-----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, TRG97hXGyC6I+D4huATIaL9fbaK+zsQQyYjx8ubM76tU0a1kydHa8Km3N7NK+4bt JmOPr0jw4+OUTng//+7+1A== 0000950124-99-006191.txt : 19991118 0000950124-99-006191.hdr.sgml : 19991118 ACCESSION NUMBER: 0000950124-99-006191 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPMAIL COM INC CENTRAL INDEX KEY: 0001044738 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 00023243 STATE OF INCORPORATION: MN FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23243 FILM NUMBER: 99760020 BUSINESS ADDRESS: STREET 1: 4801 WEST 81 STREET STREET 2: SUITE 112 CITY: BLOOMINGTON STATE: MN ZIP: 55437 BUSINESS PHONE: 6128379917 MAIL ADDRESS: STREET 1: 4801 WEST 81 STREET STREET 2: SUITE 112 CITY: BLOOMINGTON STATE: MN ZIP: 55437 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 10QSB 1 FORM 10QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-23243 POPMAIL.COM, INC. (Name of Small Business Issuer in Its Charter) MINNESOTA 31-1487885 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4801 W. 81ST STREET, SUITE 112, BLOOMINGTON, MN 55437 (Address of Principal Executive Offices) 612-837-9917 (Issuer's Telephone Number, Including Area Code) CAFE ODYSSEY, INC. (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 12, 1999, there were 10,619,072 shares of common stock, $.01 par value, outstanding. Transitional Small Business Disclosure Format (check One): Yes [ ] No [X] 1 2 POPMAIL.COM, INC. FORM 10-QSB INDEX OCTOBER 3, 1999
Page PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements Condensed Balance Sheets - As of October 3, 1999 and January 3, 1999............................................ 3 Condensed Statements of Operations - For the thirteen and thirty-nine week periods ended October 3, 1999 and September 27, 1998............................................... 4 Condensed Statements of Cash Flows - For the thirty-nine week period ended October 3, 1999 and September 27, 1998................................................................. 5 Notes to the Condensed Financial Statements............................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 PART II OTHER INFORMATION Item 1. Legal Proceedings...................................................................... 24 Item 2. Changes in Securities and Use of Proceeds.............................................. 24 Item 4. Submission of Matters to a Vote of Security Holders.................................... 26 Item 6. Exhibits and Reports on Form 8-K....................................................... 26 Signatures............................................................................. 28
2 3 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS POPMAIL.COM, INC. CONDENSED BALANCE SHEETS (UNAUDITED)
October 3, January 3, ASSETS 1999 1999 ----------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 311,811 $ 106,247 Accounts receivable 163,464 0 Inventories 101,920 161,463 Other current assets 167,499 452,243 ----------------- ---------------- Total current assets 744,694 719,953 PROPERTY AND EQUIPMENT, net 15,933,037 11,699,548 GOODWILL 31,004,531 0 OTHER ASSETS 518,058 520,487 ----------------- ---------------- $ 48,200,320 $ 12,939,988 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes payable $ 1,695,000 $ 0 Accounts payable 1,553,092 1,452,648 Advances payable to principal shareholder 0 100,000 Convertible promissory notes payable 1,416,667 150,000 Current portion of long-term debt 3,200,111 2,199,007 Accrued expenses 525,598 688,356 ----------------- ---------------- Total current liabilities 8,390,468 4,590,011 DEFERRED RENT 3,670,567 1,755,852 LONG-TERM DEBT, less current portion 626,836 755,878 ----------------- ---------------- 12,687,871 7,101,741 ----------------- ---------------- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY: Class A, C, D preferred stock, $1,000 stated value, 6,200 shares authorized; 4,065 issued and outstanding 4,065,000 0 Class B preferred stock, no stated value, 2,024 shares authorized; 2,000 issued and outstanding 21,333,750 0 Common stock, $.01 par value, 100,000,000 shares authorized; 10,348,497 and 8,000,089 shares issued and outstanding 103,485 80,001 Additional paid-in capital 33,419,049 20,281,140 Less: Common stock subscribed (402,000) (400,000) Accumulated deficit (23,006,835) (14,122,894) ----------------- ---------------- Total shareholders' equity 35,512,449 5,838,247 ----------------- ---------------- $ 48,200,320 $ 12,939,988 ================= ================
The accompanying notes are an integral part of these condensed financial statements. 3 4 POPMAIL.COM, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen weeks ended Thirty-nine weeks ended ------------------------------------- -------------------------------------- October 3, September 27, October 3, September 27, 1999 1998 1999 1998 ----------------- ------------------ ------------------ ---------------- NET SALES $ 3,548,692 $ 2,522,048 $ 9,442,347 $ 4,522,043 ----------------- ------------------ ------------------ ---------------- COSTS AND EXPENSES: Food, beverage and retail costs 935,518 701,781 2,461,551 1,263,784 Restaurant operating expenses 2,332,283 1,745,863 6,546,916 3,305,369 Depreciation and amortization 1,252,499 313,597 1,863,339 624,736 Pre-opening expenses 0 60,513 572,932 851,706 General, administrative & develop 1,827,570 649,073 2,788,346 2,067,602 ----------------- ------------------ ------------------ ---------------- Total costs and expenses 6,347,870 3,470,827 14,233,084 8,113,197 ----------------- ------------------ ------------------ ---------------- LOSS FROM OPERATIONS (2,779,178) (948,779) (4,790,737) (3,591,154) INTEREST INCOME (EXPENSE), net (370,598) (37,667) (754,743) 63,857 ----------------- ------------------ ------------------ ---------------- NET LOSS $ (3,169,776) $ (986,446) $ (5,545,480) $ (3,527,297) PREFERRED STOCK DIVIDENDS AND ACCRECTION (3,146,232) 0 (3,338,461) 0 ----------------- ------------------ ------------------ ---------------- LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (6,316,008) $ (986,446) $ (8,883,941) $ (3,527,297) ================= ================== ================== ================ BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.26) $ (0.12) $ (0.58) $ (0.44) ================= ================== ================== ================ BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON SHARE $ (0.51) $ (0.12) $ (0.93) $ (0.44) ================= ================== ================== ================ BASIC AND DILUTED WEIGHTED AVERAGE OUTSTANDING SHARES 12,423,730 8,000,089 9,601,808 8,000,145 ================= ================== ================== ================
The accompanying notes are an integral part of these condensed financial statements. 4 5 POPMAIL.COM, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-nine weeks ended ------------------------------------------ October 3, September 27, 1999 1998 ----------------- ------------------ OPERATING ACTIVITIES: Net loss $ (5,545,480) $ (3,527,297) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation 977,495 624,736 Goodwill amortization 838,059 0 Common stock issued in lieu of compensation 244,708 0 Changes in operating assets and liabilities: Inventories 59,543 (101,132) Other current assets 296,156 (372,946) Other assets 40,341 (377,995) Accounts payable (111,284) 340,535 Accrued expenses (162,758) 110,663 ---------------- ----------------- Net cash used in operating activities (3,363,220) (3,303,436) ---------------- ----------------- INVESTING ACTIVITIES: Purchases of property and equipment (4,504,680) (7,093,535) FINANCING ACTIVITIES: Proceeds from short-term notes payable 1,435,000 0 Proceeds from convertible notes payable 2,000,000 0 Proceeds from long-term debt 1,000,000 2,002,976 Proceeds from preferred stock and warrant sale 6,200,000 0 Proceeds from exercise of stock options 262,420 0 Tenant allowance collected 1,962,500 1,612,500 Payment to LegacyMaker note payable (4,448,756) 0 Payments to shareholder (100,000) 0 Payments on short-term notes payable (290,000) (200,000) Payments on long-term debt (127,938) (953,352) Repurchases of common stock 0 (300) Amortization of warrant discount 180,238 0 ---------------- ----------------- Net cash provided by financing activities 8,073,464 2,461,824 ---------------- ----------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 205,564 (7,935,147) CASH AND CASH EQUIVALENTS, beginning of period 106,247 9,222,174 ---------------- ----------------- CASH AND CASH EQUIVALENTS, end of period $ 311,811 $ 1,287,027 ================ ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 380,523 $ 82,132 Cash paid for income taxes 0 0
The accompanying notes are an integral part of these condensed financial statements. 5 6 POPMAIL.COM, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS OCTOBER 3, 1999 (UNAUDITED) 1. GENERAL On September 1, 1999, the Company completed its merger with an Internet company, popmail.com of Dallas, Texas, ("popmail") that provides branded email services to radio stations. Therefore, the Company now has two divisions: an Internet division and a restaurant division. Prior to the merger, the Company owned and operated three full service restaurants. One, which was located in Cincinnati, Ohio (the "Kenwood Restaurant"), which operated under the trade name "Hotel Discovery" was closed August 29, 1999. See Note 4 for further discussion of the Kenwood Restaurant. The other two restaurants operate under the trade name Cafe Odyssey. One is in the Mall of America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"), and the other at the Denver Pavilions, located in the downtown district of Denver, Colorado (the "Denver Pavilions Restaurant"). The Kenwood Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the Company was in the development stage. On February 25, 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey. In conjunction with this action, the Company's Board of Directors and shareholders approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved by shareholders on May 21, 1998. The Company expects to rapidly expand the Internet division, therefore, the Company's Board of Directors recommended a corporate name change to PopMail.com, inc., ("PopMail.com"). At the Company's annual meeting held August 19, 1999, the shareholders voted to approve the name change from Cafe Odyssey, Inc. to PopMail.com, inc. One of the objectives of the Internet division of PopMail.com is to become a leading provider of email services to radio stations and their listeners. PopMail.com combines the power of the Internet with the mass-medium of radio. By providing radio stations with an attractive free email service to their listeners, PopMail.com leverages radio's proven ability to engage audiences and attract advertisers. The Company has entered into a definitive purchase agreement to acquire all of the capital stock of ROI Interactive, Inc., and expects to close the acquisition in the forth quarter of 1999. The Company will continue to locate other companies, which have developed specific services of permission-based marketing email in the fields of radio, television, newspaper, sports and the entertainment media. Until September 1, 1999, the Company operated in one segment: restaurant operations. As of September 1, 1999, with the acquisition of popmail, the Company has been operating in an additional segment: the Internet. For the purposes of reporting in accordance with FAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", the Company presents a single segment, as the operations of the Internet segment for the month of September were immaterial to the overall operations. See Note 3. 2. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the Company's most recent 10-KSB dated January 3, 1999. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. Operating results for the periods ended October 3, 1999, are not necessarily indicative of the results 6 7 that may be expected for the fiscal year ending January 2, 2000. The condensed balance sheet at January 3, 1999, is derived from the Company's audited financial statements as of that date. The Company has adopted a 52/53 week accounting period ending on the Sunday nearest December 31 of each year. Fiscal year 1999 will be a 52 week year. 3. ACQUISITION AND PLAN OF MERGER On September 1, 1999, the Company acquired popmail in an acquisition accounted for as a purchase. The Company issued 2,204 shares of Series B convertible preferred stock, which may be converted into 8,635,902 shares of common stock and warrants, exercisable into 5,307,098 shares of common stock. Additionally, the Company repaid indebtedness of approximately $5.1 million to an affiliate of popmail, LegacyMaker, Inc. The required financing for the merger was obtained through the private sale of $2,000,000 of convertible debt, $2,200,000 of Series D Preferred Stock, exercise of warrants in the amount of $750,000 and a promissory note in the amount of $550,000 to LegacyMaker, Inc. The net assets acquired were 804,383. The Company recorded $31,890,106 of goodwill associated with the merger. The goodwill is amortized on a straight-line basis over three years. For the month of September, popmail had $2,910 of revenues, $83,150 of general and administrative expenses, $15,976 of depreciation and $96,216 net loss. 4. NET INCOME (LOSS) PER COMMON SHARE: The Company's basic net income (loss) per share amounts have been computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company's diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. For each of the periods presented, the Company incurred net losses and therefore basic and diluted per share amounts are the same. Common shares of 8,635,902 associated with the Series B preferred stock have been used in the calculation of basic and diluted weighted average outstanding shares. 5. PREFERRED STOCK ACCRETION AND DEEMED DIVIDENDS On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock in a private placement for total proceeds of $2,000,000. On July 13, 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock in a private placement for total proceeds of $2,000,000. On August 31, 1999, the Company issued 2,200 shares of Series D 8% convertible preferred stock in a private placement for total proceeds of $2,200,000. All three preferred stock series are convertible into the Company's common stock at a price equal to 65% of the average market closing price for the five preceding days. The Company recognized a non-cash deemed dividend of $3,146,232 and $3,338,461 for the thirteen weeks and thirty-nine weeks ended October 3, 1999, respectively. The deemed dividend was recorded as a discount to preferred stock with a corresponding credit to additional paid-in capital. The accretion of the discount is reflected in the condensed statement of operations as an adjustment to net loss, but has no net effect on total shareholders' equity. 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of:
October 3, January 3, 1999 1999 ------------------ ------------------- Leasehold improvements $ 13,221,560 $ 6,435,925 Equipment and fixtures 5,257,364 4,014,095 Construction in progress 0 2,823,920 ------------------ ------------------- 18,478,924 13,273,940 Less: accumulated depreciation and amortization (2,545,887) (1,574,392) ================== =================== Total property and equipment, net $ 15,933,03 $ 11,699,548 ================== ===================
7. WRITE-DOWN OF PROPERTY AND EQUIPMENT The Company's initial restaurant located in Cincinnati, Ohio had not generated positive operating cash flows since its opening. This initial format and the Hotel Discovery concept did not serve as the prototype for the Company's subsequent restaurants. Accordingly, the Company recorded a non-cash write-down of the Kenwood Restaurant of $2,000,000 in 1998. An impairment was determined by the Company's management based on the operating 7 8 performance of the restaurant combined with the difference between the carrying amount of the assets and the undiscounted cash flows estimated to be generated. The Company is in final negotiations for the sale of the Kenwood Restaurant. Considerations still being negotiated include (but are not limited to) lease re-assignments and the release of the September 1998 $3,000,000 credit facility guarantees discussed in Note 8. Because of the $2,000,000 impairment charge recorded in 1998, the possibility exists that a gain will be recorded over book value with the pending sale of this location. However, there can be no assurances that this sale will be completed during 1999, if at all, which would meet the requirements of the Company. 8. DEBT In June 1996 the Company entered into three convertible promissory notes with an aggregate total of $150,000 with private investors. The notes matured on July 1, 1999, with an interest rate of 8.01% per year. These notes were amended and restated in June 1999, with a new maturity date of December 31, 1999, and an interest rate of 8.01% per year. The notes (principal and accrued interest) are convertible into approximately 89,000 shares of the Company's Common Stock at a rate of $2.1875 per share. In June 1998 the Company entered into a senior loan and security agreement with a financial institution for approximately $1,000,000. The loan is secured by substantially all of the furniture, accessories, computer/POS and kitchen equipment located at the Mall of America Restaurant and required security deposits of approximately $300,000. The loan requires monthly installments of $25,044 including interest of 15.94%. This loan is due July 2002. In September 1998 the Company entered into a $3,000,000 revolving line of credit facility with a financial institution. This credit facility is secured by an open-ended leasehold mortgage, security agreement and assignment of rents, income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold improvements of the Kenwood Restaurant. See Note 7 for further discussion of the Kenwood 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 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 latter guarantees. In exchange for such guarantees and pledges of collateral, the Company issued 200,000 five-year warrants each to two of the directors in November 1998, and 400,000 five-year warrants to the other third party in January 1999 all at an exercise price of $0.75 per share. The Board of Directors of the Company also authorized the issuance of additional warrants and the payment of cash penalties to the three guarantors if the borrowings are not repaid in full by July 6, 2000. This credit facility provides for monthly payments of interest accrued on the outstanding unpaid principal balance at a rate equal to the Prime Rate (8.25% as of October 3, 1999). As of April 2, 1999, the Company has borrowed $3,000,000 under this credit facility. The line of credit facility and senior promissory note contain certain restrictive covenants, as defined and the maturity date has been extended to July 6, 2000. As of October 3, 1999, the Company was in compliance with all such covenants. On February 23, 1999, the Company entered into a promissory note for $300,000 with a private investor. The note was unsecured and required a balloon payment of principal and interest 90 days from the loan date. The interest rate was 18% per year, with a 2% loan origination fee. The Company issued a five-year warrant to such investor to purchase 50,000 shares of the Company's common stock at an exercise price of $0.50 per share. A principal payment, accrued interest and an origination fee was paid in May 1999, and a new note was issued for $200,000 with the same investor. The new note, dated May 23, 1999, is also unsecured and requires a balloon payment of principal and interest 90 days from the loan date at a rate of 12.5% per year. The investor has the option to receive payment of principal and interest in cash or in shares of the Company's common stock. On October 19, 1999, this note was repaid through the issuance of 105,000 shares of the Company's Common Stock, $.01 par value, at a price of $2.00 per share, to cancel the remaining indebtedness of principal and interest. On March 10, 1999, the Company entered into a promissory note for $825,000 with a financial institution. The 8 9 note is a secured revolving line of credit facility, which requires interest payments only. The interest rate on the note is equal to the Index Rate (8.25% as of October 3, 1999), with the maximum interest rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is secured by personal guarantees and the Company has issued five-year warrants, for an aggregate of 500,000 shares of common stock, at an exercise price of $0.75 per share to the guarantors in consideration of the guarantees. One guarantor, a director of the Company, received 87,500 warrants, the remaining 412,500 warrants going to other third party guarantors. On April 30, 1999, the Company entered into a master equipment lease agreement ("Capital Lease") for $300,000 with a financial institution. The Capital Lease was secured by substantially all of the furniture, accessories, computer/POS and kitchen equipment located at the Denver Pavilions Restaurant and had required security deposits of approximately $135,000. The note bore interest at 17.3% and was paid in full on September 1, 1999. On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock ("Series A Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant (the "Agent's Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The purchase was an institutional investor who is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended ("Regulation D"). The Company relied upon Rule 506 of Regulation D as the exception for such private placement. By September 22, 1999, all Series A Preferred Stock had been converted. On June 30, 1999, the Company entered into a Letter of Intent to acquire Internet Community Concepts ("ICC"). ICC provides Web content, e-commerce and advertising to nearly 350 radio stations. On October 20, 1999, the Company completed the purchase of a minority interest in ICC through the exchange of 120,000 shares of the Company's Common Stock. In addition, the Company acquired the rights to an exclusive joint-marketing agreement with ICC. On July 13, 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock ("Series C Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant ("Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradeable shares of common stock. Each share of Series C Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series C Preferred Stock, (ii) as a dividend on the Series C Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,762,632 shares (20% of the number of outstanding shares of common stock on July 13, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series C Preferred Stock is unable to convert shares of Series C Preferred Stock into common stock because 1,762,632 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series C Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series C Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series C Preferred Stock, which is still outstanding on July 13, 2004, is mandatorily converted at the Conversion Price. The Company is not required to convert Series C Preferred Stock, whether upon request for conversion by the holder or upon the July 13, 2004, mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series C Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. On August 13, 1999, the Company filed a Registration Statement relating to the resale of common stock issuable 9 10 (i) upon conversion of the Series C Preferred Stock, (ii) in lieu of cash dividends on the Series C Preferred Stock and (iii) upon exercise of the Warrant. The Registration Statement was declared effective by the SEC on August 26, 1999. The Company used the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common stock by the selling shareholders. On July 19, 1999, the Company entered into a Letter of Intent to purchase substantially all of the assets of ROI Interactive, LLC, a permission-based marketing email communications company which concentrates on the needs of its media, sports and entertainment customers. On August 24, 1999, the Company entered into a senior convertible note for $2,000,000 with a financial investor. The proceeds were used to finance the acquisition of popmail. The interest rate on the note is equal to the Prime Rate plus 2% (10.25% as of October 3, 1999). Interest on the unpaid principal balance of the note shall be payable quarterly. The note is due August 24, 2000, and is secured by substantially all of the furniture, accessories, computer/POS and kitchen equipment located at the Denver Pavilions Restaurant. The Company has issued a five-year warrant for an aggregate of 500,000 shares of common stock at an exercise price of $2.50 per share. On August 31, 1999, the Company issued 2,200 shares of Series D 8% convertible preferred stock ("Series D Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,200,000 and net proceeds after expenses of approximately $1,960,000. In addition, the Company issued a warrant ("Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series D Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series D Preferred Stock, (ii) as a dividend on the Series D Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,878,107 shares (20% of the number of outstanding shares of common stock on August 31, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series D Preferred Stock is unable to convert shares of Series D Preferred Stock into common stock because 1,878,107 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series D Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series D Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series D Preferred Stock, which is still outstanding on August 31, 2004, is mandatorily converted at the Conversion Price. The Company is not required to convert Series D Preferred Stock, whether upon request for conversion by the holder or upon the July 13, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series D Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. On September 30, 1999, the Company filed a Registration Statement relating to the resale of common stock issuable (i) upon conversion of the Series D Preferred Stock, (ii) in lieu of cash dividends on the Series D Preferred Stock and (iii) upon exercise of the Warrant. If the Registration Statement has not been declared effective by the SEC by February 25, 2000, the Company must pay liquidated damages thereafter until such conditions are satisfied. On September 1, 1999, the Company issued 2,024 shares of Series B convertible preferred stock ("Series B Preferred Stock") as consideration for the merger governed by the Agreement and Plan of Merger dated as of June 1, 1999, ("Agreement") by and between the Company, Stephen D. King (the Registrant's principal shareholder, Chairman and Chief Executive Officer), each of the shareholders of popmail.com, inc., a Delaware corporation ("popmail") and Cafe Odyssey acquisition Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of 10 11 the Registrant ("Acquisition Sub"). The Series B Preferred Stock may be converted at any time into shares of the Company's common stock at a rate equal to 4,266.75 shares of common stock for each share of the Series B Preferred Stock. If the Company pays any dividends on its common stock or other capital stock (other than dividends payable solely in shares of common stock), the Company shall at the same pay to the holders of shares of the Series B Preferred Stock the dividends which would have been paid with respect to the common stock issuable upon conversion of such shares of Series B Preferred Stock had all of the outstanding shares of the Series B Preferred Stock been converted immediately prior to the record date for such dividend. The Series B Preferred Shares have a per share liquidation preference equal to $9,881.42. If the assets of the Company are insufficient to pay all of the liquidation preference amount of the Series B Preferred Shares, the holders of shares of the Series Preferred Stock shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. In conjunction with the Series B Preferred Shares, the Company issued a warrant to LegacyMaker, Inc., a Delaware corporation, which warrant granted LegacyMaker the right to purchase up to 900,000 shares of the common stock of the Company (subject to customary adjustments) at an exercise price of $3.00 per share. The warrant expires on May 14, 2004 with respect to 450,000 shares and expires on July 13, 2004 with respect to the remaining 450,000 shares. On October 20, 1999, the Company amended its pending Registration Statement to include registration of the resale of 100,000 shares of common stock issuable upon conversion of the Series B Preferred Stock. The Registration Statement has not been declared effective by the SEC. The Company will receive no proceeds from any resale of these 100,000 shares of common stock issuable upon conversion of the Series B Preferred Stock. On September 1, 1999, the Company completed its merger agreement with popmail. The shareholders of Cafe Odyssey, Inc., previously approved the merger, along with a name change to PopMail.com, inc. The required financing for the merger was obtained through the private sale of $2,000,000 of convertible debt, $2,200,000 of Series D Preferred Stock, exercise of warrants in the amount of $750,000 and a promissory note in the amount of $550,000. 9. COMMITMENTS AND CONTINGENCIES LITIGATION - The Company is involved in legal actions in the ordinary course of business. While no reasonable estimates of potential liability can be determined, management believes such legal actions will be resolved without material effect on the Company's financial position or results of operations. The Company charges legal fees to operations as they are incurred. 11 12 ITEM 2. POPMAIL.COM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations should be read in connection with the accompanying unaudited condensed financial statements and related notes thereto included elsewhere in this report, and the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended January 3, 1999. OVERVIEW Subsequent to its September 1, 1999, merger with popmail, the Company manages its operation in two market segments: an Internet division and a restaurant division. Prior to the merger, the Company owned and operated three full service restaurants. One, which was located in Cincinnati, Ohio ("Kenwood Restaurant"), which operated under the trade name "Hotel Discovery" was closed August 29, 1999. See Note 4 for further discussion of the Kenwood Restaurant. The other two restaurants operate under the trade name Cafe Odyssey. One is in the Mall of America, located in Bloomington, Minnesota, a suburb of Minneapolis ("Mall of America Restaurant"), and the other at the Denver Pavilions, located in the downtown district of Denver, Colorado ("Denver Pavilions Restaurant"). The Kenwood Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the Company was in the development stage. The Company began operations as Hotel Mexico, Inc. ("HMI"), which was incorporated in Ohio in January 1994. The Kenwood Restaurant Limited Partnership, an Ohio limited partnership ("Kenwood Partnership") was formed in June 1995 to own and operate the Kenwood Restaurant. HMI's operations and the net assets of the Kenwood Partnership were combined in November 1996 and in August 1997, HMI was reorganized as Hotel Discovery, Inc., a Minnesota corporation. On February 25, 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey. The Company believes that the new name better reflects the concept's primary focus on award-winning food, served in a unique environment of adventure, imagination, exploration and innovation. In conjunction with this action, the Company's Board of Directors and shareholders approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved by shareholders on May 21, 1998. The Company expects to rapidly expand the Internet division, therefore, the Company's Board of Directors recommended a corporate name change to PopMail.com, inc., ("PopMail.com"). At the Company's annual meeting held August 19, 1999, the shareholders voted to approve the name change from Cafe Odyssey, Inc. to PopMail.com, inc. One of the objectives of the Internet division of PopMail.com is to become a leading provider of email services to radio stations and their listeners. PopMail.com combines the power of the Internet with the mass-medium of radio. By providing radio stations with an attractive free email service to their listeners, PopMail.com leverages radio's proven ability to engage audiences and attract advertisers. The Company has signed letters of intent to acquire other companies, which have developed specific services of permission-based marketing email in the fields of radio, television, newspaper, sports and the entertainment media. Future revenue and profits, if any, will depend upon various factors, including the rapidly changing e-commerce community of the Internet, the market acceptance of the Company's current restaurant concept, the quality of restaurant operations, the ability to expand to multi-unit locations and general economic conditions. The Company's present source of revenue is limited to its existing restaurants. There can be no assurances the Company will successfully implement its expansion plans, of the Internet or restaurant divisions, in which case it will continue to be dependent on the revenues from the existing restaurants. 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. Furthermore, to the extent the Company's expansion strategy is successful, it must manage the transition to multiple-site operations, higher volume operations, the control of overhead expenses and the addition of necessary personnel. With the addition of the Internet division, the Company will be hiring senior management to operate that division. The Company's present management team will continue to focus its attention on 12 13 the day to day activities of the restaurants. No assurance can be given that other acquisitions will be completed and or desired results achieved. RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998 NET SALES The restaurant division had net sales for the thirteen weeks ended October 3, 1999 and September 27,1998 of $3,548,692 and $2,522,048, respectively, or a 40.7% increase of $1,026,644. The increase in sales is attributable to the opening of the Denver Pavilions March 15, 1999, offset by the closing of the Kenwood Restaurant on August 29, 1999. The restaurant division had net sales for the thirty-nine weeks ended October 3, 1999 and September 27,1998 of $9,442,347 and $4,522,043, respectively, or a 108.8% increase of $4,920,304. The increase in sales is attributable to the opening of the Mall of America Restaurant on June 8, 1998, and the opening of the Denver Restaurant on March 15, 1999, offset by the closing of the Kenwood Restaurant on August 29, 1999. The Internet division had net sales of $2,910 for the first month after the merger. COSTS AND EXPENSES The food, beverage, retail costs and other unit operating expenses related to the operation of the restaurant division for the thirteen weeks ended October 3, 1999 were $3,267,802 or a 33.5% increase of $820,158 from $2,447,644 for the thirteen weeks ended June 28,1998. The Company will continue to incur some expenses relating to the closing of the Kenwood Restaurant until a sale is completed. The food, beverage, retail costs and other unit operating expenses related to the operation of the restaurant division for the thirty-nine weeks ended October 3, 1999 were $9,008,467 or a 97.1% increase of $4,439,314 from $4,569,153 for the thirty-nine weeks ended September 27,1998. The correlation that exists between the increase in costs and expenses as compared to the increase in revenues reflects the economies of scale of the larger revenue restaurants. Management continues to address cost and expense issues at the Restaurants. Further refinements are anticipated for both the Mall of America Restaurant and the Denver Pavilions Restaurant in the area of labor expenses. However, no assurance can be given that these efforts will achieve desired results by the year end, if at all. Depreciation and amortization expenses for the thirteen weeks ended October 3, 1999 were $1,252,499 or a 299.3% increase of $938,902 from $313,597 for the thirteen weeks ended September 27, 1998. Depreciation and amortization expenses for the thirty-nine weeks ended October 3, 1999 were $1,863,339 or a 198.2% increase of $1,238,603 from $624,736 for the thirty-nine weeks ended September 27, 1998. This increase is due primarily to the straight-line amortization of goodwill and the addition of the Denver Pavilions Restaurant and the Internet division. The Company incurred no additional pre-opening expenses for the thirteen weeks ended October 3, 1999. Pre-opening and start-up expenses were $572,932 for the thirty-nine weeks ended October 3, 1999, as compared to $851,706 for the thirty-nine weeks ended September 27, 1998, a decrease of $278,774 or 32.7%. The Company revised its pre-opening policy with the opening of the Denver Pavilions Restaurant. The restaurant division anticipates that future new restaurant openings will be in line with Denver. However, no assurance can be given that pre-opening and start-up costs will be within the same amounts, due to the size of the next unit, its geographic location or the time needed to open. Of the $572,932 pre-opening expenses, $504,973 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 specific site. The restaurant division's executive and administrative office located in Bloomington, Minnesota, had general, administrative and development expenses for the thirteen weeks ended October 3, 1999, of $1,827,570 compared to $649,073 for the thirteen weeks ended September 27, 1998, an increase of $1,178,497 or 181.5%. The restaurant division's executive and administrative office had general, administrative and development expenses for the thirty-nine weeks ended October 3, 1999, of $2,788,346 compared to $2,067,602 for the thirty-nine weeks ended September 27, 1998, an increase of $720,744 or 34.8%. This increase reflects the results of the merger of popmail. The Company recorded expenses relating to the acquisition of popmail of $1,167,061 for the thirteen weeks ended October 3, 1999. The Internet division's executive and 13 14 administrative office located in Dallas, Texas, had general, administrative and development expenses for the five weeks ended October 3, 1999, of $83,150. Interest expense for the thirteen weeks and thirty-nine weeks ended October 3, 1999 of $372,165 and $759,497, respectively. Interest income for the thirteen weeks and thirty-nine weeks ended October 3, 1999 was $1,567 and $4,754 respectively. The Company has to address the numerous executive and administrative staffing requirements, the requirements needed to manage remote sites, shareowner relationships, etc. and development costs associated with site location. 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 1999. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $7,645,774 at October 3, 1999, compared to working capital deficit of $3,870,058 on January 3, 1999. Cash and cash equivalents were $311,811 at October 3, 1999, representing an increase of $205,564 from the cash and cash equivalents of $106,247 at January 3, 1999. Since inception, the Company's principal capital requirements have been (i) the development of the Company and the Hotel Discovery/Cafe Odyssey concept, (ii) the construction of the Kenwood Restaurant and the acquisition of furniture, fixtures and equipment of approximately $5.1 million, net of landlord contributions, (iii) the construction of the Mall of America Restaurant and the acquisition of furniture, fixtures and equipment of approximately $4.8 million, net of landlord contributions, (iv) 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 (v) the acquisition and merger with popmail.com, inc., of approximately $5.1 million. The Company's primary sources of working capital have been proceeds from the sale of common stock to and borrowings from its principal shareholder, Stephen D. King, the private placement of common stock and debt, as well as the proceeds from the Company's initial public offering of Units in November 1997. The Company will not open any new restaurants in fiscal year 1999. Management is committed to its original, fundamental strategy of slow, controlled growth. This approach to expansion although conservative, will strengthen the concept and avoid the pitfalls of some of the competition by insuring that the management team is not outdistanced and can execute the Company standards. It also insures that the real estate strategy is not compromised due to forced timing of restaurant openings. With the successful execution of the Denver Pavilions Restaurant being opened on time and on budget, the Company has terminated the lease agreement with the Irvine, California developer primarily due to the physical placement that the restaurant would occupy within the Irvine complex. The Company is investigating other real estate site locations. The Company estimates that its capital expenditures required for its next restaurant (excluding any landlord contributions) will be approximately $2 to $5 million. The Company expects to finance its concept development and expansion through cash flow from operations, the exercise of its Class A Warrants and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available on terms acceptable or favorable to the Company. The Company has entered into a definitive purchase agreement to acquire all of the capital stock of ROI Interactive, Inc. This transaction is an exchange of assets for stock and cash. It is estimated that approximately $2,600,000 may be needed to complete the transaction. The Company expects to finance its Internet acquisitions through either the exercise of its Class A Warrants, or through other forms of financing such as the sale of additional equity and debt securities and other credit facilities. There are no assurances that such financing, if any, will be available on terms acceptable or favorable to the Company. The Company will continue to aggressively search for strategic partners and/or acquisition candidates for its PopMail Network Services, a suite of "permission" based and "affinity" marketing email communication services targeted at businesses in the broadcast, media, sports and entertainment industries. The Company has committed at least $2,000,000 over the next year to expand its management, sales and technical service capabilities to accommodate the planned expansion. Capital will be raised through its Class A Warrants, additional private placement equity instruments, debt securities and other credit facilities. There are no assurances that such financing, if any, will be available on terms acceptable or favorable to the Company. 14 15 IMPACT OF THE YEAR 2000 ISSUE INTRODUCTION. The term "Year 2000" is used to describe general problems that may result from improper processing of dates and date-sensitive calculations by computers or other machinery as the year 2000 is approached and reached. This problem stems from the fact that many of the world's computer hardware and software applications have historically used only the last two digits to refer to a year. As a result, many of these computer programs do not or will not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The Year 2000 issue is real and presents a number of serious risks and uncertainties that could have a broad impact across all industries and which could impact the Company's results of operations, liquidity and financial position. THE COMPANY'S STATE OF READINESS. To operate its business, the Company relies on many third party information technology systems ("IT"), including its point of sale, table seating and reservation management, inventory management, credit card processing, payroll, accounts payable, fixed assets, banking and general ledger systems. The Company does not maintain any proprietary IT systems and has not made any modifications to any of the IT systems provided to it by its IT vendors. The Company has received from each of its vendors, as required, upgrades or enhancements that will ensure that the IT systems associated with that particular vendor will be Year 2000 compliant. The Company also relies upon government agencies, utility companies, providers of telecommunications services, food, beverage and retail product suppliers and other third party product and service providers ("Material Relationships"), over which it can assert little control. The Company's ability to conduct its core business is dependent upon the ability of these Material Relationships to ensure Year 2000 compliance, to the extent they affect the Company. If the telecommunications carriers, public utilities, key food, beverage and retail product suppliers and other Material Relationships do not appropriately rectify their Year 2000 issues, the Company's ability to conduct its core business may be materially impacted, which could result in a material adverse effect on the Company's financial condition. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The Company expenses costs associated with its Year 2000 compliance efforts as the costs are incurred. The Company estimated that it has spent approximately $2,000 to complete its Year 2000 compliance efforts. The Company estimates that additional costs could be incurred should knowledge regarding specific issues become known, which would requiring more elaborate testing from any of its IT vendors. It should be noted, however, that there can be no assurance that the Company will successfully identify and rectify all its Year 2000 problems. RISKS PRESENTED BY YEAR 2000 PROBLEMS. The Company had requested and has received responses from its major IT vendors. The information received indicates no risk to the normal continuation of business due to disclosed Year 2000 issues. Furthermore, the Company believes that its efforts in the Year 2000 issues will not necessarily guarantee that events and circumstances outside the Company's direct influence and control will not adversely impact its operations. THE COMPANY'S CONTINGENCY PLANS. Although the key risks have been assessed, the Company does not expect to have any operational issues regarding Year 2000 compliance, however, the possibility exists that many unavoidable issues, that can not even be imagined, could develop after the calendar changes to 2000. With the core IT systems ready, the Company expects to deal with any Year 2000 issues on a day to day basis, and plans to implement modifications as the need arises. Nevertheless, there can be no assurances that all that has been accomplished will produce the desired results, if at all. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. When used in this Form 10-QSB, the words "anticipate", "believe", "estimate", "expect", "intend" and similar expressions, as they relate to the Company, are intended to identify such forward-looking statements. Although the Company believes these statements are reasonable, readers of this Form 10-QSB should be aware that actual results could differ materially from those projected by such forward-looking statements as a result of the risk factors listed below under the caption "Risk Factors." Readers of this Form 10-QSB should consider carefully the factors listed below, as well as the other information and data contained in this Form 10-QSB. The Company cautions the reader, however, that such list of factors under the caption "Risk Factors" may not be exhaustive and that those or other factors, many of which are 15 16 outside of the Company's control, could have a material adverse effect on the Company and its results of operations. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth hereunder and under the caption "Risk Factors." 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 this entire prospectus and consider the following risk factors: WE HAVE INCURRED LOSSES TO DATE AND IF OUR SALES DO NOT IMPROVE, WE WILL NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE OPERATIONS. We incurred net losses of approximately $8.9 million for the 39 weeks ended October 3, 1999, $6.7 million in 1998 and $4.0 million in 1997 and had a working capital deficit of approximately $7.6 million as of October 3, 1999. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to increase our revenues which are presently limited to income from our three existing restaurants. Without additional financing, cash generated from our current operations may not be adequate to fund operations and make mortgage payments in 1999. There can be no assurances that additional financing to fund current operations and expansion will be available on terms acceptable or favorable to us. In addition, our former independent auditors expressed a "going concern" qualification to their audit of our financial statements for the year ended January 3, 1999. THERE IS SIGNIFICANT POTENTIAL FOR DILUTION OF INVESTORS INTERESTS DUE TO THE E-MAIL-RELATED ACQUISITIONS OR THE CONVERSION OF PREFERRED SHARES INTO SHARES OF THE COMPANY'S COMMON STOCK. If the acquisition of ROI Interactive, LLC is completed, the Company's current shareholders could experience significant ownership dilution. Furthermore, this new business could require additional financing which could dilute shareholdings further. In May 1999, we separately issued to an investor 2,000 shares of Series A 8% Convertible Preferred Stock (the "Series A Preferred Shares") which are convertible into shares of common stock at a conversion price of 65% of the market price of our common stock and a warrant to acquire 300,000 shares of common stock at an exercise price of $3.00 per share. As of September 22, 1999, 1,015,999 shares of common stock have been issued upon the conversion of 2,000 Series A Preferred Shares, leaving no shares of Series A Preferred Shares outstanding. In July 1999, we also issued 2,000 shares of Series C Preferred Shares which are also convertible into shares of common stock at a conversion price of 65% of the market price of our common stock and a warrant to acquire 300,000 shares of common stock at an exercise price of $3.00 per share (the "Series C Warrant"). As with the Series A Preferred Shares, a decline in the stock price of common stock could result in considerable dilution to investors if the holder of the Series C Preferred Shares converts. No more than 1,453,818 shares of common stock, including those already issued, may be issued in connection with the conversion of Series C Preferred Shares and payments of dividends. As of November 15, 1999, 193,160 shares of common stock have been issued upon the conversion of 275 Series C Preferred Shares, leaving 1,725 shares of Series C Preferred Shares outstanding. Additionally, we were required to issue to LegacyMaker, Inc. securities with substantially identical terms as any options, warrants or other securities exchangeable for or convertible into common stock that were issued by us after May 3, 1999 and before September 1, 1999 upon payment by LegacyMaker of the same consideration paid by the purchaser of any such options, warrants or other securities, the effect of which, if issued and exercised, would be additional ownership dilution. 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 to exist. During most of December 1998 and into April 1999, our common stock failed to maintain the minimum bid price criteria of $1.00 per share as is required in order to trade on the Nasdaq SmallCap Market. In addition, we have responded to various inquirers of NASDAQ expressing concern over various matters, including 16 17 but not limited to the "going concern" qualification expressed by our independent auditors. Accordingly, our securities may be delisted from the Nasdaq SmallCap Market. Additional factors giving rise to such delisting could include, but might 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 in our securities to less than $1,000,000, or (4) 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 PopMail.com, inc. 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. THERE IS THE RISK THAT DUE TO THE LIMITATIONS PLACED ON THE CONVERSION OF THE 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 (1) issuable upon conversion of the Series D Preferred Stock, (2) as a dividend on the Series D Preferred Shares, and (3) upon exercise of the Warrant cannot exceed 20% of the number of shares of Common Stock of the Company issued and outstanding on September 1, 1999. In the event the holders of Preferred Shares are unable to convert shares of Preferred Shares into common stock because these limitations have been reached, the Company would be required to redeem the Preferred Shares in cash at 135% of the stated value plus any accrued and unpaid dividends. It is possible that in such case the Company may not possess sufficient cash and cash equivalents necessary to redeem the Preferred Shares in cash. A similar but separate risk exists with the Company's Series C Preferred Shares. 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 James Anderson, our Chairman of the Board, Stephen D. King, our Chief Executive Officer, Ronald K. Fuller, our President and Chief Operating Officer, and Thomas W. Orr, our Chief Financial Officer. The loss of any of them 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 and restaurant divisions. 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 YOU TO ASSESS OUR ABILITY TO OPERATE PROFITABLY. We have only been operating our Kenwood restaurant since December 1996, our Mall of America restaurant since June 1998, and our Denver restaurant since March 1999. In addition, Old Popmail was founded in December 1997, and is considered to be in the developmental stage. Therefore, in addition to the other risks included in this prospectus, 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. OUR CHAIRMAN OF THE BOARD AND PRINCIPAL EXECUTIVE OFFICER CONTROL A SUBSTANTIAL 17 18 AMOUNT OF OUR COMMON STOCK AND MAY INFLUENCE OUR AFFAIRS. As of September 27, 1999, Stephen D. King, our Chief Executive Officer, controlled approximately 14.1% of our outstanding common stock. Accordingly, Mr. King has the ability to substantially influence the election of members of the Board of Directors and influence significantly the approval of corporate transactions and other matters requiring shareholder approval. Unless and until Mr. King substantially decreases his percentage ownership in our common stock, he will continue to have significant influence over our affairs. James Anderson was elected to the Board of Directors as Chairman, as a condition of the merger with popmail.com, inc. on September 1, 1999. Pursuant to a Schedule 13D filed with the Securities and Exchange Commission on September 13, 1999, Mr. Anderson indirectly or directly controlled approximately 58.9% of our outstanding common stock. Accordingly, he has 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 ownership in our common stock, he will continue to have significant influence over our affairs. THERE IS A RISK THAT THE VALUE OF OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD BE DIMINISHED BY IMPROPER USE BY OTHERS. 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. 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 100,000,000 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 or preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. We currently have 10,619,072 shares of common stock, 1,725 shares of Series C 8% Convertible Preferred Stock and 2,200 shares of Series D 8% Convertible Preferred Stock outstanding. As of September 27, 1999, a further 24,233,782 shares of common stock have been reserved as follows: - approximately 8,635,910 shares issuable upon conversion of the Series B Convertible Preferred Stock - a maximum of 1,488,583 shares issuable upon exercise of the Series C Preferred Shares, and as payment of dividends upon the Series C Preferred Shares; - a maximum of 1,578,107 shares issuable upon exercise of the Series D Preferred Shares, and as payment of dividends upon the Series D Preferred Shares; - 2,600,000 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; - 8,372,848 shares issuable upon the exercise of warrants; - 1,250,000 shares reserved for issuance under our 1997 Stock Option and Compensation Plan, of which options relating to 911,633 shares are currently outstanding, - 250,000 shares for issuance under our 1998 Director Stock Option Plan, of which options relating to 90,000 shares are currently outstanding, and - 58,334 shares issuable upon exercise of certain directors' stock option The rights of holders of preferred stock and other classes of common stock that may be issued could be superior to the rights 18 19 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. Being 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 our stock. By impeding a merger, consolidation, takeover or other business combination involving PopMail.com, inc. 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 be 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. RESTAURANT DIVISION OUR RESTAURANT OPERATIONS OR CONTEMPLATED EXPANSION MAY PROVE UNSUCCESSFUL, EITHER OF WHICH COULD RESULT IN CONTINUED UNPROFITABILITY AND CAUSE OUR STOCK PRICE TO FALL. To date, we have not generated a profit. Due to a variety of factors, many of which are discussed in this prospectus, we may never generate significant revenues or operate profitably. In fact, our management anticipates that net losses will continue for the foreseeable future. Even if we succeed in expanding our operations as contemplated, we cannot assure a successful transition to higher volume operations. We may be unable to control our expenses, attract necessary additional personnel, or procure the capital required to maintain expanded operations. If our expansion is ultimately unsuccessful, the results of our operations will suffer accordingly, and the market price of our stock may fall. POOR OPERATING RESULTS AT ANY OF OUR RESTAURANTS OR A DELAY IN THE PLANNED OPENING OF NEW RESTAURANTS, COULD ADVERSELY AFFECT OUR PROFITABILITY AS A WHOLE. We currently operate only three restaurants. Accordingly, poor operating results at any one restaurant would materially affect the profitability and cash flow of our operations as a whole. To a substantial extent, our ability to increase the number of restaurants we operate and our choice of locations for such restaurants will determine whether we will experience future growth in our revenues and profits. However, the significant financial investment associated with opening our restaurants may create substantial fluctuations in our operating results. Due to the significance of such investments, the risk we face in opening any one of our restaurants is much larger than that associated with most other restaurant companies' venues. Consequently, a delay in any planned restaurant opening could materially affect the profitability and cash flow of our operations as a whole. THEME RESTAURANTS MAY EXPERIENCE SOME DECLINE IN SAME STORE SALES. Same store sales (sales for restaurants that have been open at least one year) is one measure of operating results used by stock analysts to analyze a publicly traded retail and restaurant businesses. Theme restaurants frequently see a decline in same store sales from the first year to the subsequent year. In addition to negatively impacting the Company's revenues, declining same store sales has had a negative impact on the publicly traded theme restaurant's stock price and resulted in stock price volatility. 19 20 OUR ABILITY, OR INABILITY, TO RESPOND TO VARIOUS COMPETITIVE FACTORS AFFECTING THE RESTAURANT 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. We will likely be required to enter into similar long-term, non-cancelable leases for any future restaurants we develop. If we decide to close any of our existing restaurants or any other future restaurant, 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. UNPREDICTABLE RISKS ASSOCIATED WITH THE CONSTRUCTION OF ADDITIONAL RESTAURANTS COULD RESULT IN DELAYS AND COST OVERRUNS IN THE CONTEMPLATED EXPANSION OF OUR OPERATIONS. As with all construction projects, we face many risks related to the opening of additional restaurants, any of which could result in delays and cost overruns which would negatively impact the success of any restaurant openings. Such risks may include: - shortages of materials or skilled labor; - unforeseen environmental, engineering or geological problems; - work stoppages; - weather interference; - floods; - difficulties with regulatory agencies; and - unanticipated cost increases. IN ORDER TO FINANCE THE FUTURE DEVELOPMENT OF ADDITIONAL RESTAURANTS OR THE ACQUISITIONS, WE MAY BE REQUIRED TO RAISE ADDITIONAL FUNDS BY ISSUING SECURITIES ON TERMS WHICH WOULD DILUTE YOUR INTERESTS IN POPMAIL. The cost of developing our restaurants has ranged from $4.5 to $5.1 million per unit. We may be unable to develop future restaurants at similar costs. In order to fund the Company's future development, and the development of internet-related businesses, we may need to obtain financing through an additional offering of our equity securities or by incurring indebtedness. If we do need additional funds, such funds may not be available on terms acceptable to us or our shareholders. Furthermore, future investors may seek and obtain, 20 21 and we may be required to offer, investment terms which are substantially better than those granted to existing investors. The issuance of securities on such terms would dilute the interests of existing shareholders. 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. Our success, and consequently any investment in our common stock, depends to a significant degree on a number of economic conditions over which we have no control, including: - discretionary consumer spending - 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 - 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 NEGATIVELY IMPACT 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 - 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. 21 22 We may also be subject in certain states to "dram-shop" statutes, which provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. INTERNET DIVISION WE MAY BE ENTERING INTO A NEW BUSINESS VENTURE IN AN EVOLVING INDUSTRY IN WHICH WE HAVE NO EXPERIENCE. The email business adds a significantly different business to our business operations. We and our present management also have no experience with the business of providing email services. Furthermore, the internet industry is rapidly evolving, extremely competitive, and the market place for internet-related shares has been very volatile. IN LIGHT OF THE CONSOLIDATION OF THE RADIO INDUSTRY, THE LOSS OF ANY SIGNIFICANT AFFILIATE CONTRACTS WOULD NEGATIVELY IMPACT POPMAIL'S OPERATIONS. The last few years have brought substantial concentration of power among a few players in the radio industry. Consequently, significant portions of the industry are controlled by a relatively few organizations. Popmail already has affiliation contracts in place with 2 of the 5 largest organizations and is in negotiations with the remaining players. In light of such consolidation, however, the loss of any of these significant affiliation contracts or the inability of Popmail to enter into contracts with other radio industry entities would negatively impact Popmail's operations. OUR E-MAIL BASED PRODUCTS 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, 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 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 effected. 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-business electronic commerce, our business will not grow or become profitable. We cannot be certain that the infrastructure or complementary 22 23 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. OUR CONTEMPLATED TRANSACTION WITH ROI INTERACTIVE, LLC MAY NOT COME TO FRUITION. We have executed definitive documents in connection with our contemplated transactions with ROI Interactive, LLC. However, we can give no assurance that the transaction with ROI Interactive, LLC will come to fruition. INCREASED COMPETITION RESULTING FROM AN INCREASE IN THE NUMBER OF FREE EMAIL PROVIDERS THAT TARGETS THE RADIO INDUSTRY MAY HAVE AN ADVERSE EFFECT ON POPMAIL'S FUTURE BUSINESS OPERATIONS. Currently there are hundreds of free email providers, but Popmail management believes that it is currently the only email provider that solely targets the radio industry. To the extent Popmail is successful within the radio industry, we anticipate others will attempt to compete in the radio segment. Increased competition due to a greater number of free email providers targeting the radio industry may have an adverse affect on Popmail's future business operations. WE MAY FACE INCREASING COMPETITION FOR RADIO STATION CUSTOMERS AND INTERNET ADVERTISERS. As a provider of free email, Popmail competes with numerous other email providers many of which have more capital than Popmail. The principal competitors in the private-label email service business are: CommTouch, WhoWhere, MailChek, iName, and OnMedia. Of these providers, to the knowledge of Popmail management, only MailChek and OnMedia have any radio station customers. Popmail views its greatest competitive threat to its ability to establish relationships with radio stations as the potential availability of software that may duplicate many of the features in the Popmail email system. In addition, Popmail faces increasing competition for internet advertisers. 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. 23 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine legal actions in the ordinary course of its business. Although 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 financial position or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On July 13, 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock ("Series C Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant ("Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradeable shares of common stock. Each share of Series C Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series C Preferred Stock, (ii) as a dividend on the Series C Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,762,632 shares (20% of the number of outstanding shares of common stock on July 13, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series C Preferred Stock is unable to convert shares of Series C Preferred Stock into common stock because 1,762,632 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series C Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series C Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series C Preferred Stock, which is still outstanding on July 13, 2004, is mandatorily converted at the Conversion Price. The Company is not required to convert Series C Preferred Stock, whether upon request for conversion by the holder or upon the July 13, 2004, mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series C Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. On August 13, 1999, the Company filed a Registration Statement relating to the resale of common stock issuable (i) upon conversion of the Series C Preferred Stock, (ii) in lieu of cash dividends on the Series C Preferred Stock and (iii) upon exercise of the Warrant. The Registration Statement was declared effective by the SEC on August 26, 1999. The Company used the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common stock by the selling shareholders. On August 31, 1999, the Company issued 2,200 shares of Series D 8% convertible preferred stock ("Series D Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,200,000 and net proceeds after expenses of approximately $1,960,000. In addition, the Company issued a warrant ("Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series D Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series D Preferred Stock, (ii) as a dividend on the 24 25 Series D Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,878,107 shares (20% of the number of outstanding shares of common stock on August 31, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series D Preferred Stock is unable to convert shares of Series D Preferred Stock into common stock because 1,878,107 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series D Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series D Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series D Preferred Stock, which is still outstanding on August 31, 2004, is mandatorily converted at the Conversion Price. The Company is not required to convert Series D Preferred Stock, whether upon request for conversion by the holder or upon the July 13, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series D Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. On September 30, 1999, the Company filed a Registration Statement relating to the resale of common stock issuable (i) upon conversion of the Series D Preferred Stock, (ii) in lieu of cash dividends on the Series D Preferred Stock and (iii) upon exercise of the Warrant. If the Registration Statement has not been declared effective by the SEC by February 25, 1999, the Company must pay liquidated damages thereafter until such conditions are satisfied. The Company used the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common stock by the selling shareholders. On September 1, 1999, the Company issued 2,024 shares of Series B convertible preferred stock ("Series B Preferred Stock") as consideration for the merger governed by the Agreement and Plan of Merger dated as of June 1, 1999, ("Agreement") by and between the Company, Stephen D. King (the Registrant's principal shareholder, Chairman and Chief Executive Officer), each of the shareholders of popmail.com, inc., a Delaware corporation ("popmail") and Cafe Odyssey acquisition Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of the Registrant ("Acquisition Sub"). The Series B Preferred Stock may be converted at any time into shares of the Company's common stock at a rate equal to 4,266.75 shares of common stock for each share of the Series B Preferred Stock. If the Company pays any dividends on its common stock or other capital stock (other than dividends payable solely in shares of common stock), the Company shall at the same pay to the holders of shares of the Series B Preferred Stock the dividends which would have been paid with respect to the common stock issuable upon conversion of such shares of Series B Preferred Stock had all of the outstanding shares of the Series B Preferred Stock been converted immediately prior to the record date for such dividend. The Series B Preferred Shares have a per share liquidation preference equal to $9,881.42. If the assets of the Company are insufficient to pay all of the liquidation preference amount of the Series B Preferred Shares, the holders of shares of the Series Preferred Stock shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. On October 20, 1999, the Company filed a Registration Statement relating to the resale of 100,000 shares of common stock issuable upon conversion of the Series B Preferred Stock. The Registration Statement has not been declared effective by the SEC. The Company will receive no proceeds from any resale of these 100,000 shares of common stock issuable upon conversion of the Series B Preferred Stock. 25 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 19, 1999, the Annual Meeting of Shareholders of Cafe Odyssey, Inc. ("Annual Meeting") was held. There were 8,379,101 shares of Common Stock entitled to vote at the meeting and a total of 6,795,051 shares were represented at the meeting. The following matters were voted: (A) To elect five directors. All of the management's nominees for directors as listed in the proxy statement were elected with the following: Shares Voted For Withheld Ronald K. Fuller 6,772,757 22,294 Stephen D. King 6,772,457 22,594 Michael L. Krienik 6,772,357 22,694 Thomas W. Orr 6,772,657 22,394 Jerry L. Ruyan 6,772,657 22,394 (B) To vote on the adoption of the Agreement and Plan of Merger with popmail.com, inc.: Shares Voted For Against Abstain Broker Non-Vote 4,506,212 31,488 950 2,256,401 (C) To vote upon an amendment to the Company's Articles of Incorporation to change the name of the Company, contingent upon consummation of the merger, to PopMail.com, inc.: Shares Voted For Against Abstain Broker Non-Vote 6,738,268 56,583 200 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 3.1(a) Articles of Incorporation, as amended (Incorporated herin 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) 3.1(d) Certificate of Designation of Series D 8% Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1(d) to the Registrant's report on Form 8-K dated September 1, 1999 and files on September 16, 1999) 3.1(e) Articles of Amendment of Articles of Incorporation files on September 3, 1999. (Incorporated herein by reference to Exhibit 3.1(d) to the Registrany's report on Form 8-K dated September 1, 1999 and filed September 16, 1999) 3.1(f) Certificate of Designation of Series E Convertible Preferred Stock 26 27 10.1 Amended and Restated Employment agreement between the Company and Thomas W. Orr dated October 5, 1999. * 27 Financial Data Schedule * This exhibit pertains to compensation. (B) REPORTS ON FORM 8-K On July 23, 1999, the Company filed a Current Report on Form 8-K, under Item 5 announcing that it had completed an equity financing in the amount of $2,000,000. On September 16, 1999, the Company filed a Current Report on Form 8-K, under Items 1, 2, 5 and 7 announcing that it merged with popmail.com, inc., closed on an equity financing in the amount of $2,200,000 and closed on a convertible debt financing. On October 1, 1999, the Company filed a Current Report on Form 8-K, under Item 4 announcing that it had changed accountants. 27 28 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPMAIL.COM, INC. By: /s/ Thomas W. Orr ----------------------------- THOMAS W. ORR VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) Date: November 16, 1999 28 EX-3.1(F) 2 CERTIFICATE OF DESIGNATION OF SERIES E STOCK 1 EXHIBIT 3.1(f) POPMAIL.COM, INC. CERTIFICATE OF DESIGNATION OF SERIES E CONVERTIBLE PREFERRED STOCK Pursuant to Section 401(3)(b) of the Business Corporation Act of the State of Minnesota, PopMail.com, inc., formerly known as Cafe Odyssey, Inc. (the "Company"), a corporation organized and existing under the Business Corporation Act of the State of Minnesota, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Company by the Articles of Incorporation of the Company, and in accordance with the provisions of Section 401(3)(a) of the Business Corporation Act of the State of Minnesota, the Board of Directors of the Company as of September 22, 1999, adopted the following resolution creating a series of preferred stock designated as Series E Convertible Preferred Stock: RESOLVED: That pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of its Articles of Incorporation, as amended, a series of preferred stock, $.01 par value, to be titled the "Series E Convertible Preferred Stock" (the "Preferred Shares") of the Company is hereby created and designated. The number of shares of Preferred Shares shall be 750,000 shares. The voting powers, preferences and relative, participating, optional and other special rights of the Preferred Shares, and the qualifications, limitations and restrictions thereof, are as follows: 1. Designation. The series of preferred stock established hereby shall be designated the "Series E Convertible Preferred Stock" (and shall be referred to herein as the "Preferred Shares") and the authorized number of Preferred Shares shall be 750,000, subject to adjustment as hereinafter provided. 2. Voting Rights. Holders of Preferred Shares shall have no vote on any matters submitted to the holders of Common Stock. Without the affirmative vote of the holders (acting together as a class) of at least a majority of Preferred Shares at the time outstanding given in person or by proxy at any annual or special meeting, or, if permitted by law, in writing without a meeting, the Company shall not alter, change or amend the preferences or rights of the Preferred Shares. 3. Dividends. There are no rights to dividends. 4. Liquidation Right and Preference. In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Preferred Shares shall be entitled to receive in cash, out of the assets of the Company, an amount equal to Two Dollars ($2.00) per share for each outstanding Preferred Share (herein, "Liquidation Value"), before any payments shall be made or any assets distributed to the holders of Common Stock or any other class of shares of the Company ranking junior to Preferred Shares. If, upon any liquidation, dissolution or winding up of the Company, the assets of the Company are insufficient to pay the Liquidation Value, the holders of such Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Preferred Shares upon such liquidation, dissolution or a winding up of the Company, the holders of Common Stock and Preferred Shares shall then share ratably in all the assets of the Company thereafter remaining. For purposes of this joint distribution of assets to the holders of Common Stock and the holders of Preferred Shares, each holder of Preferred Shares should be regarded as owning that number of Common Stock into which such Preferred Shares would then be convertible. 2 5. Conversion Rights. a. Conversion. The Company and holder of the Preferred Shares shall be entitled to convert any or all of such Preferred Shares into shares of Common Stock. The number of shares of Common Stock issuable upon such conversion shall be determined as follows: (1) divide $2.00 by the lesser of (i) $2.00, or (ii) seventy (70) percent of the average closing market price of the Company's Common Stock during the ten (10) trading days immediately preceding the Filing Date (as defined in Section 6 herein); and multiplying the quotient determined in (1) by the number of Preferred Shares being converted. b. Conversion Mechanics -- Holder. In order to exercise the conversion privilege, a holder of Preferred Shares shall (1) notify the Company in writing of such holder's intent to convert a specified portion of such shares (the "Conversion Notice" and the date of such notice which shall be the same or later than the date notice is given, the "Conversion Notice Date") and (2) provide, on or prior to the Conversion Notice Date, to the Company at its principal office the certificate evidencing the Preferred Shares being converted, duly endorsed to the Company and accompanied by written notice to the Company that the holder elects to convert a specified portion or all of such Shares. Preferred Shares converted at the option of the Holder shall be deemed to have been converted on the day of receipt by the Company of the certificate representing such shares for conversion in accordance with the foregoing provisions (the "Conversion Date"), and at such time the rights of the holder of such Preferred Shares other than the right to receive shares of Common Stock upon conversion of the Preferred Shares pursuant to the terms hereof, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of Common Stock issuable upon conversion. As promptly as practicable on or after the Conversion Date, the Company shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Stock issuable upon conversion, computed to the nearest full shares, and a certificate or certificates for the balance of Preferred Shares surrendered, if any, not so converted into Common Stock. c. Conversion Mechanics -- Company. At its election, the Company may automatically convert the Preferred Shares. Notice of the conversion to the holder shall be given by mailing via first-class mail a notice of the Company's intent to convert a specified portion of such shares (the "Conversion Notice") not less than ten (10) business days prior to the effectiveness of such conversion. As promptly as practicable on or after such conversion by the Company, the Company shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Stock issuable upon conversion, computed to the nearest full shares, and a certificate or certificates for the balance of Preferred Shares surrendered, if any, not so converted into Common Stock. 6. Registration Rights. After May 1, 2000 (the "Filing Date"), the Company shall, on a one-time basis, prepare and file a registration statement under the 1933 Act covering the resale of the shares of Common Stock issued or issuable upon conversion of the Preferred Shares. The Company shall bear all expenses and fees incurred in connection with the preparation, filing, and amendment of such registration statement, except that each holder of Preferred Shares shall pay all fees, disbursements and expenses of any counsel or expert retained by such holder and all underwriting discounts and commissions, filing fees and any transfer or other taxes relating to the Shares included in the Registration Statement. Each holder of preferred shares shall cooperate with the Company in the preparation and filing of any Registration Statement, and in the furnishing of information concerning the holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Securities Act of 1933 as to any proposed distribution. 2 3 7. Other Terms of Series E Convertible Preferred Shares. a. Consolidation, Merger, Exchange, etc. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another company, or the sale of all or substantially all of its assets to another company, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Preferred Shares shall thereafter have the right to receive, in lieu of Common Stock of the Company, such shares of stock, securities, cash or other assets as would have been issued or payable with respect to or in exchange for such number of shares of Common Stock receivable upon a conversion of such Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of the Preferred Shares to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, cash or other assets thereafter receivable upon the conversion of such Preferred Shares. The Company shall not effect any such reorganization, reclassification, consolidation, merger or sale, unless prior to the consummation thereof the surviving company (if other than the Company), the company resulting from such consolidation or the company purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Preferred Shares at the last address of such holders appearing on the Books of the Company, the obligation to deliver to such holders such shares of stock, securities, cash or other assets as, in according to the foregoing provisions, such holders may be entitled to receive. b. Stock Split, Stock Dividend, Recapitalization, etc. If the Company, at any time while any Preferred Shares are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions payable in shares of its capital stock (whether payable in shares of its Common Stock or of capital stock of any class), (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder of any Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which such holder would have owned or have been entitled to receive after the happening of any of the events described above had such Preferred Shares been converted immediately prior to the happening of such event or the record date therefor, whichever is earlier. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. c. Notice of Certain Events. If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or 3 4 (iv) the approval of any shareholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all of substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company; then the Company shall mail to the holders of Preferred Shares, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and (z) the date as of which it is expected that holders of Common Stock shall be entitled to exchange such shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. IN WITNESS WHEREOF, PopMail.com, inc. has caused this Certificate to be duly executed in its corporate name on this 5th day of November 1999. POPMAIL.COM, INC. By: s/ Thomas W. Orr --------------------------- Thomas W. Orr Chief Financial Officer STATE OF MINNESOTA FILED - DUPLICATE COPY NOV -5 1999 s/ Mary Kiffmeyer Secretary of State 4 EX-10.1 3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is made as of October 5, 1999 by and between CAFE ODYSSEY, INC., a Minnesota corporation (the "COMPANY"), and THOMAS W. ORR (the "EXECUTIVE"). WHEREAS, the Company desires to employ Executive in accordance with the terms and conditions stated in this Agreement; and WHEREAS, Executive desires to accept that employment pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows: I. EMPLOYMENT 1.1 Employment as Chief Financial Officer and Executive Vice President. The Company hereby employs Executive as Chief Financial Officer and Executive Vice President and Executive accepts such employment pursuant to the terms of this Agreement. Executive shall report to and take direction from the President. The Executive will perform those duties which are usual and customary for a Chief Financial Officer and Executive Vice President of a restaurant enterprise and Internet company. He shall perform his duties in a manner reasonably expected of a Chief Financial Officer and Executive Vice President of a restaurant company. 1.2 Term. Employment shall be for an initial term of up to three years commencing on June 1, 1999 and continuing until the earlier of (i) June 1, 2002 or (ii) the date Executive's employment terminates pursuant to Article III hereof. Unless Executive's employment has been terminated pursuant to Article III, the term of this Agreement shall be renewed for successive one-year terms if mutually agreed upon by the Executive and the Board of Directors of the Company (the "BOARD"). II. COMPENSATION, BENEFITS AND PERQUISITES 2.1 Base Salary. The Company shall pay Executive an annualized base salary ("BASE SALARY") of $150,000 during the first year of this Agreement. The Base Salary shall be payable in equal installments in the time and manner that other employees of the Company are compensated. The President will review the Base Salary at least annually and may, in his or her sole discretion, increase it to reflect performance, appropriate industry guideline data or other factors. 2.2 Bonus. Executive shall receive a bonus ("BONUS") of up to 30% of his Base Salary. Executive's bonus shall be based upon meeting certain performance criteria which shall be set by the Board from time to time. 2 2.3 Automobile Allowance. Executive shall receive an automobile allowance of $680 per month. 2.4 Vacations. Executive shall be entitled to three weeks' paid vacation, or such greater amount of time as determined by the Board. 2.5 Cafeteria Plan Benefits. In lieu of participating in any Company-sponsored welfare plans, Executive shall receive $20,000 per year in cafeteria plan benefits which Executive will utilize in his sole discretion for health, life, disability, and dental insurance or expenses, educational expenses, other personal expenses, and other benefits which the Company may from time to time make available. 2.6 Travel Expenses and Cost of Living Allowance. Executive shall be reimbursed his reasonable travel expenses from his home to Minneapolis upon submission of receipts to the Company. Executive shall also be reimbursed for the cost of a temporary apartment, meals and other expenses for his stays in Minneapolis up to a total of $1,200 per month upon submission of receipts to the Company. III. TERMINATION OF EXECUTIVE'S EMPLOYMENT 3.1 Termination of Employment. Executive's employment under this Agreement may be terminated by the Company or Executive at any time for any reason; provided, however, that if Executive's employment is terminated by the Company during the term of this Agreement for a reason other than for cause as defined in Section 3.2 below, he shall continue to receive his Base Salary for a period of one (1) year from the date of termination. The termination shall be effective as of the date specified by the party initiating the termination in a written notice delivered to the other party, which date shall not be earlier than the date such notice is delivered to the other party. This Agreement shall terminate in its entirety immediately upon the death of Executive. Except as expressly provided to the contrary in this section or applicable law, Executive's rights to pay and benefits shall cease on the date his employment under this Agreement terminates. 3.2 Cause. For purposes of this Article III, "CAUSE" shall mean only the following: (i) commission of a felony; (ii) theft or embezzlement of Company property or commission of similar acts involving moral turpitude; (iii) alcohol or drug abuse which, in the judgment of the Board, has rendered Executive incapable of carrying out his duties hereunder; or (iv) any other failure by Executive to substantially perform his material duties under this Agreement (excluding nonperformance resulting from disability), which failure is not cured within 30 days after written notice from the Chairman of the Board specifying the act of nonperformance. 3.3 Disability. If Executive has become disabled such that he cannot perform the essential functions of his job with or without reasonable accommodation, and the disability has continued for a period of more than 90 days, the Board may, in its discretion, terminate his employment under this Agreement. 2 3 3.4 Notice. Each party must provide the other with at least 30 days' written notice of termination of Executive's employment under this Agreement. IV. CONFIDENTIALITY 4.1 Prohibitions Against Use. Executive acknowledges and agrees that during the term of this Agreement he may have access to various trade secrets and confidential business information ("CONFIDENTIAL INFORMATION") of the Company. Executive agrees that he shall use such Confidential Information solely in connection with his obligations under this Agreement and shall maintain in strictest confidence and shall not disclose any such Confidential Information, directly or indirectly, or use such information in any other way during the term of this Agreement or for a period of two (2) years after the termination of this Agreement. Executive further agrees to take all reasonable steps necessary to preserve and protect the Confidential Information. The provisions of this Section 4.1 shall not apply to information known by Executive which (i) was in possession of Executive prior to receipt thereof from the Company, (ii) is or becomes generally available to the public other than as a result of a disclosure by Executive, or (iii) becomes available to Executive from a third party having the right to make such disclosure. 4.2 Remedies. Executive acknowledges that the Company's remedy at law for any breach or threatened breach by Executive of Section 4.1 will be inadequate. Therefore, the Company shall be entitled to injunctive and other equitable relief restraining Executive from violating those provisions, in addition to any other remedies that may be available to the Company under this Agreement or applicable law. V. NON-COMPETITION. Executive agrees that, on or before the date which is one (1) year after the date Executive's employment under this Agreement terminates, he will not, unless he receives the prior approval of the Board, directly or indirectly engage in any of the following actions: (a) Own an interest in (except as provided below), manage, operate, join, control, lend money or render financial or other assistance to, or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any entity whose primary business is entertainment-themed restaurants or any entity whose primary business is the provision of internet-based e-mail services to radio stations, in each case, within the United States. However, nothing in this subsection (a) shall preclude Executive from holding less than 1% of the outstanding capital stock of any corporation required to file periodic reports with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the securities of which are listed on any securities exchange, quoted on the National Association of Securities Dealers Automated Quotation System or traded in the over-the-counter market. (b) Intentionally solicit, endeavor to entice away from the Company, or otherwise interfere with the Company's relationship with any person who is employed by or otherwise engaged to perform services for the Company (including, but not limited to, any independent sales representatives or organizations), whether for Executive's own account or for the account of any other individual, partnership, firm, corporation or other business organization. 3 4 If the scope of the restrictions in this Article V are determined by a court of competent jurisdiction to be too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be construed or rewritten so as to be enforceable to the maximum extent permitted by law, and Executive hereby consents, to the extent he may lawfully do so, to the judicial modification of the scope of such restrictions in any proceeding brought to enforce them. VI. MISCELLANEOUS 6.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 6.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard thereto. This Agreement supersedes all prior agreements relating to the employment of Executive by the Company. 6.3 Assignment. This Agreement shall be binding upon, and shall inure to the benefit of parties and their respective successors, assigns, heirs and personal representatives and any entity with which the Company may merge or consolidate or to which the Company may sell substantially all of its assets. 6.4 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: PopMail.com, inc. 4801 West 81st Street, Suite 112 Bloomington, MN 55437 Attention: President If to Executive, to: Thomas W. Orr 3440 W. Pepperwood Loop Tucson, AZ 85742 or to such other addresses as either party may designate in writing to the other party from time to time. 6.5 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 6.6 Severability. If any one or more of the provisions (or portions thereof) of this Agreement shall for any reason be held by a final determination of a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability 4 5 shall not affect any other provisions (or portions of the provisions) of this Agreement, and the invalid, illegal or unenforceable provisions shall be deemed replaced by a provision that is valid, legal and enforceable and that comes closest to expressing the intention of the parties hereto. 6.7 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Minnesota, without giving effect to conflict of law principles. 6.8 Arbitration. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement or the breach of any exhibits attached to this Agreement shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and a judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. The arbitrator(s) shall have the authority to award the prevailing party its costs and reasonable attorney's fees which shall be paid by the non-prevailing party. In the event the parties hereto agree that it is necessary to litigate any dispute hereunder in a court, the non-prevailing party shall pay the prevailing party its costs and reasonable attorney's fees. Notwithstanding anything in this Section to the contrary, during the pendency of any dispute or controversy arising under or in connection with this Agreement or exhibits attached to this Agreement, the Company shall be entitled to seek an injunction or restraining order in a court of competent jurisdiction to enforce the provisions of Articles IV and V. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. POPMAIL.COM, INC. s/ Ronald K. Fuller --------------------------------------- By: Ronald K. Fuller Its: President s/ Thomas W. Orr --------------------------------------- THOMAS W. ORR 5 EX-27 4 FINANCIAL DATA SCHEDULE
5 9-MOS JAN-02-2000 JAN-04-1999 OCT-03-1999 311,811 0 163,464 0 101,920 167,499 18,478,924 2,545,887 48,200,320 8,390,468 626,836 0 25,398,750 103,485 10,010,214 48,200,320 9,442,347 9,445,257 2,461,551 14,235,994 0 0 759,497 (8,883,941) 0 (8,883,941) 0 0 0 (8,883,941) (.92) (.92)
-----END PRIVACY-ENHANCED MESSAGE-----