries Limited (TSE symbol "TIN") an oil and
gas services company with six separate businesses and approximately $100 million
revenue. Mr. Killoran approached and negotiated a profitable sale to EVI Inc.
(now Weatherford International) in 2 stages with final sale occurring March,
1998. From 1981 to May 1993, Mr. Killoran worked with Coopers and Lybrand. Mr.
Killoran was a partner in charge of Calgary's "corporate turnaround" group where
he led the review and financial restructuring of numerous corporations from a
variety of industries.
Chad C. Corneil, Director, Audit Committee Member, Compensation Committee
Member: Mr. Corneil founded and has been the Chief Executive Officer of WorldOne
Webwide, Inc. since February, 2000. Mr. Corneil has been the Secretary/Treasurer
of the ASP Industry Consortium since April, 1999. From June 1998 to February,
2000, Mr. Corneil was the Product Manager for Great Plains Hosting Services. As
Product Manager, he had assisted in the design of the Great Plains Hosting
Services offering. Prior to his role, Mr. Corneil was the Program Manager for
the Management Services Program for Great Plains Consulting where he served as
project manager to large corporate and multinational implementations of Great
Plains Dynamics CS+ for SQL. Prior to that he was Manager of Great Plains
Consulting Division from March, 1997 to June 1998. From May, 1991 to March,
1997. Mr. Corneil worked for Deloitte & Touche; first as an auditor and then as
a manager in their computer consulting group. He became a Chartered Accountant
in Canada in 1995 and maintains memberships in both the Institute of Chartered
Accountants of Saskatchewan and the Institute of Chartered Accountants of
Ontario. Mr. Corneil holds Bachelor of commerce degree from the University of
Saskatchewan where he majored in Accounting.
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Richard A. Hronicek, Directors, Compensation Committee Chair: Mr.
Hronicek, has been President and CEO of Xevo Corporation from August 1998 to
present. From June 1998 to August 1998 he was Senior Vice President of US
Internetworking. From April 1997 to January 1998 he was Chief Executive Officer
of javelin Internet Group. From April 1995 to April 1997 he was Chief Executive
Officer of Pacific Bell Internet. From 1981 to April 1995 he held various
positions with Pacific Bell.. Mr. Hronicek, has over 20 years of experience in
multiple facets of the network computing industry. He came to Xevo from
Usinternetworking, a leading application service provider (ASP) specializing in
ERP applications. As senior vice president and general manager of
Usinternetworking, Mr. Hronicek headed its highly successful Siebel business
unit and, previously, helped build USI's west coast and Japan data centers. He
founded Pacific Bell Internet Services, Inc. (PBI). Under his direction, PBI
launched its Internet service in 1996 and, as the fastest growing ISP in
California, was named "ISP Start-up of the Year" by America's Network magazine.
Previously, Mr. Hronicek led Pacific Bell's advanced service initiatives,
developing marketing strategies for its online information and data
communications services. In the process, he earned four industry awards for
creating Pacific Bell's CalREN program to develop high-performance vertical
applications, including video-on-demand. Mr. Hronicek also served as business
development director of PacTel International (now Airtouch), focusing on the
European mobile data communications market. Mr. Hronicek began his career
developing network software for Bell Labs. Mr. Hronicek earned his B.S. in
computer science from Penn State University and his Masters in computer
science/computer engineering from Stanford University.
David W. Myers, President & Chief Operating Officer: Mr. Myers joined C Me
Run in January 2000. From April 1997 through January 2000, Mr. Myers was
Director, ASP Business Strategy for Compaq Computer Corp. From 1996 through
1997, Mr. Myers was a principle of Barclay Consulting Group. From February 1996
through November 1996, he was the Chief Operating officer with Eastern Casualty
Insurance Co. From February 1995 through February 1996 he was Vice President,
Client Services for ICS Deloitte. While at Compaq Computer Corporation he
directed and developed strategic relationships with leading North American ASPs.
His management experience includes the start-up of Ziff-Davis' Timesharing
Division Digital Equipment's Internet Outsourcing Practice. While at Deloitte &
Touche and Digital Equipment, Myers provided business process and IT strategy
consulting to clients including Mobil Oil, Melon Bank, First Chicago, Baxter
Healthcare and NASA. He has presented papers and trained management consultants
internationally. Mr. Myers holds Bachelors and Masters degrees in Engineering
and Business from Cornell University.
Gerald J. McGovern, Chief Financial Officer and Treasurer: Mr. McGovern
joined C Me Run in 2000. From 1997 though 1999 he acted as a private financial
consultant, during which time he served as senior financial executive in special
situations for various client companies. From 1994 through 1996, Mr. McGovern
was Chief Financial Officer for International health Specialists. Mr. McGovern
is a Certified Public Accountant for the Commonwealth of Massachusetts and holds
a bachelor degree in Economics and Accounting from the College of Holy Cross,
Worcester, Massachusetts and a Masters Degree in Business Administration from
Babson College, Wellesley, Massachusetts
Theodora S. Convisser, Corporate Secretary: Ms. Convisser joined C Me Run
in April 2000. Prior to joining C Me Run, Ms. Convisser served for sixteen years
as Clerk of the Corporation and Assistant General Counsel to Boston Edison
Company. Before joining Boston Edison Company, Ms. Convisser spent two years as
an associate at the Boston Massachusetts law firm of Herrick and Smith and two
years as a law clerk to the Justices of the Supreme Court of New Hampshire. Ms.
Convisser holds a Bachelor of English Literature degree from Brandeis
University, a Juris Doctor degree from Northeastern University School of Law and
a Master of Law in Taxation from Boston University School of Law.
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Paula M. Hunter, VP - Sales & Marketing: Ms. Hunter joined C Me Run in
February 2000. From October 1999 to February 2000, Ms. Hunter was the General
Manager of Eggrock Partners, Inc (now Breakaway Solutions) Ms. Hunter was
responsible for Sales and Marketing, Delivery, Engineering, and Operations
functions within the ASP division. Eggrock Partners Inc. is a new breed systems
integration consulting firm and Application Service Provider with an innovative
approach to the delivery, implementation and support of customer-centered
Web-based solutions for the emerging enterprise. Ms. Hunter is one of the
founders of the ASP Industry Consortium. Ms. Hunter was elected to the office of
Vice President and has a seat on the Board of Directors. From May 1995 to
October 1999, Ms. Hunter worked for Compaq Computers Corp as Director of
Solutions Marketing for Compaq Computer Corporation's Emerging Markets and
Programs Business Unit, Ms. Hunter was responsible for the development of
Compaq's strategy and programs in the Application Service Provider market. Ms.
Hunter also managed programs for Thin Client Server Computing, and Streaming
Media Solutions. From May 1993 to May 1995, Ms. Hunter worked for Long's
Corporate Division in Boston. From May 1997 to May 1993, Ms. Hunter worked at
Digital Equipment Corporation, where she sold outsourcing services in the
pharmaceutical and petrochemical markets and held a variety of product
marketing, channels development, and solutions marketing positions. Ms. Hunter
holds a BS in Computer Information Systems from Bentley College and is enrolled
in the MBA program at Babson College, Wellesley, Massachusetts
Barbara A. DeGuise, Chief Technology Officer: Ms. DeGuise joined C Me Run
in March, 2000. From June 1998 to March, 2000 Ms. DeGuise was the Global Service
Delivery Manager at Compaq Computer Corporation. From October 1985 to June 1998,
she was with Digital Equipment Corp. Ms. DeGuise is a graduate of the University
of New Hampshire with a degree in Mathematics and Computer Science. Ms. DeGuise
also holds a Masters degree from New Hampshire College in International Business
management.
Colin B. Curwen, VP - Sales: Mr. Curwen joined in November, 1999. From
July 1998 to November 1999, Mr. Curwen was employed with FutureLink Distribution
Corp., where he was one of the original employees of the recognized founder of
the ASP industry. Serving as Director of Sales and Director of Channel Sales,
Mr. Curwen was instrumental in the development of the leading Application
Service Provider's product, sales and service strategies. Previous to
FutureLink, Mr. Curwen was the Southern Alberta Education Sales Director for
WestWorld Computers Ltd. from July, 1997 to June 1998, an Authorized Reseller
and Education Sales Organization for Apple Computer Inc. From October 1995 to
December 12, 1996, he was owner/operator of a restaurant in Kelowna
(Sandusky's). From October 1993 to October 1995, Mr. Curwen was the General
Manager of Joey Tomatoes in Calgary and Kelowna.
Warren S. Talbot, VP - Business Development: Mr. Talbot joined C Me Run in
November 1999. From October 1999 to November 1999, Mr. Talbot worked for
Futurelink Corp (formerly Futurelink Distribution Corp). From October 1997 to
October 1999, Mr. Talbot worked for Microsoft Corp. From November 1994 to
October 1997 Mr. Talbot worked for Software Spectrum. Mr. Talbot holds a
Bachelors degree in accounting from Texas A & M University.
Financial Background
According to the unaudited financial statements in C Me Run's 10QSB filed
June 6, 2000, attached as Exhibit "F", as of March 31, 2000, C Me Run's total
assets were valued at $7,274,344 and total liabilities and stockholders' equity
were valued at $7,274,344. No revenues were generated in the three months ended
March 31, 2000 period, operating expenses were $3,333,975 and interest income
was $15,866, resulting in a net loss of $3,318,109.
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Management Discussion of Operating Results
Management's discussion of operating results are contained in a Form 10-Q filed
with the Securities and Exchange Commission which can be accessed on EDGAR at
www.sec.gov.
Specific Risk Factors
1. Solvency of C Me Run
C Me Run has incurred significant losses. C Me Run may require additional
financing in order to conduct its business. There can be no assurance that such
financing will be available or, if available, will be upon terms satisfactory to
C Me Run.
2. Key Personnel
C Me Run is substantially dependent upon the continued services of current
management and directors. The loss of the services of current management would
have a material adverse affect upon our business and/or our prospects. C Me Run
does not maintain "key man" life insurance on the life of any of our employees.
To the extent that the services of key personnel become unavailable, C Me Run
shall be required to retain other qualified persons and there can be no
assurance that C Me Run shall be able to employ qualified persons upon
acceptable terms.
3. Dividends and Cash Flow
C Me Run has a limited history and currently does not have any operating
business. Since incorporation, C Me Run has not paid any dividends on its
outstanding Common Shares and has no present intention to pay dividends thereon.
4. Risks Related to Possible Acquisitions
C Me Run may expand its operations through the acquisition of additional
businesses. There can be no assurance that C Me Run will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into C Me Run without substantial expenses, delays or other
operational or financial problems. Further, acquisitions may involve a number of
special risks or effects, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances, legal
liabilities and amortization of acquired intangible assets and other one-time or
ongoing acquisition related expenses, some or all of which could have a material
adverse effect on C Me Run business, operating results and financial condition.
Client satisfaction or performance problems of a single acquired firm could have
a material adverse impact on the reputation of C Me Run as a whole. In addition,
there can be no assurance that the acquired businesses, if any, will achieve
anticipated revenues and earnings. The failure of C Me Run to arrange its
acquisition strategy successfully could have a material adverse effect upon C Me
Run's business, operating results and financial condition.
5. Limited Trading History of Common Shares; Stock Price Volatility
The market price of C Me Run's Common Shares could continue to fluctuate
substantially due to a variety of factors, including quarterly fluctuations in
results of operations, adverse circumstances affecting the introduction of
market acceptance of new products and services offered by C Me Run,
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announcements of new products and services by competitors, changes in the
information technology environment, changes in earnings estimates by analysts,
changes in accounting principles, sales of C Me Run's Common Shares by existing
holders, loss of key personnel and other factors. The market price for C Me
Run's Common Shares may also be affected by C Me Run's ability to meet analysts'
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of C Me Run's Common Shares.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. 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 a company. Any such litigation instigated
against C Me Run could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon C Me Run's business, operating results and financial condition.
6. Creditworthiness of Clients
The value of C Me Run's computer equipment, software, and intellectual
property thereto may depend on the credit and financial stability of C Me Run's
customers. C Me Run's projected income would be adversely affected if a
significant number of customers were unable to meet their obligations to C Me
Run or if C Me Run were unable to continue to collect its accounts receivables.
In the event of default by customers, C Me Run may experience delays in
enforcing its rights as a vendor and may incur substantial costs in protecting
its investment.
7. Start-Up Company
The business of C Me Run should be considered highly speculative due to
its present stage of development. C Me Run does not have a history of earnings
nor has it sufficiently diversified such that it can mitigate the risks
associated with its planned activities. C Me Run has limited cash and other
assets and a limited business history. Shareholders must rely solely upon the
ability, expertise, judgment, discretion, integrity and good faith of C Me Run's
management in all aspects of the development and implementation of C Me Run's
business strategy.
8. Speculative Nature of Computer Business
The acquisition and management of computer services may result in a
failure to produce income or revenue. Moreover, the industry is subject to
significant risk factors including changes in general economic conditions,
competition from other properties, and the failure of customers to meet their
obligations and other operating costs.
9. Tradename
While C Me Run is attempting to qualify, under a trademark, its name
throughout the U.S., Canada, Mexico, the United Kingdom and Australia,
significant issues may be present as to the ability to widely use the name in
connection with the products or services to be rendered by C Me Run.
10. Attraction and Retention of Employees
C Me Run's business involves the delivery of professional services and is
labor-intensive. C Me Run's success depends in large part upon its ability to
attract, develop, motivate and retain highly skilled technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that C Me
Run will be able to
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attract and retain sufficient numbers of highly skilled technical employees in
the future. C Me Run has historically experienced turnover rates which it
believes are consistent with industry norms. An increase in this rate could have
a material adverse effect on C Me Run's business, operating results and
financial condition, including its ability to secure and complete engagements.
11. Possible Volatility of Securities Prices
The Stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. The market prices of the securities of many publicly-traded
companies in the computer industry have in the past been and can be expected in
the future to be especially volatile. Factors such as C Me Run's operating
results, announcements by C Me Run or its competitors concerning technological
innovations, new products or systems may have a significant impact on the market
price of C Me Run's securities.
12. Minority Shareholder
The Company is acquiring 1.0% of C Me Run's outstanding shares, which is
only a minority interest in C Me Run. The Company will not have control or the
right to control the management and business activities of C Me Run. [Please
indicate whether this is on a fully diluted basis]
13. Additional Financing
C Me Run expects that in order to achieve C Me Run's growth objectives, it
will need to raise additional funds from lenders and equity markets in the
future. There can be no assurance that C Me Run will be able to raise additional
capital on commercially reasonable terms to finance their growth objectives.
Additionally, any further issuance of securities of C Me Run may result in the
dilution of ownership of the Company.
14. Unproven Acceptance of C Me Run's Proposed e-commerce Products and Services
The market for C Me Run's services has only recently begun to develop and
is rapidly changing. As is typical for a new and rapidly evolving industry,
demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty and there exist few
proven services and products. The success of C Me Run's products and services
will depend upon the adoption of the Internet as a medium for commerce and that
there is adequate infrastructure on the Internet to cope with rising demand.
There can be no assurance that widespread acceptance of e-commerce in general,
or of C Me Run's products and services in particular, will occur or that the
Internet will continue to have sufficient infrastructure capacity.
15. Reliance on Third Parties
C Me Run's operations depend on a number of third parties and, in
particular, Microsoft. C Me Run has limited control over these third parties and
no long-term relationships with any of them. C Me Run does not own a gateway
onto the Internet, but instead will rely on an Internet service provider to
connect C Me Run's Web site to the Internet and a third party network manager.
From time to time, C Me Run will experience temporary interruptions in its Web
site connection and also its telecommunications access. Continuous or prolonged
interruptions in C Me Run's Web site connection or in its telecommunications
access would have a material adverse effect on C Me Run's business, results of
operations and financial condition. There can be no assurance that C Me Run will
be able to develop and maintain satisfactory relationships with such third
parties on acceptable commercial terms.
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16. Continuance of Existing Strategic Alliances
C Me Run's growth and marketing strategies are based, in part, on seeking
out and forming strategic alliances with goods and services suppliers, Internet
service providers and other businesses involved in selling goods and services
through the Internet. There can be no assurance that existing strategic
alliances will not be terminated or modified in the future nor can there be any
assurance that new relationships will afford C Me Run the same flexibility under
which it currently operates.
17. Competition; New Entrants
C Me Run expects competition to persist, increase and intensify in the
future as the markets for C Me Run's products continue to develop and as
additional companies enter each of its markets. Numerous releases of product and
services that compete with those of C Me Run can be expected in the near future.
There can be no assurance that C Me Run will be able to compete effectively with
current and future competitors. If these or other competitors were to engage in
aggressive pricing policies with respect to other competing products or
services, or significant price competitions were to otherwise develop, C Me Run
would likely be forced to lower its prices, which could have a material adverse
effect on C Me Run's business, operating results and financial condition.
18. Dependence on the Internet; Uncertain Adoption of the Internet as a Medium
of Communications and Commerce
Rapid growth in interest in and use of the Internet is a recent
phenomenon. The market for certain of C Me Run's products and services are
highly dependent upon the increased use of the Internet for information
publication and distributions and commercial applications. Critical issues
concerning the commercial use of the Internet, including capacity, security,
reliability, cost, ease of use, access, quality or service and acceptance of
advertising, remain unresolved. If widespread commercial use of the Internet
does not develop, C Me Run's business, operating results and financial condition
could be materially adversely affected.
19. Technological Change
The Internet and e-commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence of
new industry standards and practices that could render C Me Run's existing Web
site and proprietary technology obsolete. C Me Run's performance will depend, in
part, on its ability to license leading technologies, enhance its existing
services, develop new proprietary technology that addresses the increasingly
sophisticated and varied needs of its prospective customers, and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. The development of Web site and other proprietary
technology entails significant technical and business risks. There can be no
assurance that C Me Run will be successful in using new technologies effectively
or adapting its Web site and proprietary technology to customer requirements or
emerging industry standards.
20. Marketability
There is a limited market on the OTC Bulletin Board through which the C Me
Run Common Shares may be sold and there is no assurance that an active market
will develop. The Corporation is not able and has no present intention to pay
any dividends to the holders of the C Me Run Common Shares.
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21. Exchange Rate Fluctuations
The Corporation transacts a significant portion of its purchases and sales
in U. S. dollars while the majority of the Corporation's operating expenses are
in Canadian dollars. The Corporation does not have any hedging programs in place
to manage the potential exposure to fluctuations in the U. S./Canadian dollar
exchange rate. Fluctuations in the U.S./Canadian dollar exchange rate can impact
the Corporation's earnings and cash flows.
22. Government Regulation
C Me Run is not currently subject to direct regulation by any government
agency, other than applicable securities laws, regulations applicable to
businesses generally and laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, regulating user privacy, pricing and
consumer protection which may impose additional burdens on companies conducting
business over the internet and thus increase C Me Run's cost of doing business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales tax, libel and
personal privacy is uncertain and may take years to resolve. There can be no
assurance that any such new legislation or regulation will not be enacted nor
that the application of laws or regulations from jurisdictions whose laws do not
currently apply to C Me Run's business will subsequently become applicable.
23. Internet Commerce Security
A significant barrier to e-commerce and communications is the secure
transmission of confidential information over public networks. C Me Run rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information. There can be no assurance that the advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not result in a compromise or breach of the
algorithms used by C Me Run to protect customer transaction data. Concerns over
the security of Internet transactions and the privacy of users may also inhibit
the growth of the Internet as a means of conducting commercial transactions and
the privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions. There can be no assurance that C Me Run's
security measures will prevent security breaches and protect C Me Run from any
resulting risk of loss.
24. Risk of Marketing Strategies Being Unsuccessful
C Me Run expects to derive some of its sales revenue through independent
third parties who will either resell or use C Me Run products to enhance their
own products. C Me Run is unable to determine how successful these providers
will be in selling C Me Run's software. Furthermore, C Me Run does not have any
history or experience in establishing or maintaining such third party support,
and there can be no assurance that they will be able to successfully support
their reseller networks. If C Me Run is unable to provide such support, it may
lose resellers and, consequently, distribution of C Me Run's products would
adversely affected. Additionally, most resellers will offer competitive products
manufactured by third parties. There can be no assurance that resellers will
give priority to C Me Run's products and services over competitors' products and
services. Finally, if C Me Run is unable to support a reseller, they will need
to attract additional or replacement resellers to sell C Me Run's products and
services. There can be no assurance that C Me Run will be able to convince a
sufficient number of additional or replacement
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resellers in order to assure that their products and services will be
successfully marketed and distributed at a profit or that such additional or
replacement resellers will be successful in selling their products and services.
Any reduction or delay in sales of products and services of C Me Run, their
resellers will have a material adverse effect on the business, operating results
and financial condition of C Me Run and its subsidiaries.
25. Risks that Proceeds from Available Financing will not be Sufficient
Developing, manufacturing and marketing software and information security
solutions and the plans of C Me Run for expansion of its subsidiaries, as
mentioned above, will require significant amounts of capital. Since C Me Run and
its subsidiaries have no significant internal revenues to finance the
subsidiaries' continuing operations and plans for expansion, C Me Run and its
subsidiaries are dependent upon the proceeds from sales of C Me Run securities
to satisfy its capital requirements. C Me Run believes that it has adequate
financing to satisfy its subsidiaries' capital requirements for 12 months. After
12 months, C Me Run will have to arrange for additional financing, unless its
subsidiaries are generating revenues from their products and services, to
finance the subsidiaries' manufacturing and marketing operations at a sufficient
level. Financing options could include, but will not be limited to, additional
sales of C Me Run securities or an operating line of credit. If C Me Run is
unable to obtain additional financing on satisfactory terms when needed, C Me
Run' subsidiaries may have to suspend their operations or terminate their
operations altogether.
26. Risk of Volatility of Stock Prices
Stock markets are subject to significant price fluctuations which may be
unrelated to the operating performance of particular companies and the market
price of C Me Run Common Shares may frequently change. The market price of C Me
Run Common Shares could also fluctuate substantially due to a variety of other
factors, including: quarterly fluctuations in results of operations of C Me Run
and its subsidiaries, C Me Run' ability to meet analysts' expectations, adverse
circumstances affecting the introduction of market acceptance of new products
and services offered by the subsidiaries of C Me Run, announcements of new
products and services by competitors, changes in the information technology
environment, changes in earnings estimates by analysts, changes in accounting
principles, sales of C Me Run Common Shares by existing holders and loss of key
personnel.
27. Risk Associated with Penny Stock Rules Limiting the Liquidity of C Me Run
Shares
C Me Run Common Shares have recently traded on the OTC Bulletin Board at a
price greater than $5.00 per share but may now and in the future by subject to
the penny stock rules under the Exchange Act. These rules regulate broker-dealer
practices for transactions in "penny stocks". Penny stocks generally are equity
securities with a price of less than U.S. $5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction,
the broker and/or dealer must
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make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These additional penny stock disclosure requirements are
burdensome and may reduce purchases of this offering and reduce the trading
activity in the market for C Me Run Common Shares. As long as C Me Run Common
Shares is subject to the penny stock rules, holders of such C Me Run Common
Shares may find it more difficult to sell their securities.
28. Risks of Dilution of Investment
C Me Run may issue a substantial number of shares of C Me Run Common
Shares or preferred stock without investor approval. Any such issuance of C Me
Run securities in the future could reduce an investor's ownership percentage and
voting rights in C Me Run and further dilute the value of his or her investment.
29. Risks Associated with the Authorization of Preferred Stock and Possible
Takeover Effects
The board of directors of C Me Run is authorized to create and issue
shares of preferred stock without the approval of C Me Run shareholders. Any
preferred stock that the board of directors of C Me Run creates and issues could
negatively affect the voting power or other rights of holders of shares of C Me
Run Common Shares. Also, the board of directors of C Me Run may create preferred
stock which could be used to prevent a third party from taking control of C Me
Run.
30. Risks Associated with the Protection of Directors and Officers from
Liability
The C Me Run' Articles allow it to reimburse its officers and directors
for damages which such directors or officers may be subject to, including those
which result from a breach of fiduciary duties to C Me Run shareholders. The C
Me Run' Articles also require C Me Run to advance money to any officer or
director if the law does not prevent it from doing so. C Me Run may experience
significant cash flow problems if C Me Run is required to either reimburse, or
advance money to, C Me Run officers or directors for such purposes.
31. Risks Associated with Dividend Policy
C Me Run does not anticipate generating cash flows from its subsidiaries'
operations in the near future. If the subsidiaries generate positive cash flows
from operations, C Me Run intends to use those positive cash flows to finance
further growth of the business of its subsidiaries and does not anticipate
paying dividends to C Me Run' shareholders. Accordingly, potential investors
should not tender their C Me Run Alberta Shares or C Me Run Alberta Options with
the investment objective of receiving dividend revenue from C Me Run.
32. Resale Restrictions
The shares being purchased from Chell are restricted securities owned by
an affiliate and are subject to US federal resale restrictions.
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cDEMO
cDemo is a start up company that was incorporated in the State of Delaware
in February 2000. The head office is in 236B Broadway, Chico, California, 95926
There is a satellite office in Calgary, Alberta, Canada, located at 114, 1215 -
13th Street, SE, Calgary AB.
cDemo intends to establish a no-charge to sellers nationwide network of
Internet inspection and listing centers for automobiles that will provide:
o An unbiased and detailed 100 plus point inspection;
o Multiple digital photographs of the vehicle;
o A computer generated condition report, book value, and rating of the
vehicle;
o A one-stop upload listing service to automotive and classified
advertisement websites.
cDemo's third party information enables consumers to buy, sell, trade-in,
and complete finance, insurance, and extended warranty contracts online, all of
which is not possible today.
cDemo plans to establish business alliances with nationwide quick lube
chains and other service stations, newspapers, photo buy publications, and
Internet based classifieds; automobile finance, insurance and extended warranty
companies; and automotive dot coms. There can be no assurance that any such
alliances will be formed.
cDemo plans to position itself as the "Intel Inside" of the used vehicle
transaction process, becoming the industry recognized service used to enhance
existing businesses. In order for the automotive industry and Internet-based
automotive companies to access the billion dollar used vehicle industry, cDemo
will provide the nationwide infrastructure necessary for this to occur and will
generate revenue from service providers, trade-ins, on-site volume inspections,
lease returns, advertising, and data mining.
Marketing Strategy
The cDemo business model requires that several different marketing strategies be
established for the different types of co-branding partners, business alliances,
and consumers. Each target market is listed below, with the value proposition,
marketing strategy/approach and timing identified.
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<TABLE>
<CAPTION>
====================================================================================================================================
Target market Value proposition Marketing strategy and approach Time Frame
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Increases their revenue through the
increased traffic driven to them by cDemo's
Internet and print media partners.
o Enables them to upgrade their image through
participation in the Internet economy.
o Lowers their customer acquisition cost. A cDemo
customer only costs our listing partners 15
minutes of their hourly employees' time for a
guaranteed sale, and a chance to acquire a
long-term customer.
o Gives them an increased ticket or sales average
Oil change centers because cDemo customers are more likely to repair Large franchise operations
items such as wipers, headlights and safety items will be targeted as the
before listing their car for sale. initial co-branding partners July / August
in cDemo's national roll-out
o Generates more revenue from their car washes strategy.
because sellers want a clean car for the photos.
o Allows them to attach their service to the vehicle
as well as the individual customer. Lube centers
will know when a vehicle is being sold and will
have the opportunity to pass on an incentive to
the new owner to continue doing business with
them.
o Enables them to form agreements with
lease companies to service their vehicles
during term as well as handle end of term
inspection.
====================================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
===========================================================================================================================
Target Market Value Proposition Marketing Strategy and Approach Time Frame
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Allows them to offer their
customers superior classified ads at
no additional cost.
o Allows them to access new revenue
sources through their partnership with
cDemo while maintaining their
existing classified ad base.
o Provides them with a national
Internet listing service, which Major newspapers will be August / September
Newspaper based expands their geographical area and targeted by cDemo in relation
advertisers web presence. to the geographic expansion of
the service
o Private labeling of the listing
and electronic demonstration service
allows cDemo's partners to take
ownership of the service, which
enhances the value of their
classified advertisements. (ie. L.A.
Times electronic demonstration and
listing service, powered by cDemo).
---------------------------------------------------------------------------------------------------------------------------
o cDemo provides these companies cDemo has targeted all
Automotive with virtual trade-in information to automotive dot.com companies
dot com service the seventy percent of as potential users of their October / November
companies online but have a trade-in. online trade-in information
===========================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
====================================================================================================================================
Target market Value proposition Marketing strategy and approach Time Frame
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Enables sellers to have their vehicle's information
and photos uploaded to multiple web sites without any
equipment or aggravation.
o Regardless of the number of web sites on which they
have their vehicle listed, sellers may modify or
delete their vehicle's cDemo ad system wide with one
entry.
o Eliminates nuisance calls by providing all the
necessary information online.
Sellers will only need to take calls to set cDemo's service is September / October
up test drives, not to answer questions targeted at all consumers
regarding their vehicle's condition or disposing of a used car;
history. whether by private party
Individual car sale or trade in. Also,
sellers o Expands the seller's sales area as cDemo does not have to
buyers will be willing to travel longer directly market to sellers
distances if they have sufficient reliable - the marketing is done by
information about a vehicle. the cDemo partners, at no
cost to cDemo.
o cDemo's service creates a virtual trade-in which
allows sellers to receive trade in bids online from
dealers and automotive dot.com companies.
o cDemo's service creates a virtual appraisal enabling
sellers to receive accurate quotes online which do not
require a follow up inspection from finance, insurance
and extended warranty companies.
o cDemo will provide a convenient online sales contract.
====================================================================================================================================
</TABLE>
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Revenue Model
<TABLE>
<CAPTION>
===============================================================================================================================
Description of how the Measure
Revenue source the revenue is generated of revenue
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Tablet Rental Fees cDemo will recover the cost of the tablet $150/tablet
from the oil-lube facilities by charging them per month
a monthly fee per tablet.
2 On-line Appraisal cDemo will partner with multiple finance, $120/finance
insurance and extended warranty companies alternative
whereby there will be a revenue sharing
arrangement for the business that is referred $40/insurance
to them via cDemo. alternative
cDemo will split 50/50 the revenues realized
with the portals. $90/ext warranty
alternative
3 On-Line Trade Ins Dealer will pay for the ability to establish a $50 per
trade-in value on a vehicle without the reference
consumer having to visit the dealership. (assume 2 refs
cDemo will charge the dealership a fee for per trade-in person)
each reference they provide.
4 End of Lease Inspections cDemo will charge the leasing companies a $20 fee per
fee for each vehicle they submit for an end- vehicle
of-lease electronic demonstration at the end
of the lease term.
5 On-Site Volume cDemo will charge dealers and others with large $20 fee per
Inspections inventories a fee for a cDemo representative to vehicle
come to their site and provide the electronic
Demonstration that allows them to list their
inventory for sale on multiple newspapers and
websites.
6 Targeted Advertising cDemo will charge the manufacturers for space Market value
on their website that target the people that are
selling their brand of vehicle.
7 Data Mining After a certain period of operations, cDemo will Market value
have a significant amount of detailed information
that can be sold to interested parties such as
Guidebook companies and manufacturers.
===============================================================================================================================
</TABLE>
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Technology Overview
To perform a standardized electronic demonstration, cDemo's technology
will incorporate automobile inspection software, developed by Technological
Business Solutions Ltd. (TBS) of Derbyshire, England, which will be customized
to cDemo's specifications for the North American market. The software will be
loaded into a handheld tablet and is designed to withstand the rigors of the
automotive service station environment.
The software on which cDemo's Internet listing service will be based has
been tested on over 180,000 automobiles by England's Royal Automobile Club.
cDemo will outsource the production of the tablet to a third-party OEM
manufacturer, and expects to have a commercial product before the end of August,
2000. cDemo will purchase the tablet for approximately $4,000 per unit, and then
lease it to its inspection center partners for approximately $150 per unit per
month based on a 36-month lease.
cDemo plans to use a widely recognized Internet-based data storage center
to receive and deliver its electronic vehicle demonstrations. This collection of
data will be available through virtual windows on its media partners' Websites.
cDemo's logo will identify the integrity of each vehicle listing.
cDemo plans to use the field tablet device based on software developed by
TBS to collect and transmit an electronic demonstration based on an Internet
TCP/IP connection to the cDemo backend database. cDemo intends to use an Oracle
supplied database to provide the backend support for the cDemo website as well
as a data storage warehouse that other websites can harvest data from utilizing
cDemo's XML standard. It is intended that the connection between various
websites will be handled with a proposed Cisco 128 bit encrypted VPN (Virtual
Private Network) to allow secure harvesting of cDemo data. The cDemo consumer
should have the ability to change his/her information and pricing on the cDemo
website along with the ability to view his or her vehicle and choose upload
destinations online. A vehicle buyer or seller will be able to click on a cDemo
icon to display the electronic demonstration of any vehicle from any subscribing
website.
Analysis of Competitive Environment
Newspaper Classified and Photo Buy and Sell Publications
These businesses primarily rely on the traditional model of selling and
buying used cars between individual/customers calling in and placing a 20-word
advertisement in their publication for a set time period.
cDemo sees these businesses as natural partners. They need our content to
enhance their customers' experience and to counteract Web portals' invasion into
their classified advertisement domain.
AutoTrader Magazine & Autotrader.com
AutoTrader is one of the leading national trade magazines and Websites (as
part of a partnership with eBay) dedicated to the buying and selling of used
vehicles. The company deploys a network of photographers who take a photo only
from the seller's perspective, and does not have the necessary infrastructure to
offer an electronic demonstration service similar to cDemo's.
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Auto Inspection Businesses
These businesses are generally used by the buyer to inspect automobiles
and determine their true condition. They provide the buyer with a way to confirm
the state and condition of a potential automobile purchase. These businesses are
not in direct competition with cDemo. They are used when the buyer has already
decided to purchase the vehicle. cDemo's Tier I service provides the first step
in the filtering process for the buyer. Once the buyer has decided on a vehicle,
Tier II service, the mechanical inspection, will be available through cDemo's
partner companies.
cDemos product should be attractive to these businesses. cDemo's
inspection and listing partners should be naturally suited to perform our Tier
II inspection.
Web-Based Automobile Search Companies
While not specifically tailored to private party transactions, web-based
automobile search companies, e.g., iMotors.com, take requests from individuals
for the used vehicle of their choice. For a fee, the business searches for a
suitable vehicle, using sources such as auctions, off-lease vehicles and, to a
lesser extent, private individuals. Strictly speaking, these businesses are used
car dealers who operate with no inventory but who access used automobiles on
demand. Their services are limited to late model, low-mileage automobiles, and
they sometimes require a waiting period of up to a month to locate and deliver
the requested vehicle.
cDemo intends to enhance the ability of these businesses to find used
cars. Because these businesses are prepared to buy and transport used vehicles
from distant locations, cDemo's used car content will provide them with a
distinct advantage when searching for particular automobiles with specific
options. These types of companies will also be able to use cDemo to enhance
their performance while maintaining their revenue model of delivering
refurbished certified cars to the consumer.
Automobile Dealers
Franchised or independent automobile dealers maintain used automobile
inventories obtained from trade-ins, other dealers or auctions. Dealers are
responsible for the majority of used vehicle sales.
cDemo believes that dealers will want to take advantage of cDemo's to
search for inventory and to utilize its fee-based mobile listing service to
advertise their inventory.
cDemo's market analysis indicates that there is a need for a trusted
third-party inspection service. Autobytel, iMotors, and eBay, have all
introduced a way for vehicles to get inspected. However, these inspections are
carried out within the confines and for the benefit of the particular company.
Strategic Alliances
Chell.com Ltd.
Chell.com Ltd. is a technology strategy bank founded by Cameron Chell to
incubate, test and grow businesses out of the latest in technology and service
innovations. Chell.com has offices in New York, Toronto, and Calgary.
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Thomson Kernaghan and Co. Limited
Thomson Kernaghan and Co. Limited is a 50-year old Canadian, independent,
employee-owned investment banking firm. Its head office is in Toronto, Ontario
with branches in Vancouver, B.C, Calgary, Alberta and Montreal, Quebec. Thomson
Kernaghan is a member of each of Toronto, Montreal and CDNX exchanges; the
Canadian Investor's Protection Fund and the Investment Dealers Association of
Canada.
GPC Communications
cDemo has formed an alliance with a division of GPC International, GPC
Communications, a worldwide public relations consulting firm serving clients
with a wide array of needs. GPC designs and executes strategic, marketing-based
public relations programs to help companies connect to their markets. With 40
offices and 500-plus employees in the U.S., Canada and Europe, GPC's clients
include Bell Mobility, Applied Terravision, Jaws Technologies, C Me Run,
Kenetix.com., Rx-Rite.com, Doctor Online and Intrinsyc Embedded Software. GPC
has received coverage for its clients in such high-profile publications as the
New York Times, the Boston Globe, and Fortune and Forbes magazines.
GPC will be responsible for managing cDemo's first to market public
relations campaign. This campaign will draw interest from each segment of the
automobile industry because the Electronic Demonstration and Listing Service
solves so many of the sensitive and timely problems that have been created by
advanced technology.
Capital
The authorized capital as of the August 31, 2000 closing date for the
transaction will consist of 20,000,000 common shares with a par value of $0.001.
The issued and outstanding shares shall be, prior to an anticipated closing of a
financing with VC Advantage Limited Partnership (see Material Contracts) consist
of 2,088,000 common shares. The Company is purchasing 480,000 common shares,
representing 22.9% of cDemo's common stock prior to the closing. On a fully
diluted basis, excluding options that have not vested, the Company's voting
rights will be reduced to 16.39%.
Principal Holders
The following is a list of shareholders of cDemo as of July 31, 2000:
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----------------------------------------------------------------------------
Description cDemo
Common Shares (1)
----------------------------------------------------------------------------
Common
----------------------------------------------------------------------------
Chell.com Ltd. 480,000
----------------------------------------------------------------------------
McKinsey Co. SA 480,000
----------------------------------------------------------------------------
Allan Chell 180,000
----------------------------------------------------------------------------
Lori Chell 180,000
----------------------------------------------------------------------------
Bernie Kraus 360,000
----------------------------------------------------------------------------
Richard Curtis 48,000
----------------------------------------------------------------------------
Gordon Herman 75,996
----------------------------------------------------------------------------
Frank Killoran 84,000
----------------------------------------------------------------------------
Terri Jo Killoran 60,000
----------------------------------------------------------------------------
Tom Killoran 36,000
----------------------------------------------------------------------------
May Rogers 36,000
----------------------------------------------------------------------------
Len Ully 24,000
----------------------------------------------------------------------------
Wade Shultz 20,004
----------------------------------------------------------------------------
Romola Ully 24,000
---------
----------------------------------------------------------------------------
Subtotal Issued and Outstanding 2,088,000
----------------------------------------------------------------------------
Allan Chell is the brother of Cameron Chell. Lori Chell is Allan Chell's wife.
Teri Jo Killoran is the wife of Frank Killoran. Tom Killoran, May Rogers, Len
Ully and Romola Ully are related to Frank Killoran.
Options/Warrants/Rights to Acquire Stock
As of July 31, 2000, there are 2,102,000 unallocated options to purchase shares
of cDemo at $5.00 per share. The vesting dates for such options are July 1,
2001, June 1, 2002 and December 1, 2002. the options expire on July 31, 2003.
The following table sets out the outstanding warrants entitling holders to
purchase common shares as of July, 2000:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Name # of Shares Price Expiry Date
US $
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VC Advantage Limited Partnership 60,000* $5.00 July 31, 2003
----------------------------------------------------------------------------------------------------------------------
Thomson Kernaghan & Co. Limited 60,000* $5.00 July 31, 2003
----------------------------------------------------------------------------------------------------------------------
Chell.com 60,000* $5.00 July 31, 2003
----------------------------------------------------------------------------------------------------------------------
Hammock Group Ltd. 480,000 $2.083 July 31, 2003
----------------------------------------------------------------------------------------------------------------------
SUBTOTAL: 660,000
----------------------------------------------------------------------------------------------------------------------
</TABLE>
*If VC Advantage Fund provides an additional $3,000,000 in financing to CDemo
Inc., each of VC Advantage Fund Limited Partnership, Thomson Kernaghan & Co.
Limited and Chell.com, will each earn an additional 60,000 warrants for a total
of 180,000.
VC Advantage Limited Partnership has a right to convert its indebtedness into
common shares (See "Material Contracts of cDemo"). On a fully diluted basis,
there would be 4,550,000 common shares.
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Material Contracts of cDemo
cDemo has entered into the following material contracts:
1. A services agreement with Chell.com dated March 1, 2000, for the provision of
strategic advice with respect to financing, public relations, corporate
structure, technology, human resources and other services typically required by
start-up ventures. The fee is $720,000 and has been fully paid.
2. VC Advantage Limited Partnership Loan Agreement. Pursuant to the terms of a
loan agreement which cDemo intends to close within days, VC Advantage Limited
Partnership agreed to loan (the "Loan") to cDemo in the principal amount of up
to Six Million Dollars in the currency of the United States of America
($6,000,000). It is expected that the Loan will take place through more than one
advance with the first advance commencing on the Closing Date. cDemo's
obligation to repay the Loan shall be evidenced by Note(s) in substantially the
form attached as Schedule "B" attached to this Agreement with blanks
appropriately filled in and payable to the order of the Lender. Each Note shall
be dated the date of the advance and shall be payable on July 31, 2003. It is
understood and agreed that, notwithstanding the execution of this Agreement or
other related documentation, nothing shall compel the Lender to advance any
funds and/or if certain funds are advanced to continue to advance funds to the
maximum of $6,000,000.
cDemo shall pay interest to VC Advantage Limited Partnership on the
outstanding and unpaid principal amount of the Loan at the rate of eight percent
(8%) per year, calculated on the basis of a year of 30/360 basis for the actual
number of days elapsed. Interest shall be payable upon any prepayment of
principal and at maturity, at the Lender's Principal Office. Any payments
received shall be applied first to interest and then to principal. Interest
shall be payable semi-annually. Interest is payable in cash or common shares at
the option of cDemo. If cDemo elects to pay interest in common shares the number
of common shares issuable shall be calculated by the issuance of 1 common share
for each $5.00 of indebtedness.
As additional consideration for the Loan, cDemo shall:
(a) Issue warrants to VC Advantage Limited Partnership (the "Lender's
Warrants") to purchase up to 120,000 shares (pro-rata to the advances on
the Loan) of common stock of cDemo. The Lender's Warrants shall be valid
for a period of 3 years from the Effective Date. The exercise price of the
Lender's Warrants (the "Lender's Warrant Exercise Price") will be $5.00
per share;
(b) Issue warrants to Thomson Kernaghan & Co. Limited, as agent, (the
"Agents' Warrants") to purchase 120,000 shares (pro rata to the advances
on the Loan) of common stock of cDemo. The Agents' Warrants shall be valid
for a period of 3 years from the Effective Date. The exercise price of the
Agents' Warrants (the "Agent Warrant Exercise Price") will be $5.00 per
share.; and
cDemo shall pay a fee equal to eight (8%) percent of the gross amounts
advanced under each of the Notes payable to the Lender on the date of each such
advance. The fee shall be deducted from the advance.
The Lender shall have the right to convert the indebtedness due (including
any accrued interest) into common shares of cDemo at the lower of: (a) 1 common
share for each $5.00 of indebtedness; and
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(b) if cDemo is publicly traded, 80% of the average closing bid price for 15
consecutive days prior to conversion subject to a floor of $2.50.
Registration Rights. Promptly, but no later than 270 days after the
Closing Date, cDemo is obliged file a Registration Statement in the United
States to register 200% of the shares underlying the conversion rights as
provided in this agreement; 100% of the shares underlying the Purchasers
Warrants and 100% of the Agents Warrants and use its best efforts to ensure that
such registration statement shall become effective within 120 days. cDemo shall
use commercially reasonable efforts to maintain the effectiveness for the
Effectiveness Period as defined in the Registration Rights Agreement. In the
event that the Registration Statement is not filed within 270 days or declared
effective within 120 days thereafter, cDemo shall pay to the Lender an amount
per day equal to 1% per month of the original principal amount of the
outstanding debt for each day after the 270th day that the Registration
Statement is not filed, and for each day after the 120 days that the
Registration Statement is not effective. The Lender shall be entitled to convert
such indebtedness due into common stock of cDemo at the Conversion Rate.
Within 30 days of the Registration Statement becoming effective, cDemo
shall use all commercially reasonable efforts to become a "reporting issuer"
under the US Securities Exchange Act. For so long as the Lender is the
beneficial owner of one percent (1%) or more of any class of cDemo's equity
securities, or is the beneficial owner of any right that is convertible into or
exchangeable for one percent (1%) or more of any class of cDemo's equity
securities, cDemo shall use all commercially reasonable efforts to timely file
reports and other information required by it to be filed with the Securities and
Exchange Commission under the US Securities Exchange Act in order to remain a
reporting issuer. cDemo shall use best efforts to cause a market maker to quote
its common shares on a NASDAQ or NASD market (including OTC-BB) if the Company
meets applicable listing requirements. cDemo shall maintain such quotation for
the Effectiveness Period (as defined in the Registration Rights Agreement).
If cDemo meets the requisite listing requirement, but does not establish
and maintain the quotation, cDemo shall pay to the Lender penalties of 1% per
month of the outstanding amount until the quotation is established or
re-established. The Lender shall be entitled to convert the indebtedness due
under this provision into Common Stock of cDemo at the Conversion Rate.
The Lender shall be entitled to additional common shares if cDemo issues
additional stock or deemed stock (option, warrants and/or convertible
securities) for less than $5.00/share. Formula: $5.00 times fraction (numerator
is the number of issued and outstanding shares plus number of shares at the
strike price which could be bought with the consideration received by the
cDemo)(denominator is the number of issued and outstanding shares plus all of
the stock if all option, warrants were exercised and all convertible securities
converted). This is to be adjusted if there are price increases/cancellations
due to expired options, warrants or conversion privileges.
cDemo further covenanted and agreed with the Lender that:
(a) Within two hundred seventy (270) days from the Effective Date, cDemo
USA shall have filed a registration statement with the SEC under the
Securities Act to register:
(i) common stock to be issued by cDemo;
(ii) 200% of the common stock underlying any shares of cDemo which
may be issued to the Lender upon any debt conversion by the
Lender pursuant to this Agreement;
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(iii) 100% of the common stock underlying any shares which may be
issued upon exercise of the cDemo Lenders' Warrants;
(iv) 100% of the common stock underlying any shares which may be
issued upon exercise of the cDemo Agent's Warrants.
3. Registration Rights Agreement. cDemo intends to enter into a registration
rights agreement pursuant to the anticipated closing of its financing with VC
Advantage Fund Limited Partnership. The terms will be as follows:
(a) Subject to Section 2.01(c), cDemo would, prior to May 31, 2001 (the
"Registration Date") file with the Commission a Registration Statement (a
"Registration Statement") relating to the offer and sale of the
Registrable Securities (as defined) by the Holders and, thereafter, shall
use its reasonable best efforts to cause such Registration Statement to be
declared effective under the Securities Act as soon as reasonably
practicable after the filing thereof; provided, however, that no Holder
shall be entitled to have the Registrable Securities held by it covered by
such Registration Statement unless such Holder is an Electing Holder.
(b) Subject to Section 2.01(c), cDemo shall use its reasonable best
efforts:
(i) To keep the Registration Statement continuously effective in
order to permit the Prospectus forming part thereof to be usable by
Electing Holders for the Effectiveness Period; (as defined) and
(ii) During the Effective Period of the Registration Statement,
promptly upon the request of any Holder of Registrable Securities
that is not then an Electing Holder, to take any action reasonably
necessary to enable such Holder to use the Prospectus forming a part
thereof for offers and resales of Registrable Securities, including,
without limitation, any action reasonably necessary to identify such
Holder as a selling securityholder in the Registration Statement.
(c) Notwithstanding anything to the contrary contained in this Agreement,
cDemo shall be entitled, from time to time by providing written notice to
the Holders, to require the Holders to suspend the use of the Prospectus
for sales of Registrable Securities under the Registration Statement for a
reasonable period of time not to exceed 60 days in succession or 60 days
in the aggregate in any twelve month period (a "Suspension Period") if
cDemo shall determine that it is required to disclose in the Registration
Statement a financing, acquisition, corporate reorganization or other
similar corporate transaction or other material event or circumstance
affecting cDemo or its securities, and that such disclosure of such
information at such time would be seriously detrimental to cDemo and its
stockholders. Immediately upon receipt of such notice, the Electing
Holders shall suspend the use of the Prospectus until requisite changes to
the Prospectus have been made as required below. Any Suspension Period
shall terminate at such time as the public disclosure of such information.
After the expiration of any Suspension Period and without any further
request from a Holder, cDemo shall as promptly as reasonably practicable
prepare a post-effective amendment or supplement to the Registration
Statement or the Prospectus, or any document incorporated therein by
reference, or file any other required document so that, as thereafter
delivered to purchasers of the Registrable Securities included therein,
the Prospectus will not include an untrue statement of a material fact or
omit to state any
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material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(d) After the Effective Period of the Registration Statement becomes
effective, cDemo shall, upon the request of any Holder of Registrable
Securities that is not then an Electing Holder, as promptly as
practicable, send a Notice and Questionnaire to such Holder. Following its
receipt of such Notice and Questionnaire, cDemo will as promptly as
practicable include the Registrable Securities covered thereby in the
Registration Statement (if not previously included).
(e) If (i) on or prior to the Registration Date, cDemo has not filed with
the Commission a Registration Statement with respect to the Registrable
Securities or (ii) on or prior to the 120th day following the Registration
Date the Registration Statement, if previously filed, has not been
declared effective by the Commission (each, a "Registration Default"),
cDemo shall be required to pay liquidated damages ("Liquidated Damages"),
from and including the day following such Registration Default until the
Registration Statement is either declared effective or so filed and
subsequently declared effective, as applicable; provided, however, that
cDemo shall not be required to pay Liquidated Damages after the completion
of the Effectiveness Period with respect to such Registrable Securities.
Such Liquidated Damages shall be paid monthly in arrears on the first day
of each month and on the first business day after the Registration
Statement has been declared effective, with the first such payment due on
the first such day immediately after the occurrence of such Registration
Default. cDemo shall pay to the holder a penalty in common shares of cDemo
calculated as follows: multiply one percent (1%) per month (or pro-rated
percentage thereof) times the number of Registrable Securities then held
by such Holder. In the event the Registration Statement ceases to be
effective (or the Holder is otherwise prevented or restricted by cDemo
from effecting sales pursuant thereto, for more than 60 days, whether or
not consecutive, during any twelve-month period (an "Effective Failure"),
then cDemo shall pay Liquidated Damages until such Effective Failure is
cured in the amount of and in the manner as described above. For the
purposes of determining an Effective Failure, days on which cDemo has been
obligated to pay liquidated damages in accordance with the foregoing in
respect of a prior Effective Failure within the applicable twelve-month
period shall not be included. The parties hereto agree that the Liquidated
Damages provided for in this Section 2.01(e) constitute a reasonable
estimate of the damages that will be suffered by the Holder by reason of
the failure to file a Registration Statement, the failure of a
Registration Statement to be declared effective or the failure of a
Registration Statement to remain effective, as the case may be, in
accordance with this Agreement. The Liquidated Damages set forth in this
Section 2.01(e) shall be the exclusive monetary remedy available to the
Holder for such Registration Default or Effective Failure.
"Effectiveness Period" means the period of time commencing on the
August 3, 2000 and ending on the first to occur of the following events:
(A) a registration statement with respect to the issuance or sale of such
Registrable Securities shall have become effective under the Securities
Act and such Registrable Securities shall have been issued and disposed of
in accordance with such registration statement; (B) such Registrable
Securities have been sold or are available for sale in a transaction which
complies with the provisions of Rule 144(k) promulgated under the
Securities Act; (C) such Registrable Securities shall have been otherwise
transferred, new certificates for such Registrable Securities not bearing
a legend restricting further transfer shall have been delivered by cDemo
and subsequent disposition of such Registrable Securities shall not be
subject to registration or qualification under the Securities Act; (D)
such Registrable Securities shall have ceased to be outstanding; (E) as it
relates to common stock issuable upon conversion of the Term Loan
Agreement, 2 years from the date of registration; or (F) as it relates
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to common stock issuable upon exercise of warrants, until 30 days after 90
% of the warrants have been exercised or expired.
4. Warrant. There are 3 separate warrant agreements between cDemo, VC Advantage
Limited Partnership, Thomson Kernaghan & Co. Limited and Chell.com. The warrant
agreements are identical in that the exercise price in each case is $5.00/share
(the "Exercise Price") and the expiry date is August 3, 2003. The warrants
contain anti-dilution provisions. The Exercise Price may be adjusted if there
are issuances of Additional Shares of Common Stock (as defined in the Warrant
Agreement) if the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by cDemo is less than the Exercise Price for
such Warrant Shares Stock (as defined in the Warrant Agreement) in effect on the
date of, and immediately prior to such issue, for each Warrant Share. In the
event that cDemo issues Options or Convertible Securities Stock (as defined in
the Warrant Agreement) then the maximum number of issuable shares be deemed to
have been issued, provided upon the expiration or price increase of such Options
or Convertible Securities over time would reduce the adjustment. The Exercise
Price shall be reduced, concurrently with such issuance with respect to the
Warrant Shares, to a price determined by multiplying the Exercise by a fraction
(x) the numerator of which shall be the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issuance, plus the number of
shares of Common Stock which the aggregate consideration received by the Company
for the total number of Additional Shares of Common Shares so issued would
purchase at such Exercise Price and (y) the denominator of which shall be (1)
the number of shares of Common Shares outstanding immediately prior to such
issuance plus (2) the number of such additional shares of Common Shares so
issued.
5. General Security Agreement. cDemo agreed to grant VC Advantage Limited
Partnership a general security agreement securing the assets and undertakings of
cDemo.
6. Escrow Agreements. Each of the shareholders of cDemo have agreed to deposit
their shares with an Escrow Agent who will release the shares as to a third on
each anniversary commencing July 31, 2001.
Conflicts/ Interest of Management in Material Contracts/Indebtedness of
Management
Cameron Chell, who is Chairman of the Board of cDemo, is also a director
and shareholder of VC Advantage Limited, the general partner of VC Advantage
Limited Partnership which will earn fees on loans and equity financings made to
Engyro.
Mr. Chell is also the sole shareholder of Chell.com which has earned fees
with respect to the Service Agreement.
Frank Killoran is President of Chell.com and a shareholder and director of
cDemo.
Gordon Herman is President and a shareholder of cDemo Inc. and is also a
managing director of Chell.com
Description from Valuation Discounts
Stanford Keene valued cDemo's equity at $5.00 per share based on the agreed to
financing with VC Advantage Fund Limited Partnership. The financial assumptions
are set out in their Valuation Report.
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Lawsuits
Management of cDemo is not aware of any existing litigation or the threat
of any potential litigation.
Auditors
As cDemo is a start-up company which has not yet completed its first year
of operations, it has not yet appointed auditors.
Financial Statements
According to cDemo's May 2000 unaudited financial statements , attached hereto
as Exhibit "G", as of May 31, 2000, cDemo's total assets were valued at
$1,205,941 and total liabilities were $1,554,080. No revenues were generated for
the period ended May 31, 2000. Operating expenses were $384,140, resulting in a
net loss of $384,140.
Management Discussion of Operating Results
As cDemo is a start-up venture, is still in the process of product
development and has not yet started operations, management could not comment on
operating results.
Board of Directors
Cameron Chell, Chairman
Please see page 5 for a discussion of Mr. Chell's background.
Gord Herman, President:
Mr. Herman is a managing director of Chell.com. Mr. Herman has over 15 years of
business experience, primarily at the executive management level. Mr. Herman is
currently the Chairman /President -The Madison Companies Ltd., a CDNX listed
company focused on acquiring small to medium sized facilities management
companies. From 1992 -1998, Mr. Herman was the President/ owner - Harding Hall &
Graburne Insurance Inc., a property and casualty insurance broker with sales of
CDN$20 million per annum. Concurrently, from 1996 - 1998, Mr. Herman was the
Vice President, Western Canada - Acquisitions, at Equisure Financial Network, a
publicly traded (TSE) insurance broker network (sales CDN$450mm+). From 1988 -
1992, Mr. Herman was the President- General Electric Capital Canada Leasing
Inc., Canadian Operations (Canadian Subsidiary of General Electric).
Allan Chell, VP of Strategic Development and Director
In 1990, Mr. Chell managed and/or co-managed the wholesale department, used car
department, and finally the business office for Davis Pontiac of Lethbridge, AB.
In 1992, Mr. Chell started NAFTA Trading Corp., an automobile import/export
company servicing Western Canada and the Northwestern United States. Mr. Chell
is a founding member of the North American Automobile Trade Association, which
manages governmental, customs, environmental and safety issues and regulations
on behalf of its members. As President of NAFTA Trading Corp., Allan has
positioned the company to exponentially grow the business through strategic
alliances and target acquisitions over the next 12 to 24 months.
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Bernie Knaus, VP of Strategic Development and Director
Mr. Knaus graduated from California State University, Chico, in 1990 with a
Bachelor of Science degree in Business marketing. He then started North American
Vehicle Export (NAVEX) in 1990 exporting cars from the United States to Germany
& Japan. In addition, Mr. Knaus co-developed NAVEX's internal and proprietary
custom database system to manage all processes specific to international vehicle
exportation and tax reclamation.
Stuart Dalgleish, MBA, General Manager and Corporate Secretary
From 1988 to 1989 and from 1990 to 2000, Mr. Dalgleish worked with the City of
Calgary focusing on business renewal by standardizing processes, developing
alignments among related business areas, and implementing technology solutions.
Mr. Dalgleish is currently leading a project for the City of Calgary to
introduce document management technology to their operations, effectively
creating a paperless Internetbased environment for over 300,000 Calgary property
and business accounts.
From 1989 to 1990, Mr. Dalgleish worked with the Alberta Workers' Compensation
Board (an insurance-based Crown corporation), involved in the design and
development of new forecasting and strategic planning processes. Mr. Dalgleish
is a member of the Board of Directors of the Calgary chapter of the Juvenile
Diabetes Foundation.
Michael Burnyeat, C.A, Interim CFO and Director (Part time)
Prior to joining cDemo, Mr. Burnyeat was the Assistant Controller at MetroNet
Communications Corp., which was recently acquired by AT&T Canada Inc. (NASDAQ:
ATTC). While at MetroNet, Mr. Burnyeat was responsible for the day-to-day
operations of the Calgary finance department, and preparation of consolidated
financial statements for shareholders and the various regulatory and security
commissions in Canada and the United States.
From 1996 to 1997, Mr. Burnyeat was the Assistant Manager Corporate Accounting
for Canadian Pacific Ltd., (TSE: CP and NYSE: CP), responsible for overseeing
the day-to-day accounting and monthly financial reporting for the corporate
entity and numerous corporate subsidiary companies, as well as acting as a
liaison with the treasury and legal departments. From 1990 to 1996, Mr. Burnyeat
was a Manager, Business Assurance at Coopers & Lybrand - Calgary, Canada and
Edinburgh, Scotland, where he was responsible for the management of staff on a
variety of projects and provided financial advisory service.
Mr. Burnyeat was the 1999 recipient of the CFO Recognition Award, 1998 recipient
of the Corporate Award of Merit and nominee for the President's Club, and the
recipient of the Canadian Petroleum Tax Society Scholarship.
Management Team
Richard Curtis, Manager of Strategic Partnering
Mr. Curtis has over 24 years of automotive industry experience, including
extensive management experience in both the retail dealership and the wholesale
auto auction environments. Mr. Curtis has served as site manager in several
major metro areas for two of the largest auction corporations. These sites have
involved up to 60 acres of land and facilities with hundreds of employees in
both the auction and reconditioning areas, handling in excess of 80,000 vehicles
per year. Mr. Curtis' clients have included
77
<PAGE>
the major automobile manufactures, rental car companies, leading financial
institutions and national leasing organizations.
Dave Daniels, Manager of Research and Training
Mr. Daniels has 20 years as a Certified General Motors Master Technician. For
nine consecutive years, Mr. Daniels has received the Master Award from General
Motors, and for five of those years, achieved the Grand Master level, the top
technician in Alberta, Canada. In 1995 he was National Champion (Best in
Technicians Guild Program). For the past 2 years, Mr. Daniels has taught at
Lethbridge Community College.
Wade Michael Schulz, BA., Director, Data Services
Mr. Schulz is currently working towards an MBA focusing on MIS from Athabasca
University, AB. He holds a Bachelor's degree and a certificate in MIS from the
University of Lethbridge, AB and is certified in the Multi-value Database
environment through JES and associates. Prior to joining cDemo, he was employed
at NAFTA Trading as a Systems Analyst gaining experience in Web-based data
solutions, hardware connectivity, software development and communication
strategies.
Specific Risk Factors
1. Business Partner Commitment
To bring the cDemo business model to an operating state, cDemo requires
the commitment of media/advertising partners (newspapers, photo-buy publications
and internet advertisers) and quick lube oil change partners. This establishes
the environment where sellers can obtain "electronic demonstrations", and buyers
can view enhanced used car classified advertisements.
To further bring the cDemo business model to a revenue state, cDemo
requires the additional commitment of automobile dealers, warranty, insurance
and finance providers, manufacturers and other companies who seek advertising
opportunities or an on-site inspection service.
Without these business partner commitments, the cDemo business model
cannot operate and generate revenues.
cDemo believes it has a strong set of value propositions to offer all
potential business partners - that being either increased customers or increased
revenues, or both. These value propositions will offer compelling and convincing
rationale to all potential business partners.
2. Development of Similar Business Ventures
Once cDemo unveils its business model, other businesses may elect to
follow suit with similar models. Should this occur, cDemo could face a decreased
market share and revenues that fall below projections.
A more general result could be a used automobile industry that remains
fragmented and without a common and consistent source of used automobile
information. This could cause consumers to be wary of any future service that
publicizes an offering of unbiased and objective used automobile information.
cDemo believes its aggressive and fast-track roll-out strategy will
establish a strong degree of
78
<PAGE>
control over the "distribution network", being the oil change centers that
perform "electronic demonstrations". This control over distribution will prevent
initial thrusts by other business. In the long term, once the cDemo "brand"
becomes the household name associated with trusted used automobile information,
and consumers' ability to conduct online used automobile transactions, other
businesses will face an extremely high barrier to entry level.
3. Ability To Implement
The success of the cDemo business model depends largely on the company's
ability to implement a sound system of operations. Without this, cDemo will face
dissatisfied consumers and business partners. The result would be a lack of
acceptance of the business model, which would obviously negate the potential for
revenue generation.
4. Competition
cDemo faces strong competition from established and more well known
companies such as AutoTrader.com, eBay, and iMotors.com. Many of these
competitors have substantially greater financial and technical resources and
marketing capabilities than cDemo. Competitors with superior resources may be
able to utilize such resources to market their services and gain a competitive
edge over cDemo. In addition, there can be no assurance that cDemo's potential
competitors will not succeed in developing and marketing networks that are more
effective than any which have been or will be developed by cDemo, or which would
render the cDemo's services non-competitive.
5. Projections
The projections upon which the valuations are based, as set forth in the
Valuation Report, were prepared by Management of cDemo, and based upon
assumptions concerning circumstances and events which have not occurred. The
anticipated results, which are set forth, are subject to changes and variations
as future operations and events occur. Moreover, although Management of each of
cDemo, reasonably expects, to the best of their knowledge and belief, that the
results to be achieved by each company will be as set forth in the projections,
the projections are not guarantees, and there can be no assurance that any of
the potential benefits which are described therein will occur. Furthermore,
there will usually be differences between the projected and actual results
because events and circumstances frequently do not occur as expected and the
differences may be material. If each of cDemo is not able to achieve
profitability, they may not be able to continue in the long term and any value
attached to shares of each of cDemo will be lost.
6. Additional financing
cDemo will need additional financing to meet its capital requirements. If
cDemo requires additional funds, it shall be dependent upon sources such as:
o future earnings,
o the availability of funds from private sources, including, but not limited
to, our shareholders, loans and additional private placements; and
o the availability of funds from public sources including, but not limited,
an initial public offering of our securities.
79
<PAGE>
Market conditions for private and public offerings are subject to
uncertainty and there can be no assurance when or whether a private and/or
public offering shall be successfully completed or that other funds shall be
made available to us. In view of cDemo's lack of operating history, their
ability to obtain additional funds is limited. Such financing may only be
available, if at all, upon terms which may not be advantageous to us. If
adequate funds are not available from operations or additional sources of
financing, our business shall be materially adversely affected and the company
may not be able to continue operations or develop its business plan.
7. Key Personnel
cDemo is substantially dependent upon the continued services of current
management and directors including, but not limited to Cameron Chell, Gord
Herman, Allan Chell, and Richard Curtis, who devote a significant amount of time
to enterprises in addition to those of cDemo. cDemo intends to enter into
employment agreements with each of our key employees in the future. The terms of
these employment agreements are subject to negotiation. There can be no
assurance that the employment agreements will be entered into upon acceptable
terms. The loss of the services of current management would have a material
adverse affect upon our business and/or our prospects. cDemo does not maintain
"key man" life insurance on the life of any of their employees. In order for the
Company to achieve its goals and objectives, the following personnel will be
required: Chief Operating Officer, Vice President of Sales and Marketing,
Accounting Manager, Technical Support Manager, and Regional Account Managers.
To the extent that the services of key personnel become unavailable, cDemo
shall be required to retain other qualified persons and there can be no
assurance that they shall be able to employ qualified persons upon acceptable
terms.
8. Minority Shareholder
The Company is acquiring 22.9% of cDemo's outstanding shares (to be
further reduced by an imminent financing) TO 16.39% which is only a minority
interest in cDemo. The Company will not have control or the right to control the
management and business activities of cDemo.
9. Resale Restrictions
The shares of cDemo are private corporation shares. There is no market for
such shares.
80
<PAGE>
EXHIBIT
"D"
<PAGE>
R HOME FUNDING CO. LTD
(A Development Stage Enterprise)
Financial Statements
May 31, 2000
(unaudited)
<PAGE>
R HOME FUNDING CO. LTD
(A Development Stage Enterprise)
Balance Sheet
As at May 31, 2000
(unaudited)
May 31, 2000
Assets:
Current Asset:
Accounts Receivable 1,450
Prepaids (Note 1) 450,000
--------
451,450
Total Assets: $451,450
Liabilities & Equity:
Current Liability:
Accounts Payable 319,199
Due to Chell.com 1,095,391
---------
Total Liabilities: 1,414,590
Capital Deficiency
Common Shares (Note 2) 1,450
Accumulated deficit (964,590)
---------
Total Equity: (963,140)
Total Liabilities & Equity $451,450
See accompanying notes to financial statements
<PAGE>
R HOME FUNDING CO. LTD
(A Development Stage Enterprise)
Statement of Operations
For the period from date of incorporation, November 4, 1999 to May 31, 2000
(unaudited)
May 31, 2000
Expenses:
Professional Fees $ 412,475
Software Development (Note 4) 266,168
Salaries 199,142
Travel 78,905
Marketing 5,537
Office Supplies 1,791
Telephone 572
------------
Net Loss and accumulated deficit at end of period: $964,590
Loss per share: 0.65
See accompanying notes to financial statements
<PAGE>
R HOME FUNDING CO. LTD
(A Development Stage Enterprise)
Statement of Cashflows
For the period from date of incorporation, November 4, 1999, to May 31, 2000
(unaudited)
Cash flows used in operating activities
Net loss for the period ($964,590)
Changes in non-cash working capital (note 3) $963,140
--------
($1,450)
Cash flows used in investing activities $0
Cash flows used in financing activities
Issuance of common shares $1,450
Increase in cash holding $0
Beginning cash balance $0
Ending cash balance $0
See accompanying notes to financial statements
<PAGE>
R HOME FUNDING CO. LTD.
(A Development Stage Enterprise)
Notes to the Financial Statements
For the period from date of incorporation, November 4, 1999 to May 31, 2000
(unaudited)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
R Home Funding Co. Ltd (the "Company") was incorporated on November 4,
1999 under the laws of the state of Nevada. From inception of the Company
it has conducted minimal business operations except for organizational and
capital raising activities. The Company currently has not commenced its
principal operations and in accordance with Statement of Financial
Accounting Standards (SFAS No. 7 "Accounting and Reporting by Development
Stage Enterprises") is considered a development stage company for
financial reporting purposes.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Prepaid expenses
Prepaid expenses are carried at cost and consist principally of payment to
Chell.com concerning a general services agreement which will benefit more
than one period. The amounts are charged to expense over the term of the
agreement.
<PAGE>
Financial Instruments
The Company's accounts receivable, accounts payable, and accrued
liabilities constitute financial instruments. Based on available market
information, the carrying value of the Company's financial instruments
approximates their fair value at May 31, 2000.
The Company is exposed to the risks from fluctuations in foreign exchange
rates, and the volatility of those rates. The Company does not use
derivative instruments to reduce its exposure to foreign exchange risk.
Comprehensive Income
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", which requires companies to report the
changes in their net assets during the period from nonowner sources by
major components and as a single total. The Company had no material
reportable comprehensive income items to report, other than net losses,
for the period from November 4, 1999 (date of inception) to May 31, 2000.
Adoption of this statement did not impact the Company's financial
position, results of operations or cashflows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivates, requires that all derivatives be carried at fair market
value, and provides for hedge accounting when certain conditions are met.
The Company is required to adopt this statement effective January 1, 2001.
Management does not expect the implementation to have a significant impact
on the financial statements of the Company.
2. Share Capital
Authorized: 5,000,000 shares, par value of $0.001
Issued and outstanding: 1,475,000 shares
3. Net Change in non-cash working capital
May 31, 2000
------------
Accounts Receivables $ (1,450)
Prepaid expenses (450,000)
Accounts payable and accrued liabilities 1,414,590
------------
$ 963,140
<PAGE>
4. Software Costs
As at April 14, 2000, the Company entered into a contract for a total amount of
$626,168 with Informix Enterprise Consulting Services for the development of a
flexible, scaleable, financial transaction reconciliation and reporting system.
5. Related Party Transactions
As at May 31, 2000 there was an amount owing to Chell.com of $1,095,391. This
balance was comprised of the consulting services agreement as well as several
operational advances forwarded to the Company by Chell.com.
6. Subsequent Events
Subsequent to May 31, 2000 the Company entered into a subscription agreement
with the VC Advantage Limited Partnership (VCALP) whereby 2 advances under the
same terms are to be made available. Total financing provided by VCALP is to be
$7.5 million US.
<PAGE>
EXHIBIT
"E"
<PAGE>
eSupplies (Alberta) Ltd.
BALANCE SHEET
As At May 31, 2000
April 30, 2000 May 31, 2000
Assets
443,579 Bank 35,161
250,000 Short-term deposits --
-- Restricted cash (note 2) 300,000
660,210 Trade receivables 511,348
137,999 Other receivables 182,087
36,637 Inventory 36,637
904,634 Prepaid expenses and other assets 852,186
--------------- --------------
2,433,060 Total current assets 1,917,419
1,802,200 Capital assets (note 3) 2,186,294
3,500,000 Intangibles (note 4) 3,441,667
428,158 Goodwill (note 4) 421,022
--------------- --------------
8,163,418 Total assets 7,966,401
=============== ==============
Liabilities
215,698 Trade payables 613,721
142,070 Other payables 131,719
9,476 Payroll accruals 15,564
7,703 Taxes payable 9,780
--------------- --------------
374,947 Current liabilities 770,783
9,044,110 Long-term debt (notes 4 and 5) --
--------------- --------------
9,419,057 Total liabilities 770,783
1,000 Common shares (note 6) 9,045,110
(21,896) Retained earnings (21,896)
(1,234,743) YTD net income (1,827,597)
--------------- --------------
(1,255,639) Total equity 7,195,618
--------------- --------------
8,163,418 Total liabilities and equity 7,966,401
=============== ==============
Commitments (note 8)
<PAGE>
eSupplies (Alberta) Ltd.
Income Statement
For the Period Ending May 31, 2000
<TABLE>
<CAPTION>
April 2000 May 2000 YTD
<C> <C> <S> <C> <C> <C> <C>
192,868 100.00% Sales 140,342 100.00% 707,209 100.00%
105,707 54.81% Cost of sales 94,268 67.17% 490,192 69.31%
--------------------------------- --------------------------------------------------------------
87,160 45.19% Gross margin 46,074 32.83% 217,016 30.69%
--------------------------------- --------------------------------------------------------------
11,017 5.71% Outside freight 14,688 10.47% 38,005 5.37%
2,000 1.04% Wrap and label (560) (0.40%) 4,163 0.59%
74,143 38.44% Gross profit 31,946 22.76% 174,849 24.72%
--------------------------------- --------------------------------------------------------------
178,259 92.43% Salaries and benefits 201,252 143.40% 753,760 106.58%
7,111 3.69% Commisions 7,547 5.38% 46,665 6.60%
32,195 16.69% Recruiting and relocation 57,139 40.71% 243,233 34.39%
16,199 8.40% Travel 16,466 11.73% 51,796 7.32%
21,511 11.15% Communications 23,953 17.07% 70,628 9.99%
5,074 2.63% Supplies 1,740 1.24% 12,375 1.75%
20,400 10.58% Services 95,374 67.96% 139,685 19.75%
7,547 3.91% Selling 31,563 22.49% 62,532 8.84%
1,176 0.61% Miscellaneous 4,085 2.91% 31,454 4.45%
12,262 6.36% Building occupancy 27,183 19.37% 65,555 9.27%
20,210 10.48% Corporate charges 21,115 15.05% 80,304 11.36%
26,613 13.80% Depreciation and amoritization 91,597 65.27% 167,636 23.70%
(211) (0.11%) Other 1,713 1.22% 1,713 0.24%
348,347 180.61% Total expenses 580,728 413.80% 1,727,336 244.25%
--------------------------------- --------------------------------------------------------------
(274,204) (142.17%) Operating loss (548,782) (391.03%) (1,552,487) (219.52%)
--------------------------------- --------------------------------------------------------------
1,247 0.65% Interest income 1,701 1.21% 11,466 1.62%
(240,803) (124.85%) Financing costs (45,772) (32.62%) (286,576) (40.52%)
--------------------------------- --------------------------------------------------------------
(513,759) (266.38%) Loss before taxes (592,853) (422.44%) (1,827,597) (258.42%)
-- -- -- -- -- --
--------------------------------- --------------------------------------------------------------
(513,759) (266.38%) Net loss (592,853) (422.44%) (1,827,597) (258.42%)
--------------------------------- --------------------------------------------------------------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
eSupplies (Alberta) Ltd.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. Significant Accounting Policies
The financial statements of the company have been prepared in accordance with
accounting principles generally accepted in Canada. A summary of the effect of
these differences between accounting principles generally accepted in Canada and
those generally accepted in the United States is provided in Note 10. All
amounts in these financial statements are in Canadian dollars.
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates and approximations, which have been made using
careful judgment. The financial statements have, in management's opinion, been
properly prepared within reasonable limits of materiality and within the
framework of the significant accounting policies summarized below.
Inventory
Inventory is recorded at the lower of actual cost and net realizable value.
Capital Assets
Capital assets are recorded at cost. Amortization is provided on the
straight-line basis at the following annual rates:
Computer Hardware 20%
Computer Software 20%
Furniture and Fixtures 10%
Vehicles 20%
Leasehold Improvements 20%
Office Equipment 10%
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price of acquired companies over
the estimated fair value of the tangible and intangible net assets acquired.
Goodwill and other intangibles are being amortized straight-line basis over a
20-year period.
Financial Instruments
The company has financial instruments consisting of cash, accounts receivable,
term deposit and accounts payable. The carrying value of these financial
instruments approximates their fair value.
2. RESTRICTED CASH
The company has entered into an agreement with a third party to develop an
ecommerce site. As part of this agreement, $300,000 has been put into trust as
security to cover third party billings.
<PAGE>
3. CAPITAL ASSETS
May 31, 2000
--------------------------------------
Accumulated Net Book
Cost Amortization Value
$ $ $
--------------------------------------------------------------------------------
Computers 806,768 52,846 753,922
Furniture and Equipment 456,952 14,080 442,872
Vehicles 129,920 8,661 121,259
Leasehold Improvements 398,933 26,579 372,354
Ecommerce-in progress 495,887 -- 495,887
---------------------------------------
2,288,460 102,166 2,186,29
================================================================================
4. ACQUISITION OF WILLSON STATIONERS LTD.
Effective February 7, 2000, the Company purchased for $5,081,894 the assets of
Willson Stationers Ltd. ("Willsons"), an office stationary business in Western
Canada. This acquisition has been accounted for using the purchase method with
results from operations being included since the effective date. Net assets
acquired are as follows:
Accounts receivable $ 880,063
Inventory $ 173,673
Capital assets $ 100,000
Intangibles $3,500,000
Goodwill $ 428,158
----------
$5,081,894
----------
The consideration given is as follows:
Assumption of long term debt $5,451,860
Less cash on hand $ 369,966
----------
$5,081,894
----------
5. LONG TERM DEBT
As part of the acquisition of Willsons, the Company assumed the debt owing from
Willson to secured creditors. In addition, the Company borrowed $3,592,250 from
VC Advantage Limited Partnership ("VCALP"). As security for the amounts
outstanding, these creditors held a general security interest over all the
assets of the Company.
Effective May 2000, the Company and the secured creditors agreed to convert the
debt amount of $9,044,110 at a conversion rate of one common share for each $6
USD of debt. As a result 1,050,000 Class A common shares were issued to satisfy
the debt. In addition, the Company agreed to grant warrants convertible to
316,500 Class A common shares. These warrants are exercisable at $7 USD per
share for a period of three years from the debt conversion date. The Company has
a right to cause mandatory conversion of these warrants after the first
anniversary of the effective date if the average share price of each common
share exceeds $9 USD on any Canadian or US exchange or OTC-BB for thirty
consecutive trading days.
Effective May 24, 2000, the Company entered into a $6 million USD, non-revolving
term loan agreement with VCALP. Under the terms of this agreement, VCALP is not
obliged to advance any funds and/or if certain funds are advanced to continue to
advance funds to the maximum of $6 million USD. Upon any advances, VCALP would
have a general security interest over the assets of the Company. All advances
carry an 8% fee on the date of each draw and a 10% per annum interest on gross
amounts advanced and must be repaid by June 18, 2001 (the "Maturity Date")
unless such a date is mutually extended.
As additional consideration, the Company agreed to grant warrants convertible to
a maximum of 255,000 Class A common shares based on a conversion rate of 14.1667
shares for each $1,000 USD advanced. These warrants are exercisable at $7 USD
per share up to May 24, 2003. The Company has a right to cause mandatory
conversion of these warrants after May 24, 2001 if the average share price of
each common share exceeds $9 USD on any Canadian or US exchange or OTC-BB for
thirty consecutive trading days.
Advances are convertible prior to the Maturity Date as so extended, at VCALP's
option, to Class A common shares at the lower of 1) $7 USD for conversions up to
and including May 24, 2002, $8 USD for conversions between and including May 25,
2002 and May 24, 2004 and $9 USD after May 24, 2004; or 2) maximum of a) 80% of
the weighted average of the closing bid price on a stock exchange or quotation
system during a period of 10 consecutive trading days ending not more than 3
trading days before written notice from VCALP of such intentions; b) $2 USD per
share.
Provided that the advances are not repaid by the Maturity Date the Company will
issue, on the first date of each month after the Maturity Date, warrants to
VCALP to purchase 2,500 Class A common shares for each $500,000 USD of
indebtedness outstanding. These warrants expire 3 years from the Maturity Date
and are exercisable at $7 USD per share up to and including the second
anniversary of the Maturity Date and at $8 USD per share after the second
anniversary up to the expiry date. The Company has a right to cause mandatory
conversion of these warrants after the first anniversary of the Maturity Date if
the average share price of each common share exceeds $9 USD on any Canadian or
US exchange or OTC-BB for thirty consecutive trading days.
6. SHARE CAPITAL
The Company is authorized to issue an unlimited number of Class A and B voting
shares, and Class C and D non-voting shares.
Number of Shares $
--------------------------------------------------------------------------------
Class A common shares 3,550,000 9,045,110
During May 2000, the Company adopted a stock option plan, through which options
may be granted to directors, officers, employees, consultants and affiliates for
the purchase of 1,970,000 Class A common shares. As at May 31, 2000, 880,000
stock options were outstanding. These options are exercisable at $7 USD per
share and expire in April 2010.
<PAGE>
7. CONCENTRATION OF CREDIT RISK
As disclosed in note 1, the company holds various forms of financial
instruments. The nature of these instruments and the Company's operations expose
the Company to industry credit risk. The Company manages its exposure to this
risk by operating in a manner that minimizes its exposure to the extent
practical.
A substantial portion of the Company's current assets is comprised of accounts
receivable, which are subject to normal trade credit risks. The credit risk
associated with the accounts receivable is reduced by the Company's policies of
establishing acceptable credit levels for each customer coupled with an ongoing
follow-up of the outstanding accounts receivable.
8. COMMITMENTS
The Company rents business premises under a five-year lease. The approximate
annual rents and condo fees for the next five years are as follows:
$
-----------------------------
2000 73,871
2001 126,636
2002 126,636
2003 126,636
2004 126,636
2005 10,553
The company also rents office equipment under long-term leases. The annual
commitments under these leases for the next five years are as follows:
$
-----------------------------
2000 5,636
2001 11,272
2002 11,272
2003 1,156
2004 1,156
2005 1,156
9. SUBSEQUENT EVENTS
On June 2, 2000, a gross amount of $2.5 million USD was advanced to the Company
as part of the $6 million non-revolving term loan agreement with VCALP. This
amount must be repaid by June 18, 2001.
During June 2000, the Company issued a letter of credit for $170,000 USD to
secure accounts payables relating to the purchase of inventory.
<PAGE>
10. DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
Canadian generally accepted accounting principles ("Canadian GAAP"), as they
pertain to the Company's financial statements, differ from United States
generally accepted accounting principles ("US GAAP") as follows:
The Company's potential deferred tax assets resulting from tax losses can be
carried forward to future years has been offset by a valuation allowance of an
equal amount, as there is uncertainty that offsetting taxable profits will be
generated in those future years. This does not result in differences between
U.S. GAAP and Canadian GAAP.
<PAGE>
EXHIBIT
"F"
<PAGE>
PART I -- Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
C Me Run Corp.
(A Development Stage Company)
Consolidated Balance Sheet
(unaudited)
At March 31, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,462,008
Restricted cash 1,775,000
Employee advances 83,333
Related party prepaid expenses 450,000
Prepaid expenses and other current assets 370,344
------------
6,140,685
Property and Equipment:
Leasehold improvements 108,811
Office furniture and equipment 33,506
Computer equipment 715,433
------------
857,750
Less: Accumulated depreciation and amortization 75,660
------------
782,090
Other Assets:
Employee advances 170,199
Security deposits 181,370
------------
351,569
------------
Total assets $ 7,274,344
============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 608,987
Due to related party 281,160
Accrued issuance costs 150,000
Accrued leasehold improvements 90,000
Accrued marketing costs 75,000
Accrued payroll and related costs 46,965
Other accrued expenses 35,000
------------
1,287,112
Commitments and contingencies: (Note 7)
Redeemable series A convertible preferred stock
(Aggregate liquidation preference of $1,000,000) 1,019,594
Redeemable series B convertible preferred stock
(Aggregate liquidation preference of $6,999,999) 6,602,895
Redeemable series B convertible preferred stock
subscribed and fully paid (Aggregate 1,378,027
liquidation preference of $1,500,000)
Stockholders' equity (deficit):
Common stock; $.001 par value; 50,000,000 shares
authorized, 3,001,000 issued and outstanding 3,001
Additional paid-in capital 2,715,761
Unearned compensation (2,410,937)
Deficit accumulated during the development stage (3,321,109)
------------
Total stockholders' equity (3,013,284)
------------
Total liabilities and stockholders' equity $ 7,274,344
============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
C Me Run Corp.
(A Development Stage Company)
Consolidated Statement of Operations
(unaudited)
For the three months ended March 31, 2000 and cumulative from November 8,1999
(date of inception) to March 31, 2000
<TABLE>
<CAPTION>
Cumulative
from
November 8,1999
Three months (date of inception)
Ended to
March 31, 2000 March 31, 2000
-------------- ---------------
<S> <C> <C>
Revenues $ -- $ --
-------------- ---------------
Operating expenses
Development costs 155,583 168,611
General and administrative 1,973,726 2,232,752
Marketing and promotion 856,339 932,612
-------------- ---------------
2,985,648 3,333,975
Interest income 15,847 15,866
Income tax expense (benefit) -- --
-------------- ---------------
Net loss (2,969,801) (3,318,109)
Beneficial conversion feature on
convertible preferred stock and warrants
Series A convertible preferred stock and warrants (976,425) (976,425)
Series B convertible preferred stock and warrants (1,934,857) (1,934,857)
Accretion of convertible preferred stock to
redemption value
Series A convertible preferred stock (14,795) (14,795)
Series B convertible preferred stock (112,055) (112,055)
Accretion of convertible preferred stock
issuance costs
Series A convertible preferred stock (1,744) (1,744)
Series B convertible preferred stock (5,732,362) (5,732,362)
Accretion of convertible preferred stock
dividends
Series A convertible preferred stock (26,630) (26,630)
Series B convertible preferred stock (201,699) (201,699)
-------------- ---------------
Net loss attributable to common
stockholders $(11,970,368) $(12,318,676)
============== ===============
Basic and diluted net loss per common share
Loss per common share - basic and diluted (3.99) (4.10)
Basic and diluted weighted-average 3,001,000 3,001,000
shares outstanding
</TABLE>
See notes to consolidated financial statements.
<PAGE>
C Me Run Corp.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
For the three months ended March 31, 2000 and cumulative
from November 8,1999 (date of inception) to March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Unearned Development
No. of Shares Par Value Capital Compensation Stage
------------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Issuance of founder's stock 1,000 $ 1 $ 999
Net loss $ (348,308)
-------------------------------------------------------------------------
Balance at December 31, 1999 1,000 1 999 (348,308)
Merger of Fundae Acquisition Corp and
C Me Run Corp and cancellation
of 4,000,000 outstanding shares 3,000,000 3,000 (3,000)
Beneficial conversion feature related to
Series A convertible preferred stock
and warrants 976,425
Accretion of beneficial conversion feature
related to Series A convertible preferred stock
and warrants (976,425)
Beneficial conversion feature related to
Series B convertible preferred stock
and warrants 584,857
Accretion of beneficial conversion feature
related to Series B convertible preferred stock
and warrants (584,857)
Beneficial conversion feature related to Series B
convertible preferred stock subscribed and fully paid 1,350,000
Accretion of beneficial conversion feature related to
Series B convertible preferred stock subscribed and
fully paid (1,350,000)
Accretion of Series A convertible preferred stock
to redemption value (14,795)
Accretion of Series B convertible preferred stock
to redemption value (103,562)
Accretion of Series B convertible preferred stock
subscribed and fully paid
to redemption value (8,493)
Accretion of Series A convertible preferred stock
issuance costs (1,744)
Accretion of Series B convertible preferred stock
issuance costs (40,943)
Issuance of warrants to purchase common stock
to placement agent in connection with sale
of Series B convertible preferred stock 5,686,121
Accretion of Series B convertible preferred stock
issuance costs - warrants issued to
placement agent (5,686,121)
Accretion of Series B convertible preferred stock
subscribed and fully paid issuance costs (4,247)
Dividends accrued on Series A convertible
preferred stock (26,630)
Dividends accrued on Series B convertible
preferred stock (186,411)
Dividends accrued on Series B convertible
preferred stock subscribed and fully paid (15,288)
Issuance of common stock subscriptions
in connection with advertising services 800,000 $ (800,000)
Issuance of warrants to purchase common
stock in connection with financial advisory services 1,265,000 (1,265,000)
Amortization of unearned compensation 705,938
Change in market value of common stock subscriptions
and warrants issued in connection with
advertising and financial advisory services 1,051,875 (1,051,875)
Net Loss (2,969,801)
-------------------------------------------------------------------------
Balance at March 31, 2000 3,001,000 $3,001 $ 2,715,761 $(2,410,937) $(3,321,109)
=========================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
C Me Run Corp.
(A Development Stage Company)
Consolidated Statement of Cash Flows
(unaudited)
For the three months ended March 31, 2000 and cumulative
from November 8,1999 (date of inception) to
March 31, 2000
<TABLE>
<CAPTION>
Cumulative
from
November 8, 1999
Three months (date of inception)
Ended to
March 31, 2000 March 31, 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,969,801) $(3,318,109)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 60,202 75,660
Amortization of unearned compensation 705,938 705,938
Changes in operating assets and liabilities:
Employee Advances (83,333) (83,333)
Related party prepaid expenses 180,000 (450,000)
Prepaid expenses and other current assets (114,260) (370,344)
Accounts payable 364,689 608,987
Accrued building costs 90,000 90,000
Accrued marketing costs 75,000 75,000
Accrued payroll and related costs 45,643 46,965
Accrued expenses (11,385) 35,000
Additions to other assets (151,569) (351,569)
-------------- --------------
Net cash used in operating activities (1,808,876) (2,935,805)
Cash flows used in investing activities:
Additions to property and equipment (313,086) (857,750)
-------------- --------------
Net cash used for investing activities (313,086) (857,750)
Cash flows from financing activities:
Restricted cash (1,775,000) (1,775,000)
Advances from related party 673,679 2,374,311
Repayment of advances from related party (2,092,151) (2,093,151)
Proceeds from issuance of common stock -- 1,000
Proceeds from issuance of series A preferred stock, net 976,425 976,425
of issuance costs
Proceeds from issuance of series B preferred stock, net 6,271,978 6,271,978
of issuance costs
Proceeds from preferred stock subscription 1,500,000 1,500,000
-------------- --------------
Net cash provided by financing activities 5,554,931 7,255,563
Increase in cash and cash equivalents 3,432,969 3,462,008
Cash and cash equivalents at beginning of period 29,039 0
-------------- --------------
Cash and cash equivalents at end of period $3,462,008 $3,462,008
============== ==============
Summary of noncash financing and investing activities:
Issuance of common stock subscriptions in connection
with advertising services $800,000 $800,000
============== ==============
Issuance of common stock warrants in connection
with financial advisory services $1,265,000 $1,265,000
============== ==============
Issuance of common stock warrants in connection
with fee for Series B convertible preferred stock $5,686,121 $5,686,121
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
EXHIBIT
"G"
<PAGE>
cDemo Inc.
Balance Sheet
as at May 31, 2000
(stated in Cdn $)
Assets
Current assets:
Cash holdings $ 19,167
Recoverables 14,855
Prepaid expenses 1,065,600
-----------
1,099,622
Property, Plant & Equipment (Note 4) 107,479
Other Assets 1,660
-----------
$ 1,208,761
Liabilities & Shareholders' Equity
Current liabilities:
Accounts payable & accrued liabilities (Note 7) $ 1,554,080
Shareholders' equity:
Common shares (Note 5) 1
Deficit (345,320)
-----------
(345,319)
$ 1,208,761
===========
See accompanying notes to financial statements
<PAGE>
cDemo Inc.
Statement of Operations and Deficit
For the period ended May 31, 2000
(stated in Cdn $)
Expenses:
Consulting costs $165,804
Travel & Entertainment 66,298
Marketing 38,100
Rent, telephone & other office costs 34,551
Legal fees 23,923
Training & Conferences 6,555
Other professional fees 5,741
Other 4,348
-----------
Net loss and deficit at end of period $345,320
===========
See accompanying notes to financial statements
<PAGE>
cDemo Inc.
Statement of Cash Flows
For the period ended May 31, 2000
(stated in Cdn $)
Cash flows used in operating activities
Net loss for the period $(345,320)
Changes in non-cash working capital (Note 6) 473,625
-----------
128,305
Cash flows used in investing activities
Purchase of property, plant & equipment (109,139)
-----------
Cash flows from financing activities
Issuance of common shares 1
-----------
Increase in cash holdings 19,167
Beginning cash balance --
-----------
Ending cash balance $ 19,167
===========
See accompanying notes to financial statements
<PAGE>
cDemo Inc.
Notes to the Financial Statements
For the period ended May 31, 2000
1. Organization & nature of operations:
cDemo Inc. (the 'Corporation'), was incorporated under the laws of the
State of Delaware by Articles of Incorporation dated January 14, 2000.
The Corporation filed to have its' name changed from the original name
of buyersangel.com to consumersangel.com. A subsequent filing was done
to change the Corporation's name to C Me Buy Inc.. A final name change
was filed for and received on May 4, 2000 changing the Corporation's
name to cDemo Inc.
The Corporation's business purpose is to develop an infrastructure
that empowers and aides consumers for transacting in the automotive
industry.
Ultimate recovery of the Corporation's assets is dependent on the
Corporation, after an expected period of initial losses, achieving and
maintaining profitability which is dependant to a certain extent on
market conditions, successful rollout of the Corporations business
plan and the ability to obtain adequate financing to meet capital and
operational requirements.
2. Significant accounting policies:
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and
Canada.
Use of Estimates
Because the precise determination of many assets and liabilities
is dependent on future events, the preparation of financial
statements necessarily involves the use of estimates which would
affect the amount of the recorded assets, liabilities, revenues
and expenses. Actual amounts could differ from these estimates.
Property, Plant & Equipment
Property, plant and equipment are recorded at cost and
depreciated at the following annual rates which are designed to
amortize the cost of the assets over their estimated useful
lives.
- Leasehold Improvements - over the life of the lease
- Furniture & Fixtures - 20% straight line
- Computer Hardware - 33% straight line
- Computer Software - 33% straight line
Revenue Recognition
Fees are recognized as services are provided.
Foreign Currency Translation
Assets and liabilities transacted in a foreign currency are
translated at the period end exchange rate while revenues and
expenses are translated at average exchange rates for the
period.
<PAGE>
3. Comparative figures:
As the period ended May 31, 2000 represents the first period of
operations for the Corporation, there are no comparative figures shown
in the financial statements.
4. Property, plant & equipment
Cost at
May 31
----------
Computer Hardware $ 54,144
Computer Software 10,570
Leasehold improvements 35,068
Furniture & Fixtures 7,697
----------
$ 107,479
==========
5. Share capital
Authorized: 100,000 common shares without par value
Issued: 40,000 common shares
6. Net change in non-cash working capital
May 31
----------
Recoverables $ (14,855)
Prepaid expenses 1,065,600)
Accounts payable and accrued liabilities 1,554,080
----------
$ 473,625
==========
7. Related party balances
As at May 31, 2000, there is an amount owing to Chell.com of
$1,069,497. This is primarily an amount that is to be paid as a
consulting fee in addition to various operational advances obtained
from Chell.com.
