-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QqTDgbDnQ4rgmA+YDqivbAuQCQT25ixgQmBj6w5gOoppNEtJYEL7E0XZgh+nQhww hXUdUiFblRfyWMbeZTDgmg== 0000950124-00-007607.txt : 20001222 0000950124-00-007607.hdr.sgml : 20001222 ACCESSION NUMBER: 0000950124-00-007607 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20001221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPMAIL COM INC CENTRAL INDEX KEY: 0001044738 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 311487885 STATE OF INCORPORATION: MN FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-23243 FILM NUMBER: 793603 BUSINESS ADDRESS: STREET 1: 1331 CORPORATE DR STREET 2: SUITE 350 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9725505500 MAIL ADDRESS: STREET 1: 1331 CORPORATE DR STREET 2: STE 350 CITY: IRVING STATE: TX ZIP: 75038 FORMER COMPANY: FORMER CONFORMED NAME: CAFE ODYSSEY INC DATE OF NAME CHANGE: 19980526 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL DISCOVERY INC DATE OF NAME CHANGE: 19970821 10KSB/A 1 c59001a1e10ksba.txt AMENDMENT TO FORM 10-KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 2000 COMMISSION FILE NUMBER 0-23243 POPMAIL.COM, INC. (Exact name of registrant as specified in its chapter) MINNESOTA 31-1487885 ------------------------ ----------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1331 CORPORATE DRIVE, SUITE 350 IRVING, TEXAS 75038 (972) 550-5500 (Address, including zip code, and telephone number of registrant's principal executive offices) ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Shares of Common Stock (par value $.01 per share) Common Stock Purchase Warrants ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. [ ] The Company's revenues from continuing operations for the fiscal year ended January 2, 2000 totaled $106,744. As of November 17, 2000, the aggregate market value of the registrant's common stock, $.01 par value, held by non-affiliates of the registrant, computed by reference to the average high and low prices on such date as reported by the Nasdaq SmallCap Market was $1,577,000. As of November 17, 2000, there were outstanding 4,846,839 shares of the registrant's common stock. 2 This Annual Report on Form 10-KSB/A amends and replaces in its entirety the Company's Annual Report on Form 10-KSB filed April 4, 2000. This Form 10-KSB/A restates the Consolidated Financial Statements to reflect the reclassification of the Company's restaurant division as a discontinued operation during the third quarter of fiscal 2000 and the implementation of a 10-for-1 reverse stock split of the Company's common stock during the fourth quarter of fiscal 2000. See also the accompanying notes to the consolidated financial statements regarding the Company's divestiture of IZ.com, which also occurred in the fourth quarter of fiscal year 2000. Conforming changes have also been made in the footnotes to the Financial Statements. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Items 9, 10, 11 and 12 of Part III hereof. FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages, constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties, and, in addition to the risk and other factors discussed in this Form 10-KSB/A, other factors that could cause actual results to differ materially are the following: the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; competitive pressures from other providers of email-based services; ability to raise additional capital required to support the Company's operations and enable the Company to pursue its business plan; government regulation of the Internet; business conditions, such as inflation or a recession, and growth in the general economy; changes in monetary and fiscal policies, other laws and regulations; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. 3 TABLE OF CONTENTS
PART I Page ITEM 1. Description of Business............................. 1 Risk Factors........................................ 7 ITEM 2. Description of Property............................. 18 ITEM 3. Legal Proceedings................................... 20 ITEM 4. Submission of Matters to a Vote of Security Holders. 20 PART II ITEM 5. Market for Common Equity and Related Shareholder Matters............................................. 21 ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 27 ITEM 7. Financial Statements................................ F-1 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 30 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act...................................... 31 ITEM 10. Executive Compensation.............................. 31 ITEM 11. Security Ownership of Certain Beneficial Owners and Management.......................................... 31 ITEM 12. Certain Relationships and Related Transactions...... 31 ITEM 13. Exhibits and Reports on Form 8-K.................... 32 SIGNATURES.............................................................39
4 PART I ITEM 1. DESCRIPTION OF BUSINESS. PopMail.com, inc. ("PopMail") currently consists of two divisions, the restaurant division and the Internet division. The restaurant division develops, owns and operates restaurants with multiple themed dining rooms designed to appeal to the upscale casual dining market. PopMail has Cafe Odyssey restaurants at the Mall of America in Bloomington, Minnesota, which opened in June 1998, and in the Denver Pavilions, which opened in March 1999. During the fiscal quarter ended October 1, 2000, the Company developed a formal plan for the divestiture of the restaurant division. The consolidated financial statements of the Company, included as part of this filing, have thus been restated to reflect the restaurant division as discontinued operations. Our Internet marketing division is in the business of connecting entertainment and media brands with their fans through the use of email and fan club sites. The Internet division consists of three companies: PopMail Network, Inc. ("PopMail Network"), based in Irving, Texas, is a provider of permission and vanity web based e-mail services to broadcast stations, professional sports teams and other brand name clients in the media and entertainment industries; Fan Asylum, Inc. ("Fan Asylum"), based in San Francisco, California, is a provider of official online and offline fan club sites for recording artists in the music industry; and formerly IZ.com, Inc. ("IZ"), which was based in Bellevue, Washington, and was a provider of digital publishing services, newsletters and technology for high-end brands. The Company has recently completed the sale of IZ.com, as it no longer fit with the Company's ongoing business plan. The Company commenced operations as Hotel Mexico, Inc. ("HMI"), which was incorporated in Ohio in January 1994. In 1996, the Company opened the Kenwood Restaurant under the trade name Hotel Discovery, and in August 1997, HMI was reorganized as Hotel Discovery, Inc., a Minnesota corporation. During February 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey and changed the name of the Company to Cafe Odyssey, Inc. Pursuant to a merger effective September 1, 1999, the Company acquired popmail.com, inc., a Delaware corporation engaged in the business of providing Internet email services. Following the merger, the Company changed its corporate name from Cafe Odyssey, Inc. to PopMail.com, inc. On December 3, 1999, ROI Acquisition Corporation, a Texas corporation and wholly owned subsidiary of PopMail, acquired, effective as of November 30, 1999, substantially all of the assets and assumed substantially all of the liabilities of ROI Interactive, LLC ("ROI"), a Texas limited liability company. ROI provides exclusive email service and permission-based, opt-in marketing services to television stations and major league sports franchises. Effective February 9, 2000, PopMail acquired IZ.com, Incorporated ("IZ.com"), a Delaware corporation. IZ.com was attempting to integrate the use of multiple media - television, the Internet and email - to reach 18 to 25 year olds and derive commerce. PopMail attempted to build a brand and marketing strategy that will allow it to dominate its target market. As a result of the acquisition, Iz.com changed its strategic focus to apply its multimedia expertise to the email-based marketing business operated by PopMail. In December 2000, the Company sold the assets of IZ.com to its current management team. On June 14, 2000, the Company completed its acquisition of Fan Asylum, Inc. ("Fan Asylum"). Fan Asylum manages the official fan club web sites and fan clubs for many recording artists and musical groups. Through its web site management services, Fan Asylum designs the fan club site graphics, creates the content, manages the on-line stores, provides travel packages, provides preferred tickets, sends out weekly 1 5 email newsletters under the artists brand and hosts the web site for each of its Artists. As noted in the Risk Factors section of this Form 10-KSB/A, the Company has incurred substantial operating losses to date and, as of January 2, 2000, has a deficiency in working capital of approximately $8.2 million, net of any restaurant assets reclassified to net assets of discontinued operations. There can be no assurance of the Company's capacity to achieve and sustain profitable operations, and without additional financing (of which there can be no assurance) the Company may not have sufficient funds to support its operations, retire its indebtedness in the ordinary course of business and pursue its business plan. As also noted in the Risk Factors section of this Form 10-KSB/A, the factors discussed in the preceding paragraph (among other factors) give rise to a risk that the Company's common stock will be delisted from the Nasdaq SmallCap Market, leading to a loss of liquidity and a decrease in the market price of the Company's stock. In September 2000, the Company received a notice from The Nasdaq Stock Market indicating that the Company's common stock had failed to maintain a minimum bid price greater than or equal to $1.00 over the preceding thirty consecutive trading days as required under Marketplace Rule 4310(c)(4). Should the Company's common stock fail to achieve and maintain a bid price equal to or greater than $1.00 for a minimum of ten consecutive trading days anytime before December 12, 2000, the Company's common stock will be delisted from the Nasdaq SmallCap Market. On October 12, 2000, the Company implemented a 10-for-1 reverse stock split. As of November 17, 2000, the Company had 4,846,839 post-split shares of common stock, $.01 par value, outstanding. Unless otherwise noted, all references within this 10-KSB/A have been restated to reflect the Company's post-split common stock numbers. In December 2000, the Company received an additional notice from The Nasdaq Stock Market indicating that the Company failed to maintain a minimum of two active market makers for 10 consecutive trading days as required by Nasdaq Marketplace Rule 4310(c)(01). This deficiency, as well as the minimum bid price deficiency, will be considered at a oral hearing by the Nasdaq Listing Qualifications Panel on January 11, 2001. DESCRIPTION OF POPMAIL NETWORK, INC. PopMail Network (the "Network") provides email services that allow its Clients to provide: 1) outbound distribution email messages to registrants of the services and network and 2) web based affinity email accounts to visitors of our Client's sites i.e., joe@yoursitemail.com. Network has over 400 Clients in the broadcast, professional sports teams, media and entertainment industries. Network considers its Clients to be "Affiliates," and the subscribers to ENEWSNOTIFIER(TM) and PopMail(TM) to be "Members" because of their affinity towards, and willingness to receive, information from one or more Affiliates. Together, these combined services create a permission and affinity based email marketing network. The distribution through this network, called "e-channels", is customized for each Member, allowing them to select exactly the content they choose from their favorite broadcast, entertainment and sports companies. "Clients" are defined as entities that either pay Network for services or while not paying for a service, have agreed through contract to provide Network either some right, limited or complete, to communicate with Member(s). As a result, some Network Clients both pay Network money and allow access to Members while other Network Clients may only allow Network access to Members. Network has historically provided customized email services and distribution to meet the marketing needs of individual businesses forming a one-to-one relationships with their customers in the broadcast, media, sports and entertainment industries. Network plans to bring more interested consumers ("Members") to its Client's products by extending their brand, marketing efforts and content beyond its own database and to other databases within our network of Clients. Management believes the primary value of Network is the expanding base of Members who have chosen to receive services from a Network Client and who "opt-in" to services, content and products from other Network Clients. MARKET Rapidly Growing Market: email is currently the number one application on the Internet according to Forrester Research. Forrester estimates that email will become a $4.8 Billion dollar industry by 2004, of which Network hopes to capture a small share. 2 6 Growing Demand and Use for Email: the benefits of using email are: low cost and higher response rates compared to traditional advertising and direct mail, global reach, tracking of users interests, ease of use, and near real time delivery. Unique Position Within a Growing Market: much commercial email is unsolicited and is generic - not targeted to the recipient's needs or interests. The majority of this commercial email is the electronic equivalent of junk mail. Users receive these unsolicited emails from retail and category "opt-in" lists or from lists compiled as they visit various web sites. This approach is increasingly ineffective and disliked by recipients. In fact, growing resentment towards unsolicited commercial email may lead to privacy regulation in the United States. The opposite of unsolicited email is "permission and affinity-based" marketing which has been "opted-in" by recipients. In other words, recipients have replied positively to a request by a company that they will willingly accept email content from a specified source. The next level of the permission basis is affinity, in which recipients have willingly allied with a group or organization of their choice and have sought information from that group, brand, icon or trusted agent. SERVICES At the present time, Network offers two proprietary email services, which are described below. ENEWSNOTIFIER(TM) (ENN) - a permission marketing email service, which allows Clients to collect preference and demographic information from their customers and create a Member database. These organizations can then use this database to send out targeted, personalized and customized messages for marketing purposes. Network provides the Client with a username and password to access the administration area for sending out their own emails. Clients link the services from their site. When a user visits the client's site, they click on the icon which links them to our servers. They then sign up and select the topics of interest to them on the Client's custom service. Network presently offers the ENEWSNOTIFIER service through ROI. PopMail(TM) is an affinity email service that allows Clients to offer free Web based email boxes on their home pages. Members sign up for a personal email address that contains their affinity group's name (such as JoeSmith@Yoursitemail.com). Clients benefit from the affinity with their customers and higher traffic on their Web site when registrants visit the Client's site to send and receive their email. Clients can also sell advertising. The Member visits the Client's site and clicks on the sign up box on the frame that resides on the Client's site. Each page is customized with the client's look and feel. Each time the Member wants to check their email they visit the client's site and enter their username and password in the boxes on the frame. At present, Network targets four vertical markets for its email services: broadcast, media, sports and entertainment. Companies in these vertical markets typically have customers with a stronger affinity for their product or service - such as a favorite sports team, radio station, personality, or publication. Using Network's email services allows Clients to cut through the clutter and inefficiencies of traditional marketing, and more effectively and efficiently promote and brand their content, products or services to their viewers, listeners, fans and customers on the topics and items already of interest to them. Benefits and examples of these programs in action include: - Television Stations increase ratings by using ENN to notify members, via email, about news stories of interest to them scheduled for broadcast on their station. - Radio Stations advertise their brand and drive traffic to their sites by using PopMail(TM). - Sports Teams provide advanced information to Members, sell tickets and merchandise and sponsor promotions using ENN.6 3 7 One of Network's goals is to leverage the relationships between the Company's Clients and their customers and to strengthen the PopMail Network. REVENUES Network currently generates revenue through the following means: - Annual license fees - Monthly hosting fees - Set up fees Although very little revenue has been generated to date by advertisements and no revenue has been produced from e-commerce up-selling to Members, and there can be no assurance that this will change, Network intends to introduce these revenue generators to its business model within the near future. COMPETITION There are many companies which compete directly or indirectly with PopMail. Those in customer relationship management and outbound email production include public companies such as Critical Path (CPTH), Digital Impact (DIGI) Mail.com (MAIL), Message Media, Inc. (MESG), Kana Communications, Inc., (KANA) 24/7 Media Inc. (TFSM) and Exactis (XACT). There are a host of large and smaller privately held companies. IZ's competitors include InfoBeat, Lifeminders (LFMN), YesMail (YESM) and Netcreations(NTCR). At present, there are few affinity based email companies combining affinity content with branded email and permission based email-marketing services specifically towards the vertical markets we are currently in. STRATEGY Network plans to employ the following growth strategies: - Continue to solidify its presence in its current targeted vertical markets. At present, Network has signed agreements with more than 400 Clients. Many of these Clients have not fully utilized the capability of the Network services by introducing advertising or e-commerce for up-selling and, as such, Network is also focusing on the education of its Clients and Members to increase usage and, ultimately, Members. - Grow its existing member databases. - Assist Clients in the development of affinity rich content for distribution through the network to permission based Members. - Seek out and acquire companies that can enhance our goals, member growth and content development. - Form strategic relationships with other businesses that may provide compatible and collaborative Internet services for the Company's Broadcast, Media, Sports and Entertainment Clients. - Select and move aggressively into other vertical markets where Network's products and services can be effective branding and marketing tools. - Generate revenue from each contact between the Company and each Client. Network is currently looking at building e-commerce functionality into its product offerings; this may be done internally or Network may select a strategic partner in order to build its member base more rapidly. The Company will also regularly introduce enhanced versions of its services and product offerings. In addition, Network has begun to penetrate the international market and has begun to develop and deploy bilingual versions of Network's services. 4 8 INTELLECTUAL PROPERTY The Company relies on tradename and trademark protection for its proprietary names and logos. PopMail has not registered or sought to register any patents. The Company seeks to protect its know-how and trade secrets primarily through confidentiality and license agreements. DESCRIPTION OF FAN ASYLUM, INC. On June 14, 2000, the Company completed its acquisition of Fan Asylum, Inc. ("Fan Asylum"). Fan Asylum manages the official fan club web sites and fan clubs for many recording artists and musical groups. Through its web site management services, Fan Asylum designs the fan club site graphics, creates the content, manages the on-line stores, provides travel packages, provides preferred tickets, sends out weekly email newsletters under the artists brand and hosts the web site for each of its Artists. DESCRIPTION OF RESTAURANT DIVISION GENERAL During the fiscal quarter ended October 1, 2000, the Company developed a formal plan for the divestiture of the restaurant division. The consolidated financial statements of the Company, included as part of this filing, have thus been restated to reflect the restaurant division as discontinued operations. PopMail's restaurant division develops, owns and operates restaurants with multiple themed dining rooms designed to appeal to the upscale casual dining market. PopMail owns and operates two full service "Cafe Odyssey" restaurants, one in the Mall of America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"). The Mall of America Restaurant opened on June 8, 1998, and the second, which opened on March 15, 1999, at the Denver Pavilions, located in the downtown district of Denver, Colorado (the "Denver Pavilions Restaurant"). PopMail has no current plans to expand the restaurant division through additional owned restaurants. The Company may ultimately license more Cafe Odyssey restaurants or enter into other arrangements for additional restaurants, which do not require the Company to invest substantial amounts of capital. In 1996 the Company opened a restaurant in Cincinnati, Ohio (the "Kenwood Restaurant") under the trade name Hotel Discovery. PopMail closed the Kenwood Restaurant in September 1999. In connection with the sale completed in April 2000, PopMail assigned the lease for the Kenwood restaurant property to the buyer, who is required to make the lease payments. PopMail remains primarily obligated under the lease. In November 2000, the buyer has notified the Company about its intention to re-sell the unit. The Company has also been informed that two months of property lease payments are past due. CONCEPT PopMail's restaurants are positioned in the upscale casual segment and differentiate themselves from the competition by offering its guests an enveloping experience that combines award winning food with sophisticated, non-intrusive entertainment. While there are restaurants that have a strong food base and others that focus on entertainment, PopMail feels that the "experiential dining" combination it offers is unique to the industry. Based on the concepts of travel, discovery and adventure, each restaurant provides guests with a dining experience in multiple themed environments that capture the romance, passion and nature of exotic locations throughout the world utilizing state-of-the-art technology in sound, video, lighting, scenery and decor. The Mall of America and Denver Pavilions Restaurants contain three dining rooms that replicate the environments of the lost City of Atlantis, the ancient Incan ruins of 5 9 Machu Picchu in the Andes and the sweeping plains of the Serengeti desert in Tanzania, Africa. The menu at each restaurant offers a broad range of cuisine from around the world, including "cultural fusion" menu items such as Barcelona Spring Rolls and Asian Tacos. Features include American, Asian, Jamaican, West Indian, Mexican and European tastes and textures. Menu items are freshly made, using only the highest quality fresh meats, produce, spices and other ingredients. The menu mirrors the exploratory journey and adventure society themes of the restaurants. Each restaurant also has a retail area located at the entrance which includes a collection of adult and children's casual clothing, including T-shirts, sweatshirts, shirts and caps, and a limited amount of other logo merchandise. RESTAURANT OPERATIONS On May 31, 2000, the Company entered into an agreement (the "Management Services Agreement") with an officer of the Company (the "Manager") to manage substantially all the operations of the Cafe Odyssey restaurant segment (the "Management Services") under the auspices of an independent management company (the "Management Company"). On May 31, 2000, the Manager resigned from the Company to fulfill his obligation to the Management Company under the Management Services Agreement. PopMail strives to maintain quality operations through extensive training of its employees and careful supervision of personnel. PopMail has developed a detailed operations manual containing specifications relating to food and beverage preparation, maintenance of premises and employee conduct. Each restaurant is expected to have a director of operations with a staff of five to seven managers and a staff accountant. Each director of operations reports directly to the Manager of Management Company. PopMail requires all kitchen and front-of-the-house managers to complete an intensive six-week training program which includes two weeks of food preparation training in the kitchen, as well as complete cross-training on all other phases of the restaurant's operations. PopMail's restaurant management is then tested on PopMail's philosophy, management strategy, policies, procedures and operating standards. In addition, each prospective guest service employee actually tastes, and is tested on, every food and beverage item on the menu. Daily shift meetings are held prior to lunch and dinner to re-educate the service staff on all menu items, to communicate daily specials, to respond to feedback from comment cards and to reinforce service standards. COMPETITION The food service industry is intensely competitive with respect to food quality, concept, location, service and price. In addition, there are many well- established food service competitors with substantially greater financial and other resources than PopMail and with substantially longer operating histories. PopMail believes that it competes with other full-service dine-in restaurants, take-out food service companies, fast-food restaurants, delicatessens, cafeteria-style buffets and prepared food stores, as well as with supermarkets and convenience stores. Competitors include national, regional and local restaurants, purveyors of carry out food and convenience dining establishments. Competition in the food service business is often affected by changes in consumer tastes, national, regional, and local economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of labor, purchasing power, availability of product, and local competitive factors. PopMail attempts to manage or adapt to these factors, but it should be recognized that some or all of these factors could cause PopMail to be adversely affected. Management is of the opinion that quality food which is pleasingly presented is an absolute requirement within the upscale casual segment of the industry. Cafe Odyssey restaurants have won nine major food awards in three cities, reflecting PopMail's commitment to food excellence. 6 10 GOVERNMENT REGULATIONS PopMail is subject to federal, state and local laws affecting the operation of its restaurants, including zoning, health, sanitation and safety regulation and alcoholic beverage licensing requirements. Each restaurant is operated in accordance with standardized procedures designed to assure compliance with all applicable codes and regulations. The suspension of a food service or liquor license would cause an interruption of operations at the affected restaurant. PopMail believes that it is in compliance with all licensing and other regulations. PopMail is subject to "dram shop" statutes in the State of Minnesota which generally provide a person injured by an intoxicated person the right to recover damages from the establishment or establishments that served alcoholic beverages to the intoxicated person. PopMail has obtained insurance against such potential liability. PopMail is also subject to the Fair Labor Standards Act, which governs minimum wages, overtime and working conditions. A significant portion of PopMail's restaurant employees are paid at rates relating to either the federal or state minimum wage. Accordingly, an increase in the minimum wage would directly increase each restaurant's labor cost. Obtaining alcoholic beverage licenses from various jurisdictions will require disclosure of certain detailed information about directors, officers and greater than 10 percent shareholders of PopMail's equity securities, and will necessitate that such persons be approved by the appropriate liquor licensing authority. EMPLOYEES As of January 2, 2000, PopMail employed 271 persons, including 41 in the Internet email services division and 230 persons in the Company's restaurant operations. Approximately 85 of the Company's employees work part-time. None of PopMail's employees is represented by a collective bargaining organization and the Company has never experienced a work stoppage, strike or labor dispute. The Company believes its relations with its employees are satisfactory. RISK FACTORS An investment in our common stock is very risky. You may lose the entire amount of your investment. Prior to making an investment decision, you should carefully review the accompanying consolidated financial statements and related notes included elsewhere in this report and consider the following risk factors: WE HAVE INCURRED LOSSES TO DATE AND WILL NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE OPERATIONS AND PURSUE OUR BUSINESS PLAN. We incurred net losses of approximately $43.2 million in the first nine months of 2000, $24.2 million in 1999, $6.7 million in 1998 and $4.0 million in 1997 and had a working capital deficit of approximately $3.1 million as of October 1, 2000. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to increase our revenues and ultimately attain and sustain profitable operations. Without additional financing, the cash generated from our current operations will not be adequate to fund operations and service our indebtedness during 2000. There can be no assurance that additional financing will be available on terms acceptable to the Company or on any terms whatsoever. In the event that we are unable to fund our operations and our business plan, we will be unable to continue as a going concern. OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH DELISTING COULD HINDER YOUR ABILITY TO OBTAIN ACCURATE QUOTATIONS AS TO THE PRICE OF OUR COMMON STOCK, OR DISPOSE OF OUR COMMON STOCK IN THE SECONDARY MARKET. Although our common stock is currently listed on the Nasdaq SmallCap Market, we cannot guarantee that an active public market for our common stock will continue 7 11 to exist. In September 2000, the Company received a notice from The Nasdaq Stock Market indicating that the Company's common stock had failed to maintain a minimum bid price greater than or equal to $1.00 over the preceding thirty consecutive trading days as required under Marketplace Rule 4310(c)(4). To satisfy this objective, the Company chose to implement a reverse stock split. The Company's share price has substantially fallen below the minimum bid price of $1.00. In December 2000, the Company received an additional notice from The Nasdaq Stock Market indicating that the Company failed to maintain a minimum of two active market makers for 10 consecutive trading days as required by Nasdaq Marketplace Rule 4310(c)(01). This deficiency, as well as the minimum bid price deficiency, will be considered at a oral hearing by the Nasdaq Listing Qualifications Panel on January 11, 2001. In addition, we have responded to numerous inquiries from Nasdaq expressing concern over various matters, including but not limited to a "going concern" qualification expressed by our former independent auditors as of January 3, 1999. Accordingly, our securities may be delisted from the Nasdaq SmallCap Market or be required to reapply for listing meeting the Nasdaq initial listing requirements, which are generally more stringent than the requirements currently governing the Company's listing. Additional factors giving rise to such delisting could include, but are not be limited to: (1) a reduction of our net tangible assets to below $2,000,000, (2) a reduction to one active market maker, (3) a reduction in the market value of the public float of our securities to less than $1,000,000, (4) a reduction of the trading price of our common stock to less than $1.00 per share or (5) the discretion of the Nasdaq SmallCap Market. In the event our securities are delisted from the Nasdaq SmallCap Market, trading, if any, in our common stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the National Association of Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity of our common stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, reduction in the coverage of our securities by security analysts and the news media, and lower prices for our securities than might otherwise prevail. In addition, our common stock would become subject to certain rules of the Securities and Exchange Commission relating to "penny stocks." These rules require broker-dealers to make special suitability determinations for purchasers other than established customers and certain institutional investors and to receive the purchasers' prior written consent for a purchase transaction prior to sale. Consequently, these "penny stock rules" may adversely affect the ability of broker-dealers to sell our common stock and may adversely affect your ability to sell shares of our common stock in the secondary market. WE ARE DEPENDENT ON THE ONGOING SERVICES OF CERTAIN OF OUR EXECUTIVES, THE LOSS OF WHICH COULD HAVE A DETRIMENTAL EFFECT ON OUR PROFITABILITY AND THE MARKET PRICE OF OUR STOCK. Our plan of business development and our day-to-day operations rely heavily on the experience of the executive management team. The loss of any person could adversely affect the success of our operations and strategic plans and, consequently, have a detrimental effect on the market price of our stock. WE MAY BE UNABLE TO HIRE QUALIFIED EMPLOYEES TO HELP IMPLEMENT AND MANAGE OUR EXPANSION PLANS, WHICH INABILITY COULD BE DETRIMENTAL TO THE VALUE OF YOUR INVESTMENT. Our success will depend in large part upon our ability to supplement our existing management team. We will need to hire additional corporate level and management employees to help implement and operate our plans for expansion of our Internet marketing services division. The demand for individuals with management skills is high and many other businesses, most of which have greater name recognition and resources than the Company, compete for their services. Any inability or delay in obtaining additional key employees could have a material adverse effect on our expansion plans and, consequently, the market value of our stock. DUE TO OUR LIMITED OPERATING HISTORY, YOU MAY FIND IT DIFFICULT TO ASSESS OUR ABILITY TO OPERATE PROFITABLY. 8 12 On September 1, 1999, we completed a merger with popmail.com, inc. ("Old Popmail"). Old Popmail was a provider of Internet email services to radio stations across the country. On December 3, 1999, we acquired ROI Interactive, LLC ("ROI"). ROI is a provider of permission and affinity based email services to broadcast stations, professional sports teams and other brand name clients in the media and entertainment industries. On February 9, 2000, we acquired IZ.com Incorporated ("IZ.com"). IZ.com, which we sold in December 2000, was a provider of digital publishing services, newsletters and technology for high-end brands. On June 15, 2000, we acquired Fan Asylum, Inc. ("Fan Asylum"). Fan Asylum is a provider of official online and offline fan club sites for recording artists in the music industry. Consequently, we face the added risks, expenses and difficulties related to developing and operating a new business enterprise. Given our lack of significant operating history, investors may have difficulty assessing the many factors, which will determine our ability to generate future profits. ONE INDIVIDUAL CONTROLS A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND MAY INFLUENCE OUR AFFAIRS. Following our merger with Old Popmail on September 1, 1999, James L. Anderson was elected to our Board of Directors and served as its Chairman until his resignation on January 24, 2000. Effective February 1, 2000, Mr. Anderson resigned from our Board. Based upon a Schedule 13D filed with the Securities and Exchange Commission on September 13, 1999, Mr. Anderson controlled indirectly or directly, as of that date, approximately 59.6 percent of our outstanding common stock. As of October 1, 2000, Mr. Anderson indirectly or directly controlled approximately 21.5 percent of our outstanding common stock. Accordingly, he may have the ability to determine the election of members of the Board of Directors and determine the approval of corporate transactions and other matters requiring shareholder approval. Unless and until Mr. Anderson substantially decreases his percentage beneficial ownership in our common stock, he will continue to have significant influence over our affairs. DUE TO THE LARGE NUMBER OF OUTSTANDING OPTIONS AND WARRANTS, OUR SHAREHOLDERS FACE A RISK OF SUBSTANTIAL FUTURE DILUTION AND DOWNWARD PRESSURE ON THE TRADING PRICE OF OUR COMMON STOCK. As of October 1, 2000, we have a total of 4,065,356 shares of our common stock reserved for issuance pursuant to our stock options plans, outstanding preferred stock and common purchase warrants. Most of these shares have either been registered for resale or are subject to agreements providing for their registration for resale under certain circumstances. Accordingly, our existing shareholders face a substantial risk of dilution and the trading price of our common stock may decrease as these convertible securities are exercised or converted into shares of common stock and subsequently offered for sale through the Nasdaq SmallCap Market. THERE IS A RISK THAT DUE TO THE LIMITATIONS PLACED ON THE CONVERSION OF THE SERIES G PREFERRED SHARES, THE PREFERRED SHAREHOLDER'S INVESTMENT MAY NOT BE CONVERTED INTO COMMON STOCK AND WOULD HAVE TO BE REDEEMED IN CASH. The total number of shares of common stock issuable upon conversion of the Series G Preferred Stock and upon exercise of the Series G Warrant cannot exceed 20 percent of the number of shares of common stock of the Company issued and outstanding on May 2, 2000. In the event the holders of the Series G Preferred Stock and Warrant are unable to convert preferred shares into common stock because these limitations have been reached, we would be required to redeem the Series G Preferred Shares in cash at 105 percent of the stated value plus any accrued and unpaid dividends. It is possible that in such case we may not have sufficient cash and cash equivalents necessary to redeem the Series G Preferred Shares in cash. WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS AND OTHER PROPRIETARY INFORMATION; FAILURE TO PROTECT AND MAINTAIN THESE RIGHTS AND INFORMATION COULD PREVENT US FROM COMPETING EFFECTIVELY. Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we seek to protect through a 9 13 combination of trade secret and trademark law, as well as confidentiality or license agreements with our employees, consultants, and corporate and strategic partners. If we are unable to prevent the unauthorized use of our proprietary information or if our competitors are able to develop similar technologies independently, the competitive benefits of our technologies, intellectual property rights and proprietary information will be diminished. WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK, IN WHICH EVENT YOUR ONLY RETURN ON INVESTMENT, IF ANY, WILL OCCUR ON THE SALE OF OUR STOCK. To date, we have not paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future. Rather, we intend to use any future earnings to fund our operations and the growth of our business. Accordingly, the only return on an investment in our common stock will occur upon its sale. REQUESTS FOR INCREASING THE AUTHORIZED SHARES OF COMMON STOCK COULD CREATE FUTURE DILUTION. A special meeting of the Shareholders of PopMail was held on November 27, 2000, to approve an amendment to the Company's Articles of Incorporation, as amended, to increase the number of authorized shares from 10,000,000 shares of undesignated capital stock to 25,000,000 shares of undesignated capital stock. The amendment was approved. PURSUANT TO ITS AUTHORITY TO DESIGNATE AND ISSUE SHARES OF OUR STOCK, AS IT DEEMS APPROPRIATE, OUR BOARD OF DIRECTORS MAY ASSIGN RIGHTS AND PRIVILEGES TO CURRENTLY UNDESIGNATED SHARES, WHICH COULD ADVERSELY AFFECT YOUR RIGHTS AS A COMMON SHAREHOLDER. Our authorized capital consists of 25,000,000 shares of capital stock. Our Board of Directors, without any action by the shareholders, may designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. As of October 11, 2000, we have 4,747,087 shares of common stock issued and outstanding, including 193,183 shares of Series E Convertible Preferred Stock, 287,408 shares of Series F Convertible Preferred Stock outstanding and 600,000 shares of Series G 10% Convertible Preferred Stock. As of October 1, 2000, a further 4,065,356 shares of common stock have been reserved as follows: - A maximum of 79,285 shares of common stock reserved for issuance upon exercise of the Series E Preferred Shares, 193,183 shares of which are currently outstanding; - A maximum of 737,500 shares of common stock reserved for issuance upon conversion of Series F Convertible Preferred Stock; - A maximum of 672,428 shares of common stock reserved for issuance in connection with the Series G 10% Convertible Preferred Stock and upon exercise of certain warrants issued in connection with the Series G Preferred Stock; - 334,886 shares of common stock issuable upon exercise of options granted under the IZ.com Incorporated stock option plan assumed by the Company; - 260,000 shares issuable upon the exercise of the Class A Warrants issued as part of our initial public offering and the partial exercise of the underwriter's over-allotment; - 1,606,257 shares issuable upon the exercise of outstanding warrants (excluding the warrants issued in connection with the sale of the Series G Preferred Stock); - 300,000 shares reserved for issuance under our 1997 Stock Option and Compensation Plan, of which options reverting to 262,766 shares are currently outstanding; - 75,000 shares for issuance under our 1998 Director Stock Option Plan, of which options relating to 39,833 shares are currently outstanding. The rights of holders of preferred stock and other classes of common stock 10 14 that may be issued could be superior to the rights granted to holders of the Units issued in our initial public offering. Our Board's ability to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock. MINNESOTA LAW MAY INHIBIT OR DISCOURAGE TAKEOVERS, WHICH COULD REDUCE THE MARKET VALUE OF OUR STOCK. As a corporation organized under Minnesota law, we are subject to certain Minnesota statutes, which regulate business combinations and restrict the voting rights of certain persons acquiring shares of its stock. By impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company, these regulations could adversely affect the market value of our stock. THE LIMITATIONS ON DIRECTOR LIABILITY CONTAINED IN OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DISCOURAGE SUITS AGAINST DIRECTORS FOR BREACH OF FIDUCIARY DUTY. As permitted by Minnesota law, our Amended and Restated Articles of Incorporation provide that members of our Board of Directors are not personally liable to you or the Company for monetary damages resulting from a breach of their fiduciary duties. These limitations on director liability may discourage shareholders from suing directors for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought against a director by shareholders on the Company's behalf. Furthermore, our Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law. All of these provisions limit the extent to which the threat of legal action against our directors for any breach of their fiduciary duties will prevent such breach from occurring in the first instance. PURSUING AND COMPLETING POTENTIAL ACQUISITIONS COULD DIVERT MANAGEMENT ATTENTION AND FINANCIAL RESOURCES AND MAY NOT PRODUCE THE DESIRED BUSINESS RESULTS. We do not have specific personnel dedicated solely to pursuing and completing acquisitions. As a result, if we pursue any acquisition, our management, in addition to fulfilling their operational responsibilities, could spend significant time, management resources and financial resources to pursue and complete the acquisition and integrate the acquired business with our existing business. To finance any acquisition, we may use capital stock or cash or a combination of both. Alternatively, we may borrow money from a bank or other lender. If we use capital stock, our shareholders may experience dilution. If we use cash or debt financing, our financial liquidity would be reduced. In addition, acquisitions may result in nonrecurring charges or the amortization of significant goodwill that could adversely affect our ability to achieve and maintain profitability. Despite the investment of these management and financial resources and completion of due diligence with respect to these efforts, an acquisition may fail to produce the expected revenues, earnings or business and an acquired service or technology may not perform as expected for a variety of reasons, including: - Difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; - Risks of entering markets in which we have no or limited prior experience; - Expenses of any undisclosed or potential legal liabilities of the acquired company; - The applicability of rules and regulations that might restrict our ability to operate; and - The potential loss of key employees of the acquired company. If we make acquisitions in the future and the acquired businesses fail to 11 15 perform as expected, our business operating results and financial condition may be materially adversely affected. FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS. We have grown rapidly and expect to continue the growth both by hiring new employees and serving new business and markets. Our growth has placed, and will continue to place, a significant strain on our management and our operating and financial systems. Our personnel, systems, procedures and controls may be inadequate to support our future operations. In order to accommodate the increased size of our operations, we will need to hire, train and retain the appropriate personnel to manage our operations. We will also need to improve our financial and management controls, reporting systems and operating systems, all of which will require significant ongoing investments of the efforts of key personnel. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL SIGNIFICANTLY. The market price of publicly traded securities generally reflects, to a large degree, the expectations of industry analysts and significant investors with respect to the short and long-term operating results of the issuers. When issuers fail to meet such expectations, the market price of their publicly traded securities usually decreases, sometimes significantly, and may not recover. There can be no assurance that we will be able to satisfy the expectations of market analysts and investors to avoid a precipitous drop in the market price of our common stock. INTERNET DIVISION WE HAVE ENTERED INTO NEW BUSINESS VENTURES IN AN EVOLVING INDUSTRY IN WHICH THERE REMAIN UNPROVEN BUSINESS AND REVENUE MODELS. The Internet, music and email industry is rapidly evolving, extremely competitive, and the market place for internet-related shares has been very volatile. Furthermore, the music and email business continues to indicate changing revenue models in the market place. Consequently, there can be no assurance that sufficient revenues will be generated to support our current operations and other capital requirements. IN LIGHT OF RECENT CONSOLIDATION IN THE BROADCAST INDUSTRY AND RECENT DEVELOPMENTS IN THE MUSIC INDUSTRY, THE LOSS OF ANY SIGNIFICANT AFFILIATE OR ARTIST CONTRACTS WOULD NEGATIVELY IMPACT OUR OPERATIONS. The last few years have brought substantial concentration of power among a few players in the broadcast industry. Consequently, significant portions of the industry are controlled by relatively few organizations. We currently have over 400 clients. As consolidation increases, these contracts may be merged or lost due to the landscape of the industry. In light of such consolidation, however, the loss of any of these significant affiliation contracts or our inability to enter into contracts with other clients in the broadcast industry would negatively impact our operations. The reduction of artists touring and releasing new recording can significantly impact the level of activity on the fan club sites, membership and potential advertising associated with such. OUR EMAIL BASED PRODUCTS AND FAN CLUB SERVICES ARE DEPENDENT UPON THE INTERNET. The success of our services and products will depend in large part upon the continued development and expansion of the Internet. The Internet has experienced, and is expected to continue to experience, significant and geometric growth in the number of users and the amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to 12 16 delays in the development or adoption of new standards and protocols (for example, the next-generation Internet Protocol) to handle increased levels of Internet activity, or due to increased governmental regulation. There can be no assurance that the infrastructure or complementary services necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace for services and products such as those we offer. If the necessary infrastructure or complementary services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, our business, results of operations, and financial condition will be materially adversely affected. OUR FUTURE SUCCESS WILL DEPEND ON INCREASED ACCEPTANCE OF THE INTERNET AS A MEDIUM OF COMMERCE. The market for Internet email, fan club sites, private label newsletters and other services is relatively new and evolving rapidly. Our future success will depend, in part, upon our ability to provide services that are accepted by our existing and future clients as an integral part of their business model in providing content and information to their fans and viewers. The level of demand for Internet email, fan club sites, private label newsletters and other services will depend upon a number of factors, including the following: - The growth in consumer access to, and acceptance of, new interactive technologies such as the Internet; - The adoption of Internet-based business models; - The development of technologies that facilitate two-way communications between companies and target audiences; and - Acquiring members to the brands services. Significant issues concerning the commercial use of Internet technologies, including security, reliability, privacy, cost, ease of use and quality of service, may inhibit the growth of services that use these technologies. Our future success will depend, in part, on our ability to meet these challenges, which must be met in a timely and cost-effective manner. We cannot be sure that we will succeed in effectively meeting these challenges, and our failure to do so could materially and adversely affect our business. Industry analysts and others have made many predictions concerning the growth of the Internet as a business medium. Many of these historical predictions have overstated the growth of the Internet. These predictions should not be relied upon as conclusive. The market for our Internet email and fan club services may not continue to grow, our services may not be adopted and individual personal computer users in business or at home may not use the Internet or other interactive media for commerce, interaction and communication. If the market for Internet email, fan club sites and other services fails to sustain growth, or develops more slowly than expected, or if our services do not achieve market acceptance, our business would be materially and adversely affected. INTERNET STOCKS ARE SUBJECT TO MARKET VOLATILITY. The stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These fluctuations may adversely affect our stock price. If Internet usage does not continue to grow or its infrastructure fails, our business will suffer. If the Internet does not gain increased acceptance for business-to-consumer electronic commerce, our business will not grow or become profitable. We cannot be certain that the infrastructure or complementary services necessary to maintain the Internet as a useful and easy means of transferring documents and data will continue to develop. The Internet infrastructure may not support the demands that growth may place on it and the performance and reliability of the Internet may decline. 13 17 INCREASED COMPETITION RESULTING FROM AN INCREASE IN THE NUMBER OF EMAIL FAN CLUB AND BRANDED LABEL NEWSLETTERS PROVIDERS MAY HAVE AN ADVERSE EFFECT ON POPMAIL'S FUTURE BUSINESS OPERATIONS. Currently there are a growing number of email providers, artist web sites, newsletters providers and competitors to our business. To the extent we can execute our plan and are successful within the current target vertical markets in which we compete (i.e., broadcast, sports, music and entertainment), we anticipate continued growth of clients and members to our email services, newsletters and artist fan club sites. Others currently are competing and will attempt to compete in these Affinity vertical markets, which may have an adverse affect on our future business operations. THERE IS A RISK THAT GOVERNMENT REGULATION OF THE INTERNET COULD BECOME MORE EXTENSIVE. There are currently few 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, covering issues such as user privacy, pricing, characteristics, and quality of products and service. The Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who distributes obscene, indecent, or patently offensive communications on the Internet. Other nations, including Germany, have taken actions to restrict the free flow of material deemed to be objectionable on the Internet. The adoption of any additional laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our services and products, and increase our cost of doing business or otherwise have an adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, libel, and personal privacy is uncertain and will take years to resolve. Any such new legislation or regulation could have a material adverse effect on our business, results of operations, and financial condition. WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IF THE ACCEPTANCE OF ONLINE ADVERTISING, WHICH IS NEW AND UNPREDICTABLE, DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE. We plan to derive a substantial portion of our future revenues from online advertising and direct marketing in our branded email, fan club newsletters, artist web sites and Web-based programs. If these services do not continue to achieve market acceptance, we may not generate sufficient revenue to support our continued operations. The Internet has not existed long enough as an advertising medium to demonstrate its effectiveness relative to traditional advertising. Advertisers and advertising agencies that have historically relied on traditional advertising remain slow to adopt online advertising. Many potential advertisers have limited or no experience using email or the Web as an advertising medium. They may have allocated only a limited portion of their advertising budgets to online advertising, or may find online advertising to be less effective for promoting their products and services than traditional advertising media. If the market for online advertising fails to develop or develops more slowly than we expect, we may not sustain revenue growth or achieve or sustain profitability. The market for email advertising in general is vulnerable to the negative public perception associated with unsolicited email, known as "spam." Public perception, press reports or governmental action related to spam could reduce the overall demand for email advertising in general, which could reduce our revenue and prevent us from achieving or sustaining profitability. IF WE DO NOT MAINTAIN AND EXPAND OUR CLIENT AND MEMBER BASE WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY FOR ADVERTISERS. Our revenue has been derived primarily from the licensing of our email services, set up and hosting fees through PopMail Network, creating content through IZ.com for specific brands and from management fees, ticket fees, commerce fees and 14 18 artist travel packages through Fan Asylum. All three companies are seeking to provide timely and relevant information to their clients customers, fans and viewers with personalized content and information that is of most interest to the opt-in member or fan, through targeted email, personalized newsletters and fan club sites. If we are unable to maintain and expand our affinity brand member base and add clients to our "affinity brand network," advertisers could find our audience less attractive and effective for promoting their products and services and we could experience difficulty retaining our existing advertisers and attracting additional advertisers. To date, we have relied on referral-based marketing activities to attract a portion of our members and will continue to do so for the foreseeable future. This type of marketing is largely outside of our control and there can be no assurance that it will generate rates of growth in our member base comparable to what we have experienced to date. We would also be unable to grow our member base if a significant number of our current members and clients stopped using our service. Members may discontinue using our service if they object to having their online activities tracked or they do not find our content useful. In addition, our service allows our members to easily unsubscribe at any time by clicking through a link appearing at the bottom of our email messages and selecting the particular categories from which they want to unsubscribe. OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE SERVICES THAT CREATE, DELIVER AND DISTRIBUTE RELEVANT AND APPEALING CONTENT FROM AND FOR OUR CLIENTS THROUGH OUR AFFINITY EMAIL SERVICES, PUBLISHING TOOLS AND FAN CLUB SITES; IF WE ARE NOT ABLE TO CONTINUE TO DELIVER SUCH CONTENT OR TO PROVIDE SUCH SERVICES, WE MAY BE NOT ABLE TO MAINTAIN AND EXPAND OUR MEMBER AND FAN BASE, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO RETAIN AND ATTRACT THE ADVERTISERS WE NEED TO GENERATE ADDITIONAL REVENUES. Through IZ.com and Fan Asylum, we have relied on our editorial staff to identify and develop substantially all of our content utilizing content derived from other parties and from our clients. Because our members' preferences are constantly evolving, our editorial staff may be unable to accurately and effectively identify and develop content that is relevant and appealing to our members. As a result, we may have difficulty maintaining and expanding our member base, which could negatively affect our ability to retain and attract advertisers. If we are unable to retain and attract advertisers our revenue will decrease. Additionally, we license a small percentage of our content from third parties. The loss, or increase in cost, of our licensed content may impair our ability to assimilate and maintain consistent, appealing content in our email messages or maintain and improve the services we offer to consumers. We intend to continue to strategically license a portion of our content for our emails from third parties, including content that is integrated with internally developed content. These third-party content licenses may be unavailable to us on commercially reasonable terms, and we may be unable to integrate third-party content successfully. The inability to obtain any of these licenses could result in delays in product development or services until equivalent content can be identified, licensed and integrated. Any delays in product development or services could negatively affect our ability to maintain and expand our member base. IF WE DO NOT RESPOND TO OUR COMPETITION EFFECTIVELY, WE MAY LOSE CURRENT CLIENTS AND MEMBERS AND FAIL TO ATTRACT NEW ADVERTISERS, REDUCING OUR REVENUES AND HARMING OUR FINANCIAL RESULTS. We face intense competition from both traditional and online advertising and direct marketing businesses. If we do not respond to this competition effectively, we may not be able to retain current advertisers or attract new advertisers, which would reduce our revenue and harm our financial results. Currently, several companies offer competitive email direct marketing services, such as coolsavings.com, MyPoints.com, NetCreations, YesMail.com, Digital Impact and Exactis. We also expect to face competition from online content providers, list aggregators as well as established online portals and community Web sites that engage in direct marketing programs. Additionally, we may face competition from traditional advertising agencies and direct marketing companies that may seek to 15 19 offer online products or services. We also compete in high profile industries where our email services, publishing tools and fan club site offerings must meet the demands of our fans and clients. It is imperative that we continue to make enhancements to the email services, publishing tool and fan club site offerings if we are to continue growing our client and member base. Failure to make service and product enhancements could significantly impact our financial results. WE DEPEND HEAVILY ON OUR NETWORK INFRASTRUCTURE AND IF THIS FAILS IT COULD RESULT IN UNANTICIPATED EXPENSES AND PREVENT OUR MEMBERS FROM EFFECTIVELY UTILIZING OUR SERVICES, WHICH COULD NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN MEMBERS AND ADVERTISERS. Our ability to successfully create and deliver our email messages and private label newsletters and to keep fan club sites current depends in large part on the capacity, reliability and security of our networking hardware, software and telecommunications infrastructure. Failures within our network infrastructure could result in unanticipated expenses to address such failures and could prevent our members from effectively utilizing our services, which could prevent us from retaining and attracting members and advertisers. While our technology platform is considered state of the art, we do not currently have fully redundant systems or a formal disaster recovery plan in place for all companies. Our system is susceptible to natural and man-made disasters, including earthquakes, fires, floods, power loss and vandalism. Further, telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of our systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any damages or interruptions in our systems. Accordingly, we could be required to make capital expenditures in the event of unanticipated damage. In addition, our members depend on Internet service providers, or ISPs, for access to our Web site. Due to the rapid growth of the Internet, ISPs and Websites have experienced significant system failures and could experience outages, delays and other difficulties due to system failures unrelated to our systems. These problems could harm our business by preventing our members from effectively utilizing our services. OUR FUTURE SUCCESS WILL DEPEND ON INCREASED ACCEPTANCE OF THE INTERNET AS A MEDIUM OF COMMERCE. The market for Internet email and other services is relatively new and evolving rapidly. Our future success will depend, in part, upon our ability to provide services that are accepted by our existing and future members as an integral part of their business model. The level of demand for Internet email and other services will depend upon a number of factors, including the following: - The growth in consumer access to, and acceptance of, new interactive technologies such as the Internet; - The adoption of Internet-based business models; and - The development of technologies that facilitate two-way communication between companies and target audiences. Significant issues concerning the commercial use of Internet technologies, including security, reliability, cost, ease of use and quality of service, remain unresolved and may inhibit the growth of services that use these technologies. Our future success will depend, in part, on our ability to meet these challenges, which must be met in a timely and cost-effective manner. We cannot be sure that we will succeed in effectively meeting these challenges, and our failure to do so could materially and adversely affect our business. Industry analysts and others have made many predictions concerning the growth of the Internet as a business medium. Many of these historical predictions have overstated the growth of the Internet. These predictions should not be relied upon as conclusive. The market for our Internet email services may not develop, our services may not be adopted and individual personal computer users in business or at home may not use the Internet or other interactive media for commerce and 16 20 communication. If the market for Internet email and other services fails to develop, or develops more slowly than expected, or if our services do not achieve market acceptance, our business would be materially and adversely affected. WE MAY INCUR LIABILITY FOR THE INVASION OF PRIVACY. The Federal Trade Commission has investigated businesses that have used personally identifiable information without permission or in violation of a stated privacy policy. We have established and communicated to our members a privacy policy. In the event that we convey personally identifiable information to our corporate customers without permission or in violation of our stated privacy policy, we may incur liability for the unlawful invasion of privacy. RESTAURANT DIVISION WE HAVE DEVELOPED A FORMAL PLAN FOR THE DIVESTITURE OF THE RESTAURANT DIVISION AND HAVE RECLASSIFIED THE DIVISION AS DISCONTINUED OPERATIONS. There is no guarantee that the Company will be able to complete the sale of the Restaurants, as contemplated, or upon the terms acceptable to the Company. Accordingly, the Company is still subject to certain risks associated with the Restaurant Division. OUR ABILITY, OR INABILITY, TO RESPOND TO VARIOUS COMPETITIVE FACTORS AFFECTING THE RESTAURANT INDUSTRY MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The restaurant industry is highly competitive and is affected by changes in consumer preferences, as well as by national, regional and local economic conditions, and demographic trends. Discretionary spending priorities, traffic patterns, tourist travel, weather conditions, employee availability and the type, number and location of competing restaurants, among other factors, will also directly affect the performance of our restaurants. Changes in any of these factors in the markets where we currently operate our restaurants could adversely affect the results of our operations. Furthermore, the restaurant industry in general is highly competitive based on the type, quality and selection of the food offered, price, service, location and other factors and, as a result, has a high failure rate. The themed restaurant industry is relatively young, is particularly dependent on tourism and has seen the emergence of a number of new competitors. We compete with numerous well-established competitors, including national, regional and local restaurant chains, many of which have greater financial, marketing, personnel and other resources and longer operating histories than us. As a result, we may be unable to respond to the various competitive factors affecting the restaurant industry. WE HAVE ENTERED INTO NON-CANCELABLE LEASES UNDER WHICH WE ARE OBLIGATED TO MAKE PAYMENTS FOR TERMS OF 12 TO 15 YEARS. We have entered into long-term leases relating to the Kenwood, Mall of America and Denver restaurants. These leases are non-cancelable by us (except in limited circumstances) and range in term from 12 to 15 years. Although we have sold the Kenwood restaurant and assigned the related lease to an unrelated third party, we remain the primary obligor under the lease. If we decide to close any of our existing restaurants, we may nonetheless be committed to perform our obligations under the applicable lease, which would include, among other things, payment of the applicable base rent for the balance of the respective lease term. Such continued obligations increase our chances of closing a restaurant without receiving an adequate return on our investment. AMONG OTHER ECONOMIC FACTORS OVER WHICH WE HAVE NO CONTROL, THE SUCCESS OF OUR RESTAURANTS WILL DEPEND ON CONSUMER PREFERENCES AND THE PREVAILING LEVEL OF DISCRETIONARY CONSUMER SPENDING. The success of our restaurant division depends to a significant degree on a number of economic conditions over which we have no control, including: - Discretionary consumer spending; 17 21 - The overall success of the malls, entertainment centers and other venues where Cafe Odyssey restaurants are or will be located; - Economic conditions affecting disposable consumer income; and - The continued popularity of themed restaurants in general and the Cafe Odyssey concept in particular. Furthermore, most themed restaurants are especially susceptible to shifts in consumer preferences because they open at or near capacity and frequently respond to such shifts by experiencing a decline in revenue growth or of actual revenues. An adverse change in any or all of these conditions would have a negative effect on our operations and the market value of our common stock. OUR RESTAURANT DIVISION IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS. The restaurant industry, and to a lesser extent, the retail merchandising industry, are subject to numerous federal, state, and local government regulations, including those relating to: - The preparation and sale of food; - Building and zoning requirements; - Environmental protections; - Minimum wage requirements; - Overtime; - Working and safety conditions; - The sale of alcoholic beverages; - Sanitation; - Relationships with employees; - Unemployment; - Workers compensation; and - Citizenship requirements. Any change in the current status of such regulations, including an increase in employee benefits costs, workers' compensation insurance rates, or other costs associated with employees, could substantially increase our compliance and labor costs. Because we pay many of our restaurant-level personnel rates based on either the federal or the state minimum wage, increases in the minimum wage would lead to increased labor costs. In addition, our operating results would be adversely affected in the event we fail to maintain our food and liquor licenses. Furthermore, restaurant operating costs are affected by increases in unemployment tax rates, sales taxes and similar costs over which we have no control. ITEM 2. DESCRIPTION OF PROPERTY. THE MALL OF AMERICA RESTAURANT LOCATION The Mall of America Restaurant consists of approximately 17,800 square feet located on the third floor of the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis. This site is leased pursuant to a lease agreement dated August 4, 1997. The Mall of America opened in August 1992 with 266 tenants and now holds approximately 520 stores, merchandise carts and attractions, including four large anchor tenants (Macy's, Bloomingdale's, Sears and Nordstrom). The mall encompasses 4.2 million square feet on four enclosed floors, of which 2.5 million square feet are leasable, and employs 11,000 to 13,000 people, depending on the season. More than 93% of the leasable space is under contract, up from 71% five years ago. The mall draws an estimated 40 million visitors per year. Tourists account for 35% to 37% of annual mall traffic, but increases up to 50% in the summer months. 18 22 DESCRIPTION OF LEASE The term of the lease is for 12 years, commencing on June 1, 1998. The lease does not provide for renewal terms. The lease provides for the payment of either a minimum annual rent or a percentage rent based on gross sales. The minimum annual rent is $25 per square foot, or $405,375 per year based on approximately 16,215 square feet of leased area. The percentage rent is the amount by which 6% of gross sales exceed minimum rent. The terms of payment do not change over the course of the lease term. The lease also provided for a waiver of the minimum annual rent only, for the first year of the lease. In addition to the fixed minimum rent and percentage rent, the Company is required to pay its proportionate share of common area maintenance costs; taxes, insurance, maintenance and operating costs. THE DENVER PAVILIONS RESTAURANT LOCATION The Denver Pavilions Restaurant consists of approximately 18,000 square feet located on the third floor of the Denver Pavilions in Denver, Colorado. This site is leased pursuant to a lease agreement dated May 12, 1998 and includes office space utilized for the Company's restaurant division. DESCRIPTION OF LEASE The term of the lease is for 15 years, commencing on February 27, 1999. The lease also provides for three renewal terms. The lease provides for the payment of either a minimum annual rent or a percentage rent based on gross sales. The minimum annual rent increases throughout the term of the lease from $450,000 per year in years one through five to $568,800 in years 11 through 15. The percentage rent is the amount by which 5% of gross sales exceed minimum rent. The lease also provides for a tenant allowance. In addition to the fixed minimum rent and percentage rent, the Company is required to pay its proportionate share of common area maintenance costs: taxes, insurance, maintenance and operating costs. THE KENWOOD RESTAURANT LOCATION The Kenwood Restaurant opened in December 1996 under the name Hotel Discovery and was closed by the Company in August 1999. The property is approximately 17,000 square feet in size on three levels and is located at the northeast corner of Sycamore Plaza at Kenwood Shopping Center in Cincinnati, Ohio. In November 1999, the Company assigned the related lease (described below) in connection with the sale of restaurant assets, which was completed in April 2000, to a third party, who subsequently reopened the restaurant under another name and continues to operate them. Although the third party is responsible for all payments due under the lease, PopMail remains primarily obligated under the lease. In November 2000, the third party has notified the Company about its intention to re-sell the unit. The Company has also been informed that two months of property lease payments are past due. DESCRIPTION OF LEASE The initial term of the lease is 15 years with an option for two additional five-year periods. The lease provides for the payment of both a monthly fixed minimum rent and a percentage rent based on gross sales in excess of an escalating base amount. The monthly fixed minimum rent is $12,833 for the first five years of the initial lease term, $14,117 for the sixth through tenth years of the initial lease term, $15,400 for the eleventh through fifteenth years of the initial lease term. In addition to the fixed minimum rent, the lease provides for the payment of 19 23 a percentage rent equal to 4% of the gross sales from the restaurant in excess of the following annual gross sales amounts; $3,850,000 for the first five years of the initial lease term, $4,235,000 for the sixth through tenth years of the initial lease term, $4,620,000 for the eleventh through fifteenth years of the initial lease term. No percentage rent was paid in 1998 or 1999. In addition to the fixed minimum rent and percentage rent, the Company is required to pay its proportionate share of common area maintenance costs; taxes, insurance, maintenance and operating costs. IRVING TEXAS OFFICE FACILITIES PopMail's Internet email services division subleases approximately 8,500 square feet of office space in Irving, Texas. PopMail's sublease commenced on September 1, 1998 and expires on December 31, 2001. Rentals of $11,412.00 per month ($136,444 annually) are required under the sublease, in addition to nominal charges for common area maintenance. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the business, operating results and financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of security holders during the last quarter of the fiscal year covered by this report. 20 24 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK Since November 3, 1997, the common stock of the Company has been traded in the over-the counter market and quoted on the Nasdaq SmallCap Market. Initially, the Company's common stock was quoted under the symbol "HOTD". On May 21, 1998, the Company changed its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. In conjunction with this change, effective May 24, 1998, the Company's symbol for its common stock was changed to "CODY." Effective September 1, 1999, the Company acquired popmail.com, inc. and changed its name to PopMail.com, inc. In connection with the change in the Company's name, the Company's symbol for its common stock was changed to "POPM." As described more fully in the Risk Factors section of this Form 10-KSB/A, there is a substantial risk that PopMail's common stock will be delisted from the Nasdaq SmallCap Market. In the event that such risk materializes, trading, if any, in our common stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the National Association of Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity of our common stock would likely be impaired and the market price of our shares may decrease significantly. The following table sets forth the high and low bid prices of the Company's common stock for the periods indicated and have not been adjusted to reflect the Company's October 2000 10-for-1 reverse stock split. The Nasdaq bid quotations represent inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions:
HIGH LOW FISCAL YEAR ENDED JANUARY 3, 1999: First Quarter............................ $3.75 $1.88 Second Quarter........................... 5.38 2.25 Third Quarter............................ 3.63 1.00 Fourth Quarter........................... 1.13 0.50 FISCAL YEAR ENDED JANUARY 2, 2000: First Quarter............................ 1.03 0.56 Second Quarter........................... 3.56 0.50 Third Quarter............................ 4.88 1.94 Fourth Quarter........................... 4.09 1.44
As of March 27, 2000, there were approximately 270 shareholders of record of the Company's common stock, and approximately 6,000 other beneficial owners whose shares are held in street name. The Company has never declared or paid any cash dividends or distributions on its capital stock. The Company does not intend to pay any cash dividends on its common stock in the foreseeable future, as the current policy of the Company's Board of Directors is to retain all earnings, if any, to support operations and finance expansion. Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company's earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors. RECENT SALES OF REGISTERED AND UNREGISTERED SECURITIES The following table lists recent sales of registered and unregistered securities by 21 25 the Company: (All share amounts and exercise prices are pre-split values and do not take into account the October 2000 10-for-1 reverse stock split.)
TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES ISSUED TO RECEIVED - ------------------------------------------------------------------------------------------------------------- 1/22/99 Warrant to purchase Warrants to purchase Stephen D. King In connection with common stock shares of common Jerry Ruyan certain guarantees stock(1) Greg Mosher of a loan Andrew Green - ------------------------------------------------------------------------------------------------------------- 2/23/99 Warrant to purchase Warrant to purchase Frank W. Terrizzi In consideration common stock 50,000 shares of for a loan common stock - ------------------------------------------------------------------------------------------------------------- 3/3/99 Warrant to purchase Warrants to purchase Stephen D. King In consideration common stock an aggregate of Michael Berg of a guaranty 500,000 shares of Jack Feltl of a loan and common stock, at an Cayne Mills pledge of certain exercise price of Timothy Maudlin collateral $0.75 - ------------------------------------------------------------------------------------------------------------- 3/18/99 Warrant to purchase Warrant to purchase Stephen D. King In consideration common stock 150,000 shares of of a guaranty of a common stock, at an loan and pledge of exercise price of certain collateral $1.00 - ------------------------------------------------------------------------------------------------------------- 3/18/99 Warrant to purchase Warrant to purchase Cunningham Group In consideration common stock 150,000 shares of Construction Services of certain common stock, at an financial exercise price of concessions $0.75 - ------------------------------------------------------------------------------------------------------------- 4/20/99 Warrants to purchase Warrants to purchase J. Jeffrey Brausch & Financial advisory an aggregate of an aggregate of Company services 330,000 shares of 330,000 shares of CTC, Inc. common stock at an common stock, at an exercise price of $0.75 exercise price of $0.75 - ------------------------------------------------------------------------------------------------------------- 4/20/99 Warrants to purchase Warrants to purchase Gulfstream Financial Financial advisory an aggregate of an aggregate of Partners services 1,000,000 shares of 1,000,000 shares of common stock(2) common stock - ------------------------------------------------------------------------------------------------------------- 6/10/99 Common stock 120,000 Shares Internet Community Acquisition of Concepts 1.5% of the outstanding shares of Internet Community Concepts - ------------------------------------------------------------------------------------------------------------- 8/19/99 Private Placement of Up to 750,000 Units Certain accredited $450,000 Units consisting of at a price of $2.00 investors one share of Series E per Unit 175,000 Convertible Preferred units have sold Stock and one warrant through Jan. 2, 2000 to purchase one share of common stock - ------------------------------------------------------------------------------------------------------------- 9/29/99 Common Stock 75,000 shares NC Capital Markets, Engagement Fee of Inc. $80,000 for Investment Banking services - ------------------------------------------------------------------------------------------------------------- 10/12/99 Warrant to purchase Warrant to purchase Metropolitan Financial advisory 600,000 shares of Capital services common stock Partners, Inc. - ------------------------------------------------------------------------------------------------------------- 10/12/99 Warrant to purchase Warrant to purchase Michael Bird In connection with 15,000 shares of 15,000 of common loan common stock stock - ------------------------------------------------------------------------------------------------------------- 11/3/99 Warrants to purchase Warrants to purchase Gulfstream Financial Financial advisory an aggregate of an aggregate of Partners and Blake services 1,850,000 shares 1,850,000 shares Capital Partners of common stock of common stock - ------------------------------------------------------------------------------------------------------------- 10/13/99 Common stock 66,187 shares Cunningham Group Restaurant Construction Services, construction LLC services - ------------------------------------------------------------------------------------------------------------- 11/10/99 Common stock 288,000 shares Frank Terrizzi (3) - ------------------------------------------------------------------------------------------------------------- 11/24/99 (4) Common stock 900,000 shares LegacyMaker, Inc. In exchange for cancellation of previously issued warrant - -------------------------------------------------------------------------------------------------------------
22 26
TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES ISSUED TO RECEIVED - ------------------------------------------------------------------------------------------------------------- 11/24/99 Private Placement of $2,000,000 4% Certain accredited $1,393,000 Convertible Debentures Convertible investors Debentures and warrants to purchase 150,000 shares of common stock at an exercise price of $1.625 - ------------------------------------------------------------------------------------------------------------- 11/24/99 Private Placement of Warrant to purchase J.P. Carey Securities, Commissions Convertible Debentures 125,000 shares of Inc. common stock at an exercise price of $1.625 - ------------------------------------------------------------------------------------------------------------- 12/1/99 Private Placement of 2,450,000 shares Members of ROI, LLC $450,000 common stock in connection with ROI acquisition - ------------------------------------------------------------------------------------------------------------- 12/1/99 Private Placement of Warrant to purchase The Hillstreet Fund, In consideration Warrants 200,000 shares of L.P. for a loan common stock at an exercise price of $1.34 - ------------------------------------------------------------------------------------------------------------- 12/6/99 Private Placement of Warrant to purchase Hal Taylor In consideration Warrants 80,000 shares of for a loan common stock at an exercise price of $1.25 - ------------------------------------------------------------------------------------------------------------- 12/10/99 Private Placement of Warrant to purchase eBankerUSA.com, Inc. In consideration Warrants 89,375 shares of for financing common stock at an services exercise price of $2.00 - ------------------------------------------------------------------------------------------------------------- 12/10/99 Private Placement of Warrant to purchase American Frontier As finder's fee Warrants 19,500 shares of Financial Corporation for financing common stock at an services (see exercise price of eBanker) $1.25 - ------------------------------------------------------------------------------------------------------------- 12/14/99 Private Placement 628,800 shares of Certain accredited Cash in the amount common stock warrant investors of $500,000 and to purchase 100,000 consulting services shares common stock at an exercise price of $1.00 - ------------------------------------------------------------------------------------------------------------- 12/23/99 Warrant to purchase Warrant to purchase Montgomery & In consideration common stock 16,666 shares at an Associates for financial exercise price of services $2.00 - ------------------------------------------------------------------------------------------------------------- Various Warrants to purchase Warrants to purchase Stephen D. King Issued in dates common stock an aggregate of Jerry L. Ruyan connection with from 340,000 shares at Andrew Green guarantee 12/31/99 an exercise price to of $0.75 2/29/2000 - ------------------------------------------------------------------------------------------------------------- 1/19/2000 Warrants to purchase Warrant to purchase Gulfstream Financial In consideration common stock 700,000 shares at an Partners, LLC for financial exercise price of services $2.00 - ------------------------------------------------------------------------------------------------------------- 1/19/2000 Units consisting of 2,350,000 Units Certain accredited $2,350,000 common stock and consisting of 1 investors Warrants to purchase share of common common stock stock and one warrant to purchase one share of common stock at an exercise price of $2.00 - ------------------------------------------------------------------------------------------------------------- 1/26/2000 Warrants to purchase Warrant to purchase Frank W. Terrizzi In consideration common stock 100,000 shares at for consulting an exercise price services of $1.00 (5) - -------------------------------------------------------------------------------------------------------------
23 27
TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES ISSUED TO RECEIVED - ------------------------------------------------------------------------------------------------------------- 1/31/2000 Series E Preferred Series E Preferred Certain accredited $450,000 Stock and warrants Stock and warrants investors to purchase common to purchase an stock aggregate of 175,000 shares at an exercise price of $3.00 - ------------------------------------------------------------------------------------------------------------- 2/9/2000 Warrants to purchase Warrant to purchase Blake Capital In consideration common stock 150,000 shares at Partners, LLC for financial an exercise price services of $2.25 - ------------------------------------------------------------------------------------------------------------- 2/9/2000 Units consisting of 2,457,608 Units Certain accredited $6,165,878 common stock and consisting of 1 investors warrants to purchase share of common common stock stock and 1 warrant to purchase one share of common stock at an exercise price of $3.00 - ------------------------------------------------------------------------------------------------------------- 4/17/2000 Warrants to purchase Warrants to purchase Black Brook In consideration common stock 550,000 shares at an Capital LLC, and for financial exercise price of Sands Brothers & services $1.625 Co., Ltd - ------------------------------------------------------------------------------------------------------------- 4/18/2000 Warrants to purchase Warrant to purchase Blake Capital In connection common stock (BCP 250,000 shares at an Partners, LLC with certain Series) exercise price of financing $2.00 - ------------------------------------------------------------------------------------------------------------- 4/26/2000 Warrants to purchase Warrants to purchase Maris Kott and In consideration common stock 100,000 shares at an Dara Podber for financial exercise price of services $1.625 - ------------------------------------------------------------------------------------------------------------- 5/2/2000 Series G Convertible 600,000 shares of The Shaar Fund, $4,000,000 Preferred Stock Series G Convertible Ltd. Preferred Stock and a Warrant to purchase 500,000 shares at exercise price of $2.51 - ------------------------------------------------------------------------------------------------------------- 5/15/2000 Warrants to purchase Warrant to purchase Fairview Partners In consideration common stock 80,000 shares at an for financial exercise price of services $2.00 - ------------------------------------------------------------------------------------------------------------- 6/5/2000 Common stock 800,000 shares Tim McQuaid As consideration in a merger transaction - ------------------------------------------------------------------------------------------------------------- 6/13/2000 Common Stock 450,706 Shares CraftClick.com As consideration for an investment - ------------------------------------------------------------------------------------------------------------- 6/14/2000 Common stock, warrants Common stock, warrants Certain accredited $2,700,000 and certain adjustable to purchase 300,000 investors warrants to purchase shares at an exercise common stock price of $1.00 and certain adjustable warrants to purchase common stock at a nominal exercise price - ------------------------------------------------------------------------------------------------------------- 6/15/2000 Warrants to purchase Warrants to purchase J.P. Carey In connection common stock 300,000 shares at an Securities, Fiji with certain exercise price of Capital, financing $1.00 Metropolitan Capital Partners, Inc - ------------------------------------------------------------------------------------------------------------- 7/19/2000 Warrants to purchase Warrants to purchase Cam Birge In consideration common stock 50,000 shares at an for financial exercise price of services $0.75 - ------------------------------------------------------------------------------------------------------------- 7/26/2000 Warrants to purchase Previously issued Maris Kott and In consideration common stock warrants to purchase Dara Podber for financial 100,000 shares at an services exercise price of $1.625 were repriced to $0.75 per share - -------------------------------------------------------------------------------------------------------------
24 28
TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES ISSUED TO RECEIVED - ------------------------------------------------------------------------------------------------------------- 7/26/2000 Warrants to purchase Warrants to purchase J.P. Carey In connection common stock 300,000 shares at an Securities, Fiji with certain exercise price of Capital, financial $1.00 repriced to Metropolitan arrangements purchase 200,000 Capital Partners, shares at an Inc. exercise price of $0.75 - ------------------------------------------------------------------------------------------------------------- 7/28/2000 Warrants to purchase Warrants to purchase Andrew Green In connection common stock 25,000 shares at an with certain exercise price of financial $0.75 arrangements - ------------------------------------------------------------------------------------------------------------- 8/2/2000 Common stock 300,000 shares Phil Bane Pursuant to a Restricted Stock Purchase Agreement - ------------------------------------------------------------------------------------------------------------- 8/15/2000 Common stock 60,000 Shares Metropolitan In consideration Capital Partners, for financial Inc. services - ------------------------------------------------------------------------------------------------------------- 8/18/2000 Warrants to purchase Warrants to purchase Certain accredited In connection common stock an aggregate of investors with an agreement 2,000,000 shares at to immediately an exercise price of exercise $0.625 previously outstanding warrants - ------------------------------------------------------------------------------------------------------------- 8/25/2000 Common stock 240,000 Shares Wayne Mills In consideration of purchase of Promissory Note of Officer and Director of the Company 08/28/2000 Warrants to purchase Warrants to purchase Andrew Green In connection common stock 25,000 shares at an with certain exercise price of financing $0.75 arrangements - ------------------------------------------------------------------------------------------------------------- 9/14/2000 Warrants to purchase Warrants to purchase Apache Bluff Corp. In consideration common stock 200,000 shares at an for financial exercise price of consulting $0.50 services - ------------------------------------------------------------------------------------------------------------- 9/14 and Warrants to purchase Warrants to purchase Certain accredited In connection 9/15/2000 common stock an aggregate of investors with an agreement 618,626 shares to immediately an exercise price of exercise $1.00 previously outstanding warrants - -------------------------------------------------------------------------------------------------------------
(1) The Guaranty provides for an initial Warrant to purchase 200,000 shares of common stock, at an exercise price of $0.75, to be issued to each of the Guarantors. Additionally, penalty Warrants are to be provided for each month after the due date that the loan and guaranties are still outstanding. To date, Warrants to purchase 940,000 shares of common stock have been issued. (2) Terms originally called for warrants to purchase 1,000,000 shares of common stock, one-fourth of which vested once the stock price reached $2.00 per shares for 10 consecutive days at an exercise price of $1.00 per share, one-fourth vested once the stock price reached $4.00 per shares for 10 consecutive days at an exercise price of $2.00 per share, one-fourth vested once the stock price reached $6.00 per shares for 10 consecutive days at an exercise price of $3.00 per share, one-fourth vested once the stock price reached $8.00 per shares for 10 consecutive days at an exercise price of $4.00 per share. Warrants to purchase 500,000 shares of common stock were amended to reduce the exercise price to $2.00 in exchange for the investor agreeing to immediately exercise the warrants. As an additional incentive, an additional Warrant to purchase 500,000 shares at $2.00. Additionally, in consideration of further financial services, Warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 were issued and Warrant to purchase 350,000 shares of common stock at an exercise price of $1.625 was issued. 25 29 (3) As an additional incentive to exercise immediately, an additional Warrant to purchase 500,000 shares at $2.00 was issued. Additionally, in consideration of further financial services, Warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 were issued and Warrant to purchase 350,000 shares of common stock at an exercise price of $1.625 was issued for conversion $200,000 debt and other financing services. (4) Agreement to exchange entered into as of this date. Actual issuance occurred subsequent to January 2, 2000. (5) 50,000 shares vest only if company is sold in taxable event to shareholders. All of the above-referenced warrants expire five years after the date of issuance. In all of the above cases, there was no underwriter involved. The Company relied upon Rule 506 of Regulation D and or Section 4(2) of the Securities Act of 1933, as amended. 26 30 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in connection with the Company's consolidated financial statements and related notes included elsewhere in this report. OVERVIEW PopMail.com, inc. ("the Company" or "PopMail") consists of two divisions, the Internet email services division and the restaurant division. During the Company's third fiscal quarter ended October 1, 2000, management has entered into a formal plan for the disposition of the restaurants resulting in this filing being restated to reflect the restaurants as a discontinued operation in the accompanying consolidated financial statements. Management's primary focus is to develop the Internet email division by exploring additional revenue sources and complementary services through mergers, acquisitions and joint ventures. The Company is exploring other business acquisitions for the Internet Division. However, no assurance can be given that other mergers or acquisitions will be completed or desired results achieved. Future revenue and profits, if any, will depend upon various factors, including the rapidly changing e-commerce community of the Internet and general economic conditions. The Company's ongoing source of revenue is limited to income from its Internet email services division. There can be no assurances the Company will successfully implement its expansion plans. The Company also faces all of the risks, expenses and difficulties frequently encountered in connection with the expansion and development of a new and expanding business. With the addition of the Internet email services division, the Company will be hiring senior management to operate that division. As noted in the Risk Factors section of this Form 10-KSB/A, the Company has incurred substantial operating losses to date and, as of January 2, 2000, has a deficiency in working capital of approximately $8.2 million, net of any restaurant assets reclassified to net assets of discontinued operations. There can be no assurance of the Company's capacity to achieve and sustain profitable operations, and without additional financing (of which there can be no assurance), the Company may not have sufficient funds to support its operations, retire its indebtedness in the ordinary course of business and pursue its business plan. The Company has adopted a 52-53-week year ending on the Sunday nearest December 31 of each year. All references herein to "1999" represent a 52-week fiscal year ended January 2, 2000 and "1998" represents a 53-week fiscal year ended January 3, 1999. RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 2, 2000 AND JANUARY 3, 1999 NET SALES Net sales for the restaurant division increased by $5,233,563 or 75.5% to $12,166,454 for 1999 from $6,932,891 for 1998. Sales at the Mall of America Restaurant increased by $1,705,481 or 39.8% to $5,988,165 for 1999 from $4,282,684 for 1998. The Mall of America Restaurant was open for the full fifty-two weeks in 1999 vs. 30 weeks in 1998. Sales at Denver Pavilions were $5,008,674 for the 42 weeks of operations in 1999. The Kenwood Restaurant had sales in 1999 of $1,169,615 before it closed on August 29, 1999. The Kenwood Restaurant had sales of $2,650,207 in 1998. The Company finalized the sale of this restaurant during April 2000. Net sales for the email service division were $106,744 resulting from the ROI acquisition completed on December 3, 1999. COSTS AND EXPENSES The restaurants food, beverage and retail costs were $3,144,513 (25.8% of net sales) for 1999 as compared to $1,897,492 (27.4% of net sales) for 1998, which remain within the normal operating percentage of net sales. This reduction in the 27 31 percentage change from the prior year indicates stabilization in overall cost of goods sold. Restaurants operating expenses were $8,404,324 (69.1% of net sales) for 1999 as compared to $5,038,105 (72.7% of net sales) for 1998. The increase in restaurant operating expenses is due primarily to the opening of the Denver Pavilions Restaurant. The 74.4% increase in depreciation expense in 1999 is primarily attributable to the new Denver Pavilions Restaurant. Goodwill amortization expense for 1999 was $3,933,411. This represents the excess of the purchase price and related costs over the fair value of the net assets of business acquired. The Company amortizes goodwill on a straight-line basis over a three-year period. Remaining goodwill amortization at January 2, 2000 is as follows: $13,277,280 for 2000, $13,277,280 for 2001 and $9,722,786 for 2002. The restaurant division had pre-opening expenses of $939,179 in 1999 as compared to $732,851 in 1998. Of these expenses, $871,220 were for the Denver Pavilions Restaurant and $67,959 related to the start-up site located in Irvine, California. The Company has decided not to open a restaurant at this site. The Company's executive and administrative office located in Bloomington, Minnesota, had general, administrative and development expenses of $5,002,557 for 1999 as compared to $3,081,213 for 1998. This increase reflects the results of the acquisitions of Old Popmail and ROI. The email service division's executive and administrative office located in Dallas, Texas, had general, administrative and development expenses of $1,536,589 for 1999. These expenses represent administrative and development expenses of Old Popmail and ROI since Acquisition. The Company has to address the numerous executive and administrative staffing requirements from its mergers and acquisitions, shareholder relationships, and development costs associated with Internet email software creation. The Company will be seeking additional senior management personnel as well as support staff, which will also have an associated impact on future earnings. The Company expects to continue to incur operating losses during 2000. The Company's other income and expense consist of interest income, interest expense, warrant repricing, debt guarantee cost and financial advisory services. Interest expense for 1999 was $2,357,245 as compared to $130,625 for 1998. This increase of $2,226,620 relates to the financing fees generated in raising debt throughout the year and additional borrowings during the year. Interest income for 1999 was $49,323 as compared to $180,999 for 1998 reflecting lower levels of cash of 1999. The Company recorded a warrant repricing expense of $4,539,311 relating to the Series B Preferred Stock issued in the Popmail merger. The Company recorded costs associated with the guarantees provided for debt financing for 1999 of $1,607,833. The Company also recorded costs associated with services provided by third party financial advisors for 1999 of $1,489,040. These costs were paid with both the issuances of new common stock and warrants. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $8,201,651 at January 2, 2000, compared to a deficit of $3,639,028 on January 3, 1999 (net of net assets of discontinued operations). Cash and cash equivalents were $1,136,137 at January 2, 2000 representing an increase of $1,029,890 from the cash and cash equivalents of $106,247 at January 3, 1999. During 1999, the Company's principal capital requirements were the construction of the Denver Pavilions Restaurant and the acquisition of furniture, fixtures and equipment of approximately $4.2 million, net of landlord contributions, and the acquisition and merger with popmail.com, inc., of approximately $5.1 million. The Company used approximately $5,900,000 in cash for operations and $6,600,000 for investing activities during 1999. The Company generated approximately $13,500,000 in cash from financing activities in 1999. 28 32 The Company's primary sources of working capital in 1999 were proceeds from the sale of common and preferred stock, and the issuances of warrants and debt. Financing activity in 1999 and 2000 are described in the Consolidated Financial Statements and Related Notes. The Company intends to fund operations and the expansions of the Internet email services division through additional equity and debt transactions. Management believes it has resources sufficient to meet the Company's working capital needs for the next twelve months from its cash on hand, proceeds available from the exercise of stock options and warrants, and additional equity and debt financing. There can be no assurance that additional financing will be available on terms acceptable to the Company or on any terms whatsoever. In the event that we are unable to fund our operations, we will be unable to continue as a going concern. 29 33 ITEM 7. FINANCIAL STATEMENTS POPMAIL.COM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Certified Public Accountants - Grant Thornton LLP.................................................. F-1 Report of Independent Public Accountants - Arthur Andersen LLP................................................. F-2 Financial Statements - Restated Consolidated Balance Sheets......................................... F-3 Consolidated Statements of Operations............................... F-5 Consolidated Statements Shareholders' Equity........................ F-6 Consolidated Statements of Cash Flows............................... F-8 Notes to Consolidated Financial Statements.......................... F-11
34 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders PopMail.com, inc. We have audited the accompanying consolidated balance sheet of PopMail.com, inc. and subsidiaries (the Company, formerly Cafe Odyssey, Inc.) as of January 2, 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PopMail.com, inc. and subsidiaries as of January 2, 2000 and the results of their consolidated operations and their consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ GRANT THORNTON LLP Minneapolis, Minnesota March 24, 2000 (except for Note M, as to which the date is December 18, 2000) F-1 35 To PopMail.com, inc. (formerly Cafe Odyssey, Inc.): We have audited the accompanying balance sheet of PopMail.com, inc. (formerly Cafe Odyssey, Inc.) as of January 3, 1999 and the related statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts an disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PopMail.com, inc. (formerly Cafe Odyssey, Inc.) as of January 3, 1999 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and has a net working capital deficit that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ ARTHUR ANDERSEN LLP Minneapolis, Minnesota February 19, 1999 F-2 36 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED BALANCE SHEETS
ASSETS January 2, January 3, 2000 1999 ------------ ------------- Current assets Cash and equivalents $ 1,136,137 $ 106,247 Accounts receivable 270,557 - Other current assets 450,016 118,233 ------------ ------------ Total current assets 1,856,710 224,480 Property and equipment, at cost Leasehold improvements - 45,069 Equipment and fixtures 1,051,900 81,220 ------------ ------------ 1,051,900 126,289 Less accumulated depreciation and amortization 157,021 15,970 ------------ ------------ 894,879 110,319 Net assets of discontinued operations 9,601,351 8,298,599 Goodwill, net of accumulated amortization of $3,924,232 36,277,346 - Other assets, net 7,312 139,787 ------------ ------------ $ 48,637,598 $ 8,773,185 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 37 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY January 2, January 3, 2000 1999 ------------ ------------ Current liabilities Notes payable $ 6,037,518 $ 2,000,000 Convertible promissory notes payable 1,460,417 150,000 Accounts payable 1,329,223 243,877 Due to affiliates 120,000 100,000 Accrued compensation 415,896 379,466 Other accrued expenses 695,309 61,595 ------------ ------------ Total current liabilities 10,058,363 2,934,938 Long-term obligations 1,321,643 - ------------ ------------ Total liabilities 11,380,006 2,934,938 Commitments and contingencies - - Shareholders' equity Common stock, $.01 par value, 100,000,000 shares authorized; 2,469,587 and 800,009 shares issued and outstanding 24,696 8,000 Series C 8% convertible preferred stock, par value $.01; $1,000 stated value; authorized 2,000 shares; 605 shares issued and outstanding at January 2, 2000 693,000 - Series D 8% convertible preferred stock, par value $.01; $1,000 stated value; authorized 2,200 shares; 2,200 shares issued and outstanding at January 2, 2000 2,288,000 - Series E convertible preferred stock, par value $.01; $2.00 stated value; authorized 750,000 shares; 175,000 shares issued and outstanding at January 2, 2000 350,000 - Additional paid-in capital 75,123,422 20,353,141 Less common stock subscribed and note receivable from affiliate (2,850,000) (400,000) Accumulated deficit (38,371,526) (14,122,894) ------------ ------------ 37,257,592 5,838,247 ------------ ------------ $ 48,637,598 $ 8,773,185 ============ ============
The accompanying notes are an integral part of these financial statements. F-4 38 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended ------------------------------------- January 2, January 3, 2000 1999 ------------- ------------- Revenues Internet marketing services, net $ 106,744 $ - Costs and expenses General, administrative and development expenses 5,011,736 3,081,213 Amortization of goodwill 3,924,232 - ------------- ------------- Total costs and expenses 8,935,968 3,081,213 ------------- ------------- Loss from operations (8,829,224) (3,081,213) Other income (expense) Interest expense (2,357,245) (130,625) Interest income 49,323 180,999 Warrant repricing (4,539,311) - Debt guarantee costs (1,607,833) - Financial advisory services (1,489,040) - ------------- ------------- (9,944,106) 50,374 ------------- ------------- Net loss from continuing operations (18,773,330) (3,030,839) Loss from operations of discontinued restaurant division (1,960,841) (3,675,743) ------------- ------------- Net loss (20,734,171) (6,706,582) Preferred stock dividends and accretion (3,514,461) - ------------- ------------- Loss attributable to common shareholders $ (24,248,632) $ (6,706,582) ============= ============= Basic and diluted loss per common share: Continuing operations $ (18.57) $ (3.79) Discontinued operations (1.94) (4.59) ------------- ------------- Net loss $ (20.51) $ (8.38) ============= ============= Basic and diluted net loss attributable to common shareholders per common share $ (23.99) $ (8.38) ============= ============= Basic and diluted weighted average outstanding shares 1,010,845 800,013 ============= =============
The accompanying notes are an integral part of these financial statements. F-5 39 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common stock Common stock Preferred stock Additional subscribed -------------------- -------------------- paid-in and note Accumulated Shares Amount Shares Amount capital receivable deficit Total --------- -------- ------- ---------- ------------ ----------- ------------ ------------ Balance at December 28, 1997 800,019 $ 8,000 -- $ -- $ 20,224,951 $ (400,000) $ (7,416,312) $ 12,416,639 Issuance of warrants to guarantors -- -- -- -- 128,490 -- -- 128,490 Cancellation of share grant (10) -- -- -- (300) -- -- (300) Net loss -- -- -- -- -- -- (6,706,582) (6,706,582) --------- -------- ------- ---------- ------------ ---------- ------------ ------------ Balance at January 3, 1999 800,009 8,000 -- -- 20,353,141 (400,000) (14,122,894) 5,838,247 Issuance of common stock in lieu of compensation 28,001 280 -- -- 197,428 -- -- 197,708 Issuance of common stock for services 35,194 352 -- -- 629,506 -- -- 629,858 Warrants issued for services -- -- -- -- 1,301,500 -- -- 1,301,500 Issuance of common stock 18,000 180 -- -- 199,820 -- -- 200,000 Common stock issued for conversion of promissory notes payable and payment of interest 19,715 197 -- -- 404,561 -- -- 404,758 Stock option conversions 11,900 119 -- -- 89,130 -- -- 89,249 Exercise of warrants 225,000 2,250 -- -- 2,935,250 -- -- 2,937,500 Sale of Class A convertible preferred stock -- -- 2,000 2,000,000 -- -- -- 2,000,000 Issuance of Class B convertible preferred stock in PopMail acquisition -- -- 2,024 21,589,755 -- -- -- 21,589,755 Warrants issued in PopMail acquisition -- -- -- -- 4,318,956 -- -- 4,318,956 Warrants issued to PopMail guarantor in PopMail acquisition -- -- -- -- 2,700,000 -- -- 2,700,000 Sale of Class C convertible preferred stock -- -- 2,000 2,000,000 -- -- -- 2,000,000 Sale of Class D convertible preferred stock -- -- 2,200 2,200,000 -- -- -- 2,200,000 Sale of Class E convertible preferred stock -- -- 175,000 350,000 -- -- -- 350,000 Note receivable issued to affiliate for purchase of common stock -- -- -- -- -- (2,450,000) -- (2,450,000)
The accompanying notes are an integral part of these financial statements. F-6 40 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Common stock Common stock Preferred stock Additional subscribed -------------------- -------------------- paid-in and note Accumulated Shares Amount Shares Amount capital receivable deficit Total --------- -------- ------- ---------- ------------ ----------- ------------ ------------ Series A, C and D private placement costs -- $ -- -- $ -- $ (722,323) $ -- $ -- $ (722,323) Issuance of common stock in the ROI acquisition 275,000 2,750 -- -- 6,279,711 -- -- 6,282,461 Old PopMail stock subscribed -- -- -- -- -- (2,000) -- (2,000) Cash received on common stock subscribed -- -- -- -- -- 2,000 -- 2,000 Conversion of Class A preferred 101,600 1,016 (2,000) (2,000,000) 1,998,984 -- -- -- Conversion of Class B preferred 863,390 8,634 (2,024) (21,589,755) 21,581,121 -- -- -- Conversion of Class C preferred 91,778 918 (1,395) (1,395,000) 1,394,082 -- -- -- Record non-cash preferred stock deemed dividend -- -- -- (3,338,461) 3,338,461 -- -- -- Record preferred stock deemed dividend -- -- -- 3,338,461 -- -- (3,338,461) -- Dividends paid or accrued on preferred stock -- -- -- 176,000 -- -- (176,000) -- Warrants issued to guarantors of notes payable -- -- -- -- 1,232,833 -- -- 1,232,833 Repricing of warrants related to the PopMail acquisition -- -- -- -- 4,539,311 -- -- 4,539,311 Warrants issued for private placement costs in connection with Series A, C and D issuances -- -- -- -- 469,500 -- -- 469,500 Warrants issued in connection with notes payable -- -- -- -- 1,882,450 -- -- 1,882,450 Net loss -- -- -- -- -- -- (20,734,171) (20,734,171) ---------- -------- ------- ---------- ----------- ------------ ----------- ----------- Balance at January 2, 2000 2,469,587 $ 24,696 177,805 $3,331,000 $ 75,123,422 $ (2,850,000) $(38,371,526) $ 37,257,592 ========== ======== ======= ========== =========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-7 41 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended ---------------------------------- January 2, January 3, 2000 1999 ------------ ----------- Operating activities: Net loss $(20,734,171) $(6,706,582) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization 157,025 14,311 Amortization of goodwill 3,933,411 - Amortization of warrant discount 972,333 59,302 Loss on disposal of property and equipment 51,615 - Common stock issued in lieu of compensation 197,708 - Common stock issued for services and interest 684,616 - Warrants issued for services 1,301,500 - Warrants issued to guarantors 1,232,833 128,490 Repricing of warrants issued in the popmail acquisition 4,539,311 - Discontinued operations 961,143 3,586,474 Other 567,177 - Changes in operating assets and liabilities, net of effect of business acquisitions: Accounts receivable 341,080 - Other current assets (307,340) 16,500 Other assets 176,387 (120,493) Accounts payable 557,893 (209,755) Accrued expenses (547,679) (9,796) ----------- ---------- Net cash used in operating activities (5,915,158) (3,241,549) Investing activities: Purchases of property and equipment, net (98,419) (28,469) Issuance of note receivable to affiliate (2,450,000) - Discontinued operations (4,027,388) (9,341,105) ----------- ---------- Net cash used in investing activities (6,575,807) (9,369,574)
The accompanying notes are an integral part of these financial statements. F-8 42 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended ---------------------------------- January 2, January 3, 2000 1999 ----------- ------------ Financing activities: Proceeds from issuance of stock $ 200,000 $ - Proceeds from issuance of preferred stock 5,730,000 - Proceeds from short term notes payable 5,020,884 - Payments on short-term notes payable (5,940,271) (200,000) Proceeds from convertible notes payable 2,300,000 - Payments on convertible notes payable (100,000) - Proceeds from long-term debt 1,500,000 2,000,000 Payments on long-term debt - (980,889) Advances from shareholder/officers 240,000 100,000 Repayment of advances from shareholders/officers (220,000) - Proceeds from exercise of options and warrants 3,026,749 - Payments on cancellation of stock - (300) Discontinued operations 1,763,493 2,576,385 ---------- ---------- Net cash provided by financing activities 13,520,855 3,495,196 ---------- ---------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,029,890 (9,115,927) Cash and equivalents, beginning of year 106,247 9,222,174 ---------- ---------- Cash and equivalents, end of year $1,136,137 $ 106,247 ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest $ 703,491 $ 130,625 ========== ==========
The accompanying notes are an integral part of these financial statements. F-9 43 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended ---------------------------------- January 2, January 3, 2000 1999 ------------ ---------- Non-cash financing and investing activities: Conversion of preferred stock into common stock $ 3,395,000 $ - Conversion of debt and interest into common stock 404,758 - Preferred stock issued for placement costs 820,000 - Common stock issued for compensation 197,708 - Common stock issued for services 629,858 - Warrants issued for services 1,301,500 - Warrants issued to guarantors of notes payable 1,232,833 - Warrants issued for private placement costs in connection with Series A, C and D issuances 469,500 - Warrants issued in connection with notes payable 1,882,450 - Repricing warrants related to the PopMail acquisition 4,539,311 - Acquisitions: Common stock issued 27,872,216 - Warrants issued 7,018,956 - Fair value of assets acquired (1,583,952) - Liabilities assumed 6,903,537 - ------------ --------- Purchase price in excess of fair value of assets acquired $ 40,210,757 $ - ============ =========
The accompanying notes are an integral part of these financial statements. F-10 44 POPMAIL.COM, INC. (FORMERLY CAFE ODYSSEY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF THE BUSINESS PopMail.com, inc. ("the Company" or "PopMail"), formerly Cafe Odyssey, Inc., consists of two divisions, the restaurant division and the email services division. During 1999, in conjunction with the acquisition of popmail.com, inc. the Company changed its name from Cafe Odyssey, Inc. to PopMail.com, inc. During the fiscal quarter ended October 1, 2000, the Company developed a formal plan for the divestiture of the restaurant division. The accompanying consolidated financial statements have thus been restated to reflect the restaurant division as a discontinued operation. The restaurant division develops, owns and operates upscale casual restaurants with multiple themed dining rooms. The Company has "Cafe Odyssey" restaurants at the Mall of America in Bloomington, Minnesota, which opened in June 1998 and at the Denver Pavilions, in Denver, Colorado, which opened in March 1999. The Company closed its Cincinnati, Ohio location in September 1999 and finalized the sale of this restaurant in April 2000. On October 12, 2000, the Company implemented a 10-for-1 reverse stock split. Unless otherwise noted, all references within these financial statements have been restated to reflect the Company's post-split common stock numbers. The email services division provides permission marketing and affinity-based email communications concentrating primarily on the needs of businesses in the broadcast, media, sports and entertainment industries located throughout the United States. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. FISCAL YEAR The Company has adopted a 52-53 week year ending on the Sunday nearest December 31 of each year. All references herein to "1999" represents a 52-week fiscal year ended January 2, 2000 and "1998" represents a 53-week fiscal year ended January 3, 1999. CASH AND EQUIVALENTS The Company includes as cash and equivalents, cash on hand, bank deposits and all liquid money market investments with original maturities of three months or less when purchased, which are recorded at the lower of cost or market. PROPERTY AND EQUIPMENT Property and equipment acquired are recorded at cost. Leasehold improvements are capitalized, while repair and maintenance expenses are charged to operations as incurred. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term for financial reporting purposes and accelerated methods for tax purposes. Furniture and equipment are depreciated on a straight-line method over their estimated useful lives of 3 to 15 years. GOODWILL Goodwill represents the excess of the purchase price and related costs over F-11 45 the fair value of the net assets of businesses acquired and is amortized on a straight-line basis over three years. FAIR VALUES OF FINANCIAL INSTRUMENTS Due to their short-term nature, the carrying value of the Company's current financial assets and liabilities approximates their fair values. The fair value of the Company's borrowings, if recalculated based on current interest rates, would not significantly differ from the recorded amounts. INCOME TAXES The Company accounts for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are provided for differences between the financial reporting and tax bases of the Company's assets and liabilities at currently enacted tax rates. ADVERTISING The Company expenses advertising costs as incurred. Advertising expense for continuing operations was approximately $5,000 and $55,000 during 1999 and 1998. STOCK-BASED COMPENSATION The Company utilizes the intrinsic value method for stock-based compensation. Under this method, compensation expense is recognized for the amount, if any, by which the market price of the common stock on the date of grant exceeds the exercise price of an option. Pro forma information related to the fair value method of accounting is contained in note H. NET LOSS PER COMMON SHARE Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common stock outstanding during the year. The impact of common stock equivalents has been excluded from the computation of weighted average common stock outstanding, as the net effect would be antidilutive. USE OF ESTIMATES Preparing financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. These reclassifications had no effect on net loss or shareholders' equity as previously reported. NOTE C - BUSINESS COMBINATIONS On August 29, 1999, the Company completed its merger with popmail.com, inc., which was accounted for as a purchase. The results of popmail's operations have been included with the Company's operations from the date of the merger. Consideration for the merger included the issuance of 2,024 shares of Series B Convertible preferred stock, convertible into 8,633,900 shares (on a pre-split basis) of the Company's common stock valued at $21,589,755; the issuance of 4,407,098 (on a pre-split basis) five-year warrants to purchase common at an exercise price of $3.00 per share valued at $4,318,956; the assumption of approximately $5,019,000 of notes payable, which required the issuance of 900,000 (on a pre-split basis) five-year warrants to the holder of those notes valued at $2,700,000; and $890,000 in closing costs. The total consideration exceeded the fair value of the net liabilities F-12 46 acquired by approximately $33,800,000, which has been recorded as goodwill and is being amortized on a straight-line basis over three years. On December 3, 1999, the Company completed the acquisition of ROI Interactive LLC (ROI). This acquisition was accounted for as a purchase with the results of operations included with the Company's operations from the date of acquisition. Total consideration included the issuance of 2,750,000 shares (on a pre-split basis) of the Company's common stock valued at $6,282,461 and $150,000 in closing costs. The total consideration exceeded the fair value of the net liabilities acquired by approximately $6,400,000, which has been recorded as goodwill and is being amortized on a straight-line basis over three years. The following unaudited consolidated pro forma information assumes the above business combinations occurred at the beginning of the respective periods presented and has been restated to reflect only the historical continuing operations. The 1998 pro forma information does not include ROI, as it did not begin operations until 1999.
Years ended December 31, -------------------------- 1999 1998 ------------ ----------- Net revenues $ 1,030,000 $ 49,000 Net loss from continuing operations attributable to common shareholders (33,578,000) (16,737,000) Net loss per share attributable to common shareholders $ (16.35) $ (10.06) Weighted average shares outstanding 2,054,000 1,663,000
The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the merger and acquisition occurred on those dates, nor is it indicative of the results that may occur in the future. NOTE D - NOTES PAYABLE Notes payable consists of the following:
January 2, January 3, 2000 1999 ---------- ---------- Short-term revolving line of credit (a) $3,000,000 $2,000,000 Short-term revolving loan (b) 825,000 - Short-term promissory notes, net of discounts of $192,177 (c) 2,082,823 - Other 129,695 - ---------- ---------- $6,037,518 $2,000,000 ========== ==========
(a) In September 1998, the Company entered into a $3,000,000 revolving line of credit with a financial institution collateralized by a leasehold mortgage, security agreement and assignment of rents and income of the Cincinnati restaurant. In addition, two directors and an ex-director of the Company entered into a joint and several limited guaranty of the first $1,000,000 of the Company's borrowings under this credit facility. In consideration of these guarantees, the Company issued 40,000 (on a pre-split basis) five-year warrants to each of these individuals at an exercise price of $0.75 per share in November 1998. Guarantees for the other $2,000,000 were obtained later in November 1998 from two of the aforementioned directors and an additional third party whereby two of the directors each severally guaranteed $500,000 and the other third party guaranteed $1,000,000, of such borrowings. All three guarantors pledged certain collateral to the financial institution in connection with the later guarantees. In exchange for such guarantees and pledges of collateral, the Company issued 200,000 (on a pre-split basis) five-year warrants each to two of the directors in November 1998, and 400,000 (on a pre- F-13 47 split basis) five-year warrants to the other third party in January 1999, all at an exercise price of $0.75 per share. This revolving line of credit facility was due on demand. This credit facility provided for monthly payments of interest accrued on the outstanding unpaid principal balance at a rate equal to the prime rate, or 8.5% as of January 2, 2000 and 7.75% as of January 3, 1999. Each of the guarantee agreements contain provisions which require the issuance of additional warrants and payment of cash penalties if the borrowings were not paid in full by September 30, 1999. As of January 2, 2000, the Company accrued $375,000 for the cash penalties and is obligated for and has recorded 600,000 (on a pre-split basis) five-year warrants at an exercise price of $0.75 per share. Three payments of $1,000,000 each were paid in February, March and July 2000 against this line of credit. (b) In March 1999, the Company entered into an $825,000 revolving loan facility with a financial institution collateralized by substantially all of the Company's assets. In addition, the loan was guaranteed by five individuals. In consideration of these guarantees, the Company issued 500,000 (on a pre-split basis) five-year warrants in March 1999 (ranging from 25,000 to 250,000 warrants) to these individuals at an exercise price of $0.75 per share. All guarantors pledged certain collateral to the financial institution in connection with these guarantees. This revolving line of credit facility was due on demand. This credit facility provided for monthly payments of interest accrued on the outstanding unpaid principal balance at a rate equal to the prime rate, (8.5% as of January 2, 2000). The loan was paid in March 2000. (c) In connection with the Popmail merger, the company assumed a note payable for $5,019,387, of which $4,469,387 was repaid shortly after the merger. The remaining $550,000 was payable in monthly payments with interest at the prime rate (8.5% at January 2, 2000). The principal was due on demand, and paid in full in January 2000. The loan was uncollateralized. In December 1999, the Company entered into a note payable for $200,000. The note was payable in monthly payments for interest at 15%. The principal was due on demand, and paid in full in March 2000. In connection with the loan the Company issued 80,000 (on a pre-split basis) five-year warrants with an exercise price of $1.25 to the lender. The fair value of these warrants were recorded as a discount and fully amortized over the period outstanding. In December 1999, the Company entered into a note payable for $325,000. The note was payable in monthly payments for interest at 15%. The principal was due on demand and paid in full in January 2000. In connection with the loan the Company issued 89,375 (on a pre-split basis) five-year warrants with an exercise price of $2.00 to the lender. The fair value of these warrants were recorded as a discount and fully amortized over the period outstanding. In addition, the Company issued 19,500 (on a pre-split basis) five-year warrants at an exercise price of $2.00 per share to a third party as a finders fee on this note. Also in December 1999, the Company entered into a note payable for $1,200,000. At the inception of the loan, the Company prepaid the interest of 13% ($91,000) for the life of the note until the loan matures in July 2000. In connection with the loan the Company issued 200,000 (on a pre-split basis) five-year warrants with an exercise price of $1.34 to the lender. The fair value of these warrants were recorded as a discount and fully amortized over the period outstanding. The loan was paid in full in March 2000. NOTE E - LONG-TERM OBLIGATIONS In November 1999, the Company executed a senior convertible note for $2,000,000 which matured in November 2001 and bore interest at 4%. The note and any unpaid interest was convertible into the Company's common stock at the trading price at the day of the conversion. In connection with this note, the Company issued 275,000 (on a pre-split basis) five-year warrants with an exercise price of $1.625 to the lenders and a placement agent. The fair value of these warrants were recorded as a discount and fully amortized over the period outstanding. The entire $2,000,000 note and interest were converted into 2,006,668 shares (on a pre-split basis) of common stock during the first three quarters of fiscal 2000. F-14 48 NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE Convertible promissory notes payable consists of the following:
January 2, January 3, 2000 1999 ---------- ---------- Senior convertible note payable, net of discount of $539,583 (a) $1,460,417 $ - Other (b) - 150,000 ---------- ---------- $1,460,417 $ 150,000 ========== ==========
(a) In August 1999, the Company executed a senior convertible note for $2,000,000, which matured in August 2000, and bore interest at prime plus 2% (effective interest rate of 10.5% as of January 2, 2000). In August 2000, a principal payment of $500,000 was made and the Company received a 30-day extension on the balance. The Company is currently finalizing an extension of up to one year (of monthly principle and interest payments) on the balance. The remaining balance of the note and any unpaid interest is convertible into the Company's common stock at a conversion price of $2.50 (pre-split price). In connection with this note, the Company issued 500,000 (on a pre-split basis) five-year warrants with an exercise price of $2.50 (pre-split price) to the lender. The fair value of these warrants were recorded as a discount and fully amortized over the original maturity of the note. (b) Consisted of three 8.01% convertible promissory notes which matured in July 1999. The notes were converted into 89,147 shares (on a pre-split basis) of the Company's common stock. In May 1999, the Company executed one other convertible promissory note of $300,000 which matured in 1999; $100,000 was repaid and the additional $200,000 was converted into 108,000 shares (on a pre-split basis) of the Company's common stock. NOTE G - SHAREHOLDERS' EQUITY Convertible Preferred Stock Series A - In May 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock with a stated value of $1,000 per share in a private placement transaction. In addition, the Company issued warrants for the purchase of 300,000 shares (on a pre-split basis) of the Company's common stock at $3.00 per share to the investor. The preferred stock was convertible into the Company's common stock at a price equal to 65% of the market value at the time of conversion. During 1999, all Series A shares were converted into 101,600 shares of common stock. In November 1999, the warrants issued with the Series A shares were re-priced to $1.00 per warrant. In connection with the issuance of the Series A shares, the Company recognized a non-cash deemed dividend of approximately $1,077,000 which was recorded as a discount to preferred stock with a corresponding credit to additional paid-in capital. The discount was recognized at the date of issue of the Series A shares, the same date at which the shares were eligible for conversion. The accretion of the discount is reflected in the statement of operations as an adjustment to net loss, but has no effect on total shareholders' equity. The Company also accrued approximately $21,000 in preferred stock dividends in 1999 related to the Series A shares. Series B - In June 1999, the Company issued 2,024 shares of Series B convertible preferred stock in connection with the Popmail merger (see note C). The Series B shares were convertible into 863,390 shares of common stock and warrants to purchase 4,407,098 shares (on a pre-split basis) of the Company's common stock at $3.00 per share. All Series B shares issued in this transaction were converted in 1999. F-15 49 In November 1999, the warrants issued in connection with the Series B conversion were re-priced from $3.00 to $0.75 per share. In connection with this re-pricing, the Company recognized an expense of approximately $4,500,000. Series C - In July 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock with a stated value of $1,000 per share in a private placement. In addition, the Company issued warrants for the purchase of 300,000 shares (on a pre-split basis) of common stock at $3.00 per share to the investor. The Series C shares are convertible into the Company's common stock at a price equal to 65% of the market value at the time of conversion. During 1999, 1,395 shares of Series C were converted into 91,778 shares of common stock. In November 1999, warrants for 200,000 (on a pre-split basis) shares issued with the Series C shares were re-priced to $1.00 per warrant. In connection with the issuance of the Series C shares, the Company recognized a non-cash deemed dividend and discount accretion of approximately $1,077,000 similar to that of the Series A shares. The Company also accrued approximately $67,000 in preferred stock dividends in 1999 related to the Series C shares. Series D - In August 1999, the Company issued 2,200 shares of Series D 8% convertible preferred stock with a stated value of $1,000 per share in a private placement. In addition, the Company issued warrants for the purchase of 300,000 shares (on a pre-split basis) of common stock at $3.00 per share to the investor. The Series D shares are convertible into the Company's common stock at a price equal to 65% of conversion. No Series D shares were converted during 1999. In connection with the issuance of the Series D shares, the Company recognized a non-cash deemed dividend and discount accretion of approximately $1,185,000 similar to that of the Series A and Series C shares. The Company also accrued approximately $88,000 in preferred stock dividends in 1999 related to the Series D shares. Series E - Beginning in October 1999, the Company issued 175,000 shares of Series E convertible preferred stock with a stated value of $2.00 per share in a private placement. For each Series E share issued, a warrant was also issued for the purchase of a share (on a pre-split basis) of common stock at $3.00 per share. Each Series E share is convertible into one share (on a pre-split basis) of common stock. Series E shares are not entitled to dividends. All of the convertible preferred stock series contain certain liquidation preference provisions including accrued and unpaid dividends and defined payment amounts per share. In connection with the Series A, C, and D shares, warrants for 450,000 shares (on a pre-split basis) of common stock at $3.00 per share were issued to a financial advisor. Warrants A summary of the Company's warrant activity is as follows:
Weighted average Shares exercise price ---------- ---------------- Outstanding at December 28, 1997 296,495 $52.20 Granted 52,000 7.50 Canceled (19,920) 65.00 ---------- ------ Outstanding at January 3, 1999 328,575 55.80 Granted 1,512,097 13.80 Exercised (225,000) 13.10 ---------- ------ Outstanding at January 2, 2000 1,615,672 $22.40 ========== ======
F-16 50 Outstanding warrants at January 2, 2000 are as follows:
Exercise price --------------------------------------- Weighted Number Range average of shares ------------- ----------- ----------- $ 0.00 - $10.00 $ 6.90 840,710 12.50 - 25.00 17.80 338,887 30.00 - 65.00 55.80 436,075 --------- $22.40 1,615,672 ====== =========
Stock Options The Company maintains two stock option plans (the "Plans"), the 1997 Stock Option and Compensation Plan, which has 125,000 common stock reserved for issuance and the 1998 Director Option Plan, which has 25,000 common stock reserved for issuance. At January 2, 2000, the Plans have issued 42,933 options subject to approval of additional authorized shares by the shareholders. The Plans are administered by a stock option committee of the Board of Directors, which has the discretion to determine the number of shares granted, the price of the option, the term of the option and the time period over which the option may be exercised. Stock options granted under these plans generally have an exercise price equal to the fair value of the stock on the date of grant, have a ten-year term and vest ratably over three years. A summary of the Company's option activity is as follows:
Weighted average Shares exercise price --------- ---------------- Outstanding at December 28, 1997 70,767 $31.10 Granted/repriced 84,617 11.60 Forfeited/repriced (73,467) 31.00 -------- ------ Outstanding at January 3, 1999 81,917 11.10 Granted 148,250 15.60 Exercised (11,900) 7.50 Forfeited/canceled (25,334) 7.50 -------- ------ Outstanding at January 2, 2000 192,933 $13.70 ======== ======
F-17 51 Outstanding and exercisable options at January 2, 2000 are as follows:
Options Outstanding Options Exercisable ------------------------------------------------- -------------------------------------------------------------- Exercise price ------------------------------ Weighted average Weighted Number remaining Weighted Number Range average of shares contractual life average of shares --------------- -------- --------- ----------------- -------- --------- $ 7.50 - $10.00 $ 8.50 91,433 8.32 years $ 8.70 77,433 17.80 - 30.00 18.40 101,500 9.76 years 20.60 13,000 -------- -------- --------- $13.70 192,933 $10.40 90,433 ===== ======== ======== =========
On December 10, 1998, the board of directors approved a repricing of all outstanding stock options held by the Company's employees and directors. The new exercise price of $0.75 was greater than the fair market value of the Company's stock on that date. A total of 660,666 (on a pre-split basis) options priced at $3.00 to $4.50 were exchanged for options priced at $0.75. The new options vest in three equal installments on the first, second and third anniversaries of the new date of grant. In September, in connection with the Popmail merger, 87,433 outstanding options became fully vested in accordance with the change in control provisions of the Plans. Pro forma information regarding the fair value of stock options is as follows:
1999 1998 ----------- ----------- Net loss As reported $(20,734,121) $(6,706,582) Pro forma (21,173,798) (6,891,308) Basic and diluted EPS As reported (20.51) (8.38) Pro forma (19.70) (8.60)
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used or grants in 1999 and 1998: risk-free interest rates of 6.41% and 6.01%; no expected dividend yield, expected lives of 3 and 7 years; and expected volatility of 150% and 80%. Warrants and options granted for services were valued at the fair value of the warrant or option granted or the value of the services provided, whichever is more easily determinable. NOTE H - INCOME TAXES As of January 2, 2000 and January 3, 1999, the Company's deferred taxes consisted primarily of net operating loss carryforwards, pre-opening costs not currently deductible and accelerated methods of depreciation. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits. As of January 2, 2000, the Company had net operating loss carryforwards of approximately $40 million, which, if not used, will expire through 2019. NOTE I - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company has entered into operating leases for its existing restaurants which have an initial lease term of ten to fifteen years with an option for renewal. These leases contain provisions for contingent rentals based on a percentage of F-18 52 gross revenues, as defined, and provisions for payments of real estate taxes, insurance and common area costs. In addition, certain of these leases provide for tenant inducements and rent abatement. Total rent expense, including common area costs, real estate taxes and percentage rent, was $1,385,139 and $604,146 for 1999 and 1998, respectively. The Company also leases office space at the Corporate headquarters in Minneapolis and in Dallas. The total expense for these facilities in was $151,801 and $104,035 for 1999 and 1998, respectively. Future minimum rental payments are as follows as of January 2, 2000:
2000 $ 1,339,809 2001 1,258,904 2002 1,066,795 2003 1,038,347 2004 1,084,432 Thereafter 8,471,589 ----------- $14,259,876 ===========
LITIGATION The Company is involved in various legal actions rising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or the results of its operations. NOTE J - RELATED PARTY TRANSACTIONS During 1998, the Company entered into a revolving note payable with significant shareholder, director and executive officer to the Company to fund its working capital as necessary. The maximum amount of this note was $100,000, which was outstanding at January 3, 1999. This note was paid in full in 1999. During 1999, the Company entered into four $60,000, 18% notes payable with two shareholders and officers of the Company with principal plus interest payable at maturity. In addition to the stated interest, an amount of 3% of the principal is due at maturity. Two of the notes matured in 1999 and were paid in full. The two remaining notes were paid in January 2000. In December 1999, the Company entered into a promissory note receivable of $2,450,000 with a partnership controlled by a significant shareholder, director and executive officer of the Company. The principal plus interest of 5.74% is due to the Company in December 2002. The Partnership has pledged 122,500 shares of the Company's common stock as security for the note. Proceeds of this note were used to purchase shares of the Company's stock issued in connection with the ROI acquisition (see note C). Accordingly, this note has been classified as a reduction of shareholders' equity in the accompanying financial statements. Krienik Advertising, Inc., an Ohio corporation whose President, Chief Executive Officer and 100% shareholder is a director of the Company, provided marketing and advertising services to the Company. Fees paid for these services, including payments for subcontracted media, printing, production and research services, were approximately $677,000 and $741,000 during 1999 and 1998, respectively. NOTE K - BUSINESS SEGMENTS The Company operates in two reportable segments, restaurant operations (which has been reclassified to discontinued operations) and email marketing services. The email marketing services segment began in 1999 with the Popmail merger. The F-19 53 Company's general, administrative and development expenses are included in the email segment with the exception of those expenses directly attributable to the restaurant division. The information relating to these segments for 1999 is as follows:
Restaurant email operations marketing Total ---------- ---------- ---------- Net revenues $12,166,454 $ 106,744 $ 12,273,198 Operating loss (1,960,841) (8,829,224) (10,790,065) Total assets 14,459,117 39,036,247 53,495,364 Equipment depreciation and amortization 1,639,279 157,025 1,796,304 Capital expenditures, net of acquisition 4,027,388 98,419 4,125,807
NOTE L - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1999, the Company recorded several adjustments and transactions that affect, in part, previous quarters including the following approximate amounts: Expenses related to stock warrants and stock options for services, repricings, and financial guarantees $ 8,000,000 Adjustments to equipment and depreciation 950,000 Accruals for financing fees, preferred stock dividends and financial advisory services 1,200,000 ----------- Increase to net loss attributable to common shareholders $10,150,000 ===========
Had the above adjustments been recorded in the appropriate periods, net loss attributable to common shareholders would have increased by approximately $970,000 in each of the first two quarters and approximately $550,000 in the third quarter of the year ended January 2, 2000. NOTE M - SUBSEQUENT EVENTS RECLASSIFICATION OF RESTAURANT DIVISION TO DISCONTINUED OPERATIONS During the third quarter ended October 1, 2000, the Company developed a formal plan for the divestiture of the restaurant division. The accompanying consolidated financial statements have thus been restated to reflect the restaurant division as discontinued operations. The net assets of the restaurant division have been reported as net assets of discontinued operations; the net operating results of the restaurant division have been reported as loss from operations of discontinued restaurant division; and the net cash flows of the restaurant division have been reported as discontinued operations. F-20 54 Summarized financial information for the discontinued operations are as follows:
January 2, 2000 January 3, 1999 Current assets $ 150,385 $ 495,473 Property and equipment, net 13,971,925 11,589,230 Other assets 336,809 380,700 ------------ ------------ Total assets 14,459,119 12,465,403 Current liabilities 645,211 1,456,067 Long-term liabilities 4,212,557 2,710,737 ------------ ------------ Total liabilities 4,857,768 4,166,804 ------------ ------------ Net assets of discontinued operations $ 9,601,351 $ 8,298,599 ============ ============ For the years ended January 2, 2000 January 3, 1999 Restaurant revenues $ 12,166,144 $ 6,932,890 Total restaurant expenses 14,126,985 10,608,633 ------------ ------------ Loss from discontinued operations $ (1,960,841) $ (3,675,743) ============ ============
10-FOR-1 REVERSE STOCK SPLIT On October 12, 2000, the Company implemented a 10-for-1 reverse stock split. Unless otherwise noted, all references within these financial statements have been restated to reflect the Company's post-split common stock numbers. PRIVATE PLACEMENTS In January 2000, the Company executed a private placement memorandum authorizing the issuance of 2,350,000 units valued at $1.00 per unit. Each unit consists of one share (on a pre-split basis) of the Company's common stock and one five-year warrant to purchase one share (on a pre-split basis) of the Company's common stock with an exercise price of $2.00 (pre-split price). As of March 24, 2000, the Company has issued all 2,350,000 units related to this placement. Also in January 2000, the Company executed a private placement memorandum authorizing the issuance of 2,666,667 units valued at $2.25 per unit. Each unit consists of one share (on a pre-split basis) of the Company's common stock and one five-year warrant to purchase one share (on a pre-split basis) of the Company's common stock with an exercise price of $3.00 (pre-split price). As of March 24, 2000, the Company has issued all 2,666,667 units related to this placement. The proceeds of these private placements were used to repay the due to affiliates and all but $1,000,000 of the Company's $6,037,518 notes payable that were outstanding at January 2, 2000, as well as to fund the continuing operating needs of the Company. In April 2000, the Board authorized the private placement of up to 700,000 shares of Series G 10% convertible preferred stock. As of May 15, 2000, the Company has issued 600,000 shares at a price of $10 per share. The issuance included an original discount of $1,500,000 and investment banking fees and expenses of $500,000 relating to such share issues, resulting in net proceeds of approximately $4,000,000. In addition, the Company issued warrants for the purchase of 500,000 F-21 55 shares (on a pre-split basis) of common stock at $2.51 per share. The Series G shares are convertible into the Company's common stock at a variable price ranging from 97% to 91% of the market value at the time of conversion, subject to certain holding periods as defined in the agreement. Also in April 2000, the Company advanced the sum of $245,000 to a partnership controlled by an individual who is a significant shareholder, director and executive officer of the Company. Under the terms of the note receivable issued by the partnership to the Company, the entire principal plus interest accruing at the rate of 5.74% per annum is due to the Company in March 2002. The partnership has pledged 12,250 shares of the Company's common stock as security for the note. Proceeds of the advance were used to purchase additional shares of the Company's stock issued in connection with the ROI acquisition. BUSINESS ACQUISITIONS IZ.com Incorporated On February 9, 2000, the Company completed a merger with IZ.com Incorporated ("IZ.com"), a development stage online convergent media company. The merger will be accounted for under the purchase method of accounting. The former shareholders of IZ.com were issued 287,408 shares of newly created Series F Convertible preferred stock, with an additional 130,508 shares issuable upon the exercise of IZ.com options assumed by PopMail. Both the Series F and option shares are convertible into common at a rate of 25.66 shares (on a pre-split basis). Assuming conversion of all potentially issuable shares, they would convert into approximately 10,725,000 shares (on a pre-split basis) of the Company's common stock valued at approximately $47,825,000, using a share price based upon the average closing price of the five business days prior to the closing of the transaction. With estimated closing costs of $250,000, the total consideration plus the fair value of the net liabilities assumed resulted in approximately $49,000,000 of goodwill, which will be amortized on a straight-line basis over three years. During the period from February 9, 1999 (inception) through December 31, 1999, IZ.com incurred net losses of approximately $5,000,000, representing start-up expenses. In December 2000, the Company sold the assets of its digital publishing company IZ.com to the current IZ.com management team. The Company will accelerate amortization of all remaining goodwill related to IZ.com (approximately $36,000,000) during the fourth quarter of fiscal 2000. Fan Asylum On June 14, 2000, the Company purchased 100% of the common stock of Fan Asylum from its sole shareholder ("the Seller") in exchange for up to 3.6 million shares of the Company's common stock ("the Purchase Price Shares"), valued at $9,000,000 per the agreement, subject to adjustments based on certain earn out and reset provisions. The initial shares are subject to a put right pursuant to which Seller has a one-time right to "put" the initial shares to the Company during the period between January 2, 2001 and January 31, 2001. In September 2000, the Company renegotiated the terms of the Fan Asylum acquisition and agreed to (i) accelerate the time period in which the Seller could put the initial shares to the Company, (ii) remove the earn-out provisions as a condition of Seller receiving the earn-out shares, and (iii) immediately retire a $200,000 debt obligation that was assumed in conjunction with the Fan Asylum acquisition. In consideration of the forgoing, the Seller agreed to complete a $400,000 private common stock placement with the Company at $0.46 per share, resulting in net proceeds to the Company, in October 2000, of approximately $186,000 after the aforementioned $200,000 retirement of debt was completed. F-22 56 NOTES PAYABLE In July 2000, the remaining $1,000,000 outstanding on the short-term revolving line of credit was paid. LONG-TERM OBLIGATIONS During the first three quarters of fiscal 2000, the entire $2,000,000 senior convertible note and accrued interest were converted into 2,006,669 shares (on a pre-split basis) of common stock. SECURED PROMISSORY NOTE In October 2000, the Company entered into a secured promissory note payable for $600,000. The Company received net proceeds of $450,000 after discount and finders fees. The note was payable within 30 days and is collateralized by specific computer equipment. In connection with the loan, the Company issued a 200,000 share five-year warrant with an exercise price of $0.375 to the lender. As of December 8, 2000, the Company is in payment default and may be required to pay additional late payment fees. The Company is re-negotiating the terms of this note, and no assurance can be given that any reductions will be attained. WARRANTS In March 2000, the Company took several actions to induce warrant holders to exercise warrants previously issued. Holders of 750,000 (on a pre-split basis) warrants at $2.00 per share were issued 250,000 (on a pre-split basis) additional 5-year warrants with an exercise price of $5.00 per share. Additionally, the Company re-priced 850,000 (on a pre-split basis) previously issued $3.00 per share warrants to $2.00 per share. In April 2000, the Company re-priced 250,000 (on a pre-split basis) previously issued $5.00 per share warrants to $2.00 per share, to induce a warrant holder to exercise warrants previously issued. During the quarter ended October 1, 2000, the Company re-priced previously issued pre-split warrants with exercise prices ranging from $2.00 to $3.00 per share to $0.625 and $0.75 per share to induce warrant holders to exercise warrants previously issued and generally issued replacement warrants with an exercise price of $0.625 to $1.00 per share for each original warrant exercised. Cash proceeds of approximately $2,083,000 were raised from the exercise of such warrants. COMPUTER HARDWARE ADDITION In February 2000, the Company purchased computer hardware and the related infrastructure for its email services division for approximately $1,800,000. RESTAURANT MANAGEMENT AGREEMENT On May 31, 2000, the Company entered into an agreement (the "Management Services Agreement") with an officer of the Company (the "Manager") to manage substantially all the operations of the Cafe Odyssey restaurant segment (the "Management Services") under the auspices of an independent management company (the "Management Company"). On May 31, 2000, the Manager resigned from the Company to fulfill his obligation to the Management Company under the Management Services Agreement. In exchange for the Management Services, the Company agreed to pay the Management Company approximately $452,000 per year for the Management Services. On July 1, 2000, a second officer of the Company resigned and became employed by the Management Company, at which point the annual Management Services fee increased to $675,000. The term of the Management Services Agreement is three years, but may be terminated during the term with 30 days advance notice. If terminated by the Company without cause prior to the second anniversary date of the Management Services Agreement, the Company is obligated to pay the Management Company (a) $1,474 per day for each day remaining in the first year of the term and (b) $1,063 per day for each day remaining in the second year of the term. F-23 57 Concurrent with the execution of the Management Services Agreement, the Company entered into a license agreement granting the Management Company certain development and intellectual property rights associated with the Cafe Odyssey restaurants (the "License Agreement"). The Company granted the Management Company the right to develop up to four more Cafe Odyssey restaurants and the right to develop an unlimited number of additional Cafe Odyssey restaurants with the Company's approval, which shall not be unreasonably withheld (the "Development Rights"). In conjunction with the Development Rights, the Company agreed to (a) guarantee the leases for the first four Cafe Odyssey restaurants developed by the Management Company, (b) loan the Management Company up to $500,000 for the development of a new Cafe Odyssey restaurant located at a specific location defined in the License Agreement (the "New Location"), and (c) pledge the cash flows of the two Company owned Cafe Odyssey restaurants to secure up to $1.3 million in Management Company loans drawn to develop the New Location. The Company also granted the Management Company a perpetual, nonexclusive right to all intellectual property owned by the Company associated with the Cafe Odyssey restaurants. F-24 58 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 30, 1999, Arthur Andersen LLP and the Company agreed to the resignation of Arthur Andersen LLP as independent public accountants of Registrant. The reports of Arthur Andersen LLP on the financial statements of the Company for the past two years, the most recent of which is the fiscal year ended January 3, 1999, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles. However, reference is made to said reports which includes an explanatory paragraph that describes the uncertainty over the Company's ability to continue as a going concern described in Note 1 of the financial statements. The Registrant's Board of Directors participated in and approved the decision to change independent accountants. In connection with its audits for the two most recent periods and through September 30, 1999, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen LLP would have cause them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years and through September 30, 1999, there were no reportable events (as defined in Regulation S-B Item 304(a)(1)(iv)). Arthur Andersen LLP has furnished the Company with a letter addressed to the SEC stating that it agrees with the above statements. A copy of the letter is included in an exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 1, 1999. The Company engaged Grant Thornton LLP as its new independent accountants as of September 30, 1999. During the two most recent periods and through September 30, 1999, the Company has not consulted with Grant Thronton LLP on items which (1) were or should have been subject to SAS 50 or (2) concerned the subject matter of a disagreement or reportable event with the former auditor (as described in Regulation S-B Item 304(a)(2)). 30 59 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information included in the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders under the caption "Election of Directors" is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information included in the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders under the caption "Election of Directors" is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included in the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders under the caption "Election of Directors" is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included in the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders under the caption "Election of Directors" is incorporated herein by reference. 31 60 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 2.1 Agreement and Plan of Merger dated as of June 1, 1999, among Cafe Odyssey, Inc, Stephen D. King, popmail.com, inc., all of the Holders Of common stock of popmail.com, inc. and Cafe Odyssey Acquisition Subsidiary, Inc. (Incorporated herein by reference to Exhibit 2.0 of the Registrant's Current Report on Form 8-K dated June 22, 1999 and filed on June 25, 1999). 2.2 Agreement and Plan of Reorganization among ROI InterActive, LLC, Cafe Odyssey, Inc. and ROI Acquisition Corporation (Incorporated herein by reference to Exhibit 2.0 to the Company's Current Report on Form 8-K dated December 17, 1999). 2.3 First Amendment to Agreement and Plan of Reorganization, dated November 12, 1999, by and among Parent, Sub, the Company, and the Members. (Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 17, 1999). 2.4 Agreement and Plan of Reorganization dated as of January 21, 2000, among PopMail.com, inc., IZ.com Incorporated, IZ Acquisition Corporation, and Virtual Group LLC. (Incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated February 9, 2000 and filed on February 24, 2000). 3.1(A) Articles of Incorporation, as amended (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended April 4, 1999). 3.1(B) Certificate of Designation of Series B Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1(b) to the Registrant's report on Form 8-K dated June 22, 1999 and filed on June 25, 1999). 3.1(C) Certificate of Designation of Series C 8% Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1(c) to the Registrant's report on Form 8-K dated July 13, 1999 and filed on July 23, 1999). 31 3.1(D) Certificate of Designation of Series D 8% Convertible Preferred Stock (Incorporated hereby by reference to Exhibit 3.1(d) to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 3.1(E) Articles of Amendment of Articles of Incorporation filed on September 3, 1999 (Incorporated hereby by reference to Exhibit to The Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 3.1(F) Certificate of Designation of Series F Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated February 9, 2000, filed on February 2000). 3.1(G)* Certificate of Designation of Series E Convertible Preferred Stock. 3.2 By-laws (Incorporated herein by reference to Exhibit 3.2 to the 1997 SB-2). 4.1 Form of Warrant Agreement (Incorporated herein by reference to Exhibit 4 to the 1997 SB-2). 32 61 4.2 Form of Warrant (the series of Warrants initially covers 4,407,098 shares of common stock; subject to adjustment) (Incorporated herein by reference to Exhibit 4.0 to the Registrant's Current Report on Form 8-K dated June 22, 1999). 4.3* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.2. 4.4* Common Stock Purchase Warrant issued to J. Jeffrey Brausch & Company 4.5* Warrant to Purchase Shares of Common Stock issued to J. Jeffrey Brausch & Company. 4.6* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.5. 4.7* Form of Common Stock Purchase Warrant (IPO Series). 4.8* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.7. 4.9* Warrant to Purchase Shares of Common Stock of the Company. 4.10* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.9. 4.11* Form of Warrant to Purchase Shares of Common Stock of the Company (GW-1). 4.12* Form of Warrant to Purchase Shares of Common Stock of the Company (GW-2). 4.13* Form of Warrant to Purchase Shares of Common Stock of the Company (MB-1). 4.14* Form of Warrant to Purchase Shares of Common Stock of the Company (GFP Series). 4.15* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.14. 4.16 * Warrant to Purchase Shares of Common Stock issued to Hillstreet Fund, L.P. 4.17* Warrant to Purchase Shares of Common Stock issued to Andrew Baum. 4.18* Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.17. 4.19* Warrant to Purchase Shares of Common Stock Issued to Metropolitan Capital Partners, Inc. (MCP-1). 4.20* Warrant to Purchase Shares of Common Stock Issued to Metropolitan Capital Partners, Inc. (MCP-2). 4.21* Warrant to Purchase Shares of Common Stock Issued to Wayne L. Teidge (WT-1). 4.22* Warrant to Purchase Shares of Common Stock Issued to Metropolitan Capital Partners, Inc. (HT-1). 4.23* Warrant to Purchase Shares of Common Stock Issued to eBanker USA.com, Inc. (EB-1). 33 62 4.24* Warrant to Purchase Shares of Common Stock Issued to eBanker USA.com, Inc. (EB-2). 10.1 Indenture of Lease dated November 9, 1994, between Phillip E. Stephens, Trustee and Kenwood Restaurant, Inc; First Amendment to Lease dated May 3, 1995, by and between Phillip E. Stephens, Trustee and Kenwood Restaurant, Zinc.; by Second Amendment to Lease dated , 1996, between Phillip E. Stephens, Trustee and Kenwood Restaurant Limited Partnership; Second Amendment to Agreement dated October 18, 1996, between Phillip E. Stephens, Trustee and Kenwood Restaurant Limited Partnership; and Addendum to Second Amendment to Lease dated October 18, 1996, between Phillip E. Stephen, Trustee and Kenwood Restaurant Limited Partnership (Kenwood Restaurant) (Incorporated herein by reference to Exhibit 10.1 to the 1997 SB-2). 10.2 Lease dated August 4, 1997, between Mall of America Company and Hotel Mexico, Inc. (Mall of America Restaurant) (Incorporated herein by reference to Exhibit 10.2 to the 1997 SB-2). 10.3 1997 Stock Option and Compensation Plan (Incorporated herein by reference to Exhibit 10.4 to the 1997 SB-2). 10.4 Employment Agreement between the Company and Ronald K. Fuller dated March 17, 1997, (Incorporated herein by reference to Exhibit 10.5 to the 1997 SB-2). 10.5 Amendment to 1997 Stock Option and Compensation Plan (Incorporated herein by reference to Exhibit 10.6 to the 1997 SB-2). 10.6 Second Amendment to 1997 Stock Option and Compensation Plan (Incorporated herein by reference to Exhibit 10.7 to the 1997 SB-2). 10.7 Third Amendment dated February 25, 1998 to the Company's 1997 Stock Option and Compensation Plan (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report in Form 10-QSB for the quarter ended June 28, 1998 (the "2-Q98 10-QSB"). 10.8 1998 Director Stock Option Plan (Incorporated herein by reference to Exhibit 10.2 to the 2Q98 10-QSB). 10.9 Shopping Center Lease dated May 12, 1998, between Denver Pavilions, L.P. and the Company (Incorporated herein by reference to Exhibit 10 to the Company's current Report on Form 8-K filed on May 27, 1998). 10.10 Open-End Leasehold Mortgage, Security Agreement and Assignment of Rents, Income and Proceeds made as of September 23, 1998, by the Company to The Provident Bank ("Provident")(Incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 27, 1998 (the "3Q98 10- QSB")). 10.11 Revolving Promissory Note Mortgage Loan dated September 23, 1998, between the Company and Provident (Incorporated herein by reference to Exhibit 10.2 to the 3Q98 10-QSB). 10.12 Security Agreement dated as of September 23, 1998, between the Company and Provident (Incorporated herein by reference to Exhibit 10.3 to the 3Q98 10-QSB). 10.13 Agreement Among Guarantors dated November 16, 1998, among Stephen D. King, Jerry L. Ruyan, Greg C. Mosher and the Company (Incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-KSB for the fiscal year needed 1/4/99 (the "1998 10- KSB)). 34 63 10.14 Agreement Among Guarantors dated January 22, 1999, among Stephen D. King, Jerry L. Ruyan, Greg C. Mosher and the Company (Incorporated hereby reference to Exhibit 10.19 to the 1998 10-KSB). 10.15 Warrant No. PL-1 dated November 16, 1998, to purchase 40,000 shares of common stock of the Company issued to Stephen D. King (Incorporated herein by reference to Exhibit 10.19 to the 1998 10-KSB). 10.16 Schedule identifying material details of other warrants issued by the Company substantially identical to the warrant filed as Exhibit 10.15. 10.17 Indemnification and Contribution Agreement dated March 3, 1999, among Michael A. Bird, John E. Feltl, Stephen D. King, Timothy I. Maudlin, Wayne W. Mills and the Company (Incorporated hereby reference to Exhibit 10.19 to the 1998 10-KSB). 10.18 Promissory Note dated March 10, 1999, of the Company to BankWindsor (Incorporated hereby reference to Exhibit 10.19 to the 1998 10-KSB). 10.19 Warrant No. BWL-1 dated March 3, 1999, to purchase 25,000 shares of common stock of the Company issued to Michael A. Bird (Incorporated hereby reference to Exhibit 10.19 to the 1998 10-KSB). 10.20 Schedule identifying material details of other warrants issued by the Company substantially identical to the warrant filed as Exhibit 10.24 (Incorporated hereby reference to Exhibit 10.19 to the 1998 10-KSB). 10.21 Warrant No. PL2-1 dated March 18, 1999 to purchase 150,000 shares of common stock of the Company issued to Stephen D. King (Incorporated herein by reference to Exhibit 10.26 to the Amendment to the 1998 10-KSB). 10.22 Common Stock Purchase Warrant to purchase 300,000 shares of Cafe Odyssey, Inc. dated as of May 14, 1999, issued to The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended April 4, 1999). 10.23 Schedule identifying material details of additional warrants issued by the Company substantially identical to the warrant filed as Exhibit 10.22. 10.24 Securities Purchase Agreement, dated as of May 14, 1999, between Cafe Odyssey, Inc., and The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended April 4, 1999). 10.25 Registration Rights Agreement, dated May 14, 1999, between Cafe Odyssey, Inc., and The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended April 4, 1999). 10.26 Indemnification Agreement between Cafe Odyssey, Inc. LegacyMaker, Inc. (Incorporated hereby by reference to Exhibit 10.1 to the Registrant's Form 8-K dated June 22, 1999 and filed on June 25, 1999). 10.27 Escrow Agreement by and among popmail.com, inc., James L. Anderson, as Attorney-in-Fact for certain Shareholders, Cafe Odyssey, Inc., Cafe Odyssey Acquisition Subsidiary, Inc. and Thompson & Knight, a professional corporation. (Incorporated hereby by reference to Exhibit 10.2 to the Registrant's Form 8-K dated June 22, 1999 and filed on June 25, 1999). 35 64 10.28 Agreement by and between Cafe Odyssey, Inc. and James L. Anderson (Incorporated hereby by reference to Exhibit 10.3 to the Registrant's Form 8-K dated June 22, 1999 and filed on June 25, 1999). 10.29 Indemnification Agreement between popmail.com, inc. and Stephen D. King (Incorporated hereby by reference to Exhibit 10.4 to the Registrant's Form 8-K dated June 22, 1999 and filed on June 25, 1999). 10.30 Employment Agreement by and between Cafe Odyssey, Inc. and Stephen D. King (Incorporated hereby by reference to Exhibit 10.5 to the Registrant's Form 8-K dated June 22, 1999, and filed on June 25, 1999). 10.31 Form of Warrant issued in connection with the Series C 8% Convertible Preferred Stock (Incorporated hereby by reference to Exhibit 10.1 to the Registrant's Form 8-K dated July 13, 1999, and filed on July 23, 1999). 10.32 Schedule identifying material details of additional warrants issued by the Company substantially identical to the warrant filed as Exhibit 10.31. 10.33 Securities Purchase Agreement, dated July 13, 1999, between the Company and The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.2 to the Registrant's Form 8-K dated July 13, 1999, and filed on July 23, 1999). 10.34 Registration Rights Agreement, dated July 13, 1999, between the Company and The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.3 to the Registrant's Form 8-K dated July 13, 1999, and filed on July 23, 1999). 10.35 Amended and Restated Employment Agreement dated October 5, 1999, by and between Cafe Odyssey, Inc., a Minnesota corporation (the "Company"), and Thomas W. Orr (the "Executive"). (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-QSB for Quarter ended October 4, 1999). 10.36 Securities Purchase Agreement, dated July 13, 1999, between the Registrant and The Shaar Fund Ltd. (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Form 8-K dated September 1, 1999 and filed on September 16, 1999). 10.37 Form of Warrant issued in connection with the Series D 8% Convertible Preferred Stock (Incorporated hereby by reference to Exhibit 10.2 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999) 10.38 Schedule identifying material details of additional warrants issued by the Company substantially identical to the warrant filed as Exhibit 10.37. 10.39 Registration Rights Agreement, dated July 13, 1999, between the Registrant and The Shaar Fund Ltd. (Incorporated hereby by reference to Exhibit 10.3 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 10.40 Loan Agreement by and between the Registrant and Fairview Partners dated as of August 24, 1999. (Incorporated hereby by reference to Exhibit 10.4 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 36 65 10.41 Form of Senior Convertible Note dated August 24, 1999. (Incorporated hereby by reference to Exhibit 10.5 to the Registrant's Form 8-K dated September 1, 1999 and filed on September 16, 1999). 10.42 Form of Warrant to Purchase Common Stock of the Registrant issued to Fairview Partners. (Incorporated hereby by reference to Exhibit 10.6 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 10.43 Support Agreement dated as of August 24, 1999, among Stephen D. King, the Registrant and Fairview Partners. (Incorporated hereby by reference to Exhibit 10.7 to the Registrant's Form 8-K dated September 1, 1999 and filed on September 16, 1999). 10.44 First Deed of Trust, Security Agreement and Fixture Financing Statement dated as of August 24, 1999, between the Registrant and the Public Trustee of Denver County, Colorado. (Incorporated hereby by reference to Exhibit 10.8 to the Registrant's Form 8-K dated September 1, 1999 and filed on September 16, 1999). 10.45 Agreement Between Landlord and Lender dated as of August 24, 1999, by Denver Pavilions, L.P. and the Registrant. (Incorporated hereby by reference to Exhibit 10.9 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 10.46 Escrow Agreement dated August 25, 1999, by and between Fairview Partners, the Registrant and Johnson Trust Company. (Incorporated hereby by reference to Exhibit 10.10 to the Registrant's Form 8-K dated September 1, 1999, and filed on September 16, 1999). 10.47 Registration Rights Agreement, dated January 21, 2000, between the Registrant and the stockholders of IZ.com, Incorporated. (Incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated filed on February 24, 2000). 10.48* Pledge Agreement dated December 3, 1999, between King Family Partners and the Company. 10.49* First Amendment to Pledge Agreement dated December 3, 1999, dated March 28, 2000, between King Family Partners and the Company. 10.50* Amended and Restated Promissory Note in the amount of $2,450,000 dated December 3, 1999, of King Family Partners to the Company. 10.51* Promissory Note in the amount of the $245,000 dated March 30, 2000, of King Family Partners to the Company. 10.52* Employment Agreement entered into as of February 9, 2000, by and between Jesse Berst and the Company. 10.53* Amendment to Employment Agreement dated July 27, 1999, by and between the Company and Ronald K. Fuller. 21* Subsidiaries 23.1 Consent of Grant Thornton, LLP 23.2 Consent of Arthur Andersen LLP 27 Financial Data Schedule * Incorporated herein by reference to the like numbered Exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended January 2, 2000. 37 66 (B) REPORTS ON FORM 8-K On November 15, 1999, the Company filed an amendment to a report on Form 8-K/A relating to its acquisition of popmail.com, inc. On December 17, 1999, the Company filed a report on Form 8-K relating to its acquisition of ROI Interactive, LLC. 38 67 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPMAIL.COM, INC. ("Registrant") Dated: December 21, 2000 By: /s/ Gary Schneider ------------------------------------- Gary Schneider Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 21, 2000 by the following persons on behalf of the Registrant, in the capacities indicated. SIGNATURE TITLE /s/ Gary Schneider Chief Executive Officer - ---------------------------------- (Principal Executive Officer) Gary Schneider /s/ Stephen J. Spohn Chief Financial Officer - ---------------------------------- (Principal Financial and Accounting Stephen J. Spohn Officer) /s/ Thomas W. Orr Director - ---------------------------------- Thomas W. Orr Director - ---------------------------------- Henry Fong 39 EX-23.1 2 c59001a1ex23-1.txt CONSENT OF GRANT THORNTON, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated March 24, 2000, (except for Note M, as to which the date is December 15, 2000) accompanying the consolidated financial statements included in the Annual Report of PopMail.com, inc. (formerly Cafe Odyssey, Inc.) on Form 10-KSB/A for the year ended January 2, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statements of PopMail.com, inc. on Forms S-3 (File No. 333-80241, File No. 333-85243, File No. 333-88199, File No. 333-93317, File No. 333-96109, File No. 333-32232, File No. 333-40694, File No.333-43774, and File No. 333-46468) and on Forms S-8 (File No. 333-62729, File No. 333-62747, File No. 333-41966, and File No. 333-47738). /s/ GRANT THORNTON LLP Minneapolis, Minnesota December 18, 2000 EX-23.2 3 c59001a1ex23-2.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accounts, we hereby consent to the incorporation of our report dated February 19, 1999, (except with respect to the Reclassification of Restaurant Division to Discontinued Operations and 10-For-1 Reverse Stock Split discussed in Note M, as to which the date is December 18, 2000), included in this Form 10-KSB/A, into the Company's previously filed Registration Statement File Nos. 333-80241, 333-85243, 333-88199, 333-93317, 333-96109, 333-32232, 333-40694, 333-43774, 333-46468, 333-62729, 333- 2747, 333-41966 and 333-47738. ARTHUR ANDERSEN LLP Minneapolis, Minnesota December 21, 2000 EX-27 4 c59001a1ex27.txt FINANCIAL DATA SCHEDULE
5 YEAR JAN-02-2000 JAN-03-1999 JAN-02-2000 1,136,137 0 270,557 0 0 1,856,710 1,051,900 157,021 48,637,598 10,058,363 1,321,643 0 3,331,000 24,696 33,679,634 48,637,598 106,744 106,744 0 0 8,935,968 0 2,357,245 (18,773,330) 0 (18,773,330) (1,960,841) 0 0 (20,734,171) (20.51) (20.51)
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