Edgar Filing: CYPOST CORP

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 2
TO
FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For Fiscal Year Ended: December 31, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 000-26751
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CyPost Corporation
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(Exact name of small business issuer as specified in its
charter)

Delaware 98-0178674
------------------------------------ -----------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

900-1281 West Georgia St.
Vancouver, British Columbia, Canada V6E 3J7
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number (604) 904-4422
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Securities registered under Section 12(b) of the Act: NONE
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Securities registered under Section 12(g) of the Act: Common Stock, par value
$.001 per share
---------------------------

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation SB is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $4,595,823

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) $7,046,037 as of April 2, 2001.

Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. Yes [ ]
No [ ]

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 21,562,025 as of April 2,
2001.

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).

No documents are incorporated by reference into this Annual Report on
Form 10-KSB.

Transitional Small Business Disclosure Format (check one):
Yes [ ]; No [X]

PART II, Item 7 Financial Statements

CYPOST CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report F-1

Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2

Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999 F-3

Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2000 and 1999 F-4

Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999 F-5

Notes to the Consolidated Financial Statements F-6
Independent Auditors' Report F-21

Consolidated Balance Sheets as of December 31, 1999 and 1998 F-22

Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 F-23

Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-24

Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1999 and 1998 F-25

Notes to the Consolidated Financial Statements F-26

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
CyPost Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of CyPost
Corporation and Subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of CyPost Corporation and Subsidiaries as of
December 31, 1999, were audited by other auditors whose report dated March 23,
2000, included an explanatory paragraph that raised substantial doubt about the
Company's ability to continue as a going concern.

We conducted our audit in accordance with auditing standard generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CyPost Corporation
and Subsidiaries as of December 31, 2000, and the results of its operations and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred operating losses
since its inception and requires additional financing to continue operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 1. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that may result should the Company
be unable to continue as a going concern.

GOOD SWARTZ BROWN & BERNS LLP.

Los Angeles, California
April 6, 2001

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(U.S. DOLLARS)

2000 1999
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ASSETS

CURRENT ASSETS
CASH $ 250,631 $ 415,779
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS 173,207 233,188
INSURANCE PROCEEDS RECEIVABLE 58,488 -
PREPAIDS AND DEPOSITS 250,534 173,319
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TOTAL CURRENT ASSETS 732,860 822,286

PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 751,020 599,582
GOODWILL AND OTHER INTANGIBLES, NET OF
ACCUMULATED AMORTIZATION 3,193,015 5,036,785
OTHER ASSETS 5,371 69,389
SOFTWARE DEVELOPMENT, NET OF ACCUMULATED AMORTIZATION - 139,535
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$ 4,682,266 $ 6,667,577
============= ============

LIABILITIES AND SHAREHOLDERS EQUITY

CURRENT LIABILITIES
ACCOUNTS PAYABLE & ACCRUED LIABILITIES 1,026,666 983,237
LOANS 2,110,000 875,000
DEFERRED REVENUE 640,483 626,143
PURCHASE OF INTERNET ARENA - 240,000
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TOTAL CURRENT LIABILITIES 3,777,149 2,724,380
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COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY
SHARE CAPITAL
AUTHORIZED
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
30,000,000 COMMON STOCK WITH A PAR VAUE OF $.001

ISSUED AND OUTSTANDING
PREFERRED STOCK - NONE - -
COMMON STOCK 21,556,993 - 2000, 20,246,480 - 1999 21,557 20,246
PAID-IN CAPITAL 14,047,544 8,814,002
ACCUMULATED DEFICIT (13,197,006) (4,908,127)
CURRENCY TRANSLATION ADJUSTMENT 33,022 17,076
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TOTAL STOCKHOLDERS' EQUITY 905,117 3,943,197
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$ 4,682,266 $ 6,667,577
============= ============

The accompanying notes are an integral part of these consolidated statements.

F-2

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(U.S. DOLLARS)

2000 1999
------------ ------------

REVENUE $ 4,595,823 $ 1,020,541

DIRECT COSTS 2,138,456 563,118
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2,457,367 457,423
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EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 3,599,690 1,999,151
AMORTIZATION AND DEPRECIATION 2,859,519 588,538

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6,459,209 2,587,689
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LOSS BEFORE OTHER INCOME (EXPENSE) (4,001,842) (2,130,266)
------------ ------------

OTHER INCOME (EXPENSE)

NET RECOVERY FROM FIRE INSURANCE 228,966 -

GAIN ON SALE OF INVESTMENT OF CYPOST KK 36,202 -

LOSS ON ABANDONMENT OF PLAYA OPERATIONS (2,201,253) -

IMPAIRMENT LOSS OF LONG LIVED ASSETS (128,726) -

INTEREST EXPENSE (2,113,570) (2,221,322)

------------ ------------
TOTAL OTHER INCOME (EXPENSE) (4,178,381) (2,221,322)
------------ ------------

MINORITY INTEREST (108,656) -

------------ ------------
NET LOSS $(8,288,879) $(4,351,588)
============ ============

LOSS PER SHARE BASIC & DILUTED $ (0.39) $ (0.28)
============ ============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 21,182,796 15,816,232
============ ============

The accompanying notes are an integral part of these consolidated statements.

F-3

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(U.S. DOLLARS)

ADDITIONAL CUMMULATIVE
COMMON STOCK PAID-IN TRANSLATION
NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ------- ----------- ------------- ------------ ------------

BALANCE, DECEMBER 31, 1998 13,264,500 $13,264 $ 624,416 $ (556,539) $ 33,966 $ 115,107
Issued for acquisition of Intouch.Internet, Inc. 9,855 10 28,515 28,525
Issued for acquisition of NetRover Inc. and

NetRover Office Inc. 219,000 219 679,324 679,543

Issued for acquisition of Connect Northwest 147,985 148 659,852 660,000
Issued for acquisition of Internet Arena 20,140 20 59,980 60,000

Issued for loan conversion 4,500,000 4,500 3,995,500 4,000,000

Issued for exercise of warrants 2,085,000 2,085 553,915 556,000

Beneficial conversion feature on loans 2,212,500 2,212,500

Cummulative translation adjustment (16,890) (16,890)

Net loss (4,351,588) (4,351,588)
---------- ------- ----------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1999 20,246,480 20,246 8,814,002 (4,908,127) 17,076 3,943,197

Issued for acquisition of Internet Arena 80,558 81 239,919 240,000

Issued for acquisition of Playa Corporation 785,455 785 2,699,215 2,700,000
Issued for services/debt 26,500 27 92,723 92,750

Issued for services 369,500 370 212,196 212,566
Issued for services 48,500 48 26,989 27,037

Beneficial conversion feature on loans 1,962,500 1,962,500
Cummulative translation adjustment 15,946 15,946

Net loss (8,288,879) (8,288,879)
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BALANCE, DECEMBER 30, 2000 21,556,993 $21,557 $14,047,544 $(13,197,006) $ 33,022 $ 905,117
===========================================================================

F-4

CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(U.S. DOLLARS)

2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(8,288,879) $(4,351,588)
Adjustments to reconcile net loss to cash used by
operating activities:
Amortization and depreciation 2,859,519 588,538
Interest expense 1,962,500 2,212,500
Net recovery from fire insurance (228,966) -
Gain on sale of investment on CyPost KK (36,202) -
Minority interest 108,656
Loss on abandonment of Playa operations 2,201,253 -
Impairment loss of long-live assets 128,726 -
Casualty loss on equipment 7,901 -
Fair value of stock issued for services 332,353 -
Currency translation adjustments on loss on abandonment 60,501 -
Translation adjustments 15,946 -
Changes in assets and liabilities
Accounts receivable 59,981 (90,017)
Insurance receivable (58,488) -
Prepaid and deposit (77,215) (109,550)
Other assets 64,018 (15,972)
Accounts payable and accrued liabilities (35,160) 645,204
Deferred revenue 14,340 149,921
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NET CASH USED BY OPERATING ACTIVITIES (909,216) (970,964)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business (592,454) (3,612,066)
Purchase of property and equipment (338,602) (270,100)
Investment in software development (87,431) (209,303)
Proceeds from sale of investment in CyPost KK 220,000 -
Gross proceeds received from insurance company 306,344 -
Payment of insurance related claims (77,378) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (569,521) (4,091,469)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 1,413,589 4,875,000
Loan repayment (100,000) -
Exercise of warrants - 556,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,313,589 5,431,000
------------ ------------
NET INCREASE IN CASH (165,148) 368,567
CASH, BEGINNING OF YEAR 415,779 47,212
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CASH, END OF YEAR $ 250,631 $ 415,779
============ ============

NON-CASH TRANSACTIONS
Common Stock issued for services and acquisitions $ 3,272,353 $ 1,428,068
Common Stock issued for debt conversion - $ 4,000,000

OTHER CASH INFORMATION
Interest paid $ 29,059 $ -

The accompanying notes are an integral part of these consolidated statements

F-5

CYPOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(U.S. Dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN

CyPost Corporation ("CyPost") was incorporated on September 5, 1997 under
the laws of the State of Delaware and its principal executive offices are
located in Vancouver, Canada. CyPost is engaged in the business of providing
Internet connection services for business and personal use. Previously the
Company was also involved in developing certain software products using
encryption components to enhance user security and convenience for communication
across digital networks, and in securing local data storage equipment, which
activities the Company no longer currently pursues. The Company emerged from the
development stage in 1999 and commenced revenue generating activities. The term
"Company" refers to CyPost and its consolidated subsidiaries.

The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to a "going concern", which assume
that the Company will continue in operation for at least one year and will be
able to realize its assets and discharge its liabilities in the normal course of
operations.

Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $13.2 million for the period from inception September 5, 1997 to
December 31, 2000, has a working capital deficiency at December 31, 2000 of
approximately $3 million, and requires additional financing for its business
operations.

The Company's future capital requirements will depend on numerous factors
including, but not limited to, whether the Company wishes to recommence software
development activities, and market penetration of and profitable operations from
its Internet connection services. The Company does not believe that bank
borrowings are available under present circumstances, and there can be no
assurance that any financing could be obtained from other sources. Even if
funding were available, it might be available only on terms which would not be
favorable to the Company or which management would not find acceptable.
Meanwhile, the management is working on attaining cost and efficiency synergies
by consolidating the operations of the businesses acquired.

These financial statements do not reflect adjustments that would be
necessary if the Company was unable to continue as a "going concern". While
management believes that the actions already taken or planned, as described
above, will mitigate the adverse conditions and events which raise doubt about
the validity of the "going concern" assumption used in preparing these financial
statements, there can be no assurance that these actions will be successful.

If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the

reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which,
except CyPost KK for a certain period of time during 2000, are wholly owned,
include ePost Innovations Inc., NetRover Inc., NetRover Office Inc., Hermes Net
Solutions Inc., and Intouch.Internet Inc. All significant inter-company
transactions and balances have been eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally Canadian,
are translated at the current exchange rate as of the balance sheet date. Income
statement items are translated at average exchange rates during the period. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity. Dollar values in this consolidated financial statements
are expressed in U.S. Dollars, unless indicated otherwise. On December 31, 2000
one Canadian Dollar (Cdn) was exchangeable for .66720 U.S. Dollars.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has, where practicable, estimated the fair value of financial
instruments based on quoted market prices or valuation techniques such as
present value of estimated future cash flows. These fair value amounts may be
significantly affected by the assumptions used, including the discount rate and
estimates of cash flow. Accordingly, the estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
Where these estimates approximate carrying value, no separate disclosure of fair
value is shown.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
method over a period of five years. Maintenance and repairs are charged against
operations and betterments are capitalized.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share have been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during the respective periods. Diluted earnings (loss) per
share is computed similarly, but also gives effect to the impact that
convertible securities, such as warrants, if dilutive, would have on net
earnings (loss) and average common shares outstanding if converted at the
beginning of the year. The effect of potential common shares such as warrants
would be antidilutive in each of the periods presented in these financial
statements, and accordingly, are not presented.

REVENUE RECOGNITION AND DEFERRED REVENUE

The Company's primary source of revenue is earned from Internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are provided.
Revenues applicable to future periods are classified as deferred revenue.

DIRECT COSTS

Direct costs consist of telecommunications charges in respect to providing
Internet connection services to customers. These costs are expensed as incurred.

SOFTWARE DEVELOPMENT COSTS

SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed", and Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", provide guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The capitalization of software development
costs begins upon the establishment of technological feasibility of the product,
which the Company has defined as the completion of beta testing of a working
product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Software developments costs are
amortized on the straight-line method over the estimated economic life of the
product of three years.

As at December 31, 1999, the Company capitalized $209,303 of software
development costs and amortized $69,768 of these costs. During 2000, the Company
capitalized $87,431 of software development costs and amortized $98,240 of these
costs. At the end of 2000, the management of the Company assessed the
recoverability of the Company's software products assets and determined that
this asset was impaired. Therefore, the Company has written off the net book
value of this asset in the amount of $128,726.

GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets consist primarily of customer lists and goodwill related
to acquisitions accounted for under the purchase method of accounting.
Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the intangible assets which is
estimated to be three years.

IMPAIRMENT OF LONG-LIVE ASSETS

Long-live assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the aggregate of estimated future cash
inflows less estimated future cash outflows, to be generated by an asset are
less than the asset's carrying value. Future cash inflows include an estimate of
the proceeds from eventual disposition. For purposes of this comparison,
estimated future cash flows are determined without reference to their discounted
present value. If the sum of undiscounted estimated future cash inflows is equal
to or greater than the asset's carrying value, impairment does not exist. If,
however, expected future cash inflows are less than carrying value, a loss on
impairment should be recorded. Such a loss is measured as the excess of the
asset's carrying value over its fair value. Fair value of an asset is the amount
at which an asset could be bought or sold in a current transaction between a
willing buyer and seller other than in a forced or liquidation sale. The Company
measures an impairment loss by comparing the fair value of the asset to its
carrying amount. Fair value of an asset is calculated as the present value of
expected future cash flows.

INCOME TAXES

The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to reduce deferred
tax assets to the amounts expected to be realized.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires the recognition of all derivatives as either assets or
liabilities and the measurement of those instruments at fair value. SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133", issued in August 1999, postpones for one
year the mandatory effective date for adoption of SFAS No. 133 to January 1,
2001.

The Company does not currently engage in derivative trading or hedging
activities; hence, SFAS No. 133 and SFAS No. 137 will not have a material
impact on its financial position or results of operations.

STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based employee

compensation under a fair value based method. Alternatively, stock-based
employee compensation can be accounted for under APB No. 25, "Accounting for
Stock Issued to Employees", under which no compensation is recorded.

The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106",
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pension and other postretirement
benefits to the extent practicable, requires additional information on changes
in benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful.

The Company does not offer any pension or other postretirement benefits.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.

3. ACQUISITIONS

During 2000 and 1999, the Company completed a number of business and asset
acquisitions. These acquisitions are accounted for using the purchase method,
and accordingly, these consolidated financial statements include the results of
operations from the date of acquisition of each respective business.

HERMES NET SOLUTIONS, INC. AND INTOUCH.INTERNET, INC.

On June 30, 1999, the Company acquired all of the shares of Hermes Net
Solutions, Inc. (Hermes) for approximately $528,000. Also on June 30, 1999, the
Company purchased all the issued and outstanding shares of Intouch.Internet,
Inc. (Intouch) for a purchase price of approximately $293,000. The consideration
for the purchase included cash of approximately $265,000 and the issuance of
9,855 shares of the Company's Common Stock valued at approximately $28,000. Both
Hermes and Intouch are based in Vancouver, British Columbia, Canada.

In both acquisitions, the goodwill of approximately $759,000 will be
amortized on a straight-line basis over its estimated useful life of three
years.

NETROVER INC. AND NETROVER OFFICE INC.

On October 4, 1999, the Company acquired all of the shares of NetRover Inc.
and NetRover Office Inc. for approximately $2,000,000. The consideration for the

purchase included cash of approximately $1,335,000 and 219,000 shares of the
Company's Common Stock valued at approximately $665,000. NetRover Inc. and
NetRover Office Inc. are based in Toronto, Canada.

The purchase included goodwill and other intangibles of approximately
$2,900,000 which will be amortized on a straight-line basis over its estimated
useful life of three years.

CONNECT NORTHWEST

On October 27, 1999, the Company purchased certain assets and assumed
certain liabilities of Connect Northwest for a purchase price of $1,400,000.
The purchase price consisted of a cash payment to the sellers of $670,000, the
issuance to the sellers of 147,985 shares of the Company's Common Stock valued
at $660,000, and the payment of Connect Northwest liabilities in the aggregate
amount of $70,000. Connect Northwest is based in Washington State, United States
and operates as a DBA of CyPost. The purchase included goodwill and other
intangibles of $1,300,000 which will be amortized on a straight-line basis over
its estimated useful life of three years.

INTERNET ARENA

On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $300,000 and 100,698 shares of the Company's Common
Stock for a value of $300,000. As of December 31, 1999, 20,140 shares of common
stock were issued and the remaining 80,558 were issued subsequent to year-end.
Internet Arena is based in Oregon, United States.

The purchase included goodwill and other intangibles of approximately
$536,000 which will be amortized on a straight-line basis over its estimated
useful life of three years.

PLAYA CORPORATION

On February 23, 2000, the Company purchased all the shares of Playa
Corporation (a Japan company) for $3,000,000. The consideration paid by the
Company consisted of cash in the amount of $300,000 and 785,455 shares of the
Company's common stock valued at $2,700,000. Due to a clerical error
subsequently discovered, the number of shares originally calculated to be
issued, and actually issued to the seller, was incorrectly determined to be
771,426. Therefore, in January 2001, the Company issued an additional 14,029
shares of its common stock to the seller to account for the difference. For
purposes of financial statement presentation, all 785,455 shares of the
Company's common stock were deemed issued as of February 23, 2000.

The acquisition has been accounted for by the purchase method of
accounting. The purchase included goodwill and other intangibles of $3,665,778
which will be amortized on a straight-line basis over its estimated useful life
of three years. Due to a number of factors, including without limitation, weak
performance by Playa, the difficulties of operating one small Japanese company
following the sale by the Company of CyPost KK, a former subsidiary of the
Company, and the Company's own liquidity needs, in the fourth quarter 2000, the

Company's management decided to abandon the business of Playa. In connection
therewith, the Company has written off the assets of Playa in the net amount of
$2,201,253 which is reflected as "Loss on abandonment of Playa operations",
consisting of approximately $3,067,065 in actual assets, including the goodwill
and approximately $865,812 of liabilities owed by Playa to various parties for
which the Company does not believe it is liable. These consolidated financial
statements include the results of operations of Playa for the period from
February 24, 2000 to September 30, 2000.

CYPOST KK

On March 17, 2000, the Company purchased 400 shares of CyPost KK,
representing 100% of the then issued and outstanding shares, for $188,870
(20,000,000 Yen), and transferred 180 of such shares, or 45% of the then issued
and outstanding shares, to certain members of the management of CyPost KK in
consideration of their future effort to raise additional capital for CyPost KK.

On May 5, 2000, the Company purchased an additional 400 shares of CyPost KK
from CyPost KK for $184,915 (20,000,000 Yen). The Company funded this purchase
$106,326 (11,500,000 Yen) from its own funds (with respect to 230 shares) and
$78,589 (8,500,000 Yen) in the form of a loan from these certain members of
CyPost KK management to the Company (with respect to the remaining 170 shares).
Of the 400 shares purchased by the Company on such date, the Company transferred
180 shares to these individuals in consideration of their future effort to raise
additional capital for CyPost KK. The transferred shares have been valued at the
Company's cost. As a result of acquiring a net additional 220 shares of CyPost
KK, the Company maintained its 55% ownership in CyPost KK.

On May 22, 2000, Access Media International, a company which is not
affiliated with the Company, purchased 200 shares of CyPost KK from CyPost KK
for 10,000,000 Yen, resulting in a reduction of the Company's interest in Cypost
KK to 44%.

All 360 shares of CyPost KK stock which were transferred by the Company to
these individuals were specifically intended to compensate them solely with
respect to equity financing activities and were contingent upon their ability to
raise additional equity financing in Japan for CyPost KK. Because these
individuals were not able to raise such additional financing, no portion of the
360 shares were earned.

In part because these individuals were ultimately not able to arrange such
financing, the Company decided to sell its entire interest in CyPost KK. On
July 12, 2000, the Company sold all 630 shares it then owned in CyPost KK to
Access Media International for $220,000, resulting in a gain of $36,202.

In connection with the sale by the Company of its entire interest in CyPost
KK to Access Media International, on July 3, 2000 these certain members of
CyPost KK management (i) returned to the Company 190 shares of the CyPost KK
stock that the Company had previously transferred to them, consisting of the 180
shares transferred to them by the Company in March 2000 and 10 shares
transferred to them by the Company in May 2000; (ii) canceled the $78,589 loans
made by them to the Company in May 2000 to purchase 170 of the shares; and (iii)
retained those 170 shares purchased by the Company, for which the purchase price
was $78,589.

Despite the fact that there was a brief period of time during which the
Company owned less than a majority of the voting shares of CyPost KK (May 22,
2000 through July 3, 2000), the Company owned a majority interest for most of

the period from formation of CyPost KK through June 30, 2000 and therefore had
the ability to control its operations. The Company has reflected the amounts of
revenue, cost of revenue and expenses on a consolidated basis for the entire
period of ownership. Had the Company reflected the amounts of revenue, cost of
revenue and expenses on a consolidated basis for the period from April 1, 2000
through May 22, 2000 and an equity method for the period from May 22, 2000
through June 30, 2000, the impact on the consolidated financial statements would
not have been material.

During its period of ownership of CyPost KK, the Company loaned CyPost KK
$64,764 and CyPost KK paid certain expenses on behalf of the Company in the
amount of $25,542, leaving a balance of $39,222 owed by CyPost KK to the Company
at the time of sale. In connection with the sale by the Company of all of its
interest in CyPost KK, the Company canceled the net outstanding balance of
$39,222 in loans made by the Company to CyPost KK and CyPost KK canceled $39,222
in loans made by CyPost KK to Playa Corporation ("Playa"). At September 30,
2000, there was a balance of $168,062 owed by Playa to CyPost KK. This loan
bears interest at 5.5% per annum and is payable in 60 monthly installments
beginning January 15, 2001. This loan balance has been written off in connection
with the abandonment of Playa's business. See "Acquisition of Playa".

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

2000 1999
------------ -----------

Office furniture $ 194,436 $ 153,434
Leasehold improvement 14,360 15,704
Computer hardware and software 1,144,234 839,267
------------ -----------
1,353,030 1,008,405
Less accumulated depreciation (602,010) (408,823)
------------ -----------
$ 751,020 $ 599,582
============ ===========

The depreciation expense charged to the operations for the years ended December
31, 2000 and 1999 were $179,263 and $60,012, respectively.

5. GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consist of the following:

2000 1999
------------ -----------
Customer lists $ 3,663,000 $3,663,000
Goodwill 1,832,543 1,832,543
------------ -----------
5,495,543 5,495,543
Less accumulated amortization (2,302,528) (458,758)
------------ -----------
$ 3,193,015 $5,036,785
============ ===========

The amortization expense charged to the operations for the years ended December
31, 2000 and 1999 were $2,582,016 and $458,758, respectively.

6. LOANS

Loans as of December 31, 2000 and 1999 consist of:

2000 1999
------------ -----------
Blue Heron Venture Fund, Ltd. $ 2,085,000 $ 875,000
Pacific Gate Capital 25,000 -
------------ -----------
$ 2,110,000 $ 875,000
============ ===========

Loans from Blue Heron Venture Fund, Ltd are pursuant to two promissory note
agreements ($2,000,000 and $10,000,000 loan facilities). The loans are
unsecured, bear interest at 8% per annum, and the principal and accrued interest
are due on demand. The lender has the option to withdraw its offer to lend at
any time and to convert the loans into shares of common stock of the Company. If
the lender elects to convert the outstanding principal amount of the loans of
$2,085,000 as of December 31, 2000 into shares of common stock of the Company,
the lender would be entitled to an aggregate of 2,780,000 shares of common
stock.

At the commitment date of each of the promissory notes, the conversion
price was less than the fair value of the common stock, hence a beneficial
conversion feature is attributable to these convertible notes. The amount of
this beneficial conversion feature is $1,962,500 and has been recorded as
interest expense and additional paid-in-capital for the year ended December 31,
2000.

Under the terms of the loan agreements, if the lender converts its debt to
equity, it will waive its right to be paid interest on the loans. As of December
31, 2000 and 1999, the Company has accrued interest of $158,583 and $36,572,
respectively.

During 1999, $4,000,000 of loans were settled by the issuance of 4,500,000
shares of common stock valued at $4,000,000.

The loan from Pacific Gate Capital is unsecured, bears interest at 8% per
annum, and the principal and accrued interest are due on demand.

7. SHARE CAPITAL

AUTHORIZED STOCK

The Company is authorized to issue:

(a) 30,000,000 shares of common stock at a par value of $0.001 per
share.

(b) 5,000,000 shares of preferred stock at a par value of $.001 per
share.

The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding shares of common stock, to issue shares
of preferred stock from time to time in one or more classes or series, to fix

the number of shares constituting any class or series and the stated value, if
different from the par value, and to fix the terms of any such series or class,
including dividend rights, dividend rates, conversion or exchange rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
designations, rights and preferences of any shares of preferred stock would be
set forth in a Certificate of Designation which would be filed with the
Secretary of State of the State of Delaware.

STOCK SPLIT

On September 24, 1999, the Company effected a 3-for-2 stock split of its
shares of common stock. All share, per share, unit, and warrant amounts in the
accompanying consolidated financial statements have been adjusted retroactively
to give effect to this stock split.

COMMON STOCK SUBSCRIBED

As at December 31, 1999, the Company was obligated to issue 80,558 shares
of common stock valued at $2.98 per share as consideration for the purchase of
the assets of Internet Arena. These shares were issued in 2000.

ISSUANCE OF SHARES

On March 2, 2000, the Company issued 26,500 shares of its commons stock in
an aggregate amount of $92,750 at the closing price of $3.50 per share on
February 29, 2000, to Kaplan, Gottbetter and Levenson, as payment of services
accrued at December 31, 1999 and through February 29, 2000.

On March 13, 2000, the Company issued 80,558 shares of its common stock at
the closing price of $2.98 on July 12, 1999 (as adjusted for a 3-for-2 stock
split), the date of signing the Letter of Intent, to the owners of Internet
Arena, Inc., as payment for the balance due in the amount of $240,000 in
connection with the Company's acquisition of that entity.

On June 8, 2000, the Company issued 785,455 shares of its common stock to
the selling stockholders of Playa as partial payment of the purchase price
$3,000,000 in connection with the Company's acquisition of that company. See
Note 3.

On August 1, 2000, the Company issued an aggregate 129,500 shares of its
common stock in an aggregate amount of $76,897 to seven employees at the closing
price of $0.5938 per share on July 17, 2000 in consideration for their providing
certain services to the Company from June 16, 2000 through July 15, 2000.
Subsequently 10,000 of these shares will be canceled. For purposes of financial
statement presentation, those shares were deemed canceled as of October 1, 2000.

On August 1, 2000, the Company issued 75,000 shares of its common stock in
an aggregate amount of $133,605 to each of the Company's three directors at the
closing price of $0.5938 on July 17, 2000 in consideration for their providing
certain services to the Company from June 16 through July 15, 2000.

On August 17, 2000, the Company issued an aggregate 43,500 shares of its
common stock in an aggregate amount of $25,787 to six people at the closing

price of $0.5938 per share on July 25, 2000 in consideration for their providing
consulting work to the Company from April 1, 2000 through June 30, 2000.

On October 1, 2000, the Company accrued the issuance of an aggregate 27,500
shares of its common stock in an aggregate amount of $8,800 to three employees
and one consultant at the closing price of $0.32 per share in consideration for
their providing certain services to the Company. Subsequently in the first
quarter 2001, 25,000 of these shares were issued and 2,500 share will be issued
in the second quarter 2001. For purposes of financial statement presentation,
all shares were deemed issued as of October 1, 2000.

On December 29, 2000, the Company accrued the issuance of 2,500 shares of
its common stock in an aggregate amount of $450 to a consultant at the closing
price of $0.18 per share in consideration for his providing certain services to
the Company. As of December 31, 2000, these shares have not been issued, however
for purposes of financial statement presentation, all shares were deemed issued
as of December 29, 2000.

8. INCOME TAXES

At December 31, 2000 and 1999, the Company has net operating loss carry
forwards for income tax purposes of approximately $9,000,000 and $2,800,000,
respectively which are available to offset future taxable income. The Company's
utilization of these carryforwards may be restricted due to changes in ownership
of subsidiaries during the year. The components of the deferred tax asset as of
December 31, 2000 and 1999 are as follows:

2000 1999
------------- ------------
Net operating loss carryforwards $ 4,050,000 $ 1,260,000
Less: valuation allowance ( 4,050,000) (1,260,000)
------------- ------------
$ - $ -
============= ============

9. NET PROCEEDS FROM FIRE LOSS

On January 31, 2000, the Company suffered a fire loss at its Etobicoke
(suburban Toronto), Ontario facility. The loss was completely covered by
insurance. During the fiscal year ended December 31, 2000, the Company received
net proceeds from fire insurance in the amount of $228,966.

10. RELATED PARTY TRANSACTIONS

The Company has obtained most of its financing through Blue Heron Venture
Fund Ltd. ("Blue Heron"), a corporation in which Kelly Shane Montalban may be
deemed to have an "indirect pecuniary" interest as a result of his status as
fund manager for Blue Heron. Blue Heron and Mr. Montalban are principal
stockholders of the Company. Blue Heron may be deemed to be an affiliate of
Pacific Gate, another of the Company's lenders, in which Mr. Montalban is the
sole stockholder, sole director and sole officer. Blue Heron loans are unsecured
and are convertible into Common Stock at the lender's option, in which case Blue

Heron would waive its right to be paid interest. The balance of these loans as
of December 31, 2000 and 1999 are $2,085,000 and $875,000, respectively. See
Note 6.

During the fiscal year ended December 31, 2000, the Company borrowed an
aggregate $125,000 from Pacific Gate Capital Ltd. ("Pacific Gate"), of which
amount $25,000 was outstanding on December 31, 2000. These loans bear interest
at 8% per annum and are payable on demand.

As of December 31, 2000, the Company advanced $30,615 to one of the
executive officer. This advance bears no interest and no term.

11. COMMITMENTS AND CONTIGENCIES

LEGAL PROCEEDINGS

Canada Post Litigation
----------------------

On June 11, 1999, Canada Post Corporation filed a Statement of Claim in the
Federal Court of Canada (Court File No. T-1022-99) in which it sought injunctive
and unspecified monetary relief for the allegedly "improper" use by the
Company's subsidiary, ePost Innovations, of certain marks and names which
contain the component "post". On October 18, 1999, ePost Innovations filed its
Defense and Counterclaim. In a motion heard November 24, 1999, Canada Post
Corporation challenged certain parts of the Counterclaim and the Federal Court
reserved judgment. There has been no pre-trial discovery and no trial date has
been set.

On May 25, 1999, ePost Innovations filed a statement of Claim in the
British Columbia Court (Court File No. C992649) seeking a declaration that the
public notice of Canada Post Corporation's adoption and use of CYBERPOSTE and
CYBERPOST on November 18, 1998 and December 9, 1998 respectively, did not affect
the Company's use of CYPOST and ePost Innovations as trademarks and trade-names
prior to said dates. ePost Innovations sought summary judgment for such a
declaration and on September 14, 1999, the BC Court rejected summary judgment on
the basis that no right of the Company was being infringed and that a trial of
the issues was more appropriate. The rejection is pending appeal. There has been
no pre-trial discovery (except to the extent that some was done as part of the
summary judgment application) and no trial date has been set.

Canada Post seeks relief in the form of preventing ePost Innovations from
using trademarks, trade names or brand names and does not seek monetary damages.
Accordingly, the Company does not believe that this litigation will have a
material impact on its future results of operations, financial condition and
liquidity.

ePost Innovations and Canada Post have commenced settlement discussions to
resolve the litigation. However, due to the inherent uncertainties of
litigation, the Company cannot predict whether the parties will reach a
definitive settlement and, if they do, whether the terms of any settlement will
be favorable to the Company.

Berry Litigation
----------------

On March 31, 2000, the Company commenced suit in the Supreme Court of
British Columbia, Action #S001822, Vancouver Registry against Tia Berry (the
"Tia Action"), the wife of Steven Berry ("Berry"), the former President and
Chief Executive Officer of the Company. In the Tia Action, the Company claims
$42,516 (CDN) from Tia Berry on account of monies paid to her by the Company
which she was not entitled to receive. Tia Berry has filed a Statement of
Defense in the Tia Action in which she alleges that the payments which she
received from the Company were to reimburse her for business expenses which she
had charged to her credit cards on behalf of Berry. The Tia Action has not yet
been set for trial.

On April 4, 2000, Berry commenced an action in the Supreme Court of the
State of New York, County of New York (Index No. 601448/2000), against the
Company and Continental Stock Transfer Company ("Continental"), (the "New York
Action"). In the New York Action, Berry claimed damages for alleged conversion,
fraud, breach of contract and breach of fiduciary duty all arising from the
alleged wrongful Stop Transfer Order which the Company placed relating to 75,000
shares of the Company's Common Stock registered in Berry's name and the
Company's cancellation of a further 600,000 shares (the "Contingent Shares").
The complaint in the New York Action claims damages in excess of $3,000,000 with
the precise amount to be determined at trial.

Berry received the 600,000 Contingent Shares upon condition that he would
remain in the Company's employ as Chief Executive Officer for at least two
years. Berry commenced his employment with the Company on January 4, 1999, and
resigned his employment with the Company on January 17, 2000. Following Berry's
resignation, the Company attempted to have a Stop Transfer Order issued with
respect to the 75,000 shares registered in Berry's name and cancel the 600,000
Contingent Shares. The Stop Transfer Order was not effective and Berry
subsequently sold the 75,000 shares.

On May 19, 2000 CyPost and ePost Innovations commenced suit in the Supreme
Court of British Columbia, Action #S002798, Vancouver Registry, against Berry
and his wife, Tia Berry (the "BC Action"). In the BC Action, the Company seeks
an order directing Berry to return the 600,000 Contingent Shares to the Company
for cancellation or an order entitling the Company to cancel the same on the
basis that Berry did not fulfill the employment conditions which were the
condition precedent to his becoming the beneficial owner of the Contingent
Shares.

In the BC Action, the Company also claims at least Cdn$800,000 from Berry
on account of breach of fiduciary duty, negligence, breach of statutory duties
and breach of contract arising from Berry's failure to properly carry out his
employment responsibilities. In the BC Action, the Company also claims
Cdn$34,013 from Berry and Tia Berry on account of conspiracy to defraud and
injure the Company and ePost Innovations by causing certain personal expenses to
be paid by the Company rather than by Berry and Tia Berry personally. The
Company also claims punitive and exemplary damages from Berry and Tia Berry in
the BC Action.

On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in the
alternative, on the basis of forum non conveniens. On September 5, 2000, the
court dismissed the New York Action on forum non conveniens grounds, subject to
the Company making certain stipulations in the New York Action. Those
stipulations have been made and the appeal period in the New York Action has
expired without Berry or any other party appealing the September 5, 2000 order.

The issues raised by Berry and the Company in the New York Action will be
litigated in the BC Action together with the further issues raised by the
Company in the BC Action. The Company feels that Berry's claims in the New York
Action were without merit and that the Company will be successful in obtaining
an order declaring that Berry's 600,000 Contingent Shares be cancelled and
further entitling the Company to substantial damages. The Company will
vigorously pursue its position in all respects.

On December 21, 2000, Berry and Tia Berry commenced suit in the Supreme
Court of British Columbia, Action #S006790, Vancouver Registry, against CyPost,
ePost Innovations, Kelly Shane Montalban, J. Thomas W. Johnston, Carl Whitehead
and Robert Sendoh (the "Berry Action"). Statements of Defense have been filed on
behalf of the Company and the other defendants.

The Plaintiffs in the Berry Action allege that the Tia Action, the BC
Action, and the action by Kelly Shane Montalban (Supreme Court of British
Columbia, Action #S002147, Vancouver Registry), against Berry for specific
performance of an option agreement (the "Montalban Action"), collectively,
amount to an abuse of process, malicious prosecution, unlawful interference with
the Plaintiffs' economic rights, or were commenced pursuant to a civil
conspiracy to injure the Plaintiffs.

In the Berry Action, the Plaintiffs seek a declaration that Berry is
entitled to the 600,000 Contingent Shares and claim unspecified damages which
are estimated at Cdn$2,000,000 based on the Statement of Claim. They also claim
punitive or aggravated damages and costs. The Company believes that the
allegations in the Berry Action are without merit and they will be vigorously
defended.

It is expected that the Tia Action, the BC Action and the Berry Action will
be consolidated for the purposes of trial due to the fact that there are
numerous issues of fact and law which are common to all of these actions. The
Company believes that trial will likely take place in the fall of 2002.

A loss by the Company of the claim for monetary damages would have a
material adverse effect on the Company's future results of operations, financial
condition and liquidity; however, the Company does not expect to lose this
action and believes additionally that it would be able to negotiate reasonable
payment terms should it lose this suit.

The Company is also subject to routine litigation from time to time in the
operations of its business. None of such routine litigation is material to the
Company, its assets or results of operations.

Due to the inherent uncertainties of litigation, the Company cannot predict
the outcome of any litigation to which it is a party.

LEASE COMMITMENTS

The Company leases office space and equipment, and its lease payments in
the next five years are as follows:

2001 $ 285,000
2002 202,000
2003 151,000
2004 92,000
2005 40,000
------------
$ 770,000
============

The Company entered into agreements with several companies that provides
network infrastructure for some of the Company's Internet Services Provider
services. The minimum payments in the next three years are as follows:

2001 $ 929,000
2002 109,000
2003 23,000
------------
$ 1,061,000
============

EMPLOYMENT AGREEMENT

The Company has an employment agreement with Robert Adams. The employment
agreement provides for Mr. Adams' employment by the Company as its "Operations
Manager of Canadian ISP Division", at an annual salary of Cdn $70,000. The
employment agreement has an initial term of three years commencing on October 5,
1999 and ending on October 4, 2002. The employment agreement will automatically
renew for successive terms, on a year to year basis, unless notice of
non-renewal is given by either the Company or Mr. Adams at least 90 days prior
to the expiration of the then applicable term of the contact. Bonuses may be
awarded to Mr. Adams based on his annual review, which takes place each January.
In addition, Mr. Adams is eligible for increases in his base salary, in the
discretion of the Company, on the anniversary date of each year of the
employment agreement.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
CyPost Corporation:

We have audited the accompanying consolidated balance sheet of CYPOST
CORPORATION (a Delaware corporation) as of December 31, 1999 and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States.

Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyPost Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
year then ended in accordance with accounting principles generally accepted in
the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1, the
Company has incurred operating losses since its inception and requires
additional financing to continue operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that may result should the Company be unable to
continue as a going concern.

The consolidated financial statements of CyPost Corporation as of December 31,
1998 and for the periods ended December 31, 1998 and 1997 were audited by
another auditor whose report dated March 12, 1999 expressed an unqualified
opinion with an explanatory going concern paragraph on those statements.

Arthur Andersen LLP.

Vancouver, British Columbia
March 23, 2000.

F-21

CYPOST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(U.S. Dollars)

1999 1998
------------ ----------
ASSETS
CURRENT ASSETS
CASH . . . . . . . . . . . . . . . . . . . . . . . . $ 415,779 $ 47,212
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $34,000 (1998- $NIL). . . . . . 233,188 --
PREPAIDS AND DEPOSITS. . . . . . . . . . . . . . . . 173,319 27,998
------------ ----------
822,286 75,210
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . 599,582 22,330
GOODWILL AND OTHER INTANGIBLES, NET OF
AMORTIZATION OF $458,758 (1998- $NIL). . . . . . . . 5,036,785 --
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 69,389 28,657
SOFTWARE DEVELOPMENT, NET OF AMORTIZATION OF $69,768 . 139,535 --
------------ ----------
$ 6,667,577 $ 126,197

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . $ 849,300 $ 11,090
ACCRUED LIABILITIES. . . . . . . . . . . . . . . . . 133,937 --
LOANS. . . . . . . . . . . . . . . . . . . . . . . . 875,000 --
DEFERRED REVENUE . . . . . . . . . . . . . . . . . . 626,143 --
PURCHASE OF INTERNET ARENA . . . . . . . . . . . . . 240,000 --
------------ ----------
2,724,380 11,090
------------ ----------
SHAREHOLDERS' EQUITY

SHARE CAPITAL
AUTHORIZED

5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
30,000,000 COMMON STOCK WITH A PAR VALUE OF $.001

ISSUED AND OUTSTANDING
NIL PREFERRED STOCK

20,246,480 COMMON STOCK (1998- 13,264,500) . . . 20,246 13,264
PAID-IN CAPITAL. . . . . . . . . . . . . . . . . . . 8,814,002 624,416
DEFICIT. . . . . . . . . . . . . . . . . . . . . . . (4,908,127) (556,539)
CURRENCY TRANSLATION ADJUSTMENT. . . . . . . . . . . 17,076 33,966
------------ ----------
3,943,197 115,107
------------ ----------
$ 6,667,577 $ 126,197
============ ==========

Approved by the Directors:

............../s/ Carl Whitehead...................................... Director
............../s/ Robert Sendoh....................................... Director

The accompanying notes are an integral part of these consolidated financial
statements.

F-22

CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars)

Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
-------------- -------------- -----------

REVENUE. . . . . . . . . . . . . . . . $ 1,020,541 $ -- $ --
DIRECT COSTS . . . . . . . . . . . . . 563,118 -- --
-------------- -------------- -----------
457,423 -- --
-------------- -------------- -----------

EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE 1,999,151 383,046 --
AMORTIZATION AND DEPRECIATION . . . 588,538 6,233 --
DEVELOPMENT . . . . . . . . . . . . -- 150,382 16,878
-------------- -------------- -----------
2,587,689 539,661 16,878
-------------- -------------- -----------
(2,130,266) (539,661) (16,878)
INTEREST EXPENSE . . . . . . . . . . . 2,221,322 -- --
-------------- -------------- -----------
NET LOSS . . . . . . . . . . . . . . . $ (4,351,588) $ (539,661) $ (16,878)
============== ============== ===========

LOSS PER SHARE, BASIC AND DILUTED. . . $ (0.28) $ (0.08) $ (0.01)
============== ============== ===========

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . . . . . 15,816,232 7,033,479 3,345,283
============== ============== ===========

The accompanying notes are an integral part of these consolidated
financial statements.

F-23

CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)

Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
-------------- -------------- --------------

CASH FLOWS FROM OPERATING
ACTIVITIES

NET LOSS . . . . . . . . . . . . . . . $ (4,351,588) $ (539,661) $ (16,878)
Add items not affecting cash
AMORTIZATION AND DEPRECIATION . . . 588,538 6,233 --
INTEREST EXPENSE. . . . . . . . . . 2,212,500 -- --
NON-CASH EXPENSES . . . . . . . . . -- 207,500 --
-------------- -------------- --------------
(1,550,550) (325,928) (16,878)
Changes in non-cash operating
accounts
ACCOUNTS RECEIVABLE . . . . . . (90,017) -- --
PREPAIDS AND DEPOSITS . . . . . (109,550) (27,998) --
OTHER ASSETS. . . . . . . . . . (15,972) 58,523 --
ACCOUNTS PAYABLE. . . . . . . . 583,787 9,125 1,965
ACCRUED LIABILITIES . . . . . . 61,417 -- --
DEFERRED REVENUE. . . . . . . . 149,921 -- --
-------------- -------------- --------------
Net cash provided by (used in)
operating activities (970,964) (286,278) (14,913)
-------------- -------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, less cash
THEREIN OF $115,953 . . . . . . . . (3,612,066) -- --
PROPERTY AND EQUIPMENT, NET. . . . . . (270,100) (27,711) (852)
SOFTWARE DEVELOPMENT (209,303)
-------------- -------------- --------------
Net cash used in investing
activities (4,091,469) (27,711) (852)
-------------- -------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES
LOAN . . . . . . . . . . . . . . . . . 4,875,000 -- --
SALE OF COMMON STOCK . . . . . . . . . 556,000 323,000 20,000
-------------- -------------- --------------
Net cash provided by financing
Activities 5,431,000 323,000 20,000
Exchange rate changes on Cash in
Foreign currency -- 33,966 --
-------------- -------------- --------------

NET INCREASE IN CASH . . . . . . . . . . . . 368,567 42,977 4,235
CASH, BEGINNING OF PERIOD. . . . . . . . . . 47,212 4,235 --
-------------- -------------- --------------
CASH, END OF PERIOD. . . . . . . . . . . . . $ 415,779 $ 47,212 $ 4,235
============== ============== ==============

CASH PAID DURING THE PERIOD FOR
INTEREST. . . . . . . . . . . . . . . . . $ -- $ -- $ --
INCOME TAXES. . . . . . . . . . . . . . . -- -- --

The accompanying notes are an integral part of these consolidated
financial statements.

F-24

CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)

Additional Currency
COMMON STOCK Paid-in Translation
NUMBER AMOUNT CAPITAL DEFICIT Adjustment TOTAL
---------- ------- ------------ -------------- ------------- ------------

Incorporation date, September 5, 1997
Issued for acquisition of
ePost Innovations, Inc . . . . . . . . . . 3,000,000 $ 3,000 $ (1,000) $ -- $ 2,000
ISSUED ON SALE OF UNITS . . . . . . . . . . . 600,000 600 19,400 -- 20,000
Net loss (16,878) (16,878)
---------- ------- ------------ -------------- ------------- ------------
Balance, December 31, 1997. . . . . . . . . . . . 3,600,000 3,600 18,400 -- -- 5,122
Issued on sale of units . . . . . . . . . . . 2,400,000 2,400 77,600 -- -- 80,000
Issued for cash . . . . . . . . . . . . . . . 57,000 57 18,943 -- -- 19,000
Issued for legal services . . . . . . . . . . 22,500 22 7,478 -- -- 7,500
Issued for acquisition of
Communication Exchange Management, Inc. . . 6,270,000 6,270 (2,090) -- -- 4,180
Issued for exercise of warrants . . . . . . . 915,000 915 243,085 -- -- 244,000
Offering expenses . . . . . . . . . . . . . . -- -- (20,000) -- -- (20,000)
Share transfer for services -- -- 281,000 -- -- 281,000
NET LOSS. . . . . . . . . . . . . . . . . . . -- -- -- (539,661) -- (539,661)
Currency translation adjustment -- -- -- 33,966 33,966
---------- ------- ------------ -------------- ------------- ------------
Balance, December 31, 1998. . . . . . . . . . . . 13,264,500 13,264 624,416 (556,539) 33,966 115,107
Issued for acquisition of Intouch.Internet Inc. 9,855 10 28,515 -- -- 28,525
Issued for acquisition of NetRover Inc.
and NetRover Office Inc . . . . . . . . . . 219,000 219 679,324 -- -- 679,543
Issued for acquisition of Connect Northwest . 147,985 148 659,852 -- -- 660,000
Issued for acquisition of Internet Arena. . . 20,140 20 59,980 -- -- 60,000
Issued for loan conversion. . . . . . . . . . 4,500,000 4,500 3,995,500 -- -- 4,000,000
Issued for exercise of warrants . . . . . . . 2,085,000 2,085 553,915 -- -- 556,000
Beneficial conversion feature on loans. . . . -- -- 2,212,500 -- -- 2,212,500
NET LOSS. . . . . . . . . . . . . . . . . . . -- -- -- (4,351,588) -- (4,351,588)
Currency translation adjustment -- -- (16,890) (16,890)
---------- ------- ------------ -------------- ------------- ------------
BALANCE, DECEMBER 31, 1999. . . . . . . . . . . . 20,246,480 $20,246 $ 8,814,002 $ (4,908,127) $ 17,076 $ 3,943,197
========== ======= ============ ============== ============= ============

The accompanying notes are an integral part of these consolidated financial statements.

F-25

CYPOST CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(U.S. Dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN

CyPost Corporation was formed on September 5, 1997 under the laws of the
State of Delaware and its head office is located in Vancouver, Canada. CyPost
Corporation and its subsidiaries (the "Company") generate revenues from
value-added protected internet connection services, web-site hosting,
advertising sales, promotional opportunities, and sales of privacy and
protection products. The Company's activities also include determining the
feasibility of encryption software products, beginning initial programming
and product development, conducting market research, and undertaking various
private placement offerings. The Company emerged from the development stage in
1999 and commenced revenue generating activities.

Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses before
interest expense of approximately $2.7 million for the period from inception
September 5, 1997 to December 31, 1999, has a working capital deficiency, and
requires additional financing for its business operations. As of December 31,
1999, the Company has $11.1 million of funding available which can be drawn
against a promissory note agreement with a lender; however, the lender has the
option, at any time, to withdraw its offer to lend this amount.

The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its software
products, and market penetration and profitable operations from its internet
connection services. The Company is actively pursuing alternative financing and
has had discussions with various third parties, although no firm commitments
have been obtained. Management is also pursuing acquisitions of other
businesses with existing positive cash flows. In addition, management is
working on attaining cost and efficiency synergies by consolidating the
operations of the businesses acquired.

These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, as described
above, will mitigate the adverse conditions and events which raise doubt about
the validity of the "going concern" assumption used in preparing these financial
statements, there can be no assurance that these actions will be successful.

If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.

F-26

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which are
wholly owned, include ePost Innovations Inc., NetRover Inc., NetRover Office
Inc., Hermes Net Solutions Inc. and Intouch.Internet Inc.

FOREIGN CURRENCY TRANSLATION

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS

PROPERTY AND EQUIPMENT

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share has been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during the respective periods. Diluted earnings (loss) per
share is computed similarly, but also gives effect to the impact that
convertible securities, such as warrants, if dilutive, would have on net
earnings (loss) and average common shares outstanding if converted at the
beginning of the year. The effects of potential common shares such as warrants
would be antidilutive in each of the periods presented in these financial
statements.

At December 31, 1999, there are no warrants outstanding (1998-2,085,000)

F-27

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION AND DEFERRED REVENUE

The Company's primary source of revenue is earned from internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are provided.
Revenues applicable to future periods are classified as deferred revenue.

DIRECT COSTS

Direct costs consist of telecommunications charges in respect of providing
internet connection services to customers. These costs are expensed as
incurred.

SELLING AND MARKETING COSTS

Selling and marketing costs are expensed as incurred and totaled $342,888
and $0 for the years ended December 31, 1999 and 1998, respectively. These
costs are reported under selling, general and administrative expenses on the
statement of operations.

SOFTWARE DEVELOPMENT COSTS

Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of software development
costs begins upon the establishment of technological feasibility of the product,
which the Company has defined as the completion of beta testing of a working
product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Software developments costs
amortized on the straightline method over the estimated economic life of the
product of three years.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. The
Company considers factors such as significant changes in the regulatory or
business climate and projected future cash flows. Impairment losses are
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.

INCOME TAXES

F-28

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made to conform prior years' figures to
the current year presentation.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation under a fair value based method. Alternatively, stock-based
employee compensation can be accounted for under APB No. 25, "Accounting for
Stock Issued to Employees", under which no compensation is recorded.

The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

The Company does not offer any pension or other postretirement benefits.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The implementation of SOP 98-1 does not
have a material impact on the Company's financial position or results of
operations, as the Company has not incurred any costs for computer software
developed or obtained for internal use.

F-29

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities". SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The implementation of SOP
98-5 does not have a material impact on the Company's financial position or
results of operations.

3. ACQUISITIONS

During 1999, the Company completed a number of business and asset
acquisitions. These acquisitions are accounted for using the purchase method,
and accordingly, these consolidated financial statements include the results of
operations from the date of acquisition of each respective business.

NETROVER INC. AND NETROVER OFFICE INC.

On October 4, 1999, the Company acquired all of the shares of NetRover Inc.
and NetRover Office Inc. for Cdn. $4 million (U.S. $2.7 million). The
consideration for the purchase included cash of Cdn. $3 million (U.S. $2
million) and 219,000 shares of common stock for Cdn. $1 million (U.S.
$$700,000). NetRover Inc. and NetRover Office Inc. are based in
Toronto,
Canada.

The purchase included goodwill and other intangibles of Cdn. $4.2 million
(U.S. $2.9 million) which will be amortized on a straight-line basis over its
estimated useful life of three years.

HERMES NET SOLUTIONS INC.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

F-30

3. ACQUISITIONS (CONTINUED)

INTERNET ARENA

On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $242,000, amount payable of $58,000 and 100,698 shares
of common stock for a value of $300,000. As of December 31, 1999, 20,140 shares
of common stock were issued and the remaining 80,558 were issued subsequent to
year end. Internet Arena is based in Oregon, United States.

The purchase included goodwill and other intangibles of $536,000 which will
be amortized on a straight-line basis over its estimated useful life of three
years.

CONNECT NORTHWEST

On October 27, 1999, the Company purchased certain assets and liabilities
of the business of Connect Northwest for $1.4 million. The consideration for
the purchase included cash of $670,000, amount payable of $70,000 and 147,985
shares of common stock for a value of $660,000. Connect Northwest is based in
Washington State, United States. The purchase included goodwill and other
intangibles of $1.3 million which will be amortized on a straight-line basis
over its estimated useful life of three years.

During 1998 and 1997, the Company completed two business acquisitions which
are described below.

ePost INNOVATIONS, INC.

On September 17, 1997, the Company acquired ePOST Innovations,
Inc.("ePost"), a wholly-owned subsidiary of Mushroom Innovations, Inc.
("Mushroom"). The Company and Mushroom have officers and directors in common.

The Company issued 3,000,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of ePost. The shares
of common stock were valued at $.001 per share for an aggregate consideration of
$2,000. The Company acquired all the rights, title and interest to all the
assets owned by ePost, and those assets consisted of proprietary knowledge of
various computer software products under development by ePost.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

b) Ownership Interests of CyPost

Prior to the acquisition of ePost, CyPost did not have any issued and
outstanding shares. The acquisition of ePost involved CyPost issuing 3,000,000
of its shares to Mushroom; in turn, Mushroom distributed these shares to its
shareholders in the following proportion:

Robert Sendoh 1,530,000 shares 51% interest
Carl Whitehead 900,000 shares 30% interest
William Kaleta 300,000 shares 10% interest
Chiyoko Asanumu 270,000 shares 9% interest
Total 3,000,000 shares 100% interest

Robert Sendoh at the time of acquisition was President and Director of
Epost and Chairman and of CyPost Corporation, Carl Whitehead was
Secretary/Treasurer and Director in Epost Innovations and President and Director
in CyPost Corporation and William Kaleta was Chief Technical Officer and
Director in EPost Innovations and Chief Technical Officer in CyPost Corporation.

Note: Robert Sendoh gifted 9% of his shares to Chiyoko Asanuma, his sister.
The Company acquired all the rights, title and interest to all the
assets previously owned by ePOST. Those assets consisted of proprietary
knowledge of various computer software products under development by ePost
Canada.

F-31

COMMUNICATION EXCHANGE MANAGEMENT, INC.

On October 29, 1998, the Company acquired Communication Exchange
Management, Inc. ("CEM"), a subsidiary of Mushroom. The Company issued
6,270,000 post - split shares of common stock valued at $4,180 for consideration
of all of the issued and outstanding stock of CEM. The Company acquired
all the rights, title and interest to all the assets owned by CEM which
consisted of proprietary knowledge of various computer software products under
development by CEM.

The acquisition of CEM involved CyPost issuing 6,270,000 of its shares to
Mushroom; in turn, Mushroom distributed these shares to its shareholders in the
following proportion:

ROBERT SENDOH 720,000 SHARES 11% INTEREST
CARL WHITEHEAD 1,350,000 SHARES 22% INTEREST
WILLIAM KALETA 1,950,000 SHARES 31% INTEREST
KELLY MONTALBAN 2,250,000 SHARES 36% INTEREST
---------------- -------------
6,270,000 SHARES 100% INTEREST

The acquisition has been accounted for under the purchase method.
Operating results of CEM prior to the date of acquisition were not
significant.

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

1999 1998
----------- -----------

OFFICE AND COMPUTER EQUIPMENT $1,008,405 $ 28,563
LESS- ACCUMULATED DEPRECIATION (408,823) (6,233)
----------- -----------

$ 599,582 $ 22,330
=========== ===========
5. GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consist of the following:

1999 1998
----------- -----------

CUSTOMER LISTS $3,663,000 $ -
GOODWILL 1,832,543 -
----------- -----------

5,495,543 -
LESS- ACCUMULATED AMORTIZATION (458,758) -
----------- -----------

$5,036,785 $ -
=========== ===========

6. LOANS

During 1999, the Company borrowed $4,875,000 pursuant to two promissory
note agreements. The loans are unsecured, bear interest at 8% per annum, and
the principal and accrued interest are due on demand. The lender may elect to
convert the loans into shares of common stock of the Company as follows:

SHARES
PRINCIPAL PRE-SPLIT POST-SPLIT

$ 1,000,000 1,000,000 1,500,000

3,000,000 2,000,000 3,000,000

875,000 437,500 656,250

At the commitment dates of the promissory notes, the conversion prices were
less than the fair values of the common stock, hence a beneficial conversion
feature is attached to these convertible notes. The amount of this beneficial
conversion feature is $2,212,500 and has been recorded as interest expense and
additional paid-in-capital for the year ended December 31, 1999.

F-32

6. LOANS (CONTINUED)

During 1999, $4,000,000 of loans were settled by the issuance of common
stock valued at $4,000,000. At December 31, 1999, the loans balance is
$875,000. Subsequent to year end, the Company borrowed an additional
$625,000 against the promissory note.

The fair values of the loans at December 31, 1999 are not practicable to
estimate because of the conversion features associated with the loans;
accordingly, it is not possible to estimate the present value of the
future cash flows with any reasonable degree of precision.

Subsequent to year end, the lender has offered to lend a further
$10,000,000 to the Company under similar terms except that the loans are
convertible to 3,750,000 shares of common stock at a conversion price of $2.67
per share. The lender has the option to withdraw its offer to lend any amount
of the $10,000,000 at any time. (see Note 12)

7. SHARE CAPITAL

AUTHORIZED STOCK

The Company is authorized to issue:

(a) 30,000,000 shares of common stock at a par value of $0.001 per
share.

(b) 5,000,000 shares of preferred stock at a par value of $.001 per
share. The Board of Directors of the Company has the authority,
without further action by the holders of the outstanding shares of
common stock, to issue shares of preferred stock from time to time
in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value, if different
from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or
exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the
liquidation preference of such class or series. The designations,
rights and preferences of any shares of preferred stock would be set
forth in a Certificate of Designation which would be filed with the
Secretary of State of the State of Delaware.

SHARE SPLIT

On September 24, 1999, the Company effected a three-for-two subdivision of
its shares of common stock. All share, per share, unit, and warrant amounts in
the accompanying financial statements have been adjusted retroactively to give
effect to this subdivision.

COMMON STOCK SUBSCRIBED

As at December 31, 1999, the Company is obligated to issue 80,558 shares of
common stock valued at $2.98 per share as consideration for the purchase of the
assets of Internet Arena and this obligation has been reported as a liability of
$240,000 on the balance sheet. These shares were issued subsequent to year end.

F-33

7. SHARE CAPITAL (CONTINUED)

SALE OF UNITS AND WARRANTS

In 1997, the Company offered for sale to persons who qualified as
"accredited investors" as defined under Regulation D promulgated by the
Securities and Exchange Commission 3,000,000 units at $0.05 per unit. Each unit
consists of one share of the Company's common stock and one warrant to purchase
one share of common stock at $0.27 per share.

In 1997, the Company sold 600,000 units for aggregate consideration of
$20,000. In 1998, the Company sold an additional 2,400,000 units for aggregate
consideration of $80,000 less offering expenses of $20,000.

During 1998, the Company issued 915,000 shares of common stock through the
exercise of 915,000 warrants for aggregate consideration of $244,000. As of
December 31, 1998, 2,085,000 warrants were outstanding. These warrants were
exercised for 2,085,000 shares of common stock during 1999 and at December 31,
1999, there are no warrants outstanding.

PRIVATE PLACEMENT

Pursuant to a private placement pursuant to Rule 504 of Regulation D, the
Company offered on March 26, 1998, 57,000 shares of common stock at $0.33 per
share. As of On May 5, 1998, the Company sold an aggregate 57,000 shares of
common stock for an aggregate consideration of $19,000. On May 5, 1998, the
Company sold 22,500 shares of common stock pursuant to Rule 504 of Regulation D
to Kaplan Gottbetter and Levenson, LLP in consideration for $7,500 in legal fees
valued at $0.33 per share.

8. INCOME TAXES

In accordance with SFAS 109, "Accounting for Income Taxes", income taxes
are accounted for under the liability method. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial
statement reporting and the tax bases of the assets and liabilities, and are
measured at the enacted tax rates that will be in effect when the differences
are expected to reverse. Such differences principally arise from the timing of
income and expense recognition for accounting and tax purposes.

The application of SFAS 109 does not have any material effect on the
assets, liabilities, or operations for the periods presented in these
consolidated financial statements. Deferred tax assets arising from the
Company's net operating loss carryforwards have been fully offset by a valuation
allowance.

F-34

8. INCOME TAXES (CONTINUED)

At December 31, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,800,000 which are available to offset
future taxable income. The Company's utilization of these carryforwards may be
restricted due to changes in ownership of subsidiaries during the year. The
components of the deferred tax asset as of December 31, 1999 and 1998 are as
follows:

1999 1998
---------- ---------

NET OPERATING LOSS CARRYFORWARDS $1,260,000 $ 82,000
LESS- VALUATION ALLOWANCE 1,260,000 82,000
---------- ---------

$ - $ -
========== =========

9. COMMITMENTS AND CONTIGENCIES

Litigation

Subsequent to year end, the former president of the Company filed various
Legal claims against the Company and the Company's transfer agent in
respect of the ownership of 600,000 shares of common stock of the Company
awarded to him. The claims do not include any dollar amounts.

The Company believes that the claims are without merit and intends to
contest them vigorously. As a result, no amounts have been accrued in the
financial statements in respect to these claims, and the outcome of the
claims is not determinable.

Lease Commitments

The Company leases office space and equipment, and its lease payments in
the next five years and thereafter are as follows:

2000 $ 1,236,000
2001 1,091,000
2002 293,000
2003 122,000
2004 109,000
THEREAFTER 55,000
-------------
$ 2,906,000
==============

10. PRO FORMA DISCLOSURES ON BUSINESS COMBINATIONS (UNAUDITED)

As described in Note 3, the Company completed various business and asset
acquisitions during 1999 and has entered into another acquisition in 2000
described in Note 12. The following presents unaudited pro forma financial
information as though each of the transactions occurred on January 1, 1999 and
1998. This pro forma financial information include adjustments giving effect to
goodwill amortizations associated with the acquisitions and interest expense on
debt incurred to finance the acquisitions.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1999 (UNAUDITED)

INTERNET CONNECT PRO FORMA
(US DOLLARS) CYPOST HERMES NTOUCH NETROVER ARENA NORTHWEST PLAYA ADJUSTMENTS TOTAL

REVENUE 1,020,000 87,000 189,000 1,402,000 466,000 63,000 452,000 0 4,279,000

NET INCOME (LOSS) (4,352,000) 0 (7,000) 90,000 (45,000) ,000 (259,000 (3,420,000 7,986,000)

LOSS PER SHARE (0.48)

PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1998 (UNAUDITED)

INTERNET CONNECT PRO FORMA
(US DOLLARS) CYPOST HERMES NTOUCH NETROVER ARENA NORTHWEST PLAYA ADJUSTMENTS TOTAL

REVENUE 0 196,000 404,000 1,775,000 342,000 536,000 306,000 0 3,559,000

NET INCOME (LOSS) (540,000) 0 (16,000) (23,000) (221,000) (29,000) (182,000) (3,420,000) (4,431,000)

LOSS PER SHARE (0.53)

11. NON-CASH INVESTING AND FINANCING ACTIVITIES

Loans of $4 million were converted into shares of common stock of the
Company.

12. SUBSEQUENT EVENT

ACQUISITION OF PLAYA CORPORATION

F-35

On February 23, 2000, the Company completed the acquisition of Playa
Corporation (a Japan company), developer of Yabumi instant messaging and
e-greeting card services. The acquisition totals $3 million, comprised of
$300,000 in cash and $2.7 million in the Company's shares of common stock.

LETTER OF FINANCE

On April 27, 2000 the lender Blue Heron Venture Fund renegotiated with the
Company two of the commitment letters that were available as of that date. (see
Note 6) With the renegotiation, the March 17, 1999 and July 12, 1999 debt
financing commitment letters were amended to reflect a conversion price of
$0.75. Below the table indicates the discount to market on the amended
commitment letters. The change in these conversion terms were made subsequent to
December 31, 1999; hence no changes have been made to interest expense in these
financial statements in respect of the loans with Blue Heron Venture Fund.

The loans balance of $875,000 at December 31, 1999 was issued under the
$2,000,000 commitment above. The beneficial conversion terms was $122,500. The
beneficial conversion feature on the loans calculated under the amended
conversion terms is $875,000. The Company will record an additional beneficial
conversion feature of $752,500 as interest expense in the first quarter of 2000.

The $625,000 loans borrowed by the Company subsequent to year-end will
result in a beneficial conversion feature of $625,000 which the Company will
record as interest expense in the first quarter of 2000.

F-36

COMMITMENT DATE AMOUNT OF COMMITMENT SHARE CONVERSION CLOSING SHARE PRICE CONVERSION PRICE DISCOUNT TO MARKET
--------------- --------------------- ---------------- -------------------- ----------------- -------------------

April 27, 2000 $ 2,000,000 2,666,666 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
April 27, 2000 $ 10,000,000 13,333,333 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------

F-37

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment to Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.

DATE: November 15, 2001 CYPOST CORPORATION

By:/s/ Sandra Warren
-----------------------------------
Sandra Warren
President
Secretary and Treasurer

In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of registrant and in the capacities indicated
and on the dates indicated.

Name Title Date
---- ----- ----

/s/ J. Thomas W. Johnston Chairman of the Board November 15, 2001
-------------------------- and Director
J. Thomas W. Johnston

/s/ Sandra Warren President, November 15, 2001
------------------ Secretary, Treasurer, Director
Sandra Warren Principal Executive,
Financial and Accounting Officer

/s/ Robert Sendoh Director November 15, 2001
------------------
Robert Sendoh

F-38