-----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, HHNeheeoQJlUr1I28+IXQbE6mxNz2wIGA6qW2J8+OacVP70/zjS9YiojX0fmNa6p mMgdrLgbQFRyBgZk1M1hTA== 0001094328-02-000303.txt : 20021204 0001094328-02-000303.hdr.sgml : 20021204 20021204101458 ACCESSION NUMBER: 0001094328-02-000303 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20021204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTERNET SYSTEMS INC CENTRAL INDEX KEY: 0001126003 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 880473897 STATE OF INCORPORATION: NV FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-89954 FILM NUMBER: 02848019 BUSINESS ADDRESS: STREET 1: 2200-1055 WEST HASTINGS ST V6E 2E9 CITY: VANCOUVER STATE: A1 ZIP: 00000 BUSINESS PHONE: 6047334408 FORMER COMPANY: FORMER CONFORMED NAME: NORTH PACIFIC CAPITAL CORP DATE OF NAME CHANGE: 20001006 FORMER COMPANY: FORMER CONFORMED NAME: SCHOOLWEB SYSTEMS INC DATE OF NAME CHANGE: 20020222 SB-2/A 1 alternetsb2a2112902woexh3.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ALTERNET SYSTEMS, INC. (formerly SchoolWeb Systems Inc. and formerly North Pacific Capital Corp.) (Name of Small Business Issuer in its Charter) Nevada 3576 88-0473897 (State or jurisdiction of (Primary Standard Industrial I.R.S. Employer incoporation or organization) Classification Code Number) Identification No.) 333-89954 (Commission File No.) Suite 610 - 815 West Hastings Street Vancouver, Canada V6E 1T9 Tel: (604) 608-2540 Fax: (604) 608-8775 (Address and telephone number of Registrant's principal executive offices and principal place of business) Resident Agents of Nevada 711 South Carson Street Suite 4 Carson City, Nevada 89701 Tel: (775) 882-4641; (Name, address, and telephone number of agent for service) Approximate date of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If the delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ( X ) CALCULATION OF REGISTRATION FEE Title of each Amount to be Proposed Maximum Proposed Amount class of registered(1) offering price maximum of securities per share of aggregate registration to be registered common stock(2) offering fee price Common Stock 8,443,028 $0.35 $2,955,059.80 $271.87 The Company hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Company shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (1) The total number of shares of common stock to be sold by shareholders on a continuous offering basis under Rule 415 including 1,464,514 shares of common stock which may be issued upon exercise of 1,464,514 outstanding share purchase warrants; (2) Estimated for the purposes of calculating the registration fee. (3) The calculation (given footnote 2 above) was as follows: (8,433,028 shares x $0.35)($92/1,000,000)=$271.87 PROSPECTUS ALTERNET SYSTEMS, INC. (formerly SchoolWeb Systems Inc. and formerly North Pacific Capital Corp.) Suite 280 - 815 West Hastings Street Vancouver, British Columbia Canada V6C 1B4 8,443,028 Shares Common Stock * This prospectus relates to the resale of up to 8,443,028 shares of our common stock by our shareholders who are hereinafter referred to as Selling Shareholders. The 8,443,028 shares of common stock are to be registered as follows (maximum amounts): (a) 6,978,514 shares of common stock for selling shareholders; (b) 1,464,514 shares of common stock which are reserved for issuance upon the exercise of 1,464,514 share purchase warrants of the Company previously distributed by the Company under a private placement. Cash proceeds, if any, received by the Company from the exercise of the warrants will be used primarily as working capital for the Company. The share purchase warrants are exercisable for a period of two years at an exercise price of $0.50 per warrant. Each warrant is exercisable for one share of common stock. The selling shareholders will sell the shares from time to time at $0.35 per share until our shares are quoted on the Over the Counter Bulleting Board ("OTCBB"). Thereafter, non-affiliate selling shareholders will sell their shares at prevailing market prices or privately negotiated prices while affiliate selling shareholders will continue to sell their shares at $0.35 per share unless an amendment to this registration statement is declared effective by the SEC and contains a different selling price. No public market presently exists for our common stock and, while we intend to see our shares quoted on the OTCBB, there is no guarantee that we will be successful in doing so. The shares offered hereby are highly speculative and involve a high degree of risk to public investors and should be purchased only by persons who can afford to lose their entire investment (SEE "RISK FACTORS" ON PAGE 9). These securities have not been approved or disapproved by the U.S. Securities and Exchange Commission or any state securities commission nor has the U.S. Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Information contained herein is subject to completion or amendment. The registration statement relating to the securities has been filed with the U.S. Securities and Exchange Commission. The securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Subject to Completion, Dated: ______________, 2002 TABLE OF CONTENTS PROSPECTUS SUMMARY 7 RISK FACTORS 9 USE OF PROCEEDS 12 DETERMINATION OF OFFERING PRICE 13 DILUTION 13 SELLING SECURITY HOLDERS 14 PLAN OF DISTRIBUTION 17 LEGAL PROCEEDINGS 19 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 19 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 21 DESCRIPTION OF SECURITIES 23 INTEREST OF NAMED EXPERTS AND COUNSEL 24 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION 24 ORGANIZATION WITHIN LAST FIVE YEARS 25 DESCRIPTION OF BUSINESS 26 MANAGEMENT DISCUSSION AND ANALYSIS NS 37 DESCRIPTION OF PROPERTY 40 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 41 EXECUTIVE COMPENSATION 42 FINANCIAL STATEMENTS 44 YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 NINE MONTHS ENDED SEPTEMBER 30, 2002 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 45 INDEMNIFICATION OF OFFICERS AND DIRECTORS 45 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 45 RECENT SALES OF UNREGISTERED SECURITIES 46 UNDERTAKINGS AND SIGNATURES 46 EXHIBIT INDEX AND EXHIBITS 51 PROSPECTUS SUMMARY The following summary is qualified in its entirety by detailed information appearing elsewhere in this prospectus. Each prospective investor is urged to read this prospectus in its entirety. The Company. (a) Background. Alternet was incorporated in the State of Nevada on June 26, 2000, under the name of "North Pacific Capital Corp.". Alternet changed its name to "SchoolWeb Systems Inc." effective December 20, 2001. On May 14, 2002, the Company changed its name to its present name, "Alternet Systems, Inc.". Alternet's wholly owned subsidiary, AI Systems Group Inc., was incorporated in the State of Nevada on October 13, 2000. On January 1, 2001 it entered into the License Agreement with Advanced Interactive Inc. and its subsidiary, Advanced Interactive (Canada) Inc. (collectively, "AII"). AI Systems Group changed its first to "SchoolWeb Systems Inc." and later to "SchoolWeb Holdings Inc.". On July 1, 2002 it changed its name to its present name, AI Systems Group Inc. Alternet's registered offices in the State of Nevada are at 711 South Carson Street Suite 4, Carson City, Nevada 89701. The address of their registered office in Canada is Suite 280 - 815 West Hastings Street, Vancouver British Columbia, Canada V6C 1B4. (b) Business. Our business is the marketing and distribution of broadcast caching server hardware and software technologies which we licence from Advance Interactive Inc. and market under the names "SchoolWeb", "1nterlink" and "HealthWeb". These technologies are referred to in this registration statement as generally "the SchoolWeb system". The SchoolWeb hardware system and software were developed as a result of Advanced Interactive Inc.'s subsidiary ("AII") being awarded a $650,000 contract in 1999 to provide a low cost, distance-learning Internet access system for an initial pilot of 20 British Columbia, Canada schools. The contract was awarded to AII by the Government of British Columbia. Alternet and its subsidiary, AI Systems Group Inc., licensed the SchoolWeb System from AII the rights to market and distribute AII's caching software (which is the basis of the SchoolWeb System's software) under the terms of a License Agreement. The terms of the License Agreement call for monthly payments to AII and a royalty payment to AII of 40% of the revenue realized from sales of the SchoolWeb System. Each basic SchoolWeb "system" or software / hardware package is comprised of the SchoolWeb Librarian software, Linux Operating System, a caching server (a server which downloads entire websites and updates them so that users can just make requests for information from their caching server, not from the website), redundant file system, software configuration, uninterruptible power supply, satellite or cable port, SchoolWeb user license, 24 hour technical support (provided by AII through the License Agreement), On-site installation and training (provided by resellers and distributors), system maintenance and 5X9 on-site warranty. When sold as the "1nterlink" or "HealthWeb" product, the package is very similar to the SchoolWeb system. Summary Financial Information The following discussion should be read in conjunction with the financial statements of the Company and notes thereto contained elsewhere in this prospectus The fiscal year ended December 31, 2001 was the first full year of operations for the Company and also represented the year in which it purchased AI Systems Group Inc. For this fiscal year, the Company (on a consolidated basis with its subsidiary AI Systems Group Inc.) had a net loss for the period of $(263,249) and no revenue. Of this loss, the largest expense or expenditure was payments for the Company's license agreement with Advanced Interactive Inc. which represented $120,000. Office and general expenses were $50,530, marketing expenses were $39,429 and professional fees were $29,390. The basic net loss per share was $(0.02). The Company had current assets of $5,669 cash and $3,758 in prepaid expenses. Given the Company's monthly payment for its license agreement with Advanced Interactive Inc. (which is $20,000 per month at a minimum) the Company did not have enough working capital to meet its obligations for even one month. We have completed our testing of the SchoolWeb system in the 19 schools in British Columbia where it installed for testing. We have also completed initial distributorship agreements or understandings with a number of distributors. In the third quarter of the fiscal year ending December 2002, sales and revenues have commenced. Sales in the month of September, 2002 were approximately $40,923, resulting from installation of the SchoolWeb system (under the name "1nterlink") and installation of SchoolWeb in three high schools. We had a net loss for the third quarter of the fiscal year ending December 2002 of $145,836. We continue to try to develop client contacts and leads to secure future sales. The magnitude and size of future sales cannot, at this time (partly as a result of a lack of operating history) be accurately predicted. On August 10, 2002, we signed an agreement with AII (who we license the SchoolWeb system from) to settle $80,000 in arrears license payments for 228,571 shares of common stock. The August 10, 2002 agreement also provided that we only have to pay one-half of our monthly license payment. The remaining half of the payment can be accrued or settled in shares for debt issuances. This is important because, in the remainder of the calendar year 2002 alone, our monthly license payment is $20,000 so the right to accrue one-half of this amount each month leaves us less illiquid. We still do not enough current assets (cash) to operate even one month without further equity investment or revenues. Operating costs, particularly those costs associated with administrative overhead, are expected to increase in the final quarter of 2002 as a result of planned hirings in sales and marketing. To date, salaries have been very limited (Patrick Fitzsimmons was the only paid employee in the fiscal years ending December 31, 2000 and December 31, 2001 at a salary of $40,000 per year). The Offering. Shares of common stock of the Company will be sold on a continuous delayed basis under a shelf registration under Rule 415. A total of 8,443,028 shares of common stock are to be registered, as follows (maximum amounts): - 6,978,514 shares of common for selling shareholders. - 1,464,514 shares of common stock reserved for issuance, upon payment of the exercise price of $0.50 to exercise 1,464,514 share purchase warrants of the Company. Liquidity of Investment. Although the shares will be free of resale restrictions once qualified by this Prospectus, there exists no public market for the shares. Therefore, an investor may not be able to sell shares when he or she wishes. Therefore, an investor may consider his or her investment to be long-term. Risk Factors. WE MAY BE ABLE TO RESPOND TO CHANGES IN THE MARKET FOR THE SCHOOLWEB PRODUCT: We may be unable to anticipate changes in our target market or our customers' needs and our industry changes very quickly. WE DEPEND ON TWO MEMBERS OF OUR MANAGEMENT: We are particularly dependent on, and vulnerable to the departure of, our two Vice Presidents, Greg Protti and Patrick Fitzsimmons. Their departure could result in the loss of accounts or customers. They are our sole contacts with some customers and accounts and their relationships with customers and potential customers would be difficult if not impossible to replace. WE ARE STILL A DEVELOPMENT STAGE COMPANY: Although the Company (through its subsidiary) has been developing and testing its product at various sites for the previous two years, the Company has yet to generate significant revenue from its products. The Company expects that most of its revenues in the foreseeable future will be required to expand its sales force and pay its obligations to AII. The Company's payments on its software license with AII exceed its revenues for any month of operations to date except the most recent month, September 2002. BECAUSE WE HAVE HAD LITTLE SALES REVENUE, WE HAVE INCURRED OPERATING LOSSES: We have had no sales revenue to date and have a limited operating history. We have incurred significant operating losses, including a net loss of $(263,249) in Fiscal 2001. At December 31, 2001, we had an accumulated deficit during development stage of $(263,249). OUR COST OF ESTABLISHING A PRESENCE IN ANY MARKET FOR SOFTWARE IS HIGH AND CREDIBILITY IS DIFFICULT TO BUILD: We anticipate that we will incur substantial operating expenses in connection with marketing and distribution of our SchoolWeb System and expect these expenses to result in continuing losses until such time as we are able to achieve adequate revenue levels. There can be no assurance that we will be able to significantly increase revenues or achieve profitable operations. We may be unable to attract or retain customers. Failure to obtain additional capital, if needed, would have a material adverse effect on our operations. Changes in laws (especially laws relating to our trademarks or intellectual property) could hurt our business. One of the difficulties we have run into is the realization that new software or technology companies lack credibility with potential customers. People are not hesitant to buy software from Microsoft or other companies because they know they will be around for a number of years to offer after sales support to the software and system. Establishing credibility with customers may take time. WE DO NOT HAVE ENOUGH CURRENT ASSETS (CASH) TO OPERATE EVEN ONE MONTH WITHOUT FURTHER EQUITY INVESTMENT OR REVENUES: We do not have enough current assets (cash) to operate even one month without further equity investment or revenues. Because we make monthly payments under the terms of our License Agreement, if we are unable to generate significant revenues, our License Agreement with AII could be terminated if license payments are not made. WE COULD LOSE OUR RIGHTS TO SELL THE SCHOOLWEB SYSTEM: We are vulnerable to any loss of the license with which we license the SchoolWeb System from AII. This could happen if we are unable to make required payments under the license agreement with AII and the payments under this agreement exceed our revenues to date significantly. We are Particularly Vulnerable to Currency Fluctuations. We report our financial position and results of operations in US dollars in our financial statements. However, because a large portion of the Company's operations are in Canada (and near term sales revenues, if any, are likely to be primarily from Canada), we are exposed to foreign currency fluctuation and such fluctuations may materially affect the Company's financial position and results of operations. Payments under the software license agreement with AII, our largest single expenditure and cost, are made in US dollars and, as a result, this particular cost is not vulnerable to currency fluctuations. Recently, the Canadian dollar has appreciated against the US currency. However, if the Canadian dollar were to depreciate it is possible that revenues we believed would cover payments under the license agreement would not be adequate once converted to US currency. Our accounts are maintained in US dollars including our accounts in Canada. There is no Public Market for our Securities. There is presently no market for the shares of common stock being offered. There can be no assurance that an active trading market will develop or that purchasers of the shares will be able to resell their securities, even at a loss. The securities are not listed on any national exchange and are not posted for trading on any facility such as the NASD's OTCBB or the "pink sheets". It is unclear what the listing procedures and requirements for the proposed "BBX" exchange in the United States would be and, as a result, it is impossible to know whether or not the Company would be able to list on it. We do intend, in late 2002 and in 2003, to seek a listing on the NASD's OTCBB and later on the new BBX Exchange. Even if a market were to develop or we were to successfully seek to post for trading our securities on an exchange or a trading facility such as the NASD's OTCBB (which we are seeking to do), the market prices for the securities of technology companies have historically been highly volatile and, since 2000, have experienced (overall) a significant deflation. ITEM 4: USE OF PROCEEDS We will not receive proceeds from the sale of shares sold by selling shareholders. The price at which these selling shareholders will sell their shares cannot be practicably determined or estimated as there is no market for our securities. The only proceeds we will receive from the sale of shares under this prospectus relate to the funds which the Company will receive from exercise of warrants. The exercise of these warrants would result in proceeds to the Company of $732,257 (1,464,514 warrants outstanding at an exercise price of $0.50 per share) if 100% of the warrants are exercised, $549,193 if 75% of the warrants are exercised, $366,129 if 50% of the warrants are exercised and $183,064 if 25% of the warrants are exercised. The following table sets forth the use of proceeds from the exercise of the warrants: Use of Proceeds Maximum Offering (100% of warrants exercised for proceeds of $732,257) Amount Percent Transfer Agent Fee $ 1,200 0.16% Printing Costs $ 600 0.08% Legal Fees $ 6,000 0.8% Accounting Fees $ 2,000 0.27% Working Capital $722,457 98.67% Total $732,257 100.00% There can be no certainty that the Company will receive some, all or any of the maximum proceeds which would be realized from exercise of all outstanding warrants. In the event that less than the maximum proceeds are received from exercise of 100% of the warrants, the use of proceeds remains the same save and except that the amount allocated to working capital is reduced. The other costs are essentially "fixed". Management anticipates expending these funds for the purposes indicated above. To the extent that expenditures are less than projected, the resulting balances will be retained and used for general working capital purposes or allocated according to the discretion of the board of directors. Conversely, to the extent that such expenditures require the utilization of funds in excess of the amounts anticipated, supplemental amounts may be drawn from other sources, including, but not limited to, general working capital and/or external financing. The net proceeds of this offering that are not expended immediately may be deposited in interest or non-interest bearing accounts, or invested in government obligations, certificates of deposit, commercial paper, money market mutual funds, or similar investments. ITEM 5: DETERMINATION OF OFFERING PRICE There is no existing market for the securities of the Company and, as a result, it cannot be practicably determined what will be the offering price selling shareholders sell their securities for. The exercise price of $0.50 for the 1,464,514 share purchase warrants outstanding offered hereunder was determined by the Company and shareholders in negotiation. ITEM 6: DILUTION No dilution to existing shareholders will result from the offering to the public of common shares presently issued and outstanding. No increase or decrease in the net tangible book value per share will be attributed to the cash payments made by purchasers of these shares as the purchases will be made from individuals and not from the Company's treasury. There are 1,464,514 outstanding share purchase warrants exercisable for a period of two years from their date of issue at an exercise price of $0.50 per share purchase warrant. Each share purchase warrant is exercisable for one share of common stock. Warrant holders who exercise their outstanding share purchase warrants will experience dilution as follows (assuming exercise of all outstanding warrants): Net Tangible Book Value Per Share (excluding license) before the Distribution of Warrant Shares : $0.007 Net Tangible Book Value Per Share (excluding license) After Distribution of Warrant Shares $0.048 Increase Attributable to Warrant Holders After Distribution of Warrant Shares $0.041 Amount of dilution to Warrant Holders After Distribution of Warrant Shares $0.452 Percentage Dilution in Relation to issue price 90.4% ITEM 7: SELLING SECURITY HOLDERS Selling shareholders will be offering a total of 8,443,028 shares of common stock of the Company, as follows (in the chronological order of their original issuance as restricted shares). A number of the selling shareholders are affiliates of the Company (and are designated in the list as such). SHAREHOLDERS WITH COMMON SHARES PRESENTLY ISSUED AND OUTSTANDING:
C> Name of Amount Beneficially Amount Offered for Amount Benefically Percentage Selling Owned Prior to Selling Shareholder's Owned after Ownership after Shareholder Offering Account Offering Offering (1) Shaun Greffard 1,000 1,000 0 0% Donna Taylor 1,000 1,000 0 0% Anna Lush 1,000 1,000 0 0% Debra Lush 1,000 1,000 0 0% Janet Horbulyk 1,000 1,000 0 0% Masa Tamashiro 1,000 1,000 0 0% Ron Frier 1,000 1,000 0 0% Gerard Smith 1,000 1,000 0 0% Pat Martel 1,000 1,000 0 0% Lynne Martel 1,000 1,000 0 0% Gina Wakeham 1,000 1,000 0 0% Andy Martel 1,000 1,000 0 0% Jennifer Mitchell 1,000 1,000 0 0% Patrick Sipos 1,000 1,000 0 0% Corrine Fiesel 1,000 1,000 0 0% Richard Silas (2) 116,500 116,500 0 0% Christopher D. Farber 118,500 118,500 0 0% Streamline Investments Inc. (3) 2,551,000 847,000 1,704,000 11.05% Nahatlatch Capital Inc. (4) 2,550,000 847,000 1,703,000 11.05% Patrick Fitzsimmons (5) 1,001,000 333,000 668,000 4.98% Greg Protti (6) 501,000 133,000 368,000 2.39% Grant Farkes 500,000 133,000 367,000 2.38% Deborah Stockwell 500,000 133,000 367,000 2.38% United Equities Manage- Ment Corp. 1,000,000 333,000 667,000 4.33% Sheila Adams 250,000 250,000 0 0% Pamela Briskar 250,000 250,000 0 0% Tom Acheson 500,000 500,000 0 0% Karen Acheson 500,000 500,000 0 0% David Forsythe 10,000 10,000 0 0% Cynthia M. Eden 500,000 500,000 0 0% Brandon Douglas (9) 330,000 330,000 0 0% Martin Dearden (7) 50,000 50,000 0 0% Dennis Dearden (8) 50,000 50,000 0 0% Michael Jacobs 50,000 50,000 0 0% Janette Kryzankowsi 15,000 15,000 0 0% Robert & Carolyn White 100,000 100,000 0 0% Michael Holden 150,000 150,000 0 0% Glenn Burley 25,000 25,000 0 0% Thomas Anderton 100,000 100,000 0 0% Alan Gainsford 60,000 60,000 0 0% Denis Ouellet 40,000 40,000 0 0% Rainbow Creek Ranch Ltd. 25,000 25,000 0 0% Catherine Edwards 25,000 25,000 0 0% John F. Marino 25,000 25,000 0 0% San Juan Capital Corp. 50,000 50,000 0 0% Jan Guenther 25,000 25,000 0 0% Charles W. Gay 25,000 25,000 0 0% Karim Suleman 25,000 25,000 0 0% Karima Meraly 25,000 25,000 0 0% Murray Smith 25,000 25,000 0 0% 563663 BC Ltd. 100,000 100,000 0 0% Streamline Investment Inc. (3) 60,000 60,000 0 0% Wes Huffman 30,000 30,000 0 0% John Day 60,000 60,000 0 0% Jacquelyn Scott 10,000 10,000 0 0% Romeo Zoldan 15,000 15,000 0 0% John F. Marino 10,000 10,000 0 0% Charles W. Gay 75,000 75,000 0 0% George S. Bailey 10,000 10,000 0 0% Donald Castello 30,000 30,000 0 0% Romeo Zoldan 15,000 15,000 0 0% Clayton Underwood 5,000 5,000 0 0% Jim Pendree 30,000 30,000 0 0% John F. Marino 17,500 17,500 0 0% Jack Baumstark 5,585 5,585 0 0% Florian Baumstark 14,286 14,286 0 0% Joan Woodrow 10,000 10,000 0 0% Robert Forsyth 10,000 10,000 0 0% Debra Gelowitz 9,143 9,143 0 0% Jenny Grills 10,000 10,000 0 0% Denis Ouellet 10,000 10,000 0 0% Rainbow Creek Ranch Ltd. 10,000 10,000 0 0% Wes Huffman 15,000 15,000 0 0% Charles W. Gay 100,000 100,000 0 0% Catherine Edwards 30,000 30,000 0 0% Ken Noble 30,000 30,000 0 0% Jim Pendree 18,000 18,000 0 0% SUBTOTAL: 12,822,514 6,978,514 5,844,000 36.42%
(1) Assuming exercise of all outstanding warrants (2) Richard Silas is a former director and President of the Company. He resigned from both offices on September 10, 2001. (3) Streamline Investments Inc. is a company wholly owned by Michael Dearden, Director and President of the Company. (4) Nahatlatch Capital Inc. is a company wholly owned by Griffin Jones, Director, Secretary and Treasurer of the Company. (5) Patrick Fitzsimmons is a director and Vice President of the Company. (6) Greg Protti is a director of the Company. (7) Martin Dearden is the brother of Michael Dearden, Director and President of the Company. He is of legal age and does not reside with Michael Dearden. (8) Dennis Dearden is the father of Michael Dearden, Director and President of the Company. He does not reside with Michael Dearden. (9) Brandon Douglas is a director of the Company. COMMON SHARES RESERVED FOR ISSUANCE UPON EXERCISE OF SHARE PURCHASE WARRANTS:
Name of Amount Beneficially Amount Offered for Amount Benefically Percentage Selling Owned Prior to Selling Shareholder's Owned after Ownership after Shareholder Offering Account Offering Offering (1) Robert & Carolyn White 100,000 100,000 0 0% Michael Holden 150,000 150,000 0 0% Glenn Burley 25,000 25,000 0 0% Thomas Anderton 100,000 100,000 0 0% Alan Gainsford 60,000 60,000 0 0% Denis Ouellet 40,000 40,000 0 0% Rainbow Creek Ranch Ltd. 25,000 25,000 0 0% Catherine Edwards 25,000 25,000 0 0% John F. Marino 25,000 25,000 0 0% San Juan Capital Corp. 50,000 50,000 0 0% Jan Guenther 25,000 25,000 0 0% Charles W. Gay 25,000 25,000 0 0% Karim Suleman 25,000 25,000 0 0% Karima Meraly 25,000 25,000 0 0% Murray Smith 25,000 25,000 0 0% 563663 BC Ltd. 100,000 100,000 0 0% Streamline Investment Inc. (2) 60,000 60,000 0 0% Wes Huffman 30,000 30,000 0 0% John Day 60,000 60,000 0 0% Jacquelyn Scott 10,000 10,000 0 0% Romeo Zoldan 15,000 15,000 0 0% John F. Marino 10,000 10,000 0 0% Charles W. Gay 75,000 75,000 0 0% George S. Bailey 10,000 10,000 0 0% Donald Castello 30,000 30,000 0 0% Romeo Zoldan 15,000 15,000 0 0% Clayton Underwood 5,000 5,000 0 0% Jim Pendree 30,000 30,000 0 0% John F. Marino 17,500 17,500 0 0% Jack Baumstark 5,585 5,585 0 0% Florian Baumstark 14,286 14,286 0 0% Joan Woodrow 10,000 10,000 0 0% Robert Forsyth 10,000 10,000 0 0% Debra Gelowitz 9,143 9,143 0 0% Jenny Grills 10,000 10,000 0 0% Denis Ouellet 10,000 10,000 0 0% Rainbow Creek Ranch Ltd. 10,000 10,000 0 0% Wes Huffman 15,000 15,000 0 0% Charles W. Gay 100,000 100,000 0 0% Catherine Edwards 30,000 30,000 0 0% Ken Noble 30,000 30,000 0 0% Jim Pendree 18,000 18,000 0 0% SUBTOTAL: 1,464,514 1,464,514 0 0% TOTAL OF SUBTOTALS ABOVE 14,287,028 8,443,028 5,844,000 36.42%
(1) included with the percentage calculation is the assumed exercise of 1,464,514 common shares underlying share purchase warrants which are exercisable for a period of two years from their date of issue. (2) Streamline Investment Inc. is a company wholly owned by Michael Dearden, the Company's President and one of its directors. The Company believes that none of the selling shareholders are broker dealers or affiliates of broker dealers. ITEM 8: PLAN OF DISTRIBUTION Registration under this Offering. A total of 8,443,028 shares of common stock are to be registered, as follows (maximum amounts): - 6,978,514 common shares for selling shareholders, as set forth above. - 1,464,514 common shares from selling shareholders said shares to be obtained from exercise of outstanding warrants No commissions or other fees will be paid, directly or indirectly, by the Company, or any of its principals, to any person or firm in connection with solicitation of sales of the shares. The selling shareholders and any of their pledges, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock covered by this prospectus on any stock exchange, market or trading facility on which the shares are then traded or in private transactions at a price of $0.35 per share until our shares are quoted on the OTCBB. Thereafter, non-affiliate selling shareholders may sell at prevailing market prices or privately negotiated prices. Affiliate selling shareholders must, unless an amended registration statement disclosing a different selling price is declared effective by the SEC, continue to sell at a price of $0.35. We will pay the expense incurred to register the shares being offered by the selling stockholders for resale but the selling shareholders will pay any underwriting discounts and brokerage commissions associated with these sales. As disclosed in Use of Proceeds, a total of $9,800 in costs are associated with completing this offering. There can be no assurance that we will have the funds necessary to complete this offering. (a) ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; (b) block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transction; (c) purchases by a broker-dealer as principal and resale by the broker-dealer for its account; (d) privately negotiated transactions; and (e) a combination of such methods of sale. In addition, any shares that qualify for sale under Rule 144 may be sold under Rule 144 rather than through this prospectus. In offering the shares covered by this prospectus, the selling shareholders and any broker-dealers who execute sales for the selling shareholders may be deemed to be an "underwriter" within the meaning of the Securities Act in connection with such sales. Any profits realized by the selling shareholders and the compensation of any broker-dealer may be deemed to be underwriting discounts and commissions. Selling shareholders may sell their shares in all 50 states in the US. Each selling shareholder and any other person participating in a distribution of securities will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M which may restrict certain activities of, and limit the timing of purchases and sales of securities by, selling shareholders and other persons participating in a distribution of securities. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of the foregoing my affect the marketability of the securities offered hereby. Any securities covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under that rule rather than pursuant to this prospectus. There can be no assurance that the selling shareholders will sell any or all of the shares of common stock offered by them hereunder. ITEM 9: LEGAL PROCEEDINGS Neither Alternet nor its subsidiary, AI Systems Group Inc., are party to any litigation and neither have knowledge of any threatened or pending litigation against them. ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,AND CONTROL PERSONS The following discussion contains disclosure concerning our directors, officers and control persons. There are no persons which have acted as a promoter, controlling person, or significant employee of the Company other than as disclosed below. Name Position Term of Office*1*2 Michael Dearden President and Director Expires May 10, 2003 Griffin Jones Secretary, Treasurer and Director Expires May 10, 2003 Patrick Fitzsimmons Director, Vice President Expires May 10, 2003 Greg Protti Director, Vice President Expires May 10, 2003 Karim Lakhani Director Expires May 10, 2003 Brandon Douglas Director Expires May 10, 2003 1. Directors, whether appointed at a meeting of shareholders or by the remaining directors, are appointed until the next annual meeting of shareholders. As Alternet had its last annual meeting of shareholders on May 10, 2002 all of the directors terms expired on that date and they were reappointed by the shareholders until the next annual meeting of shareholders. The expiry dates are estimates of when the next meeting will be held. 2. The President, Secretary and Treasurer do not have a set term of office. They serve at the pleasure of the Directors and can be removed at any time by the Directors. Michael Dearden, President and Director Michael Dearden, age 47. Mr. Dearden has over 25 years experience in sales and marketing, and for the past 15 years has focused specifically on corporate marketing and venture capital financing. Prior to joining Alternet in 2000, Mr. Dearden was, for five years, a director of Rolland Virtual Business Systems Limited (formerly Americ Resources Corp.), where he helped to facilitate the merger of Rolland Virtual Business Systems Limited and Americ Resources Corp. and helped to facilitate a concurrent financing of $1,800,000. Rolland Virtual Business Systems Limited is a Montreal, Canada, based E-commerce software developer with approximately 35 employees. Griffin Jones, Secretary, Treasurer and Director Griffin Jones, age 46. Mr. Jones has been self-employed for approximately 15 years as a management consultant. Mr. Jones brings to the Company experience in financial management, and experience in providing management to companies in a number of industry areas including high technology, industrial products and mining. Mr. Jones has worked in marketing management, finance and corporate relations. Patrick Fitzsimmons, Director and VP Sales Pat Fitzsimmons, age 48. Mr. Fitzsimmons joined Alternet in 2001 and brings to the company his technology sales and management experience gained from a 22-year career in the high-technology marketplace. From 1996 to 2001, was employed as Manager, Major Accounts, AT&T Canada, Vancouver B.C., Canada. Greg Protti, Director and VP Marketing Greg Protti, age 44. Mr. Protti joined Alternet in 2001 and has over 17 years experience in the high technology sector. He has held sales and management positions in all segments of the high tech sector and was Western Regional Sales Manager for Merisel Canada (a NASDAQ listed software distribution company founded in 1990) from 1996 to 2001. He was responsible for running a $200 million sales revenue territory for Merisel in Western Canada. Karim Lakhani, Director Karim Lakhani, age 42. He holds a Bachelor of Applied Science in Electrical Engineering from The University of British Columbia. As President of Orion Technologies Inc. from 1996 to 1997 he directed the development secure network software (was involved in the design of software and hardware for securely conducting electronic commerce transactions over the internet) for 79 banks in 33 countries in the Asia Pacific region. Mr. Lakhani is a co-founder of AII (Advanced Interactive Inc.) and is its President. He has been an officer of AII or its subsidiary from 1998 to the present. Brandon Douglas, Director Brandon Douglas, age 48. Mr. Douglas has been an associate lawyer with the Law Offices of Vernis & Bowling of Fort Lauderdale, P.A. from 1997 to the present. Prior to that, Mr. Douglas was a sole practitioner having operated the Law Office of Brandon J. Douglas from 1992 to 1997. Each officer and director generally serves until the next annual meeting of shareholders or until such time as he or she resigns. All of the officers and directors devote themselves full-time to the Company except for Karim Lakhani and Brandon Douglas whose duties and time are limited to those typically expected of outside directors and non-officer directors on a company's board of directors. The Company does not have standing nominating or compensation committees of the board of directors, or committees performing similar functions. ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of shares of the Company's common stock as of the date of this registration statement (16,051,085 shares issued and outstanding) by (i) all shareholders known to the Company to be beneficial owners of more than 5% of the outstanding common stock; and (ii) all directors and executive officers of the Company, and as a group (each person has sole voting power and sole dispositive power as to all of the shares shown as beneficially owned by them):
Name and Address Position Amount of Stock Percentage of Beneficially Class Owned Streamline Investments, Inc. (2) Director, President 2,611,000 16.27% 711 South Carson St. Carson City, Nevada89701 Nahatlatch Capital Corp. (3) Director, Secretary, Treasurer 2,550,000 15.89% 711 South Carson St. Carson City, Nevada89701 Patrick Fitzsimmons Director, VP Sales 1,001,000 6.24% 1406-151 E. Keith Rd. N. Vancouver, BCV7L 4M3 Greg Protti Director, VP Business 501,000 3.12% 6405 Holly Park Dr. Development Ladner, BC V4K 4W6 Karim Lakhani Director *1 0.00% Advanced Interactive Inc. 3,228,571 20.11% 718 - 1350 East Flamingo Road Las Vegas, NV 89119 Directors, Officers and 9,891,571 61.63% 5% shareholders in total (6 Persons)
1. Karim Lakhani does not personally own any common stock. However, as well as being a director of Alternet, he is a Director and President of Advanced Interactive Inc. and is a director of its Canadian subsidiary, Advanced Interactive Canada Inc. These two companies hold a total of 20.11% of the issued and outstanding stock of the Company. 2. Streamline Investments, Inc. is a company wholly owned by the Company's President and Director, Michael Dearden. Streamline Investments, Inc. also owns 60,000 of our outstanding share purchase warrants. The warrants are exercisable at $0.50 per warrant for a period until February 28, 2004. 3. Nahatlatch Capital Corp. is a company wholly owned by the Company's Treasurer, Secretary and Director, Griffin Jones. 4. Advanced Interactive Inc. ("AII") has a common director with the Company, Karim Lakhani (the President and a Director of AII). Catherine Edwards, who is listed as a selling shareholder, also is a director. 5. AII. The day to day business and affair of AII are controlled by its President, Karim Lakhani and overseen by its board of directors. It is likely that voting and disposition of AII's shares of Alternet Systems, Inc. would also be overseen by Mr. Lakhani and the board of directors of AII. Mr. Lakhani holds 24.95% of the issued and outstanding shares of AII and no other shareholder owns more than 10%. ITEM 12: DESCRIPTION OF SECURITIES General Description. The securities being offered are shares of common stock. The authorized capital of the Company consists of 100,000,000 shares of common stock, $0.00001 par value per share. As of October 4, 2002, 16,051,085 shares of common stock were issued and outstanding. Each outstanding share of the common stock entitles the holder to one vote, either in person or by proxy, on all matters that may be voted upon by the owners thereof at meetings of the shareholders. The holders of the common stock (i) have equal rights to dividends, when, and if, declared by our the Board of Directors; (ii) are entitled to share ratably in all of our assets available for distribution to the holders of the common stock upon liquidation, dissolution or winding up of our affairs; and (iii) do not have preemptive subscription or conversion rights. There are no restrictions, in the Articles or By-Laws of the Company, on the rights of holders of common stock to transfer or sell their shares of common stock. Non-Cumulative Voting. The holders of shares of common stock of the Company do not have cumulative voting rights. As a result, the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of the Company's directors. Dividends. The Company does not currently intend to pay cash dividends and has not in the past paid dividends. The Company's Articles and By-Laws empower the directors to make distributions of dividends to the Company's shareholders when the Company's board of directors deems such distributions appropriate. Because the Company does not intend to make cash distributions (its business plan is to use available funds, for the near future, for expansion of its operations, particularly its marketing and distribution teams), potential shareholders would need to sell their shares to realize a short-term return on their investment. There can be no assurances of the projected values of the shares, nor can there be any guarantees of the success of the Company. There is presently no public market for shares of the Company nor are its securities listed on any exchange. A distribution of dividends will be made only when, in the judgment of the Company's board of directors, it is in the best interest of the Company's shareholders to do so. Possible Anti-Takeover Effects of Authorized but Unissued Stock. The Company's authorized but unissued capital stock, as of October 4, 2002, consists of 83,948,915 shares of common stock. One effect of the existence of authorized but unissued capital stock may be to enable the board of directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest, or otherwise, and thereby to protect the continuity of the Company's management. If, in the due exercise of its fiduciary obligations, for example, the board of directors were to determine that a takeover proposal was not in the Company's best interests, such shares could be issued by the board of directors without shareholder approval in one or more private placements or other transactions that might prevent, or render more difficult or costly, completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent shareholder or shareholder group, by creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise. Outstanding Warrants. There are 1,464,514 outstanding share purchase warrants of the Company. Each of these share purchase warrants entitles the owner, upon payment of the $0.50 exercise price, to one share of common stock of the Company. The outstanding share purchase warrants are each exercisable for one share of common stock for a period of two years from their date of issuance. (See "Recent Sales of Unregistered Securities" for expiry dates of Share Purchase Warrants). Transfer Agent. The Company has engaged the services of Transfer Online, Inc., an Oregon company, as its transfer agent and registrar. The address for Transfer Online, Inc. is Suite 300 - 227 SW Pine Street, Portland, Oregon 97204 Tel: (503) 227-2950 / Fax: (503) 227-6874. ITEM 13: INTEREST OF NAMED EXPERTS AND COUNSEL No named expert or counsel was hired on a contingent basis, will receive a direct or indirect interest in the small business issuer, or was a promoter, underwriter, voting trustee, director, officer, or employee of the Company. ITEM 14: DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES The Articles and Bylaws of the Company do not provide for indemnification of the directors and officers of the Company for acts taken in their capacity as directors or officers. The Articles and Bylaws of the Company do not prohibit arrangement by the Company of indemnification insurance or an agreement by the Company to indemnify directors and officers against loss or damage from such acts. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to any future amendments to the Company's Articles or Bylaws, the Company has been advised that in the opinion of the US Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforcable. ITEM 15: ORGANIZATION WITHIN LAST FIVE YEARS The following are the promoters (including present and past directors, officers and affiliates) of the Company listed with any material transactions the Company has had with them: Stephen Stanley: Mr. Stanley was a director of the Company from inception to April 25, 2001. Mr. Stanley purchased 1,000 shares of the common stock of the Company on June 26, 2000 for total consideration of $1.00. Mr. Stanley lent a total of $945 to the Company which amount is still outstanding as a shareholder's loan. This loan was assigned to Mr. Richard Silas, at the time the sole director of the Company, on April 25, 2001. Drew Martell: Mr. Martell was a director of the Company from inception to April 25, 2001. Mr. Martell purchased 1,000 shares of the common stock of the Company (through a company of which he owned 100% of the issued and outstanding shares, Ramm Capital Corp.) on June 26, 2000 for total consideration of $1.00. Mr. Martell lent a total of $945 to the Company which amount is still outstanding as a shareholder's loan. This loan was assigned to Mr. Richard Silas, at the time the sole director of the Company, on April 25, 2001. Terry Wells: Mr. Wells was a director of the Company from inception to April 25, 2001. Mr. Wells purchased 1,000 shares of the common stock of the Company on June 26, 2000 for total consideration of $1.00. Mr. Wells lent a total of $945 to the Company which amount is still outstanding as a shareholders' loan. This loan was assigned to Mr. Richard Silas, at the time the sole director of the Company, on April 25, 2001. Richard Silas: Richard Silas was a director and officer of the Company from April 25, 2001 to September 10, 2001. Mr. Silas purchased 1,000 common shares from Drew Martell on April 25, 2001 and 500 common shares from Terry Wells on April 25, 2001 for $1.00 and $0.50 respectively. On May 18, 2001 he purchased 115,000 common shares from the Company for $1.15. On May 31, 2001 he purchased 50,000 common shares from the Company for $0.50. Patrick Fitzsimmons: Mr. Fitzsimmons is a director of the Company and has been since September 10, 2001. Mr. Fitzsimmmons was issued 1,001,000 common shares of the Company on July 2, 2001. Mr. Fitzsimmons receives a salary from the Company which totalled $32,607 in the year ended December 31, 2001 and which totalled $26,767 in the first nine months of financial year ending December 31, 2002 (January 1 - September 30, 2002). Mr. Fitzsimmons owed $2,498 to the Company as of June 30, 2002, an amount which he repaid on August 26, 2002 to comply with the new Sarbanes-Oxley Act of 2002 prohibitions on loans to directors and officers. Michael Dearden: Mr. Dearden is a director and officer of the Company and has been since September 10, 2001. Mr. Dearden owns a company called Streamline Investments, Inc. which has received a total of $16,696 in consulting fees from the Company to date in financial year ending December 31, 2002. Mr. Dearden has purchased a total of 2,001,000 shares of common stock from the Company as part of the closing of the Share Purchase Agreement. He also purchased, on May 17, 2001, 500,000 shares of the Company for total consideration of $0.50. To date, Mr. Dearden has loaned to the Company a total of $2,865 which amount is still outstanding. On February 28, 2002, Mr. Dearden purchased (through his company, Streamline Investments, Inc.) a total of 60,000 units (each unit comprised of one share and one share purchase warrant exercisable until February 28, 2004 for an exercise price of $0.50) for total consideration of $12,000. On June 1, 2001, he purchased a total of 50,000 shares of common stock from a shareholder of the Company, Christopher D. Farber, for total consideration of $7,500. Griffin Jones: Mr. Jones is a director and officer of the Company and has been since September 10, 2001. Mr. Jones owns a company called Nahatlatch Capital Inc. which received a total of $28,623 in consulting fees from the Company in the first nine months of the financial year ending December 31, 2002. Mr. Jones purchased 2,000,000 shares of common stock of the Company as part of the closing of the Share Purchase Agreement on July 2, 2001. He also purchased, on May 17, 2001, 500,000 shares of the Company for total consideration of $0.50. To date, Mr. Jones has loaned to the Company a total of $6,128 which amount is still outstanding. On June 1, 2001, he purchased a total of 50,000 shares of common stock from a director of the Company (at the time), Richard Silas, for total consideration of $7,500. Karim Lakhani: Mr. Lakhani is a director of the Company and has been since September 10, 2001. Mr. Lakhani is also a director of Advanced Interactive Inc., which holds 3,000,000 shares of common stock of the Company. Brandon Douglas: Mr. Douglas is a director of the Company and has been since November 16, 2001. On July 2, 2001 Mr. Douglas purchased 330,000 shares of common stock of the Company as part of the closing of the Share Purchase Agreement. Greg Protti: Mr. Protti is a director of the Company and has been since September 10, 2001. On July 2, 2001 Mr. Protti purchased a total of 501,000 shares of common stock of the Company as part of the closing of the Share Purchase Agreement. Mr. Protti has received $13,392 to date in the financial year ending December 31, 2002 as salary. ITEM 16: DESCRIPTION OF BUSINESS Company History. We were incorporated in the State of Nevada on June 26, 2000, under the name of "North Pacific Capital Corp.". We sought approval, at our meeting of shareholders to held on December 20, 2001, shareholder approval to change our name to "SchoolWeb Systems Inc." This name change was effected on April 11, 2002 when filed with the Secretary of State in Nevada. On May 10, 2002 the Company sought and received shareholder approval to a name change to "Alternet Systems, Inc." and this name change was effected on May 14, 2002. Our wholly owned subsidiary, AI Systems Group Inc., was incorporated in the State of Nevada on October 13, 2000 under the name of Alternet Systems, Inc. and subsequently changed its name, on March 6, 2001, to "SchoolWeb Systems Inc.". On July 3, 2001 SchoolWeb's name was changed to "SchoolWeb Holdings Inc." and on July 1, 2002 changed its name for the final time to its present name, AI Systems Group Inc. North Pacific Capital Corp. was a blank check company until it merged with AI Systems Group Inc. Its management (comprised of Drew Martell, Stephen Stanley and Terry Wells) did not, and have not, received any compensation, including any compensation in the form of finder's fees, commissions or incentive stock options, from the company. On January 1, 2001, AI Systems Group entered into a software license agreement to license all of the broadcast caching server technology developed by Advanced Interactive Inc., including the SchoolWeb hardware and software system. The "SchoolWeb" name in only one name under which this technology is marketed by us. We also market the technology under the names "HealthWeb" and "1nterlink". The SchoolWeb hardware system and software were developed as a result of Advanced Interactive Inc.'s subsidiary, Advanced Interactive Canada Inc., being awarded a $650,000 contract in 1999 to provide a low cost, distance-learning Internet access system for an initial pilot of 20 British Columbia, Canada schools. The contract was awarded to Advanced Interactive Canada Inc. by the Government of British Columbia. Our registered office in the State of Nevada is 711 South Carson Street Suite 4, Carson City, Nevada 89701. Its principal executive offices are located in Canada at Suite 280 - 815 West Hastings Street, Vancouver British Columbia, Canada V6C 1B4. We became a reporting issuer under the Securities Exchange Act of 1934 on November 6, 2000. General. The consideration exchanged pursuant to the Share Exchange Agreement was negotiated between the shareholders of AI Systems Group Inc. and the management of Alternet. In evaluating AI Systems Group Inc. as a possible acquisition candidate, management used criteria such as management's estimates of the value of the assets of AI Systems Group Inc. (particularly the License Agreement), the anticipated future operations of AI Systems Group Inc., material contracts, quality of management and current operations. The primary asset of Alternet (through its subsidiary, AI Systems Group Inc.) is the License Agreement between AI Systems Group Inc., Advanced Interactive Inc. and Advanced Interactive Canada Inc. (collectviely, "AII") dated January 1, 2001. AII had developed proprietary hardware systems and software known primarily as the "SchoolWeb System" for caching Internet and multimedia files on special servers at schools, homes, businesses or other locations AI Systems Group wished to acquire the rights to distribute, market, sell and license the SchoolWeb System in the United States and Canada. The License Agreement grants AI Systems Group, for a term of five (5) years renewable for an additional five (5) years, the exclusive right to distribute, market, sell and sub-license broadcast caching server software developed by AII (the SchoolWeb System) in the US and Canada for educational related purposes and grants AI Systems Group Inc., for a period of five (5) years renewable for an additional five (5) years, the non-exclusive worldwide right to distribute, market, sell and license the same products. Under the terms of the License Agreement, AI Systems Group Inc. must pay to Advanced Interactive Inc. the sum of $10,000 per month in year one, $20,000 per month in year two and increased payments in subsequent years. Advanced Interactive Inc. also receives a royalty of 40% on revenue realized from AI Systems Group's use of the Licensed Technology. Advanced Interactive Inc. was issued a total of 3,000,000 shares of common stock of AI Systems Group Inc. under the terms of the License Agreement, the Share Exchange Agreement, and their amendments. In March of 2002, AII and Hewlett Packard (Canada), in negotiations for which Alternet was present and involved, entered into an agreement whereby AII agreed that all sales of its caching server software would be "bundled" (would include) Hewlett Packard hardware. In exchange for this promise, Hewlett Packard (Canada) agreed to make efforts to distribute the SchoolWeb System. No minimum sales were imposed under the terms of this agreement and the agreement can be terminated with notice. Because AII had licensed the caching server software to AI Systems Group Inc. (as the SchoolWeb System), Alternet's consent to this agreement was required. Alternet consented believing that, even though there were no guaranteed sales volumes, Hewlett Packard (Canada)'s established distribution system could potentially generate significant sales volumes. We simply don't have the established relationships or distribution capabilities of a company like Hewlett Packard (Canada). On August 10, 2002, we agreed with AII to amend the terms of the License Agreement to provide that, in any given month, we could accrue up to one-half of the amount due to AII under the License Agreement. This is expected to significantly decrease our monthly cash flow needs. For example, in the remaining months of 2002, instead of having to pay $20,000 per month to AII we can pay $10,000 and accrue the remainder for the term of the License Agreement. When we signed the August 10, 2002 amendment, we owed AII $80,000. We agreed with AII to settle this debt by issuing to AII 228,571 shares of common stock. Share Purchase Agreement with AI Systems Group Inc. This is the agreement by which we acquired our subsidiary, AI Systems Group Inc., and began to pursue its business as our own. Under an Agreement (the "Share Exchange Agreement") dated as of July 2, 2001, as amended September 10, 2001 between the shareholders of AI Systems Group Inc. and Alternet Systems Inc. (at that time named North Pacific Capital Corp.), all of the 12,343,000 outstanding shares of common stock of AI Systems Group Inc. were exchanged for 12,343,000 shares of common stock of the Company, in a transaction in which the Company was the surviving corporation. The 12,343,000 shares of common stock (of which 3,000,000 are held by AII) represented approximately 86% of the issued and outstanding shares of common stock as of September 30, 2001, the end of the quarter in which they were issued. The Share Exchange Agreement was adopted by the unanimous consent of the Board of Directors of AI Systems Group on July 2, 2001 and approved by the unanimous consent (evidenced by their signatures on the Share Exchange Agreement) of the shareholders of AI Systems Group. The Share Exchange Agreement was adopted by the unanimous consent of the Board of Directors of Alternet on July 2, 2001. The closing of the Share Exchange Agreement occurred on September 10, 2001 with the completion of stock issuances to Advanced Interactive Inc. under the terms of the Settlement Agreement. As a result of this closing, AII had a total of 3,000,000 (held 1,500,000 by Advanced Interactive Inc. and 1,500,000 by Advanced Interactive Canada Inc.) shares of common stock of the Company. As a result of this closing, Mr. Michael Dearden and Mr. Griffin Jones, who were concurrently appointed as Directors, acquired 17.85% and 17.84% of the issued and outstanding shares of common stock of the Company respectively. The SchoolWeb System: Each basic SchoolWeb "system" or software / hardware package is comprised of the SchoolWeb Librarian software, Linux Operating System, a network server, redundant file system, software configuration, uninterruptible power supply, satellite or cable port, SchoolWeb user license, 24 hour technical support (provided by AII through the License Agreement), On-site installation and training (provided by resellers and distributors), system maintenance and 5X9 on-site warranty. This is how it works: 1 A student makes a request for an Internet website. 2 The SchoolWeb server at the school first searches its memory to determine if the site was recently requested and cached (stored) in the computer memory. 3 If the website is present in the computer memory, the information is delivered at LAN speed (usually 100 megabits per second) to the student. 4 If the file is not available in the server cache, the SchoolWeb server goes to the Internet (via the school's telephone line link to the SchoolWeb Network Center). 5 The SchoolWeb Network Center accesses the Internet and downloads the entire website via satellite to the local SchoolWeb server. 6 All subsequent requests for this site are now available at high speed (100Mb/sec) from the local SchoolWeb server. Value added services offered by the SchoolWeb system include: - - fast downloading of large Internet sites for each student - - pre-programmed downloading of teacher-requested Internet sites e-mail and web site hosting for each student - - streaming audiovisual for 50+ computer stations - - Internet computer games (recreational users do not affect Internet access speed) - - Content control and the ability to screen viewed sites Each school's SchoolWeb system includes a network server with large storage capability, redundant file systems, uninterruptible power supply and a 36" satellite dish. SchoolWeb utilizes a Linux operating system that includes e-mail, streaming multimedia (video, audio, animation, text) and caching of entire websites. The SchoolWeb system does not produce content. The SchoolWeb system sends digital data via satellite, fixed dedicated telephone data line or cable TV connection. The choice of connection is determined by client situation or available service in an area. SchoolWeb can be managed and monitored by teachers at each school using SchoolWeb Management Software. This client interface provides flexibility for teachers who, for teaching purposes, wish to pre- request websites the previous day, or minutes before the class commences. The SchoolWeb network's software and hardware performance is monitored remotely 24 hours/day by SchoolWeb support personnel (or rather by AII support personnel under the terms of the License Agreement). Although SchoolWeb was originally developed for rural schools that do not have high speed Internet access, urban schools can also benefit from the SchoolWeb system. The SchoolWeb system design is the type of infrastructure that is required to solve the problem of congestion. The SchoolWeb system was originally developed with funding from the British Columbia Ministry of Education together with the Canadian federal government to undertake research, development and pilot testing of the SchoolWeb system. In British Columbia, Canada where the first SchoolWeb systems were installed 19 SchoolWeb systems were installed on a 12 to 18 month test basis. This was, from start to finish, approximately a two year test program which ended in March 2002. Because SchoolWeb is a new technology, acceptance of the SchoolWeb System (the Company believes) must be preceded by a test period of placing the SchoolWeb server in the school for as long as a year to build comfort with the system and generate (after the test period has been completed) orders and revenue. We completed testing of the SchoolWeb System in May and June of this year and in September of this year realized revenues of approximately $38,000 from sales. The Company, when it sells the SchoolWeb system to First Nations (native or aboriginal) schools or communities, markets the SchoolWeb Systems as "1Nterlink" and "First Nations 1Nterlink". We have considered marketing the SchoolWeb system as "HealthWeb" to hospitals and health institutions but have not yet commenced such marketing or studied the possible market. How the SchoolWeb System is to be sold: The business model for sale of the SchoolWeb System is essentially as follows. AII, the original developer of the SchoolWeb software, has licensed the software to us. We pay them a monthly royalty for this software and for technical support (eg. A help desk and product research and development). We take the software and develop a marketable product (create marketing and sales materials and brochures, give the software the name "SchoolWeb" or First Nations 1Nterlink). We then make contact with potential resellers and distributors (eg. Hewlett Packard or others) to secure sales through their distribution channels. We also make contact with end user customers ourselves sometimes to secure sales. Resellers and distributors are the people who, for the most part, contact customers and, with our user manuals and sales materials, make the sale. Once a sale is made, local installers actually install the software and the hardware which the end user customer has purchased. Depending on the individual customer's needs, the hardware can be leased (eg. from Hewlett Packard (Canada)) or purchased outright. The software is sold immediately with our Company agreeing to provide user support (through AII) to the reseller's customers. The business model for our Company is very typical for companies acting as channel distribution companies. In Alternet's case, the approach is two tiered: you have a host company (through the subsidiary, AI Systems Group Inc.) and a set of resellers and agents. The idea is that AI Systems Group Inc. recruits and trains the resellers and agents and they become the direct contact with the end customers for the product. AI Systems Group Inc. also develops the user manuals and marketing materials that these resellers and agents use. In our case, there is an additional step: AII (which originally developed the SchoolWeb product) performs product development and support functions for us as well. Product Pricing The SchoolWeb System includes an Hewlett Packard Server, SchoolWeb Librarian software, a SchoolWeb license, Linux Operating System, software configuration, telephone technical support, automatic backup, 24 hour remote system monitoring and uninterruptible power supply. For an elementary school, the package cost is $395 per month for 36 months. For a middle school, the package cost is $495 per month for 36 months. For a secondary school, the package costs is $595 per month for 36 months. Prices will vary with the number of students to be served at each school, difficulty of installation, remoteness from other communities or installations and other factors (number of sites, particular requests from the customer). In the event that a customer wishes to make an "up front" or immediate full payment for the SchoolWeb System such payment is available. For an elementary school, the total payment would be $12,850. For a middle school, the total payment would be $15,450. For a secondary school, the total payment would be $18,200. The system hardware, the Hewlett Packard server, is leased from Hewlett Packard and becomes the property of the school after the completion of the 36 months of lease payments or immediately if payment is made "up front".. Status of Product Development and Business Development: We do not anticipate incurring any significant expenditures on research and development for the next 12 months. AII is responsible for the updating and revision of the SchoolWeb software under the terms of the License Agreement. We do not perform product development or research ourselves. This function is performed by AII which, under the terms of the License Agreement, is responsible for developing the SchoolWeb software and improving it to meet customers' needs. Our product development (research and development) expenditures are the amounts which we pay to AII under the terms of the License Agreement. For fiscal year 2002 (ending December 31, 2002) total product development expenditures will be $240,000 ($20,000 per month under the terms of the License Agreement). For fiscal year 2003 (ending December 31, 2003) this increases to $336,000 ($28,000 per month). We have the right to accrue (under an agreement with AII dated August 10, 2002), for the term of the License Agreement, up to half of the amount due each month under its terms. We do not anticipate any acquisitions or business combinations with other business entities in the near future. Our time and efforts are consumed by developing the SchoolWeb business, as are our limited financial resources. Markets The market for the SchoolWeb system and software can best be characterized as the market for "Internet access and e-learning in educational organizations". Estimating the size of this market is difficult. The SchoolWeb system is suitable for colleges, universities and libraries. Combined with approximately 96,000 K-12 schools (elementary and high schools) and an additional 44,000 private schools, colleges, universities and other educational institutions in North America, the total annual market targeted by SchoolWeb is very large. The market for Internet access and e-learning in educational organizations is one of the fastest growing segments of the high-tech industry in North America. Merrill Lynch estimates that the K-12 e- learning market is currently $1.3 billion and is likely to increase to $6.9 billion in 2003. In addition, the US Federal Communications Commission recently allocated $2.25 billion to fund additional high-speed Internet access to US schools and libraries. In Canada, similar funding initiatives are being implemented by Industry Canada, a federal government agency, to facilitate Internet access for all Canadian K-12 students (in fact, the first development funding that SchoolWeb received, through AII, came from Industry Canada). The figures for schools and numbers of schools above include those for First Nations (native or aboriginal) communities. Market Trends and Analysis: Management of the Company believes that there has been significant growth in the sales of caching servers and software in North America although figures for the sales of caching servers specifically are not available from independent sources such as the US Census Bureau. This growth, management believes, is fuelled by the necessity of having a caching server if the internet is to be a teaching tool in classrooms. Having a large number of students accessing the internet over traditional lines (eg. Telephone or fibre) at the same time slows the traditional lines and access to the point where classroom teaching cannot be based on active use of the internet. Caching websites (using SchoolWeb software and a caching server) speeds student's access and makes use of the internet in classrooms more feasible. Management of the Company believes that the trend in the market is for educational institutions (customers) to seek software and hardware that permits such use of the internet. Management also believes that First Nations communities are becoming more and more technologically sophisticated and represent a segment of the market we wish to concentrate on. Marketing Strategy: Our marketing strategy is characterized by the following: - - Push sales strategy. The relative newness of the SchoolWeb hardware system and software requires us to actively push it out into the field through direct sales efforts (of distributors, authorized dealers and resellers) rather than pull clients through print advertising campaigns. - - Solution selling. The product is sold as a total solution complete with implementation and on-going management services at the client site. This differentiates us from "shrink-wrapped" software or communications suppliers that offer no services or provide a limited set of services after installation has occurred. - - Strong branding within target segments. We intend to build the School WebT brand name within targetted markets. We hope to accomplish this in part through selective advertising in trade journals and attendance at relevant trade shows if and when revenues permit such expenditures (it is unlikely that there will be significant resources devoted to this in the year ending December 31, 2002). - - Channel ready product. The SchoolWeb system is designed to be channel-ready and easily installable by personnel working for our distributors and authorized dealers. Installation of the SchoolWeb hardware system and software does not require extensive training or experience. - - Direct Distribution Channel (Direct Sales). Our direct sales channel will consist of 4 regional sales managers for each geographic region, overseen by the vice president of sales, Patrick Fitzsimmons. All corporate sales management personnel will be involved in managing direct sales and in dealing with Federal, State and Provincial Education Departments, school boards and First Nations communities. Although this direct distribution from AI Systems Group to schools is planned, it is clear that SchoolWeb's marketing strategy relies to a great degree upon AI Systems Group Inc.'s ability to secure agreements with channel partners (authorized dealers) and distributors (value added resellers). To this end we have entered into Reseller Agreements with Microserve Computer Solutions Inc. (with offices in the United States and Canada) and Vancouver Office Technologies, Inc. (a franchisee of Microage Canada, Inc.), the terms of which are expected to be typical of reseller agreements (also called agent agreements). Under the terms of the reseller agreements with Microserve Computer Solutions Inc. and Vancouver Office Technologies, Inc. (a franchisee of Microage Canada, Inc.), no exclusivity is granted (either on a product line or geographically). The reseller receives a commission of $400 per SchoolWeb sale for elementary schools and $600 per unit for secondary schools. The term of the reseller agreements is one year. None of the distributors are expected to be given geographical or product exclusivity and a copy of the specimen form of Reseller Agreement is attached hereto as an exhibit. The agreement with Hewlett Packard (Canada) and AII where Hewlett Packard (Canada) agrees to make efforts to distribute the SchoolWeb System will also, hopefully, generate product sales through Hewlett Packard (Canada)'s distribution channels. To date, our marketing efforts have been limited primarily to parts of Western Canada. Installation in approximately 52 schools and other facilities is planned throughout the late fall (October to December) of 2002. Competitors We compete with the distribution branches of IBM, Compaq, Dell and Hewlett Packard in that these companies market their servers directly to educational institutions. These companies may, in the future, attempt to bundle high margin software with low margin hardware sales and, if they did, would become our competitors. Our leading competitors in the area of caching server software are Novell and Bascom.com (a company which produces caching server software not directly targeted at educational institutions). Novell does not specifically target educational institutions and Bascom.com does not have the same number of value added services that SchoolWeb's systems have, in management's view. The SchoolWeb system also arguably competes with providers of traditional cable and telecomm (data dedicated telephone lines or T1 lines) means of accessing the internet. The competitive advantages that SchoolWeb has over these providers is detailed in Competitive Factors below. Competitive Factors in the Market: The primary competitive factors in the market for internet access at educational institutions are reliability, speed and cost efficiency. The SchoolWeb system provides an increase in user speed and capacity over telecommunication (data dedicated telephone) lines of similar cost. This increase in user speed and capacity is due primarily to the SchoolWeb system's caching of internet files and websites. Although originally developed by AII as a software and hardware system geared towards rural locations, the SchoolWeb system has been installed with success in urban locations in British Columbia as well. In rural areas, which represent 23% of all schools in North America (22,000 schools), schools often have no access to high-speed infrastructure. These schools are restricted to access the Internet through slow-speed (56K-128K) telephone lines, which are most suitable for a small number of users at a time. For many rural schools, SchoolWeb may be the only alternative for high-speed Internet access. A rural or isolated First Nations community is in a similar position to these rural schools. A typical School Board will be utilizing a Private Line solution at 56k or 128k for primary schools, and usually T-1 (DS-1), or Ethernet ports for their secondary schools. Schools are usually connected to State or Provincial communication systems by full or partial T-1 circuits to a central government office, which provides services such as firewall filtering, virus protection, curriculum and systems management. Because so many students and schools become connected, not only are the typical school's overall telephone line operating costs substantial (especially for rural long distance lines), these circuits are usually near or at saturation most times, due to increased demand from an ever increasing number of online computers. ADSL and high speed Cable, although excellent for the residential/SOHO (small office/home office) market, is not widely used by schools due to security issues and limited performance for commercial applications. Cable is a shared network with security and congestion problems, and ADSL bandwidth performance is greatly affected by the distance from the telephone company Central Office (C.O.). These internet access solutions are rarely used by educational institutions (except in circumstances where a small or less developed school may only have one or a few computers with internet access). Because many school Internet requests are repetitive, the SchoolWeb system caches and serves these requests at LAN speed of 100 megabits/second (Mb/S). Based on SchoolWeb data in schools in British Columbia where the SchoolWeb system has been installed, it has been shown that the repeat request ratio is between 40% and 70%. Therefore, over half of the student requests are serviced at 100 Mb/sec from the local SchoolWeb cache. This equates to a performance increase of between 5 and 100 times when compared to operating without SchoolWeb. Proprietary Protection (a) General. The Company does not itself own the intellectual property rights to the SchoolWeb System. These rights are held by AII and licensed under the terms of the Company's Software License Agreement with AII. The SchoolWeb System's software is written by AII using Linux code available on the internet as "shareware" (that is, it is in the public domain and is unlikely to be patentable). Furthermore, we think it is unlikely that the process by which the software is written can itself be patented. Other associated processes, such as installation, are too generic to be patented. As a result, although we state that we or AII wish to seek protection of our software when possible, it is unlikely that the SchoolWeb System or the process of writing its software and installing it can be patented and protected. (b) Patents, Copyrights and Trade Secrets. AII itself is unlikely to seek patent protection of the SchoolWeb System because, as described in the previous section, the software and the processes of installing it with customers are unlikely to be patentable. We do not have patents or patents pending. We rely upon trade secrets, know-how and continuing technological innovations to develop our competitive position as well as (hopefully) confidential customer lists and contacts in the future. (c) Trademark Applications. We have applied for trademark rights in the United States and Canada for the tradename "SchoolWeb". The initial application was filed in Canada on March 30, 2001 and it is expected that a response should be received within 18 months. The trademark is expected to be registered on the supplemental register in the United States as the United States trademark was applied for based on the Canadian trademark application. Once a company has used a supplemental register mark in the United States for five years, the company's mark is placed on the full register. In the meantime, its rights in the United States are protected to the limited extent that another company cannot commence using the name. We anticipate filing for trademark protection in a similar manner for the "First Nations 1Nterlink" and "1Nterlink" trademarks when funds permit us to do so. Organizational Structure and Facilities At this time, none of our employees are subject to collective bargaining agreements. Alternet currently has only four employees: Patrick Fitzsimmons, who performs sales and marketing functions as VP Sales; Greg Protti, who performs various business development functions as VP Marketing. Both devote all of their working time to the Company; Michael Dearden, who is the President; and Griffin Jones, who is the Secretary and Treasurer. The directors of Alternet, excluding Karim Lakhani and Brandon Douglas, offer their services full-time to Alternet (although not remunerated as employees). Karim Lakhani is only part-time as is Brandon Douglas. Griffin Jones and Michael Dearden have received consulting service payments from the Company as described in Executive Compensation. Our business model is not labour intensive. Our software development and updating is provided by Advanced Interactive Inc. and Advanced Interactive Canada Inc. under the terms of the License Agreement. The actual sales and installations are performed by various resellers. However, there will be a need in the future to either hire additional sales people or develop additional distribution relationships. In addition, when needed, Alternet and AI Systems Group employ independent consultants and intends to appoint an advisory board (possibly for equity compensation) to help manage its affairs. At present, the Company has two consultants employed on a project basis writing the user manuals for its software and working to create a distribution system for its products. We anticipate 4-6 full time hirings by June 30, 2003 in the areas of sales and marketing. We do not anticipate any additional hirings of administrative personnel. ITEM 17: MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the financial statements of the Company and notes thereto contained elsewhere in this prospectus. (a) Fiscal Year Ended December 31, 2001 The fiscal year ended December 31, 2001 was the first full year of operations for the Company and also represented the year in which it purchased AI Systems Group Inc. For this fiscal year, the Company (on a consolidated basis with its subsidiary AI Systems Group Inc.) had a net loss for the period of $(263,249) and no revenue. Of this loss, the largest expense or expenditure was payments for the Company's license agreement with Advanced Interactive Inc. which represented $120,000. Office and general expenses were $50,530, marketing expenses were $39,429 and professional fees were $29,390. The basic net loss per share was $(0.02). The Company had current assets of $5,669 cash and $3,758 in prepaid expenses. Given the Company's monthly payment for its license agreement with Advanced Interactive Inc. (which is $20,000 per month at a minimum) the Company did not have enough working capital to meet its obligations for even one month. As of the date of this registration statement, the Company has raised additional working capital through sales of unregistered securities under Regulations S and D. The proceeds of these sales have, to date, been sufficient to meet the Company's ongoing requirements. Our limited operating history makes the prediction of future results difficult or impossible. Furthermore, our limited operating history leads us to believe that period-to-period comparisons of our operating results may not be meaningful and that the results for any particular period should not be relied upon as an indication of future performance. To date, we have essentially developed and tested the SchoolWeb system. We are only anticipating that we will begin to realize significant revenue in the remaining quarter of this fiscal year. (b) Fiscal Year Ended December 31, 2000: This was the first year that SchoolWeb's subsidiary, AI Systems Group Inc., commenced operations. As a result, there was little operating or financial activity other than that relating to negotiating the License Agreement, installing servers and the SchoolWeb system in the 19 schools in British Columbia where they are installed, working with AII to detect any failings in the SchoolWeb software and monitoring the performance of the SchoolWeb system in the schools in which it was installed. (c) Nine months ending September 30, 2002 and plans for the next 12 months: For the nine months ending September 30, 2002, we had a net loss of $373,649. Our basic net loss per shares doubled to $0.02 from the same period last year. On September 30, 2002, we had $19,254 in cash available to us, not even enough to operate for one month. We also had approximately $86,771 in accounts payable of which $21,517 was owed to AII, leaving us with less of a working capital deficit. For the quarter ending September 30, 2002, the Company had a net loss of $145,836 or ($(0.01) per share. The net loss for the corresponding period of July 1, 2001, to September 30, 2001 was $55,591 or $(0.01) per share. The increased loss (relative to the same period last year) was due to: an increase in marketing expenses, consulting fees, professional fees, office expense and an increase in License Agreement fees due to Advanced Interactive Inc. SALES For the period ending September 30, 2002, the Company had sales of $40,923. During the corresponding period of July 1, 2001 to September 30, 2001, the Company had no sales. The increase in sales is attributable to the fact that the SchoolWeb and 1nterLink products were in development during the period and not ready for commercial sale. EXPENSES For the quarter ended September 30, 2002, the Company incurred general and administrative expenses of $21,115; marketing expenses of $25,585; consulting fees of $22,080; fees payable under the License Agreement of $60,000; and $10,134 in professional fees. For the corresponding period of July 1, 2001 to September 30, 2001, the Company had general and administrative expenses of $3,689; marketing expenses of $12,162; no consulting fees; fees payable under the License Agreement of $30,000 and professional fees of $8,450. The increase in marketing, consulting and office and general expense this quarter, compared to the corresponding period of July 1 2001 to June 30 2002, is a result of increased activity in marketing the SchoolWeb and 1nterLink products since their commercial launch in May 2002. License fees payable to Advanced Interactive have increased to $20,000 per month compared to $10,000 per month during the period of July 1 2001 to September 30 2001, as per the License Agreement; and professional fees increased this quarter due to fees associated with achieving a public listing. As at September 30, 2002, the Company had $19,254 cash in the bank, accounts receivable of $30,619 and prepaid expenses of $5,897. Inventory as of that date was $6,057. The Company has installed an 1nterLink ISP system at the Heiltsuk aboriginal nation, located at Bella Bella, British Columbia, Canada. This system was installed in June 2002, and invoiced this quarter. Partial payment was received during this quarter, with the balance received subsequent to the quarter. The Company also installed and invoiced a SchoolWeb system during the quarter. Audit Fees During the period ended September 30, 2002, the Company incurred approximately $5,700 in fees to its principal independent accountant for all non-audit services (including reviews of the Company's quarterly financial statements). We have completed our testing of the SchoolWeb system in the 19 schools in British Columbia where it was installed. Installations of more systems, including installation in a number of First Nations (native or aboriginal) communities under the name "1Nterlink" is planned for October to December of 2002. Installations in three schools and two First Nations communities occurred in August and September of 2002 resulting in sales revenues of $40,923. Our plan of operation for the year ending December 31, 2002 anticipates an increase in employees to 6 people, representing the hiring of 2 additional persons, to focus on direct sales to schools. Existing employees will (primarily Patrick Fitzsimmons and Greg Protti) continue to develop distributorship and reseller relationships in the hopes of generating sales through these channels. The Company expects that it will, at least to the year ending December 31, 2003, maintain its present offices which have some additional office space for expansion if necessary. There has been no additional sales revenues recognized from September 30, 2001 to November 20, 2002. While sales are expected to increase future periods, the magnitude and size of these sales cannot, at this time (partly as a result of a lack of operating history on Alternet's part) be predicted. We plan (at this time) to seek a listing on the new BBX Exchange or on the NASD's OTCBB in the spring of 2003. If such a listing is sought (and occurs) we would attempt to finance more aggressive sales and marketing initiatives with public financings. There is no guarantee that we will continue to pursue this strategy or, if listed, that we would be able to secure any financing. Market conditions right now are very poor for technology debt or equity financings and even if we did obtain financing, it would likely be expensive to the Company or cause significant dilution to existing shareholders. Forward-Looking Statements. This prospectus contains "forward looking statements" within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended, including statements regarding, among other items, the Company's business strategies, continued growth in the Company's markets, projections, and anticipated trends in the company's business and the industry in which it operates. The words "believe," "expect," "anticipate," "intends," "forecast," "project," and similar expressions identify forward-looking statements. These forward- looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, among others, the following: reduced or lack of increase in demand for the Company's products, competitive pricing pressures, changes in the market price of ingredients used in the Company's products and the level of expenses incurred in the Company's operations. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained herein will in fact transpire or prove to be accurate. The Company disclaims any intent or obligation to update "forward looking statements." ITEM 18: DESCRIPTION OF PROPERTY We currently do not have any physical property other than two computer servers. These servers were valued at $2,635 as of September 30, 2002. Our office furniture and computers are rented, on a monthly basis. ITEM 19: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the past two years, there have not been any transactions that have occurred between the Company and its officers, directors, and five percent or greater shareholders, except as follows: The software License Agreement entered into between the Company's subsidiary, AI Systems Group Inc. and Advanced Interactive Inc. saw Advanced Interactive Inc. become an affiliate of the Company with its President, Karim Lakhani, joining the board of directors of the Company and with Advanced Interactive Inc. AII received 3,000,000 shares of common stock in the Company for entering into the License Agreement. The number of shares was negotiated between AI Systems Group, the Company and AII. In August of 2002, we were $80,000 in arrears on license payments to AII. This arrears debt was settled by issuing to AII a total of 228, 571 shares of common stock. In the nine months ended September 30, 2002, AII received $180,000 in license agreement payments from Alternet. AII received $120,000 in license agreement payments from Alternet in the year ending December 31, 2001. Michael Dearden (through his wholly owned company, Streamline Investments Inc.) has acquired 60,000 share purchase warrants (exercisable for a period of two years at an exercise price of $0.50) and 60,000 shares of the Company. Streamline Investments Inc. paid $21,000 to the Company for these securities. Certain of the officers and directors of the Company are and have been compensated for their work with the Company (see Executive Compensation), either personally or through corporations which they own. Officers and Directors of the Company are reimbursed for expenses they incur on behalf of the Company. Certain of the officers and directors of the Company are engaged in other businesses, either individually or through partnerships and corporations in which they have an interest, hold an office, or serve on a board of directors. As a result, certain conflicts of interest may arise between the Company and its officers and directors. The Company will attempt to resolve such conflicts of interest in favor of the Company. The officers and directors of the Company are accountable to it and its shareholders as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling the Company's affairs. A shareholder may be able to institute legal action on behalf of the Company or on behalf of itself and other similarly situated shareholders to recover damages or for other relief. ITEM 20: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS There is no market for the securities of the Company at this time. The Company's securities are not traded on a recognized exchange or the NASD's over-the-counter trading system at this time. A total of 16,051,085 shares are issued and outstanding. A total of 6,978,514 shares are being registered for resale under this registration statement. The remaining 9,072,571 issued and outstanding shares may become free of resale restrictions under Rule 144 (as the Company is no longer a blank check company) or could be separately registered under the Securities Act of 1933. A total of 1,464,514 warrants are outstanding as of October 4, 2002. These warrants expire two years after their issuance and upon payment of the exercise price of $0.50 per warrant, result in the issuance of one share of common stock to the warrant holder. As of November 20, 2002, there were 72 shareholders of record of the Company's common stock. We intend to seek an OTCBB or BBX Exchange listing of our securities in late 2002 and early 2003 respectively. We may or may not be able to achieve this and it is possible that other considerations will cause us to change our minds regarding this listing. The purpose of seeking such a listing is to then secure funds to finance further expansion of sales and marketing operations through a public financing. There can be no guarantee that such funds will be available or, if available, will be available at rates which are not prohibitively expensive or do not result in significant dilution to existing shareholders. Dividend Information. The Company has not declared or paid a cash dividend to shareholders since it was incorporated on June 26, 2000. The board of directors presently intends to retain any earnings to finance Company operations and does not expect to authorize cash dividends in the foreseeable future. Any payment of cash dividends in the future will depend upon the Company's earnings, capital requirements and other factors. ITEM 21: EXECUTIVE COMPENSATION
Summary Compensation Table Annual compensation Long-term Compensation Awards Payouts Name and Other Restricted Securities principal annual stock underlying LTIP All other position Year Salary Bonus compensation award(s) options/SARs payouts compensation ($) ($) ($) ($) (#) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) Michael Dearden 2000 0 0 (1) 0 0 0 0 President & 2001 0 0 (2) 0 0 0 0 Director Griffin Jones 2000 0 0 0 0 0 0 0 Secretary, 2001 0 0 (3) 0 0 0 0 Treasurer & Director Patrick 2000 0 0 0 0 0 0 0 Fitzsimmons 2001 $40,000 0 (4) 0 0 0 0 Director Greg Protti 2000 0 0 0 0 0 0 0 Director 2001 0 0 (5) 0 0 0 0 Karim Lakhani 2000 0 0 0 0 0 0 0 Director 2001 0 0 0 0 0 0 0
(1) Michael Dearden received $16,696 in consulting fees, paid to him personally and to a company which he owns, Streamline Investments, Inc., to date in fiscal year 2002. Consulting fees were paid to him in the year ending December 2000 totalling $6,250. (2) See 1 above. (3) Griffin Jones received $28,623 in consulting fees for the six months ended September 30, 2002 He received a total of $11,050 in compensation in the fiscal year ending December 31, 2001 and no compensation for the fiscal year ending December 31, 2000. (4) Patrick Fitzsimmons has, for the nine months ending September 30, 2002, received $26,767 in marketing fees / salary from the Company. (5) Greg Protti has, for the nine months ending September 30, 2002, received $13,392 in salary from the Company. Alternet, at its annual meeting of shareholders held on December 20, 2001, adopted a Stock Option Plan which would permit Alternet to grant up to 1,000,000 incentive stock options. This Stock Option Plan was approved by shareholders. No stock options have yet been granted under this Stock Option Plan nor has it been filed with the SEC using the S8 Registration Statement procedure. However, some or all of the persons named above may be granted stock options in the future and the Stock Option Plan may be filed using the S8 Registration Statement procedure. EQUITY COMPENSATION PLAN INFORMATION Plan category Number of securities Weighted average Number of securities to be issued upon exercise price of remaining available exercise of outstanding options, for future issuance outstanding options, warrants and rights warrants and rights Stock Option Incentive Plan No options outstanding No options outstanding 1,000,000 (1,000,000 common shares so no exercise price Common Shares authorized for issuance) Total Nil Nil 1,000,000 Common Shares
As of December 31, 2001, certain directors had provided cash loans to, or incurred expenses on behalf of, the Company totaling $16,186. This amount decreased (with the partial reimbursement of expenses) to $12,542 as of September 30, 2002. These amounts due from related parties are non-interest bearing and have no specific terms of repayment. A director of AI Systems Group Inc. received $32,607 in marketing fees in the year ended December 31, 2001 (the director was Patrick Fitzsimmons and the $32,607 is included in the $40,000 figure given in the table above). Other than as stated below, there is no known relationship between any of the Directors and Control persons with major clients or providers of essential products and technology, nor are there any other known related transactions except as disclosed otherwise in this registration statement. Karim Lakhani is Director and President of Advanced Interactive Inc. and Director of Advanced Interactive Canada Inc., corporations which own a total of 3,000,000 shares of common stock (approximately 21% of the issued and outstanding shares of common stock) of Alternet. These corporations are also party to the License Agreement and its amendments. As of August 10, 2002 AII was owed $80,000 in arrears license payments by the Company which was debt settled by the issuance to AII of 228,571 shares of common stock of the Company. None of the directors or officer's individual's total compensation under all contracts with the Company, including special allowances or bonuses, will exceed $100,000 this year. All officers and directors will be reimbursed for expenses incurred on behalf of the Company including director expenses pertaining to attendance at meetings. It is anticipated that additional management may be hired as the Company develops and revenue is generated. If such hirings occur, salaries paid to new employees will be consistent with the salaries of others in similar positions in the industry. Although the Company's shareholders adopted a Stock Option Plan on December 20, 2001 at the Company's annual shareholders' meeting no stock options have been granted under this Stock Option Plan to date and no stock options are, at this time, planned to be granted. There are no annuity, pension or retirement benefits proposed to be paid to officers, directors, or employees of the Company in the event of retirement at normal retirement date as there is no existing plan provided for or contributed to by the Company. ITEM 22: FINANCIAL STATEMENTS ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) CONSOLIDATED BALANCE SHEETS June 30, December 31, 2002 2001 - - ------------------------------------------------------------------------------ (Unaudited) (Note 1) $ $ ASSETS CURRENT ASSETS Cash 2,665 5,669 Accounts receivable 14,625 - Prepaid expenses 4,194 3,758 Inventory 6,057 - - ------------------------------------------------------------------------------- 27,541 9,427 LICENSE RIGHTS, net of amortization of $9,000 (2001 - $6,000) (Note 4) 21,000 24,000 FIXED ASSETS, net of depreciation of $1,110 (2001 - $600) 2,890 3,400 - ------------------------------------------------------------------------------- 51,431 36,827 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 77,046 26,091 Due to related parties (Note 6) 8,970 33,486 - ------------------------------------------------------------------------------- 86,016 59,577 - ------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 1 and 4) STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Capital stock (Note 5) Common stock, $0.00001 par value, 100,000,000 shares authorized 15,580,371 (2001 - 14,733,000) issued and outstanding 156 147 Additional paid-in capital 460,873 242,302 Accumulated comprehensive loss (4,552) (1,950) Deficit accumulated during development stage (491,062) (263,249) - ------------------------------------------------------------------------------- (34,585) (22,750) - - ----------------------------------------------------------------------------- 51,431 36,827 =============================================================================== The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Three Six Six Oct 13, months months months months 2000 ended ended ended ended (inception) June 30, June 30, June 30, June 30, to June 2002 2001 2002 2001 30, 2002 $ $ $ $ $ (Note 1) HARDWARE SALES 14,625 - 15,450 - 15,450 - - ----------------------------------------------------------------------------- EXPENSES Depreciation and Amortization 1,755 3,000 3,510 3,000 10,110 Consulting 21,881 - 38,836 - 56,136 License fees 60,000 30,000 120,000 60,000 240,000 Office and general 19,295 18,795 29,581 24,833 80,111 Marketing 15,709 10,145 31,555 14,376 70,984 Professional fees 16,238 5,841 19,781 7,161 49,171 - ------------------------------------------------------------------------------- 134,878 67,781 243,263 109,370 506,512 - ------------------------------------------------------------------------------- NET LOSS FOR THE PERIOD (120,253) (67,781) (227,813) (109,370) (491,062) =============================================================================== BASIC NET LOSS PER SHARE (0.01) (0.01) (0.02) (0.01) ==================================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,439,579 12,343,000 15,175,483 12,343,000 ===================================================================== The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) October 13, Six months Six months 2000 ended June ended June (inception) 30, 2002 30, 2001 to June 30 2002 $ $ $ - - ---------------------------------------------------------------------------- (Note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period (227,813) (109,370) (491,062) Adjusted for item not involving cash: Depreciation and amortization 3,510 3,000 10,110 Changes in operating assets and liabilities: Accrued consulting fees (17,300) - - Changes in accounts receivable (14,625) - (14,625) Changes in inventory (6,057) - (6,057) Changes in prepaid expenses (435) - (4,194) Changes in accounts payable 50,955 14,395 72,906 ------------------------------------------------------------------------------ NET CASH FLOWS USED IN PERATING ACTIVITIES (211,766) (91,975) (432,922) CASH FLOWS FROM FINANCING ACTIVITIES Advances (to) from related parties (7,216) 20,985 5,132 Proceeds on sale of common stock 218,580 128,100 438,933 - ------------------------------------------------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES 211,364 149,085 444,065 - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of capital assets - (4,000) (4,000) Cash acquired on reverse acquisition of SchoolWeb - - 74 - - ----------------------------------------------------------------------------- NET CASH FLOWS USED IN INVESTING ACTIVITIES - (4,000) (3,926) - - ----------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,602) - (4,552) - - ----------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH (3,004) 53,110 2,665 CASH, BEGINNING OF PERIOD 5,669 3 - - - ----------------------------------------------------------------------------- CASH, END OF PERIOD 2,665 53,113 2,665 =============================================================================== The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 (Unaudited) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION The Company was incorporated on June 26, 2000 in the State of Nevada as North Pacific Capital Corp. and was organized for the purpose of creating a corporate vehicle to locate and acquire an operating business. On December 19, 2001 the Company changed its name to Schoolweb Systems Inc. and on May 14, 2002 the Company changed its name to Alternet Systems Inc. ("Alternet" or the "Company") On November 6, 2000, the Company filed a Form 10SB registration with the United States Securities and Exchange Commission ("SEC") and as a result is subject to the regulations governing reporting issuers in the United States. By agreement dated July 2, 2001 and completed September 10, 2001, Alternet Issued 12,343,000 shares of restricted common stock to the shareholders of Schoolweb Holdings Inc. ("SW Holdings"), a development stage company incorporated October 13, 2000 in the State of Nevada, in exchange for all of the issued and outstanding shares of SW Holdings. On June 26, 2002 SW Holdings changed its name to AI Systems Group, Inc. The acquisition resulted in the former shareholders of SW Holdings acquiring 90.1% of the outstanding shares of the Company and has been accounted for as a reverse merger with SW Holdings being treated as the accounting parent and Alternet, the legal parent, being treated as the accounting subsidiary. Accordingly, the consolidated results of operations of the Company include those of SW Holdings for all periods shown and those of the Alternet since the date of the Reverse acquisition. The results of operations of SW Holdings are from its inception, October 13, 2000 and include the results of its wholly- owned subsid-iary, SchoolWeb Systems (Canada) Ltd. a company incorporated April 17, 2001 in the Province of British Columbia. The comparative balance sheet as at December 31, 2001 and the comparative results of operations and cash flows for the three and six months ended June 30, 2001 are those of SW Holdings. Refer to Note 3. SW Holdings, through a License Agreement dated January 1, 2001, distributes, markets sells and licenses in the United States and Canada, certain proprietary software and hardware systems technology known as "SchoolWeb" used for caching Internet and multimedia files on special servers (refer to Note 4). The consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and further losses are anticipated before the Company reaches a commercial stage raising substantial doubt as to the Company's ability to continue as a going concern. The Company's continued operations are dependent on the successful implementation of its business plan, its ability to obtain additional financing as needed, and ultimately to attain profitable operations. Unaudited Interim Financial Statements The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AI Systems Group, Inc. and Schoolweb Systems (Canada) Ltd. All significant intercompany transactions and account balances have been eliminated. Use of Estimates and Assumptions Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all liquid investments, with an original maturity of Three months or less when purchased, to be cash equivalents. Inventory Inventory consists of computer hardware products held for resale and is carried at the lower of cost and net realizable value. License Rights The Company amortizes the cost of acquiring license rights on a straight-line basis over the term of the license. The Company evaluates the carrying amount of its unamortized license rights against the undiscounted future cash flows associated with them. If the evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value, an impairment provision is recorded to adjust the carrying value of the license rights to their fair value. Fixed Assets Fixed assets are recorded at cost and depreciated on a declining balance basis at a rate of 30% per annum. Revenue recognition To date, the Company has not generated any revenues from the licensing of its SchoolWeb system. The Company will license its SchoolWeb system on a prepaid basis for terms ranging from one to three years. The Company will recognize license revenues on a straight-line basis over the license term upon completion of the required hardware and software installations and upon acceptance by the purchasers. The Company has generated revenues from hardware sales in connection with the testing of the SchoolWeb system. Hardware sales are shown net of hardware acquisition costs and are recognized upon completion and acceptance of installation by the purchasers. Foreign Currency Translation The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Stock-Based Compensation The Company accounts for stock-based compensation in respect to stock options granted to employees and officers using the intrinsic value based method in accordance with APB 25. Stock options granted to nonemployees are accounted for using the fair value method in accordance with SFAS No. 123. In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No.123 showing the results of applying the fair value method using the Black-Scholes option pricing model. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96- 18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25 ("FIN 44"), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at June 30, 2002 the Company had net operating loss carryforwards; however, due to the uncertainty of realization the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards. Net Loss per Common Share Basic loss per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. The accompanying presentation is only of basic loss per share as the potentially dilutive factors are anti-dilutive to basic loss per share. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which requires that goodwill not be amortized. SFAS requires that the Company review goodwill at least annually to determine if an impairment has occurred and if so that goodwill should be reduced accordingly. The Company has determined that the implementation of this standard does not have any impact on its financial statements. NOTE 3 - ACQUISITION OF SW HOLDINGS By agreement dated July 2, 2001 and completed September 10, 2001, Alternet acquired 100 % of the issued and outstanding shares of SW Holdings in exchange for 12,343,000 shares of restricted common stock of Alternet. At the time of this transaction, the former shareholders of SW Holdings acquired 90.1% of the 13,693,000 total issued and outstanding shares of Alternet. This acquisition has been accounted for as a recapitalization using accounting Principles applicable to reverse acquisitions with SW Holdings being treated as the accounting parent (acquirer) and Alternet being treated as the accounting subsidiary (acquiree). The value assigned to the capital stock of consolidated Alternet on acquisition of SW Holdings is equal to the book value of the Capital stock of SW Holdings plus the book value of the net assets liabilities) of Alternet as at the date of the acquisition. The book value of SW System's capital stock subsequent to the acquisition is calculated and allocated as follows: SW Holdings capital stock $ 153,103 Alternet net assets (liabilities) (7,904) -------------- $ 145,199 =============== Capital stock $ 137 Additional paid-in capital 145,062 --------------- $ 145,199 ============== These consolidated financial statements include the results of operations of SW Holdings since October 13, 2000 (inception) and the results of operations of Alternet since the date of the reverse acquisition on September 10, 2001. NOTE 4 - LICENSE AGREEMENT By agreement dated January 1, 2001, SW Holdings entered into an agreement with Advanced Interactive Inc. ("AII") and Advanced Interactive (Canada) Inc. ("AIC") whereby SW Holdings acquired exclusive and non-exclusive rights and licenses to commercialise, distribute and market SW Holdings related licensed technology, products and services in the United States and Canada for a period of five years renewable for a further five years at SW Holdings' option. SW Holdings must pay royalties equal to 40% of net revenue received plus a fixed amount of $10,000 per month in the first year, $20,000 per month in year two, and increasing by $8,000 per month in each of the subsequent years to a maximum of $84,000 per month in year ten. After year three, the fixed monthly payment is reduced by the amount of royalties otherwise payable. In addition SW Holdings issued 2,500,000 shares on June 29, 2001 valued at $.01 per share or $25,000. Effective September 10, 2001 SW Holdings, AII and AIC amended the original agreement such that AI and AIC would receive an additional 500,000 shares valued at $5,000 which Alternet issued on September 10,2001. Also effective September 10, 2001 the President and director of AII and AIC became a director of the Company. NOTE 5 - CAPITAL STOCK To June 30, 2002, the Company has not granted any stock options and has not recorded any stock-based compensation. During the period ended June 30, 2002 the Company completed a private placement of 510,000 units at a price of $.20 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to February 28, 2004. During the period ended June 30, 2002 the Company completed a private placement of 100,000 units at a price of $.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to March 15, 2004. During the period ended June 30, 2002 the Company completed a private placement of 140,000 units at a price of $.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to April 30, 2004. The Company is in the process of completing a private placement of 146,514 units at a price of $0.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to July 18, 2004. To June 30, 2002, the Company had received total subscription proceeds of $32,580 towards the issuance of 97,371 units in connection with this private placement. The 97,371 common shares in connection with these units are included in issued and outstanding capital stock as of June 30, 2002. At June 30, 2002 there were 510,000 warrants outstanding to purchase 510,000 common shares at a price of $0.50 per share to February 28, 2004, 375,000 warrants outstanding to purchase 375,000 common shares at a price of $0.50 per share to November 24, 2003, 100,000 warrants outstanding to purchase 100,000 common shares at a price of $0.50 per share to March 15, 2004, 140,000 warrants outstanding to purchase 140,000 common shares at a price of $0.50 per share to April 30, 2004 and 97,371 warrants outstanding to purchase 97,371 common shares at a price of $0.50 per share to July 18, 2004. Effective June 3, 2002 the Company filed a Form SB-2 Registration Statement with the SEC for the registration of a total of 7,764,000 shares of the Company's common stock of which 6,639,000 are issued and outstanding and 1,125,000 will be reserved to be issued upon the exercise of 1,125,000 share purchase warrants. NOTE 6 - RELATED PARTY TRANSACTIONS During the six months ended June 30, 2002, certain directors were paid for previously accrued consulting fees of $17,300 and were repaid cash advances totalling $7,216. At June 30, 2002 a total of $8,970 is owing to directors and shareholders. Amounts due from related parties are non-interest bearing and have no specific terms of repayment. During the six months ended June 30, 2002, the following amounts were incurred to directors of the Company or its subsidiary, and a company with a director in common. Six months ended June 30, 2002 2001 $ $ -------------------------- Consulting 29,096 - License fees 120,000 - Marketing 25,921 14,376 -------------------------- 175,017 14,376 ========================== NOTE 7 - INCOME TAXES The Company and its subsidiaries have tax losses which may be available to Reduce future year's taxable income, that result in deferred tax assets. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history and losses to date. Accordingly a full, deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. NOTE 8 - SUBSEQUENT EVENT Subsequent to June 30, 2002, the Company received $18,700 towards the purchase of 53,429 units at a price of $0.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to July 18, 2004. SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LABONTE & CO. 1205 - 1095 West Pender Street C H A R T E R E D A C C O U N T A N T S Vancouver, BC Canada V6E 2M6 Telephone (604) 682-2778 Facsimile (604) 689-2778 Email rjl@labonteco.com AUDITORS' REPORT To the Board of Directors and Stockholders of Schoolweb Systems Inc. (formerly North Pacific Capital Corp.) We have audited the consolidated balance sheets of Schoolweb Systems Inc. (formerly North Pacific Capital Corp.) (A Development Stage Company) as at December 31, 2001 and 2000 and the consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2001, the period from October 16, 2000 (inception) to December 31, 2000 and cumulatively, from October 16, 2000 (inception) to December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows and the changes in stockholders' equity for the year ended December 31, 2001, the period from October 16, 2000 (inception) to December 31, 2000 and cumulatively, from October 16, 2000 (inception) to December 31, 2001in accordance with generally accepted accounting principles in the United States. COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-UNITED STATES REPORTING DIFFERENCES In the United States, reporting standards for auditors' would require the addition of an explanatory paragraph following the opinion paragraph when the financial statements are affected by a significant uncertainty such as referred to in Note 1 regarding the Company's ability to continue as a going concern. Our report to the directors and stockholders dated February 28, 2002 is expressed in accordance with Canadian reporting standards which do not permit a reference to such uncertainties in the auditors' report when the uncertainties are adequately disclosed in the financial statements. "LaBonte & Co." CHARTERED ACCOUNTANTS February 28, 2002 Vancouver, B.C. SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31 December 31 2001 2000 (Note 1) ASSETS CURRENT ASSETS Cash $ 5,669 $ 3 Prepaid expenses 3,758 - 9,427 - LICENSE RIGHTS, net of amortization of $6,000 (Note 4) 24,000 - FIXED ASSETS, net of depreciation of $600 3,400 - $ 36,827 $ 3 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 26,091 $ - Due to related parties (Note 6) 33,486 - 59,577 - COMMITMENTS AND CONTINGENCIES (Notes 1 and 4) STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Capital stock (Note 5) Common stock, $0.00001 par value, 100,000,000 shares authorized 14,733,000 (2000 - 20,000) issued and outstanding 147 3 Additional paid-in capital 242,302 Comprehensive loss (1,950) - Deficit accumulated during development stage (263,249) - (22,750) 3 $ 36,827 $ 3 The accompanying notes are an integral part of these consolidated financial statements SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) CONSOLIDATED STATEMENT OF OPERATIONS
October 13 2000 October 13 2000 Year ended (inception) (inception) December 31 to December 31 to December 31 2001 2000 2001 (Note 1) EXPENSES Depreciation and amortization $ 6,600 $ - $ 6,600 Consulting fees to related parties 17,300 - 17,300 License fees to related parties 120,000 - 120,000 Office and general 50,530 - 50,530 Marketing ($32,607 to a related party) 39,429 - 39,429 Professional fees ($3,000 to a related party 29,390 - 29,390 NET LOSS FOR THE PERIOD $(263,249) $ - $ (263,249) BASIC NET LOSS PER SHARE $ (0.02) $ - WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,566,069 12,343,000
The accompanying notes are an integral part of these consolidated financial statements SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 13, 2000 (INCEPTION) TO DECEMBER 31, 2001
Deficit Other Accumulated Comprehensive Additional During Income Number of Paid-In Development (Loss) Shares Amount Capital Stage Total Issuance of common stock for cash at $.001 per share - October 16, 2000 3,000 $ 3 $ - $ - $ - $ 3 Balance, December 31 2000 3,000 3 - - - 3 Issuance of common stock for cash at $.007 per share - May 24, 2001 5,500,000 5,500 33,000 - 38,500 Issuance of common stock for cash at $.01 per share - June 4, 2001 4,010,000 4,010 36,090 - 40,100 Issuance of common stock for cash at $.15 per share - June 8, 2001 330,000 330 49,170 - 49,500 Issuance of common stock for license agreement at $.01 per share - June 29, 2001 (Note 4) 2,500,000 2,500 22,500 - 25,000 Schoolweb Holdings Inc. balance before reverse acquisition 12,343,000 12,343 140,760 - 153,103 Schoolweb Systems Inc. balance before reverse acquisition (Note 5) 1,350,000 14 19 (7,937) - (7,904) Issued to effect reverse Acquisition 12,343,000 123 (123) - - - Reverse acquisition Recapitalization Adjustment (12,343,000) (12,343) 4,406 7,937 - - Schoolweb Systems Inc. balance after reverse acquisition 13,693,000 137 145,062 - - 145,199 Issuance of common stock for license agreement at $.01 per share - September 10, 2001 500,000 5 4,995 - - 5,000 Issuance of common stock for cash at $.10 per share - September 11, 2001 100,000 1 9,999 - - 10,000 Issuance of common stock for cash at $.10 per share - November 5, 2001 50,000 1 4,999 - - 5,000 Issuance of common stock for cash at $.15 per share - November 8, 2001 15,000 - 2,250 - - 2,250 Issuance of common stock for cash at $.20 per share - November 24, 2001 375,000 3 74,997 - - 75,000 Foreign exchange translation Adjustment - - - - (1,950) (1,950) Net loss for the year ended December 31, 2001 - - - (263,249) - (263,249) Balance, December 31 2001 14,733,000 147 242,302 (263,249) (1,950) (22,750) Note: The statement of Stockholders' Equity has been restated to reflect the reverse acquisition of Schoolweb Holdings Inc. Refer to Notes 1 and 3. The accompanying notes are an integral part of these consolidated financial statements
SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
October 13 2000 October 13 2000 Year ended (inception) (inception) December 31 to December 31 to December 31 2001 2000 2001 (Note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period $ (263,249) $ - $ (263,249) Adjusted for item not involving cash: Depreciation and amortization 6,600 - 6,600 Changes in operating assets and liabilities: Accrued consulting fees 17,300 - 17,300 Changes in prepaid expenses (3,758) - (3,758) Changes in accounts payable 21,951 - 21,951 NET CASH FLOWS USED IN OPERATING ACTIVITIES (221,156) - (221,156) CASH FLOWS FROM FINANCING ACTIVITIES Advances from related parties 12,348 - 12,348 Proceeds on sale of common stock 220,350 3 220,353 NET CASH FLOWS FROM FINANCING ACTIVITIES 232,698 3 232,698 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of capital assets (4,000) - (4,000) Cash acquired on reverse acquisition of SchoolWeb (Note 3) 74 - 74 NET CASH FLOWS FROM INVESTING ACTIVITIES (3,926) - (3,926) EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,950) - (1,950) INCREASE IN CASH 5,666 3 5,669 CASH, BEGINNING OF PERIOD 3 - - CASH, END OF PERIOD 5,669 3 5,669
OTHER NON-CASH TRANSACTION: During 2001 the Company issued a total of 3,000,000 common shares for a license agreement at $.01 per share. (Note 4) The accompanying notes are an integral part of these consolidated financial statements SCHOOLWEB SYSTEMS INC. (Formerly North Pacific Capital Corp.) (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION The Company was incorporated on June 26, 2000 in the State of Nevada as North Pacific Capital Corp. and was organized for the purpose of creating a corporate vehicle to locate and acquire an operating business. On December 19, 2001 the Company changed its name to Schoolweb Systems Inc. ("SW Systems" or the "Company"). On November 6, 2000, the Company filed a Form 10SB registration with the United States Securities and Exchange Commission and as a result is subject to the regulations governing reporting issuers in the United States. By agreement dated July 2, 2001 and completed September 10, 2001, SW Systems issued 12,343,000 shares of restricted common stock to the shareholders of Schoolweb Holdings Inc. ("SW Holdings"), a development stage company incorporated October 13, 2000 in the State of Nevada, in exchange for all of the issued and outstanding shares of SW Holdings. The acquisition resulted in the former shareholders of SW Holdings acquiring 90.1% of the outstanding shares of the Company and has been accounted for as a reverse merger with SW Holdings being treated as the accounting parent and SW Systems, the legal parent, being treated as the accounting subsidiary. Accordingly, the consolidated results of operations of the Company include those of SW Holdings for all periods shown and those of the SW Systems since the date of the reverse acquisition. The results of SW Holdings are from its inception, October 13, 2000 and include the results of its wholly- owned subsidiary, SchoolWeb Systems (Canada) Ltd. a company incorporated April 17, 2001 in the Province of British Columbia. The comparative balance sheet as at December 31, 2000 and the comparative results of operation and changes in financial position for the periods ended December 31, 2000 are those of SW Holdings. Refer to Note 3. SW Holdings, through a License Agreement dated January 1, 2001, will distribute, market, sell and license in the United States and Canada, certain proprietary software and hardware systems technology known as "SchoolWeb" used for caching Internet and multimedia files on special servers (refer to Note 4). The consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and further losses are anticipated before the Company reaches a commercial stage raising substantial doubt as to the Company's ability to continue as a going concern. The Company's continued operations are dependent on the successful implementation of its business plan, its ability to obtain additional financing as needed, and ultimately to attain profitable operations. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, SW Holdings and Schoolweb Systems (Canada) Ltd. which have been accounted for as a reverse acquisition. All significant intercompany transactions and account balances have been eliminated. Use of Estimates and Assumptions Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents. License Rights The Company amortizes the cost of acquiring license rights on a straight-line basis over the term of the license. The Company evaluates the carrying amount of its unamortized license rights against the undiscounted future cash flows associated with them. If the evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value, an impairment provision is recorded to adjust the carrying value of the license rights to their fair value. Fixed Assets Fixed assets are recorded at cost and depreciated on a declining balance basis at a rate of 30% per annum. Revenue recognition To date, the Company has not generated any revenues from the licensing of its SchoolWeb system. The Company will license its SchoolWeb system on a prepaid basis for terms ranging from one to three years. The Company will recognize license revenues on a straight-line basis over the license term upon completion of the required hardware and software installations and upon acceptance by the purchasers. The Company has generated revenues from hardware sales in connection with the testing of the SchoolWeb system. Hardware sales are shown net of hardware acquisition costs and are recognized upon completion and acceptance of installation. Foreign Currency Translation The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Stock-Based Compensation The Company accounts for stock-based compensation in respect to stock options granted to employees and officers using the intrinsic value based method in accordance with APB 25. Stock options granted to non- employees are accounted for using the fair value method in accordance with SFAS No. 123. In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No. 123 showing the results of applying the fair value method using the Black-Scholes option pricing model. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at December 31, 2001 the Company had net operating loss carryforwards; however, due to the uncertainty of realization the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards. Net Loss per Common Share Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. Because the Company does not have any potentially dilutive securities, the accompanying presentation is only of basic loss per share. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which requires that goodwill not be amortized. SFAS requires that the Company review goodwill at least annually to determine if an impairment has occurred and if so that goodwill should be reduced accordingly. The Company has determined that the implementation of this standard will not have any impact on its financial statements. NOTE 3 - ACQUISITION OF SW HOLDINGS By agreement dated July 2, 2001 and completed September 10, 2001, SW Systems acquired 100 % of the issued and outstanding shares of SW Holdings in exchange for 12,343,000 shares of restricted common stock of SW Systems. At the time of this transaction, the former shareholders of SW Holdings acquired 90.1% of the 13,693,000 total issued and outstanding shares of SW Systems. This acquisition has been accounted for as a recapitalization using accounting principles applicable to reverse acquisitions with SW Holdings being treated as the accounting parent (acquirer) and SW Systems being treated as the accounting subsidiary (acquiree). The value assigned to the capital stock of consolidated SW Systems on acquisition of SW Holdings is equal to the book value of the capital stock of SW Holdings plus the book value of the net assets of SW Systems as at the date of the acquisition. The book value of SW System's capital stock subsequent to the acquisition is calculated and allocated as follows: SW Holdings capital stock $ 153,103 SW Systems net assets (liabilities) (7,904) $ 145,199 Capital stock $ 137 Additional paid-in capital 145,062 $ 145,199 These consolidated financial statements include the results of operations of SW Holdings since October 13, 2000 (inception) and the results of operations of SW Systems since the date of the reverse acquisition on September 10, 2001. SW Systems had no material assets, liabilities or operations for the period from July 1, 2001 to September 10, 2001. For the period from October 13, 2000 (inception) to September 10, 2001 the weighted average number of common shares outstanding is deemed to be 12,343,000 being the number of shares issued by SW Systems in connection with the acquisition of SW Holdings. NOTE 4 - LICENSE AGREEMENT By agreement dated January 1, 2001, SW Holdings entered into an agreement with Advanced Interactive Inc. ("AII") and Advanced Interactive (Canada) Inc. ("AIC") whereby SW Holdings acquired exclusive and non-exclusive rights and licenses to commercialise, distribute and market SW Holdings related licensed technology, products and services in the United States and Canada for a period of five years. SW Holdings must pay royalties equal to 40% of net revenue received plus $10,000 per month in the first year, $20,000 per month in year two, and increasing by $8,000 per month in each of the subsequent years to a maximum of $84,000 per month. After year three, the monthly payment is reduced by the amount of royalties otherwise payable. In addition SW Holdings issued 2,500,000 shares on June 29, 2001 valued at $.01 per share or $25,000. Effective September 10, 2001 SW Holdings, AII and AIC amended the original agreement such that AI and AIC would receive an additional 500,000 shares valued at $5,000 which SW Systems issued on September 10, 2001. Also effective September 10, 2001 the President and director of AII and AIC became a director of the Company. NOTE 5 - CAPITAL STOCK To December 31, 2001, the Company has not granted any stock options and has not recorded any stock-based compensation. SW System's capital stock transactions prior to reverse acquisition are as follows:
Deficit Accumulated Additional During Number of Paid-In Development Shares Amount Capital Stage Total Issuance of common stock for cash at $.001 per share - - June 26, 2000 3,000 $ - $ 3 $ - $ 3 Issuance of common stock for cash at $.001 per share - September 13, 2000 17,000 1 16 - 17 Net loss for the period June 26, 2000 (inception) to December 31, 2000 - - - (4,280) (4,280) Balance, December 31, 2000 20,000 1 19 (4,280) (4,260) Issuance of common stock for cash at $.00001 per share - May 17, 2001 1,000,000 10 - - 10 Issuance of common stock for cash at $.001 per share - May 18, 2001 230,000 2 - - 2 Issuance of common stock for cash at $.001 per share - June 1, 2001 100,000 1 - - 1 Loss from January 1, 2001 to date of reverse take-over - - - (3,657) (3,657) SW Systems balance before reverse acquisition 1,350,000 14 19 (7,937) (7,904)
NOTE 6 - RELATED PARTY TRANSACTIONS During the year ended December 31, 2001, certain directors and shareholders provided cash loans totalling $12,348. In addition, consulting fees of $17,300 were accrued to two directors, and $3,838 was acquired in connection with the reverse acquisition described in Note 3. At December 31, 2001 a total of $33,486 is owing to these directors and shareholders. Amounts due from related parties are non- interest bearing and have no specific terms of repayment. During the year ended December 31, 2001, the following amounts were incurred to directors of the Company or its subsidiary, a company with a director in common and a company controlled by a shareholder of the Company. Consulting $ 17,300 License fees 120,000 Marketing 32,607 Professional fees 3,000 $ 172,907 Of the amounts incurred above, the $120,000 license fees were incurred to AII and AIC. AII and AIC became related to the Company effective September 10, 2001 when the President and director of AII and AIC became a director of the Company. NOTE 7 - INCOME TAXES The Company and its subsidiaries have tax losses which may be available to reduce future year's taxable income, that result in deferred tax assets. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history and losses to date. Accordingly a full, deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. NOTE 8 - SUBSEQUENT EVENT Subsequent to December 31, 2001 the Company received $55,000 towards private placement subscriptions. ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Unaudited) CONSOLIDATED BALANCE SHEETS INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) CONSOLIDATED BALANCE SHEETS September 30 December 31 2002 2001 (Unaudited) (Note 1) ASSETS CURRENT ASSETS Cash $ 19,254 $ 5,669 Accounts receivable 30,619 - Prepaid expenses 5,897 3,758 Inventory 6,057 - 61,827 9,427 LICENSE RIGHTS, net of amortization of $10,500 (Note 4) 19,500 24,000 FURNITURE AND EQUIPMENT, net of depreciation of $1,365 (2001 - $600) 3,691 3,400 85,018 36,827 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 86,771 26,091 Deferred license revenue 5,615 - Due to related parties (Note 6) 12,542 33,486 104,928 59,577 COMMITMENTS AND CONTINGENCIES (Notes 1 and 4) STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Capital stock (Note 5) Common stock, $0.00001 par value, 100,000,000 shares authorized 15,858,085 (2001 - 14,733,000) issued and outstanding 158 147 Additional paid-in capital 559,571 242,302 Obligation to issue shares 62,300 - Deficit accumulated during development stage (636,898) (263,249) Accumulated other comprehensive loss (5,041) (1,950) (19,910) (22,750) 85,018 36,827 The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Three Nine Nine October 13 months months Months Months 2000 ended ended ended ended inception Sept 30 Sept 30 Sept 30 Sept 30 to 2002 2001 2002 2001 Sept 30 2002 (Note 1) HARDWARE SALES AND FEES $ 40,923 $ - $ 58,398 $ - $ 58,398 COST OF SALES 46,090 - 48,115 - 48,115 GROSS PROFIT (LOSS) (5,167) - 10,283 - 10,283 EXPENSES Depreciation and Amortization 1,755 1,650 5,265 4,650 11,865 Consulting 22,080 - 60,916 - 78,216 License fees 60,000 30,000 180,000 90,000 300,000 Office and general 21,115 3,689 50,696 28,522 101,226 Marketing 25,585 12,162 57,140 26,538 96,569 Professional fees 10,134 8,450 29,915 15,611 59,305 140,669 55,951 383,932 165,321 647,181 NET LOSS FOR THE PERIOD (145,836) (55,951) (373,649) (165,321) (636,898) BASIC NET LOSS PER SHARE (0.01) (0.00) (0.02) (0.01) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,672,446 12,762,022 15,346,800 12,484,208 The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months Nine months October 13 ended ended 2000 September 30 September 30 inception 2002 2001 to September 30, 2002 (Note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period $ (373,649) $ (165,321) $ (636,898) Adjusted for item not involving cash: Depreciation and amortization 5,265 4,650 11,865 Changes in operating assets and liabilities: Changes in accounts receivable (30,619) - (30,619) Changes in inventory (6,057) - (6,057) Changes in prepaid expenses (2,139) (3,758) (5,897) Changes in deferred license revenue 5,615 - 5,615 Changes in accounts payable 140,680 15,743 179,931 NET CASH FLOWS USED IN OPERATING ACTIVITIES (260,904) (148,686) (482,060) CASH FLOWS FROM FINANCING ACTIVITIES Advances (to) from related parties (20,944) 15,558 (8,596) Obligation to issue shares 62,300 - 62,300 Proceeds on sale of common stock 237,280 138,100 457,633 NET CASH FLOWS FROM FINANCING ACTIVITIES 278,636 153,658 511,337 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of capital assets (1,056) (4,000) (5,056) Cash acquired on reverse acquisition of SchoolWeb - 74 74 NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,056) (3,926) (4,982) EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,091) (706) (5,041) INCREASE IN CASH 13,585 340 19,254 CASH, BEGINNING OF PERIOD 5,669 3 - CASH, END OF PERIOD 19,254 343 19,254 OTHER NON-CASH TRANSACTIONS: During 2002 the Company issued 228,571 common shares at a price of $0.35 per share to settle debt of $80,000. The accompanying notes are an integral part of these interim consolidated financial statements ALTERNET SYSTEMS INC. (Formerly Schoolweb Systems Inc.) (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Unaudited) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION The Company was incorporated on June 26, 2000 in the State of Nevada as North Pacific Capital Corp. and was organized for the purpose of creating a corporate vehicle to locate and acquire an operating business. On December 19, 2001 the Company changed its name to Schoolweb Systems Inc. and on May 14, 2002 the Company changed its name to Alternet Systems Inc. ("Alternet" or the "Company"). On November 6, 2000, the Company filed a Form 10SB registration with the United States Securities and Exchange Commission ("SEC") and as a result is subject to the regulations governing reporting issuers in the United States. By agreement dated July 2, 2001 and completed September 10, 2001, Alternet issued 12,343,000 shares of restricted common stock to the shareholders of Schoolweb Holdings Inc. ("SW Holdings"), a development stage company incorporated October 13, 2000 in the State of Nevada, in exchange for all of the issued and outstanding shares of SW Holdings. On June 26, 2002 SW Holdings changed its name to AI Systems Group, Inc. The acquisition resulted in the former shareholders of SW Holdings acquiring 90.1% of the outstanding shares of the Company and has been accounted for as a reverse merger with SW Holdings being treated as the accounting parent and Alternet, the legal parent, being treated as the accounting subsidiary. Accordingly, the consolidated results of operations of the Company include those of SW Holdings for all periods shown and those of the Alternet since the date of the reverse acquisition. The results of operations of SW Holdings are from its inception, October 13, 2000 and include the results of its wholly- owned subsidiary, SchoolWeb Systems (Canada) Ltd. a company incorporated April 17, 2001 in the Province of British Columbia. Refer to Note 3. SW Holdings, through a License Agreement dated January 1, 2001, distributes, markets, sells and licenses in the United States and Canada, certain proprietary software and hardware systems technology known as "SchoolWeb" used for caching Internet and multimedia files on special servers (refer to Note 4). The consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and further losses are anticipated before the Company reaches a commercial stage raising substantial doubt as to the Company's ability to continue as a going concern. The Company's continued operations are dependent on the successful implementation of its business plan, its ability to obtain additional financing as needed, and ultimately to attain profitable operations. Unaudited Interim Financial Statements The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AI Systems Group, Inc. and Schoolweb Systems (Canada) Ltd. All significant intercompany transactions and account balances have been eliminated. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates and Assumptions Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents. Inventory Inventory consists of computer hardware products held for resale and is carried at the lower of cost and net realizable value. License Rights The Company amortizes the cost of acquiring license rights on a straight-line basis over the term of the license. The Company evaluates the carrying amount of its unamortized license rights against the undiscounted future cash flows associated with them. If the evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value, an impairment provision is recorded to adjust the carrying value of the license rights to their fair value. Furniture and Equipment Furniture and equipment are recorded at cost and depreciated on a declining balance basis at a rate of 30% per annum. Revenue recognition To date, the Company has not generated any revenues from the licensing of its SchoolWeb system. The Company will license its SchoolWeb system on a prepaid basis for terms ranging from one to three years. The Company will recognize license revenues on a straight-line basis over the license term upon completion of the required hardware and software installations and upon acceptance by the purchasers. The Company has generated revenues from hardware sales in connection with the testing of the SchoolWeb system. Hardware sales are recognized upon completion and acceptance of installation by the purchasers. Foreign Currency Translation The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Stock-Based Compensation The Company accounts for stock-based compensation in respect to stock options granted to employees and officers using the intrinsic value based method in accordance with APB 25. Stock options granted to non- employees are accounted for using the fair value method in accordance with SFAS No. 123. In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No. 123 showing the results of applying the fair value method using the Black-Scholes option pricing model. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at September 30, 2002 the Company had net operating loss carryforwards; however, due to the uncertainty of realization the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards. Net Loss per Common Share Basic loss per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. The accompanying presentation is only of basic loss per share as the potentially dilutive factors are anti-dilutive to basic loss per share. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which requires that goodwill not be amortized. SFAS requires that the Company review goodwill at least annually to determine if an impairment has occurred and if so that goodwill should be reduced accordingly. The Company has determined that the implementation of this standard does not have any impact on its financial statements. NOTE 3 - ACQUISITION OF SW HOLDINGS By agreement dated July 2, 2001 and completed September 10, 2001, Alternet acquired 100 % of the issued and outstanding shares of SW Holdings in exchange for 12,343,000 shares of restricted common stock of Alternet. At the time of this transaction, the former shareholders of SW Holdings acquired 90.1% of the 13,693,000 total issued and outstanding shares of Alternet. This acquisition has been accounted for as a recapitalization using accounting principles applicable to reverse acquisitions with SW Holdings being treated as the accounting parent (acquirer) and Alternet being treated as the accounting subsidiary (acquiree). The value assigned to the capital stock of consolidated Alternet on acquisition of SW Holdings is equal to the book value of the capital stock of SW Holdings plus the book value of the net assets (liabilities) of Alternet as at the date of the acquisition. The book value of SW System's capital stock subsequent to the acquisition is calculated and allocated as follows: SW Holdings capital stock $ 153,103 Alternet net assets (liabilities) (7,904) $ 145,199 Capital stock $ 137 Additional paid-in capital 145,062 $ 145,199 These consolidated financial statements include the results of operations of SW Holdings since October 13, 2000 (inception) and the results of operations of Alternet since the date of the reverse acquisition on September 10, 2001. NOTE 4 - LICENSE AGREEMENT By agreement dated January 1, 2001, SW Holdings entered into an agreement with Advanced Interactive Inc. ("AII") and Advanced Interactive (Canada) Inc. ("AIC") whereby SW Holdings acquired exclusive and non-exclusive rights and licenses to commercialise, distribute and market SW Holdings related licensed technology, products and services in the United States and Canada for a period of five years renewable for a further five years at SW Holdings' option. SW Holdings must pay royalties equal to 40% of net revenue received plus a fixed amount of $10,000 per month in the first year, $20,000 per month in year two, and increasing by $8,000 per month in each of the subsequent years to a maximum of $84,000 per month in year ten. After year three, the fixed monthly payment is reduced by the amount of royalties otherwise payable. In addition SW Holdings issued 2,500,000 shares on June 29, 2001 valued at $.01 per share or $25,000. Effective September 10, 2001 SW Holdings, AII and AIC amended the original agreement such that AI and AIC would receive an additional 500,000 shares valued at $5,000 which Alternet issued on September 10, 2001. Also effective September 10, 2001 the President and director of AII and AIC became a director of the Company. NOTE 5 - CAPITAL STOCK To September 30, 2002, the Company has not granted any stock options and has not recorded any stock-based compensation. During the period ended September 30, 2002, the Company completed a private placement of 510,000 units at a price of $.20 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to February 28, 2004. During the period ended September 30, 2002, the Company completed private placements of 386,514 units at a price of $.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share for two years. The Company is in the process of completing a private placement of 193,000 units at a price of $.35 per unit. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to October 2, 2004. To September 30, 2002, the Company had received total subscription proceeds of $62,300 in connection with this private placement which was completed subsequently. At September 30, 2002 there were 375,000 warrants outstanding to purchase 375,000 common shares at a price of $0.50 per share to November 24, 2003; 510,000 warrants outstanding to purchase 510,000 common shares at a price of $0.50 per share to February 28, 2004, 100,000 warrants outstanding to purchase 100,000 common shares at a price of $0.50 per share to March 15, 2004, 140,000 warrants outstanding to purchase 140,000 common shares at a price of $0.50 per share to April 30, 2004, and 146,514 warrants outstanding to purchase 146,514 common shares at a price of $0.50 per share to July 18, 2004. Effective June 3, 2002 the Company filed a Form SB-2 Registration Statement with the SEC for the registration of a total of 7,764,000 shares of the Company's common stock of which 6,639,000 are issued and outstanding and 1,125,000 will be reserved to be issued upon the exercise of 1,125,000 share purchase warrants. NOTE 6 - RELATED PARTY TRANSACTIONS During the nine months ended September 30, 2002, certain directors were repaid for net cash advances and consulting fees owed totalling $20,944. At September 30, 2002 a total of $12,542 is owing to directors and shareholders. Amounts due from related parties are non-interest bearing and have no specific terms of repayment. During the nine months ended September 30, 2002, the following amounts were incurred to directors of the Company or its subsidiary, and a company with a director in common. Nine months ended September 30 2002 2001 Consulting $ 45,319 $ - License fees 180,000 - Marketing 40,159 21,719 $ 265,478 $ 21,719 NOTE 7 - INCOME TAXES The Company and its subsidiaries have tax losses which may be available to reduce future year's taxable income, that result in deferred tax assets. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history and losses to date. Accordingly a full, deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. ITEM 23: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the Company's two most recent fiscal years and any subsequent interim period, there were no disagreements with the Company's accountants on any matter of accounting principle or practices, financial statement disclosure or auditing scope or procedure. In addition, there were no reportable events as described in Item 304(a)(1)(iv)(B)1 through 3 of Regulation S-B that occurred within the Company's two most recent fiscal years and the subsequent interim periods. Labonte & Company have been engaged as the Company's principal accountants to audit its financial statements since its inception PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS No statute, charter provision, article, by-law, contract or other arrangement exists under which any controlling persons, directors or officers of the Company is insured or indemnified in any manner against liability which he or she may incur acting in his or her capacity as such. Information on this item is set forth in the prospectus under the heading "Disclosure of Commission Position on Indemnification for Securities Act Liabilities." ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION As the offering under this registration statement, which is a continuous offering under Rule 415, involves existing shareholders selling their shares to members of the public, the transfer agent's fees, printing and engraving, legal, accounting and other fees associated with the distribution are minimal. Information on this item is set forth in the prospectus under the heading "Use of Proceeds." ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following disclosure of recent sales of unregistered securities is divided into sales by Alternet and by its subsidiary, AI Systems Group: Alternet Systems, Inc. On June 26, 2000 Alternet issued a total of 3,000 shares of common stock to three principals (Stephen Stanley, Terry Wells and Drew Martel as to 1,000 shares each) in a transaction not involving a public offering. Total consideration for these 3,000 shares was $3.00. On September 13, 2000 a total of 17,000 shares of common stock were issued to sixteen (16) non-US resident persons under Regulation S for total consideration of $17.00. On May 17 and May 18, 2001 a total of 1,230,000 shares of common stock were issued to four non-US resident persons under Regulation S for total consideration of $1,230. On May 31, 2001 a total of 100,000 shares of common stock were issued to two non-US resident persons under Regulation S for total consideration of $100.00. On July 2, 2001 a total of 12,343,000 shares of common stock were issued as payment for the purchase of the 12,343,000 shares of common stock of Alternet's subsidiary, AI Systems Group. Of these 12,343,000 shares of common stock: - - 3,000,000 shares of common stock were issued to a total of six (6) US resident persons under Regulation D, Rule 506; - - A total of 8,333,000 shares of common stock were issued to six affiliates (Patrick Fitzsimmons, 1,001,000 shares; Greg Protti, 501,000 shares; Griffin Jones, 2,000,000 shares; Michael Dearden, 2,001,000 shares; Advanced Interactive Inc., 2,500,000 shares; Brandon Douglas, 330,000 shares) in a transaction not involving a public offering; and - - A total of 1,010,000 shares of common stock were issued to three non- US resident persons under Regulation S. On September 10, 2001, a total of 500,000 shares of common stock were issued to Advanced Interactive Inc. in a transaction not involving a public offering. The shares were issued to settle a dispute between Alternet and Advanced Interactive Inc. regarding the number of shares Advanced Interactive Inc. was entitled to under the terms of the License Agreement. On September 11, 2001, a total of 50,000 shares of common stock were issued to one non-US resident person under Regulation S. Total consideration for these shares of common stock was $5,000. On September 18, 2001, a total of 50,000 shares of common stock were issued to one non-US resident person under Regulation S. Total consideration for these shares of common stock was $5,000. On November 5, 2001, a total of 15,000 common shares were issued to one non-US resident person under Regulation S. Total consideration for these shares was $2,250. On November 8, 2001, a total of 50,000 common shares were issued to one non-US resident persons under Regulation S. Total consideration for these shares was $5,000. On November 24, 2001, a total of 250,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until November 24, 2003) were issued at a price of $0.20 per unit to two US resident persons under Regulation D, Rule 506. Total consideration for these units was $50,000. On November 24, 2001, a total of 25,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until November 24, 2003) were issued at a price of $0.20 per unit to one non-US resident person under Regulation S. Total consideration for these units was $5,000. On December 3, 2001, a total of 100,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until November 24, 2003) were issued at a price of $0.20 per unit to one US resident person under Regulation D, Rule 506. Total consideration for these units was $20,000. On February 28, 2002, a total of 365,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until February 28, 2004) were issued at a price of $0.20 per unit to a total of ten non-US resident persons under Regulation S. Total consideration for these units was $73,000. On February 28, 2002 a total of 85,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until February 28, 2004) were issued to two US resident persons under Regulation D, Rule 506. Total consideration for these units was $17,000. On February 28, 2002 a total of 60,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until February 28, 2004) were issued to Streamline Investment, Inc., a company of which the sole shareholder is Michael Dearden, Alternet's President and a Director, in a transaction not involving a public offering. Total consideration for these units was $12,000. On March 2, 2002, Griffin Jones, a Director and Secretary of Alternet, transferred all of his 2,550,000 shares of common stock in Alternet to the name of Nahatlatch Capital Inc., a company of which he is the sole shareholder, in a transaction not involving a public offering. On March 2, 2002, Michael Dearden, a Director and President of Alternet, transferred all of his 2,551,000 shares of common stock in Alternet to the name of Streamline Investment Inc., a company of which he is the sole shareholder, in a transaction not involving a public offering. On March 15, 2002, a total of 30,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until March 15, 2004) were issued to one non-US resident person under Regulation S. Total consideration for these units was $10,500. On March 15, 2002, a total of 70,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until March 15, 2004) were issued to two US resident persons under Regulation D, Rule 506. Total consideration for these units was $24,500. On April 30, 2002, a total of 35,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until April 30, 2004) were issued to three non-US resident persons under Regulation S. Total consideration for these units was $12,250. On April 30, 2002, a total of 105,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until April 30, 2004) were issued to two US resident persons under Regulation D, Rule 506. Total consideration for these units was $36,750. On May 30, 2002, a total of 60,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until May 30, 2004) were issued to three non-US resident persons under Regulation S. Total consideration for these units was $15,750. On June 27, 2002, a total of 37,371units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until June 27, 2004) were issued to four non-US resident persons under Regulation S. Total consideration for these units was $13,080. On July 8, 2002, a total of 49,143 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until July 8, 2004) were issued to four non-US resident persons under Regulation S. Total consideration for these units was $17,200. On September 11, 2002 a total of 228,571 shares of common stock were issued to Advanced Interactive Inc. (an affiliate of the Company) in settlement of an $80,000 debt owed to it by the Company in a transaction not involving a public offering. On October 2, 2002, a total of 93,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until October 2, 2004) were issued at a price of $0.35 per unit to four non-US resident persons under Regulation S. Total consideration for these units was $32,550. On October 2, 2002, a total of 100,000 units (each unit comprised of one share of common stock and one share purchase warrant exercisable at a price of $0.50 until October 4, 2004) were issued at a price of $0.35 per unit to one US resident person, Charles W. Gay, under Regulation D, Rule 506. Total consideration for these units was $35,000. Because these units were issued to a US resident person after June 6, 2002 (the date on which Alternet's initial registration statement on Form SB2 was filed on EDGAR) it is possible, even though Mr. Gay entered into his agreement to purchase the units on June 5, 2002, that Mr. Gay will have rescission rights granted to him under the Securities Act of 1933 for a period of two years. The position of Alternet is that the sale was made in accordance with Regulation D, Rule 506 and Alternet has not had any indication from Mr. Gay that he wishes to exercise any rescission rights he may have. As a result of the unit issuances described above, a total of 1,464,514 share purchase warrants are issued and outstanding. AI Systems Group Inc. (Alternet's wholly owned subsidiary): On October 16, 2000 a total of 3,000 shares of common stock were issued to three principals (Michael Dearden, Patrick Fitzsimmons and Greg Protti as to 1,000 shares each) of AI Systems Group in a transaction not involving a public offering. Total consideration for these 3,000 shares was $3.00. On May 24, 2001 a total of 5,500,000 shares of common stock were issued to four principals (Griffin Jones, 2,000,000 shares of common stock; Michael Dearden, 2,000,000 shares of common stock; Patrick Fitzsimmons, 1,000,000 shares of common stock; Greg Protti, 500,000 shares of common stock) in a transaction not involving a public offering. All of the four principals were directors and / or senior officers of AI Systems Group. Total consideration for these 5,500,000 shares was $5,000. On June 4, 2001, a total of 1,000,000 shares of common stock were issued to a total of two non-US resident persons under Regulation S for total consideration of $1,000. On June 4, 2001, a total of 3,000,000 shares of common stock were issued to seven US residents under Regulation D Rule 506 for total consideration of $3,000. On June 4, 2001 a total of 10,000 shares of common stock were issued to one non-US resident person under Regulation S for total consideration of $1.00 On June 8, 2001 a total of 330,000 shares of common stock were issued to Brandon Douglas (a director of AI Systems Group Inc.) in a transaction not involving a public offering. Total consideration for these 330,000 shares of common stock was $330. On June 29, 2001 a total of 2,500,000 shares of common stock were issued to Advanced Interactive Inc., a US resident company, under the terms of the License Agreement in a transaction not involving a public offering. The consideration for the issuance of these shares was the acquisition by AI Systems Group of software license rights. Where the offerings (shares and warrants) described above were undertaken under Rule 506 of Regulation D: - - the sales were made to accredited investors as defined in Rule 502 and to less than 35 non-accredited investors; - - the company gave each purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the company possessed or could acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information furnished; - - at a reasonable time prior to the sale of securities, the company advised the purchasers of the limitations on resale in the manner contained in Rule 502(d)2 of this section; - - neither the company nor any person acting on its behalf sold the securities by any form of general solicitation or general advertising; and - - the company exercised reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of Section 2(11) of the Act in compliance with Rule 502(d). Where the offerings described above were undertaken under Regulation S they were made under Rule 903 (Category 3, equity securities) and: - - the sale was made in an offshore transaction; - - no directed selling efforts were made in the United States by the Company; - - the purchaser certified that it is not a US person and is not acquiring the securities for the account or benefit of any US person; - - the purchaser agreed to resell such securities only in accordance with the provisions of the Securities Act of 1933 or regulations applicable to their securities; - - the securities contained a legend to the effect that transfer was prohibited unless the securities were first registered under the Securities Act of 1933 or resale was made pursuant to an exemption therefrom. No commission or professional fees were paid in connection with the Company's sales of unregistered securities under either Regulation S or Regulation D, Rule 506. Although not strictly required to do so by Regulation D, Rule 506, in light of anti-fraud provisions and for the purpose of ensuring that potential investors were aware of the Company's financial circumstances and stage of development, all persons purchasing under Regulation S or Regulation D, Rule 506 were advised to review the Company's continuous disclosure filings and financial statements available on the EDGAR system. Neither we nor any person acting on our behalf offered or sold the foregoing securities by means of any form of general solicitation or general advertising. All purchasers represented in writing that they acquired the securities for their own accounts. A resale legend has been provided for the stock certificates stating that the securities have not been registered under the Securities Act of 1933 and cannot be resold or otherwise transferred without registration or an exemption (such as that provided by Regulation S or Rule 144). ITEM 27. EXHIBITS The Exhibits required by Item 601 of Regulation S-B, and an index thereto, are attached. ITEM 28. UNDERTAKINGS In accordance with Rule 415 and Item 512 of Regulation S-K, the undersigned company hereby undertakes to: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and Notwithstanding the forgoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation From the low or high end of the estimated maximum offering range may be reflected in the form of prospects filed with the U.S. Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the corporation certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorize, in the City of Vancouver in the Province of British Columbia, Canada on this 20th day of November, 2002. "Griffin Jones" "Michael Dearden" /s/Griffin Jones /s/Michael Dearden Director and Treasurer President and Director "Patrick Fitzsimmons" "Greg Protti" /s/Patrick Fitzsimmons /s/Greg Protti Director Director NUMBER EXHIBIT DESCRIPTION 3.1 Articles of incorporation dated June 26, 2000 (incorporated by reference to Exhibit 3 of the Registration Statement of the Form 10-SB filed on November 6, 2000) 3.2 Certificate of Amendment to Articles of incorporation concerning name change to SchoolWeb Systems Inc. 3.3 Certificate of Amendment to Articles of incorporation concerning name change to Alternet Systems Inc. 4.1 Stock Plan for Non-Employee Directors and Consultants 4.2 Specimen Form of Share Purchase Warrants for common shares issued by the Company and allowing for a total of 1,125,000 common shares to be purchased. 5.1 Legal opinion 10.1 License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc., SchoolWeb Holdings Inc. (formerly Alternet Systems Inc.) dated January 1, 2001 10.2 Amendment to License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc., SchoolWeb Holdings Inc. (formerly Alternet Systems Inc.) dated June 29, 2001 10.3 Amendment to License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc., SchoolWeb Holdings Inc. (formerly Alternet Systems Inc.) dated July 17, 2001 10.4 Amendment to License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc., SchoolWeb Holdings Inc. (formerly Alternet Systems Inc.) dated March 8, 2002 10.5 Share Purchase Agreement between the shareholders of SchoolWeb Holdings Inc. and Alternet Systems Inc. (formerly North Pacific Capital Corp.) (incorporated by reference to Exhibit 2.1 of the Form 8K filed on December 20, 2002) 10.6 Amendment to License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc., SchoolWeb Holdings Inc. (formerly Alternet Systems Inc.) dated September 10, 2001 10.7 Solutions Partner Agreement between Hewlett Packard (Canada) Ltd. and Advanced Interactive Inc. dated March 8, 2002 10.8 Consent of Alternet Systems Inc. to the Solutions Partner Agreement between Hewlett Packard (Canada) Ltd. and Advanced Interactive Inc. dated March 8, 2002 10.9 Specimen form of Reseller Agreement between Alternet Systems Inc. and distributors 10.10 Amendment to License Agreement between Advanced Interactive Inc., Advanced Interactive (Canada) Inc. and Alternet Systems Inc. dated August 14, 2002 23.1 Consent of Accountants (see below) 23.2 Consent of Counsel (see below) EX-3.2 2 alternetex321203.txt EXHIBIT 3.2 CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION CONCERNING NAME CHANGE TO SCHOOLWEB SYSTEMS INC. I, Griffin Jones, certify that: 1. The original articles of North Pacific Capital Corp. were filed with the Office of the Secretary of State on June 26, 2000. 2. Pursuant to the unanimous written consent of the Board of Directors, the Corporation hereby adopted the following amendments to the Articles of Incorporation of the Corporation: Article 1: Name is amended to read as follows: "The name of the corporation is SchoolWeb Systems Inc." 3. At a Meeting of the shareholders of the Corporation held on December 19, 2001, the Corporation had 14,293,000 shares of voting common stock outstanding. By a vote of 10,433,000 shares of this common stock, present in person or by proxy (which represents 72% of the issued and outstanding shares of common stock), which vote is sufficient for approval, the foregoing amendment to the Articles of Incorporation of this corporation was approved. Dated this 7th day of March, 2002: _______________________________ GRIFFIN JONES, Director, Treasurer and Secretary EX-3.3 3 alternetex331203.txt EXHIBIT 3.3 CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION CONCERNING NAME CHANGE TO ALTERNET SYSTEMS INC. 1. Name of corporation: SchoolWeb Systems Inc. 2. The Articles have been amended as follows (provide article numbers, if available): Article 1: Change name to: ALTERNET SYSTEMS, INC. 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favour of the amendment is: simple majority. 4. Officer Signature (Required): /s/Michael Dearden /s/Griffin Jones" Michael Dearden Griffin Jones *If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition of the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and remit the proper fees may cause this filing to be rejected. Nevada Secretary of State Form 78.385 PROFIT AMENDMENT 1999.01 Revised on: 07/21/01 EX-4.1 4 alternetex411203.txt EXHIBIT 4.1 NORTH PACIFIC CAPITAL CORP. RETAINER STOCK PLAN FOR NON-EMPLOYEE DIRECTORS AND CONSULTANTS 1. Introduction. This plan shall be known as the "North Pacific Capital Corp. Retainer Stock Plan for Non-Employee Directors and Consultants" is hereinafter referred to as the "Plan". The purposes of the Plan are to enable North Pacific Capital Corp., a Nevada corporation (the "Company"), to promote the interests of the Company and its shareholders by attracting and retaining non- employee Directors and Consultants capable of furthering the future success of the Company and by aligning their economic interests more closely with those of the Company's shareholders, by paying their retainer fees in the form of shares of the Company's common stock (the "Common Stock") on the terms and conditions to be agreed between the Company and these persons. 2. Definitions The following terms shall have the meanings set forth below: "Board" means the Board of Directors of the Company. "Change of Control" has the meaning set forth in Section 12(d). "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder. References to any provision of the Code or rule or regulation thereunder shall be deemed to include any amended or successor provision, rule or regulation. "Committee" means the committee that administers the Plan, as more fully defined in Section 13. "Common Stock" has the meaning set forth in Section 1. "Company" has the meaning set forth in Section 1. "Deferral Election" has the meaning set forth in Section 6. "Deferred Stock Account" means a bookkeeping account maintained by the Company for a Participant representing the Participant's interest in the shares credited to such Deferred Stock Account pursuant to Section 7. "Delivery Date" has the meaning set forth in Section 6. "Director" means an individual who is a member of the Board of Directors of the Company. "Divided Equivalent" for a given dividend or other distribution means a number of shares of Common Stock having a Fair Market Value, as of the record date for such dividend or distribution, equal to the amount of cash, plus the fair market value on the date of distribution of any property, that is distributed with respect to one share of Common Stock pursuant to such dividend or distribution; such fair market value to be determined by the Committee in good faith. "Effective Date" has the meaning set forth in Section 3. "Exchange Act" has the meaning set forth in Section 13(b). "Fair Market Value" means the mean between the highest and lowest reported sales prices of the Company's Common Stock on the last trading day prior to the date with respect to which the Fair Market Value is to be determined or such other value as the Company's Board of Directors may, in its sole discretion, determine. "Participant" has the meaning set forth in Section 4. "Payment Time" means the time when a Stock Retainer is payable to a Participant pursuant to Section 5 (without regard to the effect of any Deferral Election). "Stock Retainer" has the meaning set forth in Section 5. "Third Anniversary" has the meaning set forth in Section 6. 3. Effective Date of the Plan. The Plan shall be effective as of , 2000 ("Effective Date"), provided that it is approved by the Board. 4. Eligibility. Each individual who is a Director or Consultant on the Effective Date and each individual who becomes a Director or Consultant thereafter during the term of the Plan, shall be a participant ("Participant") in the Plan, in each case during such period as such individual remains a Director or Consultant and is not an employee of the Company or any of its subsidiaries. Each credit of shares of Common Stock pursuant to the Plan shall be evidenced by a written agreement duly executed and delivered by or on behalf of the Company and a Participant, if such an agreement is required by the Company to assure compliance with all applicable laws and regulations. 5. Grant of Shares. Commencing on the Effective Date, the amount for service to directors or consultants shall instead be, at the discretion of the Committee, payable in shares of Common Stock ("Stock Retainer") pursuant to this Plan. 6. Deferral Option. From and after the Effective Date, a Participant may make an election (a "Deferral Election") on an annual basis to defer delivery of the Stock Retainer to be delivered: (a) on the date which is three years after the Effective Date for which it was originally payable ("Third Anniversary"), (b) on the date upon which the Participant ceases to be a Director or Consultant for any reason ("Departure Date") or (c) in five equal annual installments commencing on the Departure Date ("Third Anniversary" and "Departure Date" each being referred to herein as a "Delivery Date"). Such Deferral Election shall remain in effect for each Subsequent Year unless changed, provided that, any Deferral Election with respect to a particular Year may not be changed less than six (6) months prior to the beginning of such Year and provided, further, that no more than one Deferral Election or change thereof may be made in any Year. Any Deferral Election and any change or revocation thereof shall be made by delivering written notice thereof to the Committee no later than six (6) months prior to the beginning of the Year in which it is to be effected; provided that, with respect to the Year beginning on the Effective Date, any Deferral Election or revocation thereof must be delivered no later than the close of business on the thirtieth (30th) day after the Effective Date. 7. Deferred Stock Accounts. The Company shall maintain a Deferred Stock Account for each Participant who makes a Deferral Election to which shall be credited, as of the applicable Payment Time, the number of shares of Common Stock payable pursuant to the Stock Retainer to which the Deferral Election relates. So long as any amounts in such Deferred Stock Account have not been delivered to the Participant then on the payment date for any dividend paid or other distribution made with respect to the Common Stock the Deferred Stock Account shall be credited, with a number of shares of Common Stock equal to (a) the number of shares of Common Stock shown in such Deferred Stock Account on the record date for such dividend or distribution multiplied by (b) the Dividend Equivalent for such dividend or distribution. 8. Delivery of Shares. (a) The shares of Common Stock in a Participant's Deferred Stock Account with respect to any Stock Retainer for which a Deferral Election has been made (together with dividends attributable to such shares credited to such Deferred Stock Account) shall be delivered in accordance with this Section 8 as soon as practicable after the applicable Delivery Date. Except with respect to a Deferral Election pursuant to Section 6(c), or other agreement between the parties, such shares shall be delivered at one time; provided that, if the number of shares so delivered includes a fractional share, such number shall be rounded to the nearest whole number of shares. If the Participant has in effect a Deferral Election pursuant to Section 6(c), then such shares shall be delivered in five equal annual installments (together with dividends attributable to such shares credited to such Deferred Stock Account), with the first such installment being delivered on the first anniversary of the Delivery Date. References to a Participant in this Plan shall be deemed to refer to the Participant's estate or legal guardian, where appropriate. (b) The Company may, but shall not be required to, create a grantor trust or utilize an existing grantor trust (in either case, "Trust") to assist it in accumulating the shares of Common Stock needed to fulfill its obligations under this Section 8. However, Participants shall have no beneficial or other interest in the Trust and the assets thereof, and their rights under the Plan shall be as general creditors of the Company, unaffected by the existence or nonexistence of the Trust, except that deliveries of Stock Retainers to Participants from the Trust shall, to the extent thereof, be treated as satisfying the Company's obligations under this Section 8. 9. Share Certificates; Voting and Other Rights. The certificates for shares delivered to a Participant pursuant to Section 8 above shall be issued in the name of the Participant, and from and after the date of such issuance the Participant shall be entitled to all rights of a shareholder with respect to Common Stock for all such shares, and the Participant shall receive all dividends and other distributions paid or made with respect thereto. 10. General Restrictions. (a) Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (i) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, upon the advice of counsel, deem necessary or advisable; and (ii) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements for the Participants. 11. Shares Available. Subject to Section 12 below, the maximum number of shares of Common Stock which may in the aggregate be paid as Stock Retainers pursuant to the Plan is One Million (1,000,000). Shares of Common Stock issuable under the Plan may be taken from treasury shares of the Company or purchased on the open market. 12. Adjustments; Change of Control. (a) In the event that there is, at any time after the Board adopts the Plan, any change in corporate capitalization, such as a stock split, combination of shares, exchange of shares, warrants or rights of offering to purchase Common Stock at a price below its fair market value, reclassification, or recapitalization, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other extraordinary distribution of stock or property of the Company, any reorganization or any partial or complete liquidation of the Company (each of the foregoing a "Transaction"), in each case other than any such Transaction which constitutes a Change of Control (as defined below), (i) the Deferred Stock Accounts shall be credited with the amount and kind of shares or other property which would have been received by a holder of the number of shares of Common Stock held in such Deferred Stock Account had such shares of Common Stock been outstanding as of the effectiveness of any such Transaction, (ii) the number and kind of shares or other property subject to the Plan shall likewise be appropriately adjusted to reflect the effectiveness of any such Transaction and (iii) the Committee shall appropriately adjust any other relevant provisions of the Plan and any such modifications by the Committee shall be binding and conclusive on all persons. (b) If the shares of Common Stock credited to the Deferred Stock Accounts are converted pursuant to Section 12(a) into another form of property, references in the Plan to the Common Stock shall be deemed, where appropriate, to refer to such other form of property, with such other modifications as may be required for the Plan to operate in accordance with its purposes. Without limiting the generality of the foregoing, references to delivery of certificates for shares of Common Stock shall be deemed to refer to delivery of cash and the incidents of ownership of any other property held in the Deferred Stock Accounts. (c) In lieu of the adjustment contemplated by Section 12(a), in the event of a Change of Control, the following shall occur on the date of the Change of Control: (i) the shares of Common Stock held in each Participant's Deferred Stock Account shall be deemed to be issued and outstanding as of the Change of Control; (ii) the Company shall forthwith deliver to each Participant who has a Deferred Stock Account all of the shares of Common Stock or any other property held in such Participant's Deferred Stock or any other property held in such Participant's Deferred Stock Account; and (iii) the Plan shall be terminated. (d) For purposes of this Plan, Change of Control shall mean any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company or (b) the combined voting power of the then outstanding voting securities of the Company entitle to vote generally in the election of directors. (ii) Individuals who, as of the date hereof, constitute the Board of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company. (iii) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company. 13. Administration; Amendment and Termination (a) The Plan shall be administered by a committee consisting of all persons who are current directors of the Company ("Committee"), which shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, and to take all such actions and make all such determinations in connection with the plan as it may deem necessary or desirable. (b) The Board may from time to time make such amendments to the Plan, including to preserve or come within exemption from liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as it may deem proper and in the best interest of the Company provided, that, if and to the extent required for the Plan to comply with Rule 16b-3 promulgated under the Exchange Act, no amendment to the Plan shall be made more than once in any six (6) month period that would change the amount, price or timing of the grants of Common Stock hereunder other than to comform with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 174, as amended, or the regulations thereunder. (c) The Board may terminate the Plan at any time by a vote of a majority of the members thereof but shall terminate on September 18, 2003 at the latest and no grants made be made pursuant to the Plan after that date. The provisions of the Plan governing Deferred Stock Accounts shall survive the termination of the Plan. 14. Miscellaneous (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders or to limit the rights of the shareholders to remove any Director. (b) The Company shall have the right to require, prior to the issuance or delivery of any share of Common Stock pursuant to the Plan, that a Participant make arrangements satisfactory to the Committee for the withholding of any taxes required by law to be withheld with respect to the issuance or delivery of such shares, including without limitation by the withholding of shares that would otherwise be so issued or delivered, by withholding from any other payment due to the Participant, or by a cash payment to the Company by the Participant. 15. Governing Law The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Nevada. North Pacific Capital Corp. By:/s/ Chief Executive Officer EX-4.2 5 alternetex421203.txt EXHIBIT 4.2 This Warrant will be void and of no value unless exercised on or before 4:00 o'clock in the afternoon (Pacific Standard Time) on February 28, 2004 THIS WARRANT IS NON-TRANSFERABLE WARRANT FOR THE PURCHASE OF COMMON SHARES OF SCHOOLWEB SYSTEMS INC. (Incorporated under the laws of the State of Nevada) Warrant Number: SPW- RIGHT TO PURCHASE COMMON SHARES THIS IS TO CERTIFY THAT, for value received, (the "Holder"), is entitled to subscribe for and purchase fully paid and non- assessable common shares without par value in the capital stock (as constituted on (February 28, 2002) of SchoolWeb Systems Inc. (the "Company") at the price of $0.50 per share at any time prior to 4:00 o'clock in the afternoon (Pacific Standard Time) on February 28, 2004. The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as to a fractional share), by completing the subscription form attached hereto and surrendering this Warrant at the office of the Company at Suite 210 - 815 West Hastings St. Vancouver, British Columbia, V6C 1B4, together with a certified cheque, money order or bank draft payable to or to the order of the Company in payment of the purchase price of the number of Common Shares subscribed for. In the event of an exercise of the rights represented by this Warrant, certificates for the Common Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been exercised and, unless this Warrant has expired, a new Warrant representing the number of Common Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder within such time. The Company covenants and agrees that all Common Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant. The following are the terms and conditions referred to in this Warrant: 1. In the event of any subdivision of the Common Shares of the Company as such shares are constituted on the date hereof, at any time while this Warrant is outstanding, into a greater number of Common Shares, the Company will thereafter deliver at the time or times of purchase of shares hereunder, in addition to the number of shares in respect of which the right to purchase is then being exercised, such additional number of shares as result from such subdivision without any additional payment or other consideration therefor. 2. In the event of any consolidation of the Common Shares of the Company as such shares are constituted on the date hereof, at any time while this Warrant is outstanding, into a lesser number of Common Shares, the number of shares represented by this Warrant shall thereafter be deemed to be consolidated in like manner and any subscription by the Holder for shares hereunder shall be deemed to be a subscription for shares of the Company as consolidated. 3. In the event of any reclassification of the Common Shares of the Company at any time while this Warrant is outstanding, the Company shall thereafter deliver at the time of the purchase of shares hereunder the number of shares of the appropriate class resulting from the reclassification as the Holder would have been entitled to receive in respect of the number of shares so purchased had the right to purchase been exercised before such reclassification. 4. As used herein, the term "Common Shares" shall mean and include the Company's presently authorized Common Shares and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holder thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 5. This Warrant shall not entitle the Holder to any rights as a member of the Company, including without limitation, voting rights. 6. The Holder, by acceptance of this Warrant, agrees that this Warrant, any shares acquired by the Holder pursuant to this Warrant and all rights hereunder are non-transferable and further agrees that the Company may, on the certificate representing any shares acquired by the Holder pursuant to this Warrant, print any legend regarding resale restrictions or hold periods which the Company, in its sole discretion acting reasonably, may determine apply as a result of the jurisdiction of residency of the Holder. IN WITNESS WHEREOF SchoolWeb Systems Inc. has executed this Warrant as of . SCHOOLWEB SYSTEMS INC. Per: _________________________________ Authorized Signatory SUBSCRIPTION FORM To: SchoolWeb Systems Inc. The holder of the within Share Purchase Warrant, hereby subscribes for ________ Common Shares referred to therein according to the terms and conditions thereof, and herewith makes payment of the purchase price in full for the said number of shares at the rate of $0.50 per share from February 28, 2002 until February 28, 2004. DATED this ____ day of _____________, 20___. _______________________________ Signature of Warrant Holder EX-5.1 6 alternetex511203.txt EXHIBIT 5.1 LEGAL OPINION October 4, 2002 Alternet Systems Inc. 815 West Hastings Street, Suite 280 Vancover, British Columbia V6C 2TB Re: Alternet Systems Inc. (the "Corporation") Registration Statement on Form SB-2/A (the "Registration Statement") dated October 4, 2002 Gentlemen: We have acted as counsel to the Corporation in connection with the preparation of the Registration Statement filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "1933 Act"), relating to the proposed public offering of up to 8,443,028 shares of the Corporation's Common Stock, par value $0.00001 per share (the "Common Stock"). We are furnishing this opinion to you in accordance with Item 601(b)(5) of Regulation S-B promulgated under the 1933 Act for filing as Exhibit 5.1 to the Registration Statement. We are familiar with the Registration Statement, and we have examined the Corporation's Articles of Incorporation, as amended to date, the Corporation's Bylaws, as amended to date, and minutes and resolutions of the Corporation's Board of Directors and shareholders. We have also examined such other documents certificates, instruments and corporate records, and such statutes, decisions and questions of law as we have deemed necessary or appropriate for the purpose of this opinion. We have relied upon these documents together with the audited financial statements of the Corporation in expressing our opinion below. The opinions expressed herein are limited to the Nevada General Corporation Law. We do not express any opinion concerning any law other than the Nevada General Corporation Law. Based upon the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Selling Stockholders (as defined in the Registration Statement) to the public, when issued and sold in the manner described in the Registration Statement (as amended), will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Prospectus Constituting a part thereof in connection with the matters referred to under the caption "Legal Matters." Very truly yours, CD FARBER LAW CORPORATION EX-10.1 7 alternetex1011204.txt EXHIBIT 10.1 LICENSE AGREEMENT THIS LICENSE AGREEMENT made effective this 1st day of January, 2001 BETWEEN: ADVANCED INTERACTIVE INC., a corporation, incorporated on September 1, 1998 established under the laws of the State of Nevada, USA, and having its head offices located at suite 718 - 1350 East Flamingo Road, Las Vegas, NV 89119 (hereinafter called "AII Nevada") AND: ADVANCED INTERACTIVE CANADA INC., a corporation established under the laws of the Province of British Columbia which is a wholly owned subsidiary of AII Nevada with offices at suite 2101 - 1177 West Hastings Street, Vancouver, BC V6E 2K3 (hereinafter called "AII Canada") AND: ALTERNET SYSTEMS INC., a corporation established under the laws of the State of Nevada, USA, having offices at Suite 280 - 815 West Hastings Street, Vancouver, BC, Canada V6C 1B4 (hereinafter called "Alternet") singularly referred to as "party", and together referred to as "the Parties" WITNESSETH THAT: A. WHEREAS AII Nevada and AII Canada have developed proprietary software and hardware systems technology known as "SchoolWeb" and "OfficeServer" for caching Internet and multimedia files on special servers at schools, homes, businesses or other locations, and wish to license certain rights to the SchoolWeb and OfficeServer software and hardware systems technology (the "Licensed Technology") to Alternet; B. WHEREAS AII Nevada or AII Canada wishes to provide Products and Services to customers using the Licensed Technology including after installation support and services to customers which use the Licensed Technology; and C. WHEREAS Alternet is a start-up company with a skilled sales force, operating in North America, and wishes to enter into this License Agreement to obtain rights to distribute, market, sell and license the Licensed Technology, to provide the Licensed Technology, Products and Services in a prescribed Field of Use, in a prescribed Territory, under the terms and conditions of this Agreement, and D. WHEREAS Alternet represents that it is experienced in, and wishes to put its full energy towards, the enhancement and commercial development of a business which would use the Licensed Technology including devoting funds, staff, business expertise and business and marketing planning to further the commercial success of the Licensed Technology. NOW THEREFORE in consideration of the mutual promises and covenants hereinafter contained, AII Nevada, AII Canada, and Alternet, the Parties to this Agreement, agree as follows: 1.0 INTERPRETATION 1.1 As used in this Agreement, the following terms shall have the definitions respectively assigned to them hereunder unless the subject matter or context otherwise requires: (a) "Agreement" means this document comprising Sections 1 to 22 inclusive together with Schedules 1.0 and 2.0 attached hereto, which shall be read with and form a part of this Agreement; (b) "SchoolWeb" and "OfficeServer" mean the trademarked names of the Licensed Technology produced by employing the Licensed Technology and shall be read to include any future names trademarked by AII Nevada or AII Canada or Alternet which relate to the Licensed Technology; (c) "Follow-on Invention" means an invention made by, owned by or licensed to AII Nevada or AII Canada that falls within the scope of the claims of the intellectual property ("IP") rights forming the Licensed Technology, or an invention that utilizes the IP or one that constitutes an Improvement to the IP; (d) "Field of Use" has the meaning set out in Schedule 1.0, part V; (e) "herein", "hereby", "hereof", "hereunder", and similar expressions, when used in any Section, shall be understood to relate to this Agreement as a whole and not merely to the Section in which they appear; (f) "Improvement" means any change to or development of the Licensed Technology made by, owned by, or licensed to, AII Nevada or AII Canada, including a Follow-on Invention, that may improve the Licensed Technology or the Services or both. Improvement includes for copyrightable or copyrighted material, any translation, abridgement, revision or other form in which an existing work may be recast, transformed or adapted; for patentable or patented material, any improvement thereon; and for material which is protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected or protectable by copyright, patent and/or trade secret; (g) "Licensed Technology" means the proprietary software and hardware systems technology currently known as "SchoolWeb" and "OfficeServer" for caching and indexing Internet and multimedia files on special servers at schools, homes and businesses as described in Schedule 1.0, Part I. The term Licensed Technology also includes: (i) the head-end hardware and software system necessary to transmit data via various broadcasting systems, and the receiving and decoding hardware and software at the receiving location, as described in Part III of Schedule 1.0, (ii) all claims specific to the transmission encoding process contained in IP described in Part II of Schedule 1.0, as may be amended from time to time, including any continuation, divisional, or continuation-in-part application entitled to priority based on the IP, as described in Schedule 1.0, as well as any Improvements, (iii) any Licensed Technology provided by way of technical assistance as more particularly set out in Section 4.0 hereof of this Agreement; and (iv) Product as defined below. (h) "Maintenance" means provision of Hardware Maintenance, and Software Maintenance which is required to ensure Licensed Technology customers' ability to utilize the Licensed Technology. "Hardware Maintenance" means the provision of hardware service calls and repair and/or replacement of hardware components of SchoolWeb and OfficeServer systems. "Software Maintenance" means provision of a service to repair any software problems, as well as provide upgrades to the software, on a periodic basis; (i) "Net Revenue" means the total revenue from the distribution, marketing, sub-license or sale of the Licensed Technology, less the cost of installation, Maintenance, hardware costs, hardware leasing costs, taxes, costs incurred by third parties (parties other than the Parties) but charged against the Net Revenue, discounts and rebates Alternet receives from its rights to the Licensed Technology, and specifically excludes revenues of AII Nevada or AII Canada which are realized from providing Product Software, Software Maintenance and Software License to Alternet's customers; (j) "Party" means Alternet, AII Nevada and/or AII Canada as the context requires, and "Parties" means all of Alternet, AII Nevada or AII Canada; (k) "Product" means any Product Hardware and Product Software which are made in whole or in part by utilizing the Licensed Technology, or any application or hardware of the IP which falls within the definition of Licensed Technology, or which are produced according to a process which, in whole or in part, is subject to IP which falls within the definition of Licensed Technology, or any IP application therefor. "Product Hardware" means any physical hardware that resides in the server box, along with any other peripheral units required to make up the SchoolWeb and OfficeServer systems. Product hardware may also include installation and commissioning at the customer's premises. "Product Software" means any software operating systems and software applications that are part of , and allow the SchoolWeb and OfficeServer to operate, including software programs that may reside on computer clients that use the SchoolWeb and OfficeServer systems. Product Software may also include installation and configuration of software on server hard drives; (l) "Restricted Information" means information of a confidential or proprietary nature disclosed by one party to another. Restricted Information does not include: (i) information which is lawfully in the public domain at the time of one Party's receipt or acquisition thereof from the other Party, or which becomes a part of the public domain through no breach, by the receiving Party, of any obligation of confidentiality with respect to such information; and (ii) information which, subsequent to one Party's receipt or acquisition thereof from the other Party, is lawfully obtained by the receiving Party from another source without restriction on further disclosure and without breach by any person of any obligation of confidentiality (contained herein or otherwise existing) with respect to such information. (m) "Services" means any Support Services or Consulting Services related to the Licensed Technology which are required to ensure Licensed Technology customers' ability to utilize the Licensed Technology. "Support Services" means the provision of help desk and technical support for purchasers of SchoolWeb and OfficeServer systems, for 'x' hours per day, 'y' hours per week. "Consulting Services" means the provision of consulting work regarding variations of hardware and software of SchoolWeb and OfficeServer systems to suit new client applications; (n) "Software License" means the license attached to each SchoolWeb and OfficeServer system sold or leased to every client; (o) "Territory" means the geographical area, in which Alternet has been given the licensed rights to the Licensed Technology. The Territory is described in Schedule 1, Part IV. 1.2 For the purposes of this Agreement, any reference to the "sale" of Licensed Technology or Services shall be interpreted to include the "lease", "license" or "sub- license" of Licensed Technology or Service, or both. 2.0 GRANT OF LICENSE 2.1 Subject to the terms of this Agreement AII Canada and AII Nevada hereby grant to Alternet an exclusive right and license to commercialize, distribute, sell, sub-license and market SchoolWeb related Licensed Technology, Products and Services in the prescribed Fields of Use, and in prescribed Territories, as set out in Schedule 1.0 hereto; and a non- exclusive license to commercialize, distribute, sell, sub- license and market OfficeServer related Licensed Technology, Products and Services, in the prescribed Fields of Use, and in prescribed Territories, as set out in Schedule 1 hereto. 2.2 AII Canada and AII Nevada shall be the sole and exclusive provider of the Software License for SchoolWeb and OfficeServer systems. AII Canada and AII Nevada shall also have the right of first refusal to be the provider to Alternet (at commercially reasonable and competitive rates) of Product Software and Software Maintenance. The Parties shall agree annually on suitable levels of service and cost of both Product Software (including installation and configuration on a hard drive) and Software Maintenance. 2.3 Alternet agrees that this Agreement does not grant Alternet any rights to or interest in such Licensed Technology except the right to use such Licensed Technology in accordance with the terms of this Agreement. In short, Alternet will not acquire existing IP rights from AII Nevada or AII Canada as a result of engaging in the transactions in this License Agreement. 2.4 Alternet agrees that during the term of this Agreement and thereafter it will not dispute or contest, directly or indirectly, the validity of AII Nevada's or AII Canada's IP rights to the Licensed Technology, nor counsel or assist any other party to do the same, unless compelled to do so by due process of law. 2.5 Except as concerns GNU licenses and other software vendors licenses provided to Alternet by AII Nevada or AII Canada, neither AII Nevada nor AII Canada are aware of any way in which the Licensed Technology or Services infringe upon any third parties' copyright, patent, industrial design, registration or trademark rights. Nothing in this Agreement shall be construed as a representation, warranty or covenant by or on behalf of AII Nevada or AII Canada, (a) that any Licensed Technology which is manufactured, used, or sold, or any Service which is provided pursuant to the license granted under this Agreement, is, or will be, free from infringement of any copyright, patent, industrial design registration, or trademark, or is not, or will not be, in breach of a trade secret, (b) that it will bring or prosecute any action or suit of any nature against any third party with respect to such third party's infringement or alleged infringement of the Licensed Technology, or (c) that it will defend any action or suit of any nature brought by any third party in which it is alleged that use of the Licensed Technology has infringed, or will infringe, such third party's rights, (d) if there are any software license fees to be paid to third parties then Alternet will pay those fees and the fees will be considered as part of the cost of the server. 2.6 Alternet agrees that it will not institute any action or suit of any nature against AII Nevada or AII Canada, by way of indemnification or otherwise, in respect of any of the matters set out in Section 2.4. 2.7 In the event of an alleged infringement of the Licensed Technology or any right with respect to the Licensed Technology, Alternet shall have the right to prosecute litigation designed to enjoin infringers of the Licensed Technology. AII Nevada and AII Canada agree to co-operate to the extent of executing all necessary documents and to vest in Alternet the right to institute any such suits, so long as all the direct costs and expenses of bringing and conducting any such litigation or settlement shall be borne by Alternet and in such event all recoveries in excess of all costs relating to the litigation shall enure to Alternet. 2.8 Subject to the prior written consent (said consent not to be unreasonably withheld) of AII Nevada or AII Canada, Alternet may grant sublicenses to third parties on terms and conditions substantially in accordance with the terms and conditions contained herein. AII Canada's or AII Nevada's entitlement to payments derived from such sublicensing arrangements shall be agreed upon by the Parties prior to AII Nevada or AII Canada providing its written consent. 2.9 In the event that any complaint is made against Alternet with respect to its marketing, use or sale of the Licensed Technology or Services, the following procedure shall be adopted: (a) Alternet shall promptly notify AII Nevada or AII Canada upon receipt of any such complaint and shall keep AII Nevada or AII Canada fully informed of the actions and positions taken by the complainant and taken or proposed to be taken by Alternet on behalf of itself or a sublicensee, (b) all costs and expenses incurred by Alternet or any sublicensee of Alternet in investigating, resisting, litigating and settling such a complaint, including the payment of any award of damages and/or costs to any third party, shall be paid by Alternet or any sublicensee of Alternet, as the case may be save and except in the case of negligence or fault in the provision of Services by AII Canada or AII Nevada (in which case the costs and expenses shall be paid by AII Canada or AII Nevada); (c) no decision or action concerning or governing any final disposition of the complaint shall be taken without fully informing AII Nevada or AII Canada; (d) AII Nevada or AII Canada may elect to participate formally in any litigation involving the complaint to the extent that the court may permit, but any additional expenses generated by such formal participation shall be paid by AII Nevada or AII Canada (subject to the possibility of recovery of some or all of such additional expenses from the complainant); and (e) if the complainant is willing to make or accept an offer of settlement and Alternet is willing to make or accept such offer and AII Nevada or AII Canada is not, then AII Nevada or AII Canada shall conduct all further proceedings at its own expense, and shall be responsible for the full amount of any damages, costs, accounting of profits and settlement costs in excess of those provided in such offer, but shall be entitled to retain unto itself the benefit of any litigated or settled result entailing a lower payment of costs, damages, accounting of profits and settlement costs than that provided in such offer. 2.10 In the event that any complaint is made against AII Nevada or AII Canada with respect to the use of the Licensed Technology by Alternet or the marketing, use or sale of the Licensed Technology by Alternet for which AII Nevada or AII Canada is relying upon the indemnification of Alternet pursuant to Section 14 herein, then the following procedure shall be adopted: (a) AII Nevada or AII Canada shall promptly notify Alternet upon receipt of any such complaint and shall keep Alternet fully informed of the actions and positions taken by the complainant and taken or proposed to be taken by AII Nevada or AII Canada, (b) pursuant to the indemnification contained in Section 14, all reasonable costs and expenses incurred by AII Nevada or AII Canada in investigating, resisting, litigating and settling such a complaint, including the payment of any award of damages and/or costs to any third party, shall be paid by Alternet, (c) no decision or action concerning or governing any final disposition of the complaint shall be taken without full consultation with and approval by Alternet in writing, such approval not to be unreasonably withheld, (d) Alternet may elect to participate formally in any litigation involving the complaint to the extent that the Court may permit, with the consent of AII Nevada or AII Canada, such consent not to be unreasonably withheld, but any additional expenses generated by such formal participation shall be paid by Alternet (subject to the possibility of recovery of some or all of such additional expenses from the complainant), and (e) if the complainant is willing to accept an offer of settlement and AII Nevada or AII Canada is willing to approve the acceptance of such an offer and Alternet is not, then Alternet shall conduct all further proceedings at its own expense and shall be responsible for the full amount of damages, costs, accounting of profits and settlement costs in excess of those provided in such offer, but shall be entitled to retain unto itself the benefit of any litigated or settled result entailing a lower payment of costs, damages, accounting of profits and settlement costs than that provided in such offer. 2.11 Upon request by AII Nevada or AII Canada (both acting reasonably and without undue interference in the business of Alternet): (a) Alternet shall provide AII Nevada or AII Canada with copies of all reports, minutes, notes, and other documents containing information which Alternet generates in relation to the use of the Licensed Technology (provided no law, statute or regulation bars such provision); and (b) Alternet shall grant to AII Nevada or AII Canada an exclusive, irrevocable right and license to use such information together with the right to grant other sublicensees the right to use such information at no cost to AII Nevada or AII Canada. 3.0 TRANSFER OF LICENSED TECHNOLOGY 3.1 To the extent required for marketing, use and sales, and subject to the terms and conditions contained in this Agreement, and upon execution of the Agreement, AII Nevada or AII Canada shall provide to Alternet, at AII Nevada's or AII Canada's expense: (a) an IP disclosure statement prepared by AII Nevada or AII Canada relating to the IP referred to in Schedule 1.0, Part I; (b) all of the available technical information described in Schedule 1.0, Parts I and III which deal with the knowledge of the Licensed Technology, within one hundred fifty (150) days after the effective date of this Agreement, and (c) technical assistance in accordance with Article 4.0. 3.2 During the term of this Agreement AII Nevada or AII Canada shall provide to Alternet any Improvement to the Licensed Technology, in which case the provisions of Article 7 hereof shall apply to said Improvement. 3.3 To maintain quality control during the term of this Agreement, Alternet agrees to purchase materials and software provided by AII Nevada or AII Canada provided that these are available at commercially reasonable and competitively advantageous rates. AII Nevada's or AII Canada's proprietary software shall be kept by Alternet as highly Restricted Information as outlined in Section 8.0. 3.4 Alternet further agrees to make all reasonably necessary efforts to affix or print the SchoolWeb or OfficeServer trademark on software or hardware components comprising the Licensed Technology marketed under this Agreement to its customers, such that a trade mark is clearly visible to its customers. 4.0 TECHNICAL ASSISTANCE 4.1 Upon the written request of Alternet, AII Nevada or AII Canada will make available, for a time period and at a commercially reasonable and competitive price to be determined at the time of the request, and at a level to be determined by AII Nevada or AII Canada, the services of a minimum of two (2) full time suitable, competent personnel to assist Alternet in exploiting the Licensed Technology for the purposes specified in Section 2.1 to provide Products and Services to customers. 4.2 Upon the written request of Alternet, AII Nevada or AII Canada may permit Alternet to attach a reasonable number of two (2) or more of its personnel to AII Nevada's or AII Canada's facilities, in accordance with terms and conditions reasonably specified by AII Nevada or AII Canada, in order to assist Alternet in exploiting the Licensed Technology. 4.3 Upon the written request of AII Nevada or AII Canada, Alternet may, at Alternet's discretion, permit AII Nevada or AII Canada to attach a limited number of its personnel to any facility where the Licensed Technology is being exploited by Alternet for the purposes specified in Section 2.1, under terms and conditions specified by Alternet, to enable AII Nevada or AII Canada to observe such exploitation of the Licensed Technology. 4.4 AII Nevada or AII Canada may also provide to Alternet other forms of technical assistance, including making its facilities available in connection with a demonstration of the Licensed Technology. Such technical assistance will be provided upon payment therefor by Alternet, on the basis of AII Nevada's or AII Canada's standard commercial rates (which shall be commercially reasonable) plus travelling and living expenses at AII Nevada's or AII Canada's standard rates (provided these rates are commercially reasonable). 5.0 PAYMENTS 5.1 In consideration of the grant of license under this Agreement Alternet shall pay to AII Nevada or AII Canada during the term of this Agreement, the following payments (the "Payments"): (a) Payments from its revenue from the sale, lease or sub- license of Licensed Technology, Products and Services equal to forty (40) % of the Net Revenue received for such revenue, except that payment under Net Revenue shall not be less than US$1000 per server per annum; and (b) Payments, if applicable, for Product Software and Software Maintenance provided by AII Nevada or AII Canada (if these fees are first received by Alternet from its clients to whom the services were rendered), as agreed annually by the Parties as described in Article 2.2 for both the SchoolWeb and OfficeServer portions of the Licensed Technology; (c) Also, in consideration of the license granted, and on execution of this Agreement, Alternet will issue to AII Nevada the greater of 2,000,000 of its common shares, or an amount equal to 25% of Alternet's totally issued and outstanding common shares at the date of execution of this Agreement. Furthermore, Alternet will give AII Nevada the right to appoint Karim Lakhani (or such other person as may be agreed by AII Nevada and Alternet) to its Board of Directors; (d) For the term of this Agreement and commencing on January 15, 2001 Alternet will make payments to AII Nevada or AII Canada of US$10,000 per month in year one (1), US$20,000 per month in year two (2), and increasing in US$8,000 per month in each of the subsequent years of the Agreement to maximum monthly payments of US$64,000 in year ten (10), said payments to be reduced in any given month by the amount received in the previous month by AII Nevada or AII Canada from payments in 5.1(a) hereof after the first three years of this agreement, except that the total payment under 5.1(a) and 5.1(d) shall not be less that the regular monthly fee in 5.1(d). 5.2 The Parties agree that a payment in respect of Licensed Technology or Service shall be made even if such Licensed Technology or Service is not covered by a claim of a proprietary right set forth in Schedule 1.0, Part II. 5.3 Alternet shall provide financial accounting statements to AII Nevada or AII Canada within thirty (30) days after each quarterly period during the term of this Agreement. All such statements shall include a calculation of the amount due to AII Nevada or AII Canada for payments under Section 5.1, be certified as correct by the Treasurer or other responsible financial officer of Alternet, and be accompanied by a remittance to AII Nevada or AII Canada of the amount shown to be payable. 5.4 All payments and statements to be submitted by Alternet to AII Nevada or AII Canada shall be sent as directed by AII Nevada or AII Canada. All amounts payable to AII Nevada or AII Canada shall be calculated and paid in US dollars (using prevailing currency exchange rates where Alternet has received revenues in Canadian dollars). 5.5 All overdue accounts shall bear interest at a rate equal to the Royal Bank of Canada's bank prime commercial lending rate in effect on the date the payment becomes overdue, plus 2%. 5.6 Alternet agrees that it will not sell or sub-license the Office Server portion of the Licensed Technology for a price less than US$2,500 per server per year unless otherwise agreed with AII Nevada. 5.7 AII Nevada and AII Canada agree that they will direct Alternet as to which one of them any individual Payment should be made. AII Canada and AII Nevada are both included as parties to this Agreement because: (a) this permits them to direct income in accordance with the applicable laws governing income distribution between a US parent and a Canadian subsidiary; (b) it is unclear to Alternet which has Proprietary IP rights to all or part of the Licensed Technology so it is necessary for Alternet to contract with both to protect its rights under this Agreement. 6.0 AUDIT AND INSPECTION OF RECORDS 6.1 Alternet shall keep proper and detailed records and accounts including invoices, receipts, and vouchers showing all information necessary for the accurate determination of the Payments. 6.2 During reasonable business hours, Alternet shall make available such accounts and records and permit AII Nevada or AII Canada or its authorized representatives to audit and inspect such records, to take extracts therefrom and make copies thereof. Furthermore Alternet shall afford reasonable facilities for such audits and inspections and furnish AII Nevada or AII Canada or its authorized representatives with all information requisite to the understanding of the records. 6.3 All costs incurred in conducting an audit or inspection referred to in Section 6.2 shall be borne by Alternet if the amount found to be due to AII Canada or AII Nevada exceeds by five (5%) percent or more the amount which Alternet previously reported as due to AII Canada or AII Nevada. 6.4 Alternet shall keep and preserve the accounts and records referred to in Section 6.1, relative to each year of the term of this Agreement, for a period of five years thereafter. 7.0 IMPROVEMENTS 7.1 If AII Nevada or AII Canada develops or acquires an Improvement to the Licensed Technology and has the right to license or transfer such Improvement to others, AII Nevada or AII Canada shall, by written notice, inform Alternet of the Improvement within ninety (90) days of its development or acquisition. Any such Improvement shall, upon the request of Alternet become part of the Licensed Technology and all further use, licensing or transfer of the Improvement by Alternet (including any revenues it realizes) shall be subject to the term of this Agreement. 7.2 If Alternet develops or acquires an Improvement to the Licensed Technology and has the right to license or transfer such Improvement to others, Alternet shall, by written notice, inform AII Nevada or AII Canada of the Improvement within ninety (90) days of its development or acquisition. Upon request by AII Nevada or AII Canada, Alternet shall transfer such Improvement to AII Nevada or AII Canada and grant to AII Nevada or AII Canada an exclusive, irrevocable right and license to use such Improvement together with the right to grant to others sublicenses to use such Improvement at no cost to AII Nevada or AII Canada. 7.3 Should AII Nevada or AII Canada or Alternet, as the case may be, decide not to seek or maintain IP protection on any Improvement or Follow-on Invention more than six (6) months after its discovery, the other Parties shall be entitled to apply for, obtain or maintain, as the case may be, such IP Rights protection, in their own names and at their own expense, and AII Nevada or AII Canada or Alternet, as the case may be, shall do all such things as are requisite for implementing the foregoing including assigning their ownership rights to the Improvement or Follow-on Invention to the Party seeking IP protection. 7.4 Subject to Section 9.2, no fee shall be charged by any Party to another Party for the costs of creating an Improvement or Follow-on Invention under Sections 7.1 or 7.2. 8.0 PROTECTION OF RESTRICTED INFORMATION 8.1 A Party receiving Restricted Information pursuant to this Agreement (hereinafter referred to as the "Receiving Party") shall respect the confidential nature thereof. A Receiving Party shall, in addition to complying with the provisions of Sections 8.2 and 8.3, use the same precautions to protect Restricted Information which it uses to protect its own proprietary or confidential information. 8.2 A Receiving Party shall not, without the prior written consent of the other Party, disclose or permit disclosure of such Restricted Information to any person, firm, corporation or other entity, other than to employees, agents or contractors of the Receiving Party who require such Restricted Information in order to carry out the purposes of this Agreement and who receive such Restricted Information under an obligation of confidence no less onerous than that set out in this Agreement for the benefit of AII Nevada or AII Canada and Alternet. Where Restricted Information is disclosed to such employees, agents or contractors, the Receiving Party shall ensure that such employees, agents or contractors do not further disclose such Restricted Information in violation of this Section 8.0. 8.3 A Receiving Party shall not use or permit use of such Restricted Information in any manner not permitted under the terms of this Agreement. 8.4 Any copy or other reproduction of Restricted Information shall be identified as confidential and shall be subject to the same restrictions as to disclosure and use as apply to the original thereof. 8.5 Notwithstanding Section 21.0 of this Agreement, the provisions of this Section 8.0 shall survive the expiration or early termination of this Agreement for a period of ten (10) years from the date of expiration referred to in Section 11.0. 9.0 AII NEVADA OR AII CANADA PARTICIPATION IN PRODUCT SOFTWARE, SOFTWARE MAINTENANCE AND R&D WORK 9.1 Alternet agrees that AII Nevada or AII Canada shall have the right and the obligation to provide all SchoolWeb and OfficeServer Product Software and Software Maintenance work at commercially reasonable and competitive rates. In the event that AII Nevada or AII Canada is unable to provide the required services at commercially reasonable and competitive rates , Alternet may use the services of another Product Software and Software Maintenance company, upon written approval from AII Nevada or AII Canada, which approval shall not be unreasonably withheld. 9.2 In the event that Alternet wishes to contract to have any research or development work with a third party (the "Contractor") to have any services carried out in relation to the Licensed Technology, AII Nevada or AII Canada shall have the right of first refusal to carry out such work at commercially reasonable and competitive rates. Concurrently with entering into such an Agreement, the Contractor must agree to enter into a non-disclosure and non-competition agreement with Alternet, AII Nevada and AII Canada, satisfactory to AII Nevada and AII Canada. 9.3 Alternet agrees that in the promotion of Licensed Technology or Service by Alternet, where reasonable to do so, the words, "developed, produced, or supplied under license from Advanced Interactive Inc.", shall be used. 10.0 DUE DILIGENCE 10.1 Alternet shall use its best efforts and exercise due diligence in commercially exploiting the Licensed Technology as provided for herein. Alternet shall, within 90 days of the effective date of this Agreement, produce a Business Plan, to be attached to this Agreement as Schedule 2. The Business Plan shall be prepared in consultation and collaboration with AII Nevada or AII Canada and shall outline the entire business strategy for exploitation of the Licensed Technology, forecasts of sales of Licensed Technology and Services for current and future years, and forecasts of minimum targets of performance. 11.0 TERM 11.1 This Agreement shall be effective as of the date first set out herein. Unless otherwise terminated pursuant to the provisions hereof, this Agreement shall continue in force for a period of five (5) years following the effective date and may automatically be renewed (at Alternet's sole and absolute discretion) for a further 5 year term. 12.0 TERMINATION AND EXPIRATION 12.1 The Parties shall be entitled to terminate this Agreement and/or to revoke the grant of license under this Agreement if the other Party becomes insolvent or makes an assignment for the benefit of creditors or passes a resolution for winding up or takes the benefit of any statute relating to bankruptcy or insolvency or the orderly payment of debts, or a receiver is appointed, provided however that no termination of this Agreement shall take effect if a trustee or other representative of the Insolvent Party is willing and able to complete that Party's obligations under this Agreement. The Insolvent Party is required to notify the other Parties 30 days prior to filing a petition for bankruptcy. 12.2 Alternet shall be entitled to terminate this Agreement upon the occurrence of any of the following events: (a) failure by AII Nevada or AII Canada to provide Licensed Technology, Products and Services, within 90 days after being advised by Alternet in writing of the failure. 12.3 AII Nevada and AII Canada shall be entitled to terminate this Agreement and/or revoke the grant of license hereunder upon any of the following events: (a) the failure by Alternet to make timely payments to AII Nevada or AII Canada when due; or (b) the failure by Alternet to comply with Section 14.3. 12.4 Any termination shall be effected by a notice which shall, as of the date stated therein, terminate the license granted hereunder, together with all rights of Alternet under this Agreement, without prejudice to the right of AII Nevada or AII Canada to sue for and recover any benefits due to AII Nevada or AII Canada, and without prejudice to the remedy of either Party in respect of any previous breach of this Agreement. A failure by AII Nevada or AII Canada in 12.2 above may be waived by Alternet to prevent termination of this Agreement and a failure by Alternet in 12.3 above may be waived by AII Nevada or AII Canada to prevent termination of this Agreement. 12.5 Upon expiration of the term of this Agreement, or upon early termination of this Agreement: (a) all rights to the Licensed Technology shall revert to AII Nevada or AII Canada, and Alternet thereafter shall not utilize the Licensed Technology and Services, IP and IP applications which form a part of the Licensed Technology in any manner or for any purpose whatsoever, (b) Alternet shall return to AII Nevada or AII Canada and AII Nevada or AII Canada shall have the right to take possession of all technical information furnished by AII Nevada or AII Canada to Alternet under this Agreement, (c) Alternet may sell all stocks of Licensed Technology which remain unsold, and shall complete all Services which are in the course of being provided by it or are contracted for at the date of expiration or earlier termination provided that within thirty (30) days after the date of such sale of Licensed Technology or the completion of such Services, Alternet submits Payments to AII Nevada or AII Canada with respect thereto, computed in accordance with Article 5 hereof. (d) (i) AII Nevada's or AII Canada's rights to use any information licensed to it under Section 2.10(b) shall remain in full force; and (ii) AII Nevada's or AII Canada's rights to use any Improvement licensed to it under Section 7.2 shall remain in full force. (e) Upon termination of this Agreement, Alternet agrees not to manufacture, supply, market, or sell any other system similar to the Licensed Technology for a period of five (5) years. 13.0 ASSIGNMENT/CHANGE OF OWNERSHIP 13.1 This Agreement shall be binding upon and enure to the benefit of the Parties hereto and their respective successors and permitted assigns. No Party shall assign this Agreement or any rights hereunder, whether by operation of law or otherwise, without first obtaining the written consent of the other Parties and any assignment or attempted assignment made without such consent is void. 14.0 LIABILITY/INDEMNIFICATION 14.1 (a) In no event shall AII Nevada or AII Canada be liable to Alternet for any injury to or death of persons or for damage to, or loss of property, or for any other loss, cost, expense or damage of any kind whatsoever (hereinafter collectively referred to as "damages") arising out of or in any way resulting from this Agreement, whether based on contract, tort including negligence, strict liability or otherwise, unless such damages result from the negligence of AII Nevada or AII Canada. (b) Notwithstanding Section 14.1(a), in no event shall AII Nevada or AII Canada be liable to Alternet for any indirect, consequential, special, incidental or contingent damages of any nature whatsoever, including but not limited to loss of revenue or profit, or loss of use of either, or costs of capital. (c) Notwithstanding Section 14.1(a), in no event shall AII Nevada or AII Canada be liable to Alternet for an amount in excess of the total consideration received by AII Nevada of AII Canada hereunder as at the date of claim, or an aggregate amount of $50,000 over the entire term of the Agreement, whichever is the lesser. 14.2 Alternet shall indemnify and hold harmless AII Nevada or AII Canada from and against any and all claims, demands, actions, suits or proceedings of whatever nature including all costs and expenses incurred in connection therewith, brought or instituted by a third party, and based on or arising out of Alternet's unauthorized disclosure of any Restricted Information of AII Nevada or AII Canada; the supply, use or sale of a Product, or the provision of a Service or both by Alternet; or the use by any customer of Alternet of any Product or Service. 14.3 Prior to the receipt of revenue from its use of Licensed Technology, Alternet shall obtain and maintain insurance coverage with respect to public liability, product liability, and errors and omissions with respect to Alternet's use of the Licensed Technology. Alternet shall provide AII Nevada or AII Canada with a certified copy of such a policy of insurance prior to any utilization of the Licensed Technology, and such policy of insurance shall: (i) name AII Nevada or AII Canada as co-insured; (ii) contain an appropriate and commercially standard cross-liability clause; (iii) be a minimum face amount of US$2,000,000; and (iv) require the insurer to provide AII Nevada or AII Canada with a minimum of sixty (60) days notice prior to cancellation or expiry. In the event that Alternet fails to pay the premiums as they fall due, AII Nevada or AII Canada may, at its option, renew such policy or alternatively purchase a new policy of insurance in accordance with the terms and conditions above described and Alternet shall reimburse AII Nevada or AII Canada forthwith upon demand any premiums, sums, or other costs so incurred by AII Nevada or AII Canada in renewing or purchasing such a policy of insurance. Failure to reimburse AII Nevada or AII Canada within six months may be cause for termination of this agreement. 15.0 FORCE MAJEURE 15.1 No Party shall be in breach of this Agreement where its failure to perform or its delay in performing any obligation is due wholly or in part to a cause beyond its reasonable control including but not limited to an act of God, an act of any national, civil or military authority, civil commotion, war, strikes, lockouts and other labour disputes, fires, floods, sabotage, earthquake, storm, or epidemic. 15.2 Each Party shall notify the other promptly of any failure to perform or delay in performing due to a cause set out in Section 15.1, and shall provide an estimate, as soon as practicable, of the date when the obligation will be performed. 15.3 When the performance of an obligation is delayed by at least six months due to a force majeure event and the Parties have not agreed upon a revised basis for performing the obligation, either Party may, upon thirty (30) days prior written notice, terminate this Agreement. 16.0 NOTICES 16.1 Any notice, request, demand, consent or other communication provided or permitted under this Agreement shall be in writing unless otherwise specified, and shall be transmitted by personal delivery, telex, telecopier, or by registered mail addressed to the recipient at its address as follows: AII Nevada: Advance Interactive Inc. 718-1350 East Flamingo Rd Las Vegas Nevada 89119 USA Attention: Karim Lakhani, President and CEO AII Canada: Advanced Interactive Canada Inc. 2010 - 1177 West Hastings Street Vancouver, B.C. V6E 2K3 Canada Attention: Harry K. Davis, CEO Alternet: Alternet Systems Inc. 280 - 815 West Hastings street Vancouver, BC V6C 1B4 Canada Attention: Michael Dearden, President 16.2 Any communication so transmitted shall be deemed to have been received on the date on which it was personally delivered, or sent by telex or telecopier, or if mailed, on the 10th day next following the mailing thereof. 16.3 Any Party may change its address for purposes of receipt of communication by giving at least fifteen (15) days prior written notice of such change to the other Parties, in the manner prescribed above. 17.0 ARBITRATION 17.1 All Parties shall act in good faith and utilize their best efforts to resolve any dispute arising in connection with this Agreement. All disputes which are not so resolved shall be finally settled under and in accordance with the current Arbitration Act in effect in British Columbia, Canada. 17.2 The Arbitration Panel shall consist of three arbitrators and any award made by the arbitrators shall be decided by majority vote and shall state the reasons for their decision. The arbitrators shall also decide and fix in their award the extent to which each of the Parties shall bear the arbitration costs. Any such arbitration shall be held at Vancouver, B.C., Canada and shall be conducted in the English language. Judgement upon any award may be entered in any court having jurisdiction. Alternatively, an application may be made to such court for a judicial acceptance of the award and an order of enforcement. 17.3 The performance of obligations under the terms of this Agreement shall continue during any arbitration proceedings and payments due to AII Nevada or AII Canada shall not be withheld on account of any such proceeding. 18.0 WAIVER 18.1 The failure of a Party to enforce, at any time, any of the provisions of this Agreement or any of its rights hereunder, or to insist upon strict adherence to any condition of this Agreement shall not be considered to be a waiver of such provision or right or condition, nor shall it deprive that Party of the right thereafter to enforce any such provision or right or to insist upon such strict adherence. 18.2 The exercise by a Party of any of its rights under this Agreement will not prejudice that Party from exercising any other rights it may have under this Agreement, irrespective of any previous action or proceeding taken by such Party. 18.3 Where a Party waives any of its rights under this Agreement, such waiver will be valid only where it is expressed in writing and only where it is signed by the Party for whose benefit such right was granted. 19.0 GOVERNING LAW 19.1 This Agreement shall be governed by, subject to and interpreted in accordance with the laws of the Province of British Columbia and the federal laws of Canada applicable therein. The Parties hereto agree that the Courts of the Province of British Columbia shall have jurisdiction to entertain any action or other legal proceeding based on any provisions of this Agreement. Each Party hereby agrees to the jurisdiction of such Courts. 20.0 SEVERABILITY 20.1 In the event that any provision contained in this Agreement shall be declared invalid, illegal or unenforceable by a court or other lawful authority of competent jurisdiction, this Agreement shall continue in force with respect to the enforceable provisions and all rights and remedies accrued under the enforceable provisions shall survive any such declaration. 21.0 SURVIVAL 21.1 In addition to the provisions of Section 6.4 and 8.5 hereof, Sections 2.4, 2.5, 2.6, 7.3, 14.1, 14.2 and this Section 21.0 shall survive the early termination or expiration of this Agreement. 22.0 ENTIRE AGREEMENT 22.1 This Agreement constitutes the entire agreement between the Parties relating to the subject matter herein and supersedes any and all prior agreements, negotiations, representations and understandings whether written or oral between the Parties. This Agreement may not be released, supplemented, or modified in any manner except by further written agreement signed by a duly authorized officer or representative of each of the Parties. 23.0 OUTSTANDING LIABILITIES 23.1 The Parties hereto agree and confirm that Alternet, AII Nevada and AII Canada are current (and not in arrears) on any and all payments outstanding as of the date of execution of this Agreement and that there are no presently outstanding payments as of the date of execution hereof. 24.0 INDEPENDENT LEGAL ADVICE 24.1 The Parties hereby confirm that Heenan Blaikie has represented only Alternet in the preparation and negotiation of this Agreement and that AII Canada and AII Nevada have hereby been advised to seek independent legal advice in general and in particular with respect to any tax consequences arising out of the transactions (including Payment transactions) contemplated in this Agreement. 25.0 CURRENCY 25.1 All dollar figures in this Agreement are given in the valid currency of the United States. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of by their duly authorized signing officers. ADVANCED INTERACTIVE INC. ALTERNET SYSTEMS INC. /s/ Karim Lakhani /s/ Michael Dearden Mr. Karim Lakhani Mr. Michael Dearden President and CEO President ADVANCED INTERACTIVE CANADA INC. /s/ Harry Davis Mr. Harry Davis CEO SCHEDULE 1.0 PART I Licensed Technology 1. SchoolWeb software and ancillary systems as described in the product description attached hereto. 2. OfficeServer software, and ancillary systems as described in the product description attached hereto. PART II Territory The Territory for the SchoolWeb portion of the Licensed Technology is exclusive for USA and Canada. The Territory for the OfficeServer portion of the Licensed Technology is non-exclusive, worldwide. PART III The Field of Use The Field of Use for the SchoolWeb portion of the Licensed Technology is for educational purposes. The Field of Use for the OfficeServer portion of the Licensed Technology is unlimited. SCHEDULE 2.0 BUSINESS PLAN To be developed by Alternet in co-operation with AII Nevada or AII Canada SCHOOLWEB PRODUCT DESCRIPTION SchoolWeb is a server with a Linux operating system that has the ability to act as a Windows NT file server equivalent. SchoolWeb provides local network services and access to the Internet. SchoolWeb caches previously visited Internet sites and demanded sites transferred by the broadcast/cable/satellite network. Both 'Policy-based' (scheduled) and 'Dynamic' (demand-based) caching is used to provide a large cache of educational material at the school location for immediate access by students and teachers. Access requests are serviced by SchoolWeb Librarian and an automatic indexing and retrieval system. SCHOOLWEB SYSTEM SOFTWARE AND HARDWARE Linux Operating System Virtual Private Network and Firewall Roaming E-mail server High-speed local HTTP (Web) server Proxy/cache/DNS server Automatic on-line backup Redundant on-line system FTP server NFS server Print Server Broadcast caching software Head-end broadcast equipment OFFICESERVER PRODUCT DESCRIPTION OfficerServer is a server with a Linux operating system that has the ability to act as a Windows NT file server equivalent. OfficeServer provides local network services and access to the Internet. OfficeServer caches previously visited Internet sites and demanded sites transferred by the broadcast/cable/satellite network. Both 'Policy-based' (scheduled) and 'Dynamic' (demand- based) caching is used to provide a large cache of business material at the office location for immediate access by employees and others. OFFICESERVER SYSTEM SOFTWARE AND HARDWARE Linux Operating System Virtual Private Network and Firewall Roaming E-mail server High-speed local HTTP (Web) server Proxy/cache/DNS server Automatic on-line backup Redundant on-line system FTP server NFS server Print Server Broadcast caching software Head-end broadcast equipment EX-10.2 8 alternetex1021203.txt EXHIBIT 10.2 SCHOOLWEB SYSTEMS INC. #280-815 West Hastings Street Vancouver, BC V6C 1B4 Phone: (604) 608-2540 Fax: (604) 608-8775 June 29, 2001 Advanced Interactive Inc. 718-1350 East Flamingo Road Las Vegas, Nevada 89119 Attention: Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101-1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Harry K. Davis Dear Sirs: Re: License Agreement dated January 1, 2001 (the "Agreement") This letter is written to confirm as follows: 1. The license agreement dated January 1, 2001 (the "Agreement") between Advanced Interactive Inc. ("AII Nevada"), Advanced Interactive Canada Inc. ("AII Canada") and SchoolWeb Systems Inc. (formerly Alternet Systems Inc.) ("SchoolWeb") states, in Section 5.1(c), that SchoolWeb shall issue shares to AII Nevada for the license as follows: "Also, in consideration of the license granted, and on execution of this Agreement, Alternet will issue to AII Nevada the greater of 2,000,000 of its common shares, or an amount equal to 25% of Alternet's totally issued and outstanding common shares at the date of execution of this Agreement." 2. The Agreement is hereby amended such that the amount of shares which are granted is: "Also, in consideration of the license granted, and on execution of this Agreement, Alternet will issue to AII Nevada 2,500,000 of its common shares." 3. In all other ways, the Agreement remains in full force and effect. If this accurately describes your understanding of our agreement, please so indicate by signing below and returning a copy of this letter to our offices at (604) 608-8775. Upon execution hereof, this letter becomes an amendment to the Agreement binding upon its terms. Yours truly, SCHOOLWEB SYSTEMS INC. /s/ Patrick Fitzsimmons Patrick Fitzsimmons, Director The terms of the Agreement above are hereby read, understood, acknowledged and accepted by the undersigned effective the 29th day of June, 2001. ADVANCED INTERACTIVE INC. By Its Authorized Signatory /s/ Karim Lakhani Karim Lakhani, President and Director ADVANCED INTERACTIVE CANADA INC. By Its Authorized Signatory /s/ Harry Davis Harry Davis, President and Director EX-10.3 9 alternetex1031203.txt EXHIBIT 10.3 SCHOOLWEB SYSTEMS INC. #280-815 West Hastings Street Vancouver, BC V6C 1B4 Phone: (604) 608-2540 Fax: (604) 608-8775 July 17, 2001 Advanced Interactive Inc. 718-1350 East Flamingo Road Las Vegas, Nevada 89119 Attention: Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101-1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Harry K. Davis Dear Sirs: Re: License Agreement dated January 1, 2001 (the "Agreement") This letter is written to confirm as follows: 1. The license agreement dated January 1, 2001 (the "Agreement") between Advanced Interactive Inc. ("AII Nevada"), Advanced Interactive Canada Inc. ("AII Canada") and SchoolWeb Systems Inc. (formerly Alternet Systems Inc.) ("SchoolWeb") states, in Schedule 1.0, Part II, that the Territory for which rights are granted is: "The Territory for the SchoolWeb portion of the Licensed Technology is exclusive for USA and Canada. The Territory for the OfficeServer portion of the Licensed Technology is non-exclusive, worldwide." 2. The Agreement is hereby amended such that the Territory for which rights are granted is: "The Territory for the SchoolWeb portion of the Licensed Technology is exclusive for the USA, Canada and the Commonwealth of Jamaica. The Territory for the OfficeServer portion of the Licensed Technology is non-exclusive, worldwide." 3. In all other ways, the Agreement remains in full force and effect. If this accurately describes your understanding of our agreement, please so indicate by signing below and returning a copy of this letter to our offices at (604) 608-8775. Upon execution hereof, this letter becomes an amendment to the Agreement binding upon its terms. Yours truly, SCHOOLWEB SYSTEMS INC. /s/ Patrick Fitzsimmons Patrick Fitzsimmons, Director The terms of the Agreement above are hereby read, understood, acknowledged and accepted by the undersigned effective the 17th day of July, 2001. ADVANCED INTERACTIVE INC. By Its Authorized Signatory /s/ Karim Lakhani Karim Lakhani, President and Director ADVANCED INTERACTIVE CANADA INC. By Its Authorized Signatory /s/ Harry Davis Harry Davis, President and Director EX-10.4 10 alternetex1041203.txt EXHIBIT 10.4 SCHOOLWEB SYSTEMS INC. #280 - 815 West Hastings Street Vancouver, BC V6C 1B4 Tel: (604) 608-2540 Fax: (604) 608-8775 March 8, 2002 Advanced Interactive Inc. 718 - 1350 Flamingo Road Las Vegas, Nevada 89119 Attention: Mr. Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101 - 1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Mr. Al Jamal Dear Sirs: Re: License Agreement (the "License Agreement") dated January 1, 2001 as amended July 17, 2001 This letter is written to confirm our agreement as follows: 1. The License Agreement between SchoolWeb Systems Inc. and SchoolWeb Holdings Inc. (collectively, "SchoolWeb") and Advanced Interactive Inc. / Advanced Interactive (Canada) Inc. (collectively, "AII") is amended such that SchoolWeb consents (as described in Schedule "A" hereto) to the granting to Hewlett Packard of the rights detailed in the Solutions Partner Agreement attached as Schedule "B" hereto. 2. AII and SchoolWeb agree that any funds received under the terms of the Solutions Partner Agreement shall be paid into a bank account maintained in the name of Alternet Systems Inc. (to which SchoolWeb is changing its name). This bank account (the "Bank Account") will have two signatories, Karim Lakhani (in his capacity as President of AII) and one signatory from SchoolWeb. 3. SchoolWeb agrees to distribute the funds in the Bank Account in accordance with the provisions of the License Agreement pertaining to the royalty due to AII for sales of caching server products which AII has licensed to SchoolWeb. Specifically, SchoolWeb will deduct its Cost of Goods Sold (including its costs of training, installation, configuration and providing help desk services) from the funds received under the terms of the Solutions Partner Agreement and distribute the remaining funds to SchoolWeb (as income) and to AII (as its royalty under the License Agreement). 4. SchoolWeb agrees that, in administering the bank account in paragraph 3 above, it will provide to AII an annual audit of all funds received and funds paid from the account. 5. SchoolWeb will provide AII with the name of the financial institution, the branch number, the account number and any other information which is required to be provided to Hewlett Packard to enable it to make the payments referred to paragraph 2 above and AII will instruct Hewlett Packard (or any division thereof, including Hewlett Packard Finance Division) to pay any amounts due under the Solutions Partner Agreement to this account. 6. The License Agreement is hereby amended such that SchoolWeb is granted the exclusive right, in North America (subject to the provisions of the Solutions Partner Agreement and of SchoolWeb's consent dated March 6 thereto), to sell all broadcast caching server software and hardware systems developed by AII (including that software known as Office Server, SchoolWeb and HealthWeb). 7. The License Agreement is also amended such that SchoolWeb will have any and all right to trademark and use (as a trademark for SchoolWeb and Office Server software and hardware systems sold to indigenous communities) the trademark "1nterlink" (it is expressly acknowledged by SchoolWeb that AII does not own or have any rights to this trademark at present, that SchoolWeb will have to pursue the registration of this trademark without aid from AII and that AII makes no representation or warranty to SchoolWeb that this mark is registrable or does not conflict with existing marks). AII shall be permitted to use the 1nterlink mark to identify itself (in documents such as its annual reports or brochures) as a company connected to 1nterlink. 8. Nothing in this amendment to the License Agreement shall be deemed to amend the obligation of SchoolWeb to continue to make its monthly payments under the terms of the License Agreement. 9. The parties to the License Agreement agree that they shall, prior to April 30, 2002, draft a new License Agreement to reflect the terms of the License Agreement and all of the amendments thereto. This new License Agreement will contain no new terms or conditions but will supersede and replace the various agreements constituting the present License Agreement. In all other ways, the License Agreement remains in full force and effect (as amended by this and other amendments). Should the above terms and conditions accurately reflect your understanding of the terms of our agreement, please so indicate by signing this document below and returning it to our offices at (604) 608-8775. Yours truly, SCHOOLWEB SYSTEMS INC. /s/ Griffin Jones Griffin Jones, Director On behalf of AII, I have read, understood, acknowledged and accepted the terms and conditions of our amendment of the License Agreement as outlined above ADVANCED INTERACTIVE INC. ADVANCED INTERACTIVE CANADA INC. /s/ Karim Lakhani /s/ Harry Davis Karim Lakhani, President Harry Davis, President EX-10.6 11 alternetex1061203.txt EXHIBIT 10.6 NORTH PACIFIC CAPITAL CORP. #280-815 West Hastings Street Vancouver, BC V6C 1B4 Phone: (604) 608-2700 Fax: (604) 608-8775 September 10, 2001 Advanced Interactive Inc. 718-1350 East Flamingo Road Las Vegas, Nevada 89119 Attention: Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101-1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Harry K. Davis Dear Sirs: Re: License Agreement dated January 1, 2001 (the "License Agreement") This Settlement Agreement is written to confirm our agreement as follows: 1. The parties hereto agree that the license agreement dated January 1, 2001 (the "License Agreement") between Advanced Interactive Inc. ("AII Nevada"), Advanced Interactive Canada Inc. ("AII Canada") and SchoolWeb Systems Inc. (formerly Alternet Systems Inc.) ("SchoolWeb") states, in Section 5.1(c), that SchoolWeb shall issue shares to AII Nevada for the license as follows: "Also, in consideration of the license granted, and on execution of this Agreement, Alternet will issue to AII Nevada the greater of 2,000,000 of its common shares, or an amount equal to 25% of Alternet's totally issued and outstanding common shares at the date of execution of this Agreement." 2. The parties hereto agree that the Agreement should have stated that the number of shares to be granted was: "Also, in consideration of the license granted, and on execution of this Agreement, Alternet will issue to AII Nevada 3,000,000 of its common shares." 3. The parties hereto agree that under the share purchase agreement (the "Share Purchase Agreement") between North Pacific Capital Corp. ("North Pacific") and various parties dated July 2, 2001 which called for the issuance of common shares of North Pacific on a one-for-one basis to shareholders of SchoolWeb to purchase all of the issued and outstanding shares of SchoolWeb, should have (as a result of the correction to the License Agreement described in 2 above) called for the issuance to AII Nevada and AII Canada, collectively, 3,000,000 common shares of North Pacific and not the 2,500,000 which have been issued. 4. The parties hereto agree, upon issuance of an additional 500,000 common shares to AII Nevada and/or AII Canada (the 500,000 common shares of North Pacific to be registered as AII Canada and AII Nevada agree), North Pacific has satisfied any and all obligations to issue common shares to AII Nevada or AII Canada under the Share Purchase Agreement and its subsidiary, SchoolWeb Holdings Inc. (formerly, SchoolWeb Systems Inc.), has satisfied all obligation to issue common shares to AII Nevada or AII Canada under the terms of the License Agreement. If this accurately describes your understanding of our agreement, please so indicate by signing below and returning a copy of this letter to our offices at (604) 608-8775. Upon execution hereof, this letter becomes a Settlement Agreement binding upon its terms. Yours truly, NORTH PACIFIC CAPITAL CORP. /s/ Griffin Jones Griffin Jones, Director The terms of the Settlement Agreement above are hereby read, understood, acknowledged and accepted by the undersigned effective the 10th day of September, 2001. ADVANCED INTERACTIVE INC. By Its Authorized Signatory /s/ Karim Lakhani Karim Lakhani, President and Director ADVANCED INTERACTIVE CANADA INC. By Its Authorized Signatory /s/ Harry Davis Harry Davis, President and Director SCHOOLWEB HOLDINGS INC. (formerly SchoolWeb Systems Inc.) By Its Authorized Signatory /s/ Michael Dearden Michael Dearden, Director EX-10.7 12 alternetex1071203.txt EXHIBIT 10.7 BETWEEN Hewlett-Packard (Canada) Ltd. AND Advanced Interactive Canada Inc. This Solutions Partner Agreement is entered into between Hewlett- Packard (Canada) Ltd., incorporated under the laws of Canada and having a principal place of business located at 5150 Spectrum Way, Mississauga, Ontario L4W 5G1 ("HP") and Advanced Interactive Inc., incorporated under the laws of the State of Nevada and having a principal place of business located at #2101 - 1177 West Hasting Street, Vancouver, B.C., V6E 2K3 ("Solutions Provider"). 1. SCOPE a) HP manufactures and markets various computer, computer peripheral, computer management software tools, software development tools, and instrumentation products (HP Products). Solutions Partner develops and/or markets computer software products and associated support services as part of an integrated solution (including HP hardware products) that is remotely managed via the Internet (the "Solution"), satellite, or telecommunications. Solutions Partner agrees to market the Solutions Partner above integrated solution to users of HP Products, and HP agrees to assist Solutions Partner in this marketing program, to the extent set forth in this Agreement. b) HP and Solutions Partner are not agents or legal representatives of each other and have no power or authority to represent, act for, bind or commit each other with respect to any products. Neither execution nor performance of this Agreement shall be construed to have established any joint venture or partnership. c) HP and Solutions Partner agree that the Solutions Partner will only market and sell the software portion Solution to end user customers (including the SchoolWeb Caching Server) to its customers exclusively on HP products, both domestically and internationally, where HP products are made available for the Solution. HP will use commercially reasonable efforts to have international subsidiaries make HP products available for the Solution, but HP cannot guarantee that such products will be made available. HP agrees to provide marketing assistance to Solutions Partner through its Business Development and Sales force in Canada. Marketing assistance will primarily consist of appointing an account manager to: list the Solution as part of HP's portfolio of products and services targeted at the Education market; assist Solutions Partner in developing marketing strategies; and to list Solutions Partner on HP's internal web-sites for third party applications. Outside of Canada, the HP account manager will act as a liaison to assist Solutions Partner in developing similar relationships with other HP entities. d) The provision contained in Section 1.c) above to sell software exclusively on HP products shall not apply to any sales of software directly resulting from written quotations to customers which were issued in the sixty (60) day period preceding the effective date of this Agreement. 2. Solutions Partner RIGHTS AND OBLIGATIONS a) Solutions Partner agrees to work exclusively with HP for the provisioning of infrastructure products that include Intel- based HP NetServers, notebook computers (HP OmniBook), and palmtop devices (HP Jornada) as part of its integrated solutions. b) Solutions Partner will provide to HP a Business Plan that includes, but is not limited to outlining, the international locations (countries) where it plans to deploy the integrated solution that will require support of the HP hardware products deployed as part of this integrated solutions offering. c) Solutions Partner commits to develop ongoing enhancements that extend and enrich the competitive capabilities of its integrated solutions offering, and to collaborate with HP (and/or any HP-designated solutions resource working on HP's behalf) to expand the Solutions applicability to other target markets. d) Solutions Partner must offer support services to end-users for the Solution. Support services for HP hardware products must be provided by an HP approved support provider. Such support will include providing updates to software, fixing any bugs, and ensuring that any issues related to HP hardware, or other solution components that it is made aware of, are communicated to HP or the appropriate support resource, as outlined in a Customer Services Agreement (CSA) or Services Level Agreement (SLA). [does this paragraph mean that HP is responsible for hardware support?] e) Solutions Partner will consider HP Technology Finance (HPTF) as its preferred Leasing partner, (as determined by international geography)Solutions Partner. f) Solutions Partner shall not make any claims about HP or its Products, other than those based on current information published by HP, and Solutions Partner shall not use HP's name except as the hardware manufacturer. g) From time to time, HP may authorize Solutions Partner, in writing, to use one or more designated HP trademarks, logotypes, trade names and insignias (HP Marks). Solutions Partner is authorized, upon HP's execution of this Agreement, to use the HP Mark known as the HP Channel Partner Insignia. Solutions Partner may use HP Marks solely in connection with the marketing of the Solutions Partner solutions, which are to be integrated with and delivered on HP hardware, covered by this Agreement. Any use of the HP Marks must be in good taste, in a manner that preserves their value as HP Marks, and in accordance with all standards and guidelines provided by HP for their use. Solutions Partner shall not use any HP Mark or symbol in a way that may imply that Solutions Partner is an agency or branch of HP. Upon HP's request, Solutions Partner will discontinue the use of any HP Mark or symbol. Any rights or purported rights in any HP Marks acquired through Solutions Partner's use belong solely to HP. All rights to use HP Marks will cease upon expiration or termination of this Agreement. h) Solutions Partner certifies that any information provided to HP in writing, including descriptions of the Solutions Partner integrated solution portfolio, is true and accurate. Solutions Partner hereby authorizes HP to contact any references provided to HP. Solutions Partner agrees to furnish HP with any other specific information reasonably requested by HP in furtherance of this Agreement. Solutions Partner further agrees that HP has no obligation to treat as confidential any materials, information or documents submitted to it by Solutions Partner, which are not submitted pursuant to a separately executed confidential disclosure agreement. i) Solutions Partner will be responsible for ensuring that proper notice of any existing copyright or other proprietary right in the Solution and associated documentation or training manuals properly appear thereon. 3. HP RIGHTS AND OBLIGATIONS a) HP commits to supply hardware products and associated support services, either from an HP authorized reseller or directly from HP, as determined by each local HP entity which supports the geography in which the end user is located or as may be outlined in any applicable agreements with the Solutions Partner. This Agreement to supply and service HP products may vary, depending on the international geography in which the said services are to be executed, subject to prevailing rules associated with non-resident suppliers in that region. b) HP agrees, from time to time, to provide the Solutions Partner with marketing materials including white papers, brochures, flyers, and data or spec sheets describing HP Products, in order to assist the Solutions Partner in positioning and marketing their integrated solution. c) HP will use commercially reasonable efforts to provide Solutions Partner with an introduction to customers and prospects, in the defined vertical markets related to the Solutions Partner's integrated solutions. This may include executive-level presentations, joint marketing communications, and/or participation in conferences, trade shows, and other prospect-facing initiatives. d) HP Technology Finance (HPTF) shall have the first right to provide competitive and responsive Leasing quotations and/or services to the Solutions Partner as a valued business partner, where appropriate, as determined by international geography e) HP agrees to describe the Solutions Partner and the Solutions Partner's integrated solution offering in PR, publications, including product literature, electronic catalogs or databases, which may also describe similarly situated products and services from other solutions partners. Solutions Partner agrees that HP may publish or otherwise use any non-confidential information submitted by Solutions Partner in order to achieve this purpose. HP will make reasonable efforts to ensure that the materials and descriptions related to the Solutions Partner's integrated solutions, as provided for communications purposes, are accurate based on available information. Upon expiration or termination of this Agreement, HP may immediately discontinue distributing such information. f) HP may provide demo/development equipment to Solutions Partner, which if so provided, will be subject to the terms of the Demo/Development Agreement. 4. REPRESENTATIONS AND WARRANTIES a) Solutions Partner warrants it owns or has the legal right to distribute the Solutions Partner applications, tools, products, and all portions thereof which are or will form part of the Solution. b) Solutions Partner further warrants that the Solutions Partner's integrated solution, and all portions thereof, either alone or in connection with an HP system, do not infringe or violate any patent, copyright, trademark, trade secret, or other proprietary right of any third party. c) To the best of its knowledge, each party warrants that its performance of its obligations under this Agreement does not conflict with any other agreement between it and a third party. d) Solutions Partner represents and warrants that it is not currently a party to, nor will it during the term of this Agreement, enter into a similar agreement with a company which HP considers to be a competitor of HP, in HP's sole discretion acting reasonably, and which agreement requires Solutions Partner to promote an HP competitor as the preferred hardware provider of Solutions Partner products. e) Solutions Partner owns or has the right to distribute the integrated solution described herein and has the right to make it available to HP for evaluation and, if mutually agreeable, to distribution by and/or through HP. f) Each party hereby agrees to defend and indemnify the other party for any alleged infringement of Intellectual Property Rights of a third party based on materials provided or supplied by that party hereunder. 5. TERM AND TERMINATION a) This Agreement shall terminate exactly one year from its effective date unless terminated earlier as provided below. It is anticipated by the parties that the specific Solutions Partner integrated solution included within this Agreement may change during the one year term but such changes shall not effect this Agreement's termination date. b) HP may terminate any Exhibit or this entire Agreement, at any time for any reason or for no reason, upon 60 (sixty) days written notice to Solution Provider. c) Solution Provider may terminate any Exhibit or this entire Agreement, at any time for any reason or for no reason, upon 180 (on hundred and eighty) days written notice to HP. d) In addition to any other remedies unavailable at law, HP may terminate this Agreement on 10 days prior written notice where Solutions Partner is in breach of its obligations set out in Sections 1.c and 2.a of this Agreement. e) Upon expiration, HP may extend this Agreement for successive one year terms upon thirty (30) days written notice prior to the expiry date. 6. LIMITATION OF LIABILITY Except for claims of intellectual property infringement or breach of confidentiality obligations, in no event shall either party be liable to the other for consequential, incidental or special damages arising from any claim or action, incidental or collateral to, or directly or indirectly related to or in any way connected with, the subject matter of this Agreement whether based on contract, tort, statute, implied duties or obligations or other legal theory. 7. GENERAL a) Neither party will be liable for performance delays or for non-performance, due to causes beyond its control. b) Neither party may amend this Agreement or assign or transfer any rights or obligations hereunder without prior written consent of the other party. c) Neither party's failure to enforce any provision of this Agreement will be deemed a waiver of that provision or of the right to enforce it in the future. d) Solutions Partner will conduct all its activities relating to its business with HP in accordance with the highest standards of ethics and fairness as well as in compliance with applicable law. HP may immediately terminate this Agreement if Solutions Partner fails to do so. e) This Agreement shall be governed in accordance with the laws of the Province of British Columbia and, as applicable, Canada. f) To the extent that any provision of this Agreement is determined to be illegal or unenforceable, the remainder of the Agreement will remain in full force and effect. The offending provision will be deemed amended by the parties so as to make it enforceable and to the extent possible, have consequences which are substantially the same as what was intended by the parties. g) Choice of Language. The parties acknowledge that they have requested and are satisfied that this Agreement be drawn up in the English language. Les parties aux pr,sentes reconnaissent que chacune d'elle a exig, que cette Annexe soit r,dig,e en anglais, et s'en d,clarent satisfaites. h) All notices that are required under this Agreement will be in writing and will be considered given as of twenty-four (24) hours after sending by electronic means, facsimile transmission, overnight courier, or hand delivery, or as of five (5) days of certified mailing and appropriately addressed to Solutions Partner : HP: Hewlett-Packard (Canada) Ltd. 5150 Spectrum Way Mississauga, Ontario L4W 5G1, Canada Attention: Contracts Manager i) This Agreement constitutes the entire understanding between HP and Solutions Partner , and supersedes any previous communications, representations or agreements between the parties, whether oral or written, regarding transactions hereunder. Solutions Partner 's additional or different terms and conditions will not apply. j) This Agreement shall remain in full force and effect in the event of any sale, whether in whole or in part, merger, consolidation or other re-organization of Solution Provider, or in the event of any significant change in management control of Solution Provider's operations. k) Solutions Partner agrees, by signing below, that Solutions Partner has read and agrees to all provisions contained in this Agreement. 8. ATTACHMENTS The following attachments form part of this Agreement: Effective the 8th day of March, 2002 AUTHORIZED SIGNATURES: Solutions Partner Advanced Interactive Inc. Hewlett-Packard (Canada) Ltd. /s/ Karim Lakhani /s/ Jim Ranalli Karim Lakhani Jim Ranalli President Senior Contracts Consultant EX-10.8 13 alternetex1081203.txt EXHIBIT 10.8 SCHOOLWEB SYSTEMS INC. #280 - 815 West Hastings Street Vancouver, BC V6C 1B4 Tel: (604) 608-2540 Fax: (604) 608-8775 March 8, 2002 Advanced Interactive Inc. 718 - 1350 Flamingo Road Las Vegas, Nevada 89119 Attention: Mr. Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101 - 1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Mr. Karim Lakhani Dear Sirs: Re: Agreement between Hewlett Packard (Canada) and Advanced Interactive Inc. ("AII") dated March 6, 2002 This letter is written to confirm our agreement as follows: 1. We consent to the terms of the agreement between Advanced Interactive Inc. and Hewlett Packard (Canada) attached hereto as Schedule "A" (the "Solutions Partner Agreement"); 2. We acknowledge paragraph 5 of the Solutions Partner Agreement and confirm that we will not, without first giving 210 days' notice to AII, withdraw our consent in paragraph 1 above; and 3. We confirm that, in conjunction with the Solutions Partner Agreement, we have ceased to use the name "SchoolWeb Systems Inc." for business purposes and will (subject to shareholder approval) be changing our name to "Alternet Systems Inc." as soon as practicably possible. Should you require anything further, please do not hesitate to contact us at anytime. Yours truly, SCHOOLWEB SYSTEMS INC. /s/ Patrick Fitzsimmons Patrick Fitzsimmons, Director and Vice-President EX-10.9 14 alternetex1091203.txt EXHIBIT 10.9 SchoolWeb Systems Inc. 280-815 W. Hastings Street Vancouver, BC Canada V6C 1B4 Agreement No: SchoolWeb Systems Inc. Reseller AGREEMENT This Reseller Agreement (the "Agreement") is made and entered into between Alternet Systems Inc., a Nevada corporation ("SchoolWeb "), and the entity named below (the "Reseller") effective as of the Effective Date set forth below: Reseller: Effective Date: Billing/Notice Address: Telephone: Fax: Province of Incorporation: Territory: Initial Term: Contact Persons: Reseller Pricing Reseller Facility: same as above As indicated in Exhibit A The SchoolWeb products, together with each product's version number, listed below, constitute Products for purposes of the Agreement, and all attachments and schedules hereto: Products: SchoolWeb Application System SchoolWeb Server Version 1.1 as per Function Specifications Document This Cover Page, the attached Reseller Terms and Conditions, and any duly executed addenda are incorporated into and made a part of this agreement as of the Effective Date set forth above. Additional documents, schedules, exhibits, addenda and amendments may be incorporated and made a part of the Agreement upon the written consent of the parties. The parties hereby acknowledge that they have read and understand this Agreement and all exhibits and addenda hereto, and agree to all terms and conditions stated herein and attached hereto. Alternet Systems Inc. RESELLER: Patrick Fitzsimmons Name: Vice President Sales Title: Reseller TERMS AND CONDITIONS 1. DEFINITIONS. a. "Addendum" means any addendum to this Agreement that either amends any of the terms of the Cover Page or identifies additional Products to be covered by this Agreement, provided that both SchoolWeb and Reseller execute such addendum. b. "Reseller Discount" means the applicable percentage discount from the List Price set forth on the Cover Page hereto. SchoolWeb shall have the right to modify the Reseller Discount for any or all Products upon written notice to Reseller given no later than ninety (90) days prior to the beginning of any Renewal Term. c. "Reseller Server" means a computer server owned or leased exclusively by Reseller, which is operated exclusively by Reseller or its agents at its Facility listed on the Cover Page or of which Reseller has informed SchoolWeb in writing. d. "Documentation" means the End User Software documentation provided by SchoolWeb for distribution by Reseller to End Users under this Agreement. e. "End User" means a person or entity to whom Reseller distributes a copy of the Software and Documentation for private use, as opposed to redistribution, and who has agreed to be bound by all the terms of the Software License Agreement. f. "Intellectual Property" means patents, copyrights, trademarks, trade secrets or other intellectual and intangible property rights, including registrations and applications therefore, and all continuations, continuations in part, divisional applications, and renewals of any of the foregoing. g. "Key" means the electronic code necessary to enable locked Software to be used are accessed by the Maximum Number of Concurrent Users of an End User. h. "List Price" means, with respect to a Product, SchoolWeb 's standard list price for the Product in the Territory, as it may be revised by SchoolWeb from time to time. A revised List Price shall become effective, for purposes of this Agreement, thirty (30) days after SchoolWeb publishes such a List Price or otherwise provides such revised List Price to Reseller. i. "Maximum Number of Concurrent Users" means, for each Product, the maximum number of Authorized Users (as that term is defined in the Software License Agreement) licensed to access Software, or those portions of the Software designated to operate on server computers, simultaneously. j. "Products" means executable object code for the SchoolWeb software products identified in the Cover Page attached hereto or any Addendum. k. "Proprietary Information" means information concerning a party's inventions, confidential know-how and trade secrets (including methods or concepts utilized therein), software, customers, distribution and business. The Keys are expressly agreed to constitute Proprietary Information of SchoolWeb . l. "Software License Agreement" means SchoolWeb 's form of End User license agreement which governs the use of the Software by the End User (as such form may be modified by SchoolWeb from time to time), to which each End User of the Products must be bound; a copy of such form signed by the End User must be received by SchoolWeb before Reseller may release the Key to the End User. m. "Territory" means the geographic or other market coverage areas identified on the Cover Page hereto. n. "Update" means any change to the Products or Documentation provided by SchoolWeb to Reseller following Reseller's initial receipt of the particular Product or Documentation. 2. LICENSE AND DISTRIBUTION a. Rights Granted to Reseller. Subject to Reseller's compliance with terms and conditions set forth in this Agreement, SchoolWeb grants Reseller, and Reseller accepts, during the term of this Agreement, a non-transferable, non-exclusive license and right (i) to reproduce and store one or more copies of the Software and Documentation on the Reseller Servers for the purpose of distribution to End Users or for demonstration to End User; (ii) to distribute the Products and Documentation to End Users in the Territory, either electronically from the Reseller Server(s) or by other means authorized in writing by SchoolWeb , and to provide such End Users with necessary Key(s) once provided to Reseller by SchoolWeb ; and (iii) to demonstrate, market and promote the Software to End Users, subject to the restrictions of this Agreement. b. Disclosure of Software Keys to Reseller. The Key necessary to unlock a particular Product will be disclosed by SchoolWeb only upon SchoolWeb 's receipt of: (i) written documentation in a form acceptable to SchoolWeb ("Key Purchase Order"), which will expressly reference this Agreement and contain the following information: (1) name and address of End User; (2) description of the Products to be purchased; (3) the Maximum Number of Concurrent Users licensed to use each Product; and (4) confirmation of Purchase Price to be paid to SchoolWeb by Reseller for each Product; and (ii) a Software License Agreement covering the Products and listing the Maximum Number of Concurrent Users for each, such Software License Agreement duly executed by the End User. All Key Purchase Orders issued by Reseller will be governed exclusively by terms and conditions of this Agreement, notwithstanding any preprinted terms and conditions contained on any Reseller Key Purchase Orders. c. Distribution Updates. Reseller shall be responsible for distributing, at Reseller's expense, all Updates in accordance with SchoolWeb 's instructions. d. Restrictions. Reseller shall not use, modify, supplement, enhance or bundle the Software, and shall distribute the Software solely in the form in which it was provided to Reseller by SchoolWeb . Reseller shall not have the right to sublicense the Software or Documentation, and Reseller shall ensure that all End Users execute the then-current Software License Agreement with SchoolWeb before they are permitted to use or access the Software. Reseller shall not have the right to subcontract its rights hereunder, nor to distribute the Software or Documentation indirectly trough agents, resellers or sub-Resellers. e. Reverse Engineering. Reseller agrees not to: (i) disassemble, decompile or otherwise reverse engineer the Software or otherwise attempt to learn the source code, structure, algorithms or ideas underlying the Software; (ii) customize, modify, enhance or otherwise change the Software or Documentation; (iii) take any action contrary to SchoolWeb 's Software License Agreement except as expressly allowed under this Agreement. f. Intellectual Property. (i) Ownership. Reseller agrees and acknowledges that SchoolWeb and its suppliers are the owners of all right, title and interest in and to the Software, Documentation and all Intellectual Property therein, and that Reseller shall not obtain or claim any ownership interest in the Software or Documentation, or any portion thereof, or any Intellectual Property therein. (ii) Proprietary Notices. Reseller shall not obscure, alter or remove any patent, copyright, trademark, service mark or other proprietary rights symbol or notice contained or displayed in or on the Software or Documentation. Reseller shall reproduce, on every copy of the Software and Documentation made by or for it, all patent, copyright, trademark, service mark or other markings or legends contained therein of thereon. (iii) Prohibitions. Reseller shall not register any of SchoolWeb 's trademarks, logos, domain names or brands, or substantially or confusingly similar trademarks, logos, domain names or brands, anywhere in the world. g. No Other Rights. Except as stated in Section 2, Reseller shall make no other utilization of the Software and Documentation, or use the Software and Documentation for the benefit of any other person or entity, or permit any third party to make such utilization, and Reseller shall have no other rights or licenses with respect to the Software and Documentation (including rights under any patents or other Intellectual Property of SchoolWeb ). 3. OTHER OBLIGATION OF RESELLER a. Distribution Quality. Reseller agrees that it shall distribute the Software and Documentation to End Users in a rapid, secure and reliable electronic manner, which provides the End User with an uncorrupted, complete copy of the Software and Documentation. Reseller shall be fully liable to End Users for all transmission errors and other defects in the Software introduced following SchoolWeb 's delivery to Reseller, and shall indemnify, defend and hold SchoolWeb harmless against any End User claims, injuries, damages and settlements relating thereto. b. Security. Reseller shall use its best efforts to ensure that any network, server, storage device or other medium on which the Software or Documentation is stored is secure from unauthorized intrusion or tampering, and that no unauthorized third parties have access to, or the ability to use or download the Software or Documentation. Reseller shall notify SchoolWeb immediately in the vent of any actual or suspected unauthorized access to, use of or tampering with the Software or Documentation. c. Promotion. Subject to the rights and restrictions set forth in this Agreement, Reseller shall use its best efforts in the Territory during the term of this Agreement to (i) actively market, promote and distribute Products; (ii) make Product demonstrations that showcase the features of the Products; (iii) establish and maintain appropriate marketing and distribution facilities and personnel within its organization to create and meet the demand for Products among End Users in the Territory; (iv) promote the goodwill, name and reputation of SchoolWeb and the Products; and (v) represent Products accurately and fairly and at all times avoid misleading or unethical business practices. Reseller shall make no claim or representation relating to the performance or functionality of the Software other than as expressly set forth by SchoolWeb in the Documentation or other written material or SchoolWeb intended for public distribution. Reseller shall also distribute the following materials to all of its locations in the Territory: (i) all marketing and technical brochures provided by SchoolWeb ; and (ii) educational material, whether provided by SchoolWeb or developed by Reseller, for training Reseller's sales personnel. d. Reseller Internal Training. Reseller shall train a sufficient number of sales personnel in the features and functions of the Products as may be required for Reseller to satisfy its obligations under this Agreement in a professional and competent manner. 4. OBLIGATIONS OF SCHOOLWEB a. Initial Deliverables. SchoolWeb will provide a warranty to the End Users of the Software as set forth in the Software License Agreement. Reseller is not authorized to make any other warranties on SchoolWeb 's behalf. 6. PAYMENTS a. Purchase Price. Reseller will pay SchoolWeb an amount for each Key distributed, delivered or made accessible to an End User by Reseller equal to the List Price less the applicable Reseller Discount (the "Purchase Price"). Payments shall be payable upon receipt of an invoice or no later than thirty (30) days following Reseller's receipt of an invoice from SchoolWeb depending on invoice terms. All Products ordered by Reseller after the effective date of any List Price change will be subject to the price in effect at the time of order. b. End User License Fees. Notwithstanding SchoolWeb 's publication of the List Prices, Reseller shall be free, in its absolute discretion, to set the license fee, if any, it charges to End Users for Software. c. Payments Net. All payments, fees and other charges payable by Reseller to SchoolWeb under this Agreement are exclusive of all federal, state, local and foreign taxes, levies and assessments. Reseller agrees to bear and be responsible for the payment of all such taxes, levies and assessments imposed on Reseller of SchoolWeb arising out of this Agreement, excluding any tax based on SchoolWeb 's net income. The Fees shall be grossed-up for any non-refundable withholding tax imposed on such Fees by a foreign governmental entity. Reseller shall obtain and provide to SchoolWeb any certificate of exemption or similar document required to exempt any transaction under this Agreement from sales tax, use tax or other tax liability. d. Payment Terms. All payments shall be made in US Dollars. If any payment or any other sum due from Reseller under this Agreement should become past due, SchoolWeb may charge Reseller a late payment charge of the lesser of (i) one and one- half (1.5) percent per month and (ii) the legal maximum as may be permitted by law on the past due balance. SchoolWeb shall also be entitled to receive all costs and expenses incident to the collection of overdue amounts hereunder, including but not limited to attorneys' fees. e. Changes in Price. SchoolWeb may at any time change the List Price of the Software. If SchoolWeb changes the price of the Software, SchoolWeb agrees to notify Reseller of such a change at least five (5) days in advance of its effectiveness. f. Books and Records. During the term of this Agreement and for a period of three (3) years thereafter, Reseller agrees to maintain adequate books and records ("Records") relating to the distribution of Software and Documentation to End Users. g. Audit Rights. SchoolWeb shall have the right upon reasonable notice and during regular business hours, itself and/or through one or more legal, accounting or technical auditors, to inspect the facilities, computers, products and Records of Reseller to verify Reseller's compliance with the terms and conditions of this Agreement, subject to the terms set out in Section 9 Proprietary Information, including but not limited to compliance with the restrictions of the Licenses and the proper payment of Purchase Prices. Reseller shall comply with all reasonable requests made in such inspection, including by making its personnel available to answer questions and providing copies of the relevant Records. SchoolWeb shall have the right to conduct such an audit upon ten (10) days advance notice, no more than once during any 12-month period (unless a previous audit has identified an underpayment, in which case audits may be performed as frequently as reasonable requested by SchoolWeb ). The expense of such audit shall be borne by SchoolWeb unless such audit reveals a material breach of one or more of provisions of this Agreement (including an underpayment of Purchase Price by more then five (5) percent during any quarter, in which case in addition to all other remedies that may be available to SchoolWeb hereunder, Reseller shall pay all costs and expenses of such audit (including fees and expenses of third party auditors and related counsel fees)). Payment of any amount determined to be due as a result of such audit shall be made within thirty (30) days of receipt of SchoolWeb 's invoice therefore, together with interest at the rate of one and one-half (1.5) percent per month (or the highest rate permitted by law, if lower) from the date payment was due until the date paid. 7. LIMITATIONS OF LIABILITY; REMEDIES a. THE SOFTWARE AND DOCUMENTATION ARE PROVIDED TO RESELLER HEREUNDER "AS IS". SCHOOLWEB DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, RELATING TO THE SOFTWARE AND DOCUMENTATION, INCLUDING ALL IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTIBILITY, NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. SCHOOLWEB SPECIFICALLY DISCLAIMS ANY WARRANTY THAT THE OPERATION OF THE PRODUCTS WILL BE UNINTERRUPTED OR ERROR FREE. b. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY DAMAGES RESULTING FROM LOSS OF DATA, LOST PROFITS, LOSS OF USE OF EQUIPMENT OR LOST CONTRACTS OR FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES IN ANY WAY ARISING OUT OF OR IN CONNECTION WITH THE USE OF PERFORMANCE OF THE PRODUCTS OR DOCUMENTATION OR RELATING TO THIS AGREEMENT, HOWEVER CAUSED, EVEN IF SUCH PARTY HAS BEEN MADE AWARE OF THE POSSIBILITIY OF SUCH DAMAGES. THIS LIMITATION DOES NOT APPLY TO THE DAMAGES ARISING FROM RESELLER'S BREACH OF SECTION 2. c. SCHOOLWEB 'S ENTIRE LIABILITY TO RESELLER, REGARDLESS OF THE FORM OF ANY CLAIM OR ACTION OR THEORY OF LIABILITY (INCLUDING CONTRACT, TORT, OR WARRANTY), SHALL BE LIMITED TO THE TOTAL AMOUTS ACTUALLY PAID BY RESELLER TO SCHOOLWEB DURING THE PRECEDING 12-MONTH PERIOD. d. Acknowledgment. Reseller acknowledges and agrees that the Reseller Discount has been set based on the application of the limitation described in Sections 7(a), 7(b) and 7(c) above and that absent from such limitation, the Reseller Discount would be significantly higher. e. Relief. Reseller acknowledges that the Software constitutes the valuable property of SchoolWeb , and that nay violation of the provisions of Section 2, 3 or 9 of this Agreement is likely to cause SchoolWeb irreparable harm, which is not remediable by payment of monetary damages. Therefore, Reseller agrees that SchoolWeb shall be entitled to injunctive and/or other equitable relief, in addition to other remedies afforded by law, to prevent any such violation from occurring. 8. INDEMINIFICATION a. Indemnity. SchoolWeb shall indemnify Reseller against any damages, settlements, costs and expenses (including reasonable attorney's fees) awarded against Reseller and shall defend Reseller in any suit, claim, or proceeding arising from a claim that use by the Reseller of the Software or Documentation infringes or violates any currently existing Canada patent, copyright, trademark or trade secret; provided, however, that Reseller (i) promptly notifies SchoolWeb in writing of such suite, claim, or proceeding; (ii) gives SchoolWeb reasonable information, assistance, and cooperation required to defend such suit, claim, or proceeding; and (iii) allows SchoolWeb to control the defense of any such action and all negotiations for its settlement or compromise. Reseller may be represented in the defense of any such claim at Reseller's expense, by counsel of Reseller's selection. SchoolWeb shall have no liability for settlements or costs incurred without its consent. b. Injunctive Relief. In the event that an injunctive restraint is obtained against Reseller's use of the Software or Documentation by reason of infringement or violation of any Canada patent, copyright, trade secret or trademark, or if in SchoolWeb 's opinion that Software or Documentation is likely to become the subject of such an injunction, SchoolWeb shall have the right, but not the obligation, to (i) procure for Reseller the right to continue to use the Software or Documentation as provided in this Agreement; (ii) replace or modify the Software or Documentation so that it becomes non-infringing (so long as the functionality or the Software or Documentation is essentially unchanged); or (iii) if the preceding clauses (i) and (ii) are not reasonably practicable, terminate this Agreement and the License with respect to such infringing Software. c. Exceptions. The provisions of Sections 8(a) and 8(b) notwithstanding, SchoolWeb shall not have liability to Reseller, and Reseller shall indemnify SchoolWeb, to the extent that any claim is based upon (i) use of the Software or Documentation in conjunction with nay data, equipment or software not provided by SchoolWeb , where the Software or Documentation would not itself be infringing or otherwise the subject of the claim; (ii) use of the Software in a manner not described in the Documentation; (iii) any modification to the Software or Documentation not made by SchoolWeb ; (iv) use of the Software or Documentation in any unlawful, improper or inappropriate manner or for any unlawful, improper or inappropriate purpose; or (v) any claim of infringement of any patent or copyright or misappropriation of any trade secret in which Reseller or any affiliate of Reseller has a pecuniary or other material interest. d. Reseller Indemnity. Reseller shall indemnify and hold SchoolWeb harmless against any damages, settlements, costs and expenses (including reasonable attorney's fees) arising from (i) any third party claim, including claims made by End Users, arising from the distribution, marketing or use of the Products, other than claims for which SchoolWeb indemnifies Reseller pursuant to Section 8(a) above and (ii) any of the claims described in Section 8(c) above. If notified promptly in writing of any third party action (and all prior related claims) brought against SchoolWeb based on a claim described in the previous sentence, Reseller shall defend against such action at its expense and pay all costs and damages finally awarded in such action or of any such action and all negotiations for its settlement or compromise. SchoolWeb shall reasonable cooperate with Reseller in the defense of such claim, and may be represented, at SchoolWeb 's expense, by counsel of SchoolWeb 's selection. SchoolWeb shall have no liability for settlements or costs incurred without its consent. e. Exclusive Remedy. The indemnification remedies set forth in this Section 8 shall constitute the exclusive remedies of Reseller, and the exclusive liability of SchoolWeb , with respect to the claims described in this Section 8. 9. PROPRIETARY INFORMATION a. Generally. Each party shall hold the Proprietary Information of the other party secret, and shall protect and preserve the confidential nature and secrecy of such Proprietary Information. All Proprietary Information shall be held in confidence by the party receiving such Proprietary Information (the "Receiving Party") following the date of disclosure and shall be used only as necessary in connection with the performance of its obligations under this Agreement only as necessary in connection with the performance of its obligation under this Agreement. Employees of the Receiving Party shall be bound in writing to maintain the confidentiality of such Proprietary Information to at least the extent provided in this Section 9. The Receivng Party shall maintain all Proprietary Information in secure premises, and the Receiving Party shall take all appropriate measures to prevent the unauthorized disclosure thereof. Neither party shall at any time during or after the term of this Agreement, without the other party's prior written consent: (i) disclose or communicate to any third party all or any of the other party's Proprietary Information except as permitted by this Agreement; (ii) make, or assist any person to make, any use of the other party's Proprietary Information not authorized by this Agreement, and shall use its best efforts to ensure that any employee or other person who acquires the other party's Proprietary Information shall not make any unauthorized use thereof. b. Exceptions. Proprietary Information shall not include any information to the extent it (i) is or becomes a part of the public domain through no act or omission on the part of the receiving party; (ii) is disclosed to the receiving party by a third party having no obligation of confidentiality with respect hereto; (iii) is released from confidential treatment by written consent of the disclosing party; or (iv) is required to be disclosed by law or order of a court or governmental agency (such disclosure to be made only after consultation with the party disclosing such Proprietary Information). c. Ownership. All Proprietary Information of a party shall remain the exclusive property of such party, and no right, title or interest in such information shall be conveyed to the other party by release of such information to it. Each party receiving such information agrees to reasonable determination by the other party that the receiving party no longer has a need for such information. Each party agrees to notify the other party is it becomes aware of any use of the information that is not authorized by this Agreement. 10. TERM AND TERMINATION a. Term. Subject to earlier termination as described in Section 10(b), and unless otherwise agreed in writing by the parties, this Agreement shall have an initial term of one year (the "Initial Term") commencing on the Effective Date and ending on the first anniversary of the Effective Date, unless a different Initial Term is otherwise specified on the Cover Page. Thereafter, this Agreement shall automatically renew for successive renewal terms of one 91) year each ("Renewal Terms"). b. Termination. Either party may terminate this Agreement, for any or no reason, upon thirty (30) days' prior written notice to the other party. c. Effects of Termination. Upon termination of this Agreement for any reason, all rights and obligations of the parties shall immediately terminate, and Reseller agrees (i) to cease use, copying and distribution of the Software and Documentation immediately; (ii) to destroy all copies of the Software and Documentation which it has made, or which are otherwise in its possession or control; (iii) to return to SchoolWeb any advertising and other materials furnished to it by SchoolWeb ; (iv) to remove and not thereafter use any signs containing the name or trademarks of SchoolWeb ; and (v) to destroy all of its advertising matter and other preprinted matter remaining in its possession or under its control containing the word "SchoolWeb " and related SchoolWeb trade names or trademarks. Reseller agrees to remit all fees due to SchoolWeb within thirty (30) days of such termination. Notwithstanding the foregoing, the provision of Sections 2(e), 3(e), 3(f), 3(g), 6(a), 6(c), 6(d), 7, 8, 9, 10(c), 11(g) and 11(i) of this Agreement shall survive its termination in accordance with their terms. Termination shall be in addition to, and shall not prejudice, any of the parties' remedies at law or in equity. d. No Compensation. Reseller agrees that neither it nor its employees shall be entitled to any compensation or severance payment resulting from the fact of the termination of this Agreement or relating to any goodwill created by Reseller, and whether relating to loss of prospective sales, investments, compensation or goodwill. Reseller, for itself and on behalf of its employees, hereby waives any right it may have under any applicable laws with respect to any such payments, including but not limited to applicable termination, labour, social security or other similar laws or regulations. 11. GENERAL PROVISIONS a. Relationship of the Parties. Each party is acting as an independent contractor and not as an agent, partner, or joint venture, franchisee or franchisor, with the other party for any purpose. In particular, the parties expressly agree that no franchise relationship exists between them, and that the bargained for provisions of this Agreement shall govern their relationship and the termination thereof, notwithstanding the application of any rule or law relating to franchises. Reseller expressly waives the benefit of all such rules and laws. Except as provided in this Agreement, neither party shall have the right, power, or authority to act or to create any obligation, express or implied, on behalf of other. b. Publicity. Reseller shall not issue any press release or other similar publicity of any nature regarding this Agreement or its relationship with SchoolWeb without the prior written approval of SchoolWeb . This Agreement does not grant either party the right to use any trademark, trade name or logo of the other party in any advertising or promotional material, except that SchoolWeb may disclose that Reseller is a Reseller of the Products. c. Compliance With Laws. Reseller covenants that all of its activities under or pursuant to this Agreement shall company with all applicable laws, rules and regulations. d. Entire Agreement. This Agreement (including its addenda) constitutes the entire agreement between SchoolWeb and Reseller with respect to the distribution and promotion of the Software and Documentation, and hereby supersedes and terminates any prior agreements or understandings, oral or written, relating to such subject matter. No addendum, waiver, consent, modification, amendment or change of the terms of this Agreement shall bind either party unless in writing and signed by duly authorized officers of SchoolWeb and Reseller. e. Severability. In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be enforceable, unless such construction would materially alter the meaning of this Agreement. f. Assignments. Neither this Agreement nor any right, obligations or licenses granted hereunder may be assigned or delegated by Reseller either voluntarily or by operation of law, to any other person, persons, firms, or corporation without the prior written consent of SchoolWeb . For purposes of this Section, a merger, acquisition or change of control of Reseller shall be deemed to be an assignment. This Agreement shall insure to the benefit of the parties and their permitted successors and assigns. SchoolWeb may assign this Agreement without the consent of Reseller. g. Notices. Any notice by a party under this Agreement shall be in writing and either personally delivered, delivered by facsimile or sent via reputable overnight courier (such as Federal Express) or certified mail, postage prepaid and return receipt requested, addressed to the other party at the address specified on the Cover Page or such other address of which either party may from time to time notify the other in accordance with this Section 11(e). All notices shall be in English and shall be deemed effective on the date of personal delivery, upon confirmation of a facsimile transmission, one day after deposit with an overnight courier, or five days after deposit in the mail. h. Export. Reseller shall comply with all applicable export laws and regulations of all jurisdictions with respect to the Products and obtain, at its own expense, any required permits or export clearances, copies of which Reseller shall provide to SchoolWeb prior to such export. i. Governing Law and Jurisdiction. The validity, construction and interpretation of this Agreement, and the rights and duties of the parties, shall be governed by and construed in accordance with the laws of the Province of British Columbia, excluding its choice of law rules, and excluding any application of the United Nations Convention on Contracts for the International Sale of Goods. The parties hereto consent to the jurisdiction of the provincial and federal courts of Canada located in British Columbia in connection with any controversy arising out of the operation of this Agreement and agree not to bring any action in any other jurisdiction. j. No Waiver. The waiver by either party of a breach of a default of any provision of this Agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either party to exercise or avail itself of any right, power or privilege that it has, or may have thereunder, operate as a waiver of any right, power or privilege by such party. k. Section Headings. Captions and section headings hereof are for reference purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. l. Certification. SchoolWeb shall give the Reseller written notice if SchoolWeb reasonable deems itself insecure with respect to Reseller's compliance with the protections of Sections 2 or 9. Reseller shall then, within ten (10) days of the notice, either certify in writing by a duly authorized representative that it has complied with the terms of those Sections, or give SchoolWeb access to its facilities in a manner that is sufficient to enable SchoolWeb to verify compliance. m. Force Majeure. Neither party shall be liable in any respect for failures to perform hereunder due wholly or substantially to the elements, acts of God, labour disputes, acts of terrorism, acts of civil or military authority, fires, floods, epidemics, quarantine restrictions, armed hostilities, riots, or other unavoidable natural disasters beyond the control of the parties and the time for performance of obligations hereunder by the party subject to such event shall be extended for the duration of such event. Exhibit A Reseller Pricing Reseller will receive twenty percent of Net value of "SchoolWeb" License Fees as specified by the the End User sales agreement. Reseller will receive fifty percent net proceeds of third party devices included with the SchoolWeb Server. EX-10.10 15 alternetex1010101203.txt EXHIBIT 10.10 ALTERNET SYSTEMS, INC. #280 - 815 West Hastings Street Vancouver, British Columbia Tel: (604) 608-2540 Fax: (604) 608-8775 August 14, 2002 Advanced Interactive Inc. 718 - 1350 East Flamingo Road Las Vegas, Nevada 89119 Attention: Mr. Karim Lakhani - -and- Advanced Interactive Canada Inc. 2101 - 1177 West Hastings Street Vancouver, BC V6E 2K3 Attention: Mr. Al Jamal Dear Sir or Madam: Re: License Agreement dated January 1, 2001, as amended (the "License Agreement") This letter is written to confirm as follows: 1. The License Agreement between Advanced Interactive Inc. ("AII Nevada") and Advanced Interactive Canada Inc. ("AII Canada") and Alternet Systems, Inc. ("Alternet") is hereby amended such that the existing section 5.1(d) of the License Agreement is deleted and replaced with the following section 5.1(d): "Commencing on January 15, 2001 (and ending on December 15, 2001) Alternet will make payments to AII Nevada or AII Canada of: (a) US$10,000 per month in 2001; (b) US$20,000 per month in 2002; (c )US$28,000 per month in 2003; (d) US$36,000 per month in 2004; (e) US$44,000 per month in 2005; (f) US$52,000 per month in 2006; (g) US$60,000 per month in 2007; (h) US$68,000 per month in 2008; (i) US$76,000 per month in 2009; and (j) US$84,000 per month in 2010. In any given month, the amount payable under (a) to (j) above will be reduced by the 40% royalty payment in paragraph 5.1(a). Any royalty payments in paragraph 5.1(a) which are made and which exceed the amount due under (a) to (j) above will be accrued and applied to future months' payments. Alternet shall have the right, in any given month: (i) to accrue (for the term of this Agreement) up to one-half of the amount owed in that month; and (ii) subject to the consent of AII Canada or AII Nevada, to pay one-half of the amount owed in any given month by way of issuance to AII Canada or AII Nevada of: (A) prior to Alternet trading publicly, common shares at a price of US$0.35 per share; or (B) on or after commencement of public trading of Alternet, common shares at the weighted average market price for the week prior to the monthly payment becoming due. 2. Alternet shall make all reasonable efforts to register for immediate resale (by way of filing of an SB2 Registration Statement or S8 Registration Statement) any shares issued to AII Canada or AII Nevada in settlement of outstanding monthly payments. 3. In all other ways, the License Agreement remains in full force and effect as amended. 4. AII Canada and AII Nevada hereby agree that Alternet may settle, by way of issuance of common shares at US$0.35 per share, any outstanding payments due to this amendment's date under section 5.1(d) of the Agreement. 5. To simplify and clarify their agreement, AII Canada, AII Nevada and Alternet shall, on or before September 15, 2002, complete a new License Agreement which incorporates the terms of License Agreement and all of its amendments. Upon execution hereof, this letter becomes an amendment to the License Agreement binding upon its terms. Yours truly, ALTERNET SYSTEMS, INC. Patrick Fitzsimmons, Director The terms of this Agreement above are hereby read, understood, acknowledged and accepted by the undersigned effective the 15th day of August, 2002. ADVANCED INTERACTIVE, INC. By its Authorized Signatory ______________________________ ADVANCED INTERACTIVE CANADA INC. By its Authorized Signatory ______________________________ EX-23.1 16 alternetnewex231120302.txt EXHIBIT 23.1 LABONTE & CO. 1205 - 1095 West Pender Street C H A R T E R E D A C C O U N T A N T S Vancouver, BC Canada V6E 2M6 Telephone (604) 682-2778 Facsimile (604) 689-2778 Email rjl@labonteco.com November 26, 2002 U. S. Securities and Exchange Commission Division of Corporation Finance 450 Fifth St. N.W. Washington DC 20549 RE: Alternet Systems, Inc. (formerly Schoolweb System Inc.) (formerly North Pacific Capital Corp.) - Form SB-2 Registration Statement Dear Sirs: As chartered accountants, we hereby consent to the inclusion or incorporation by reference in this Form SB-2 Registration Statement dated November 25, 2002, of the following: - Our report to the Board of Directors and Stockholders of Schoolweb Systems Inc. (formerly North Pacific Capital Corp.) dated February 28, 2002, on the consolidated balance sheets of the Company as of December 31, 2001 and 2000 and on the consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2001, the period from October 16, 2000 (inception) to December 31, 2000 and cumulatively, from October 16, 2000 (inception) to December 31, 2001. Yours truly, LaBONTE & CO. Chartered Accountants EX-23.2 17 alternetex2321203.txt EXHIBIT 23.2 The consent of CD Farber Law Corporation to include its opinion regarding the legality of the issuance of shares is set forth in CD Farber Law Corporation's opinion attached as Exhibit 5.1 to the Registration Statement on Form SB-2 dated October 4, 2002. -----END PRIVACY-ENHANCED MESSAGE-----