U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
900-1281 West Georgia St., Vancouver, British Columbia, Canada V6E 3J7
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(Address of Principal Executive Offices) (Zip Code)
(604) 904-4422
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 30,392,025 as of September
30, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission ("Commission"). While these statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim period, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto, which are included in the
Company's Annual Report on Form 10-KSB, as amended, for the fiscal year ended
December 31, 2001, previously filed with the Commission.
The accompanying notes are an integral part of these consolidated financial
statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002
2002
-------------
(Unaudited)
ASSETS
CURRENT ASSETS
CASH $ 11,482
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS of $40,274 103,804
PREPAID EXPENSES 60,632
NOTE RECEIVABLE & ACCRUED INTEREST - RELATED PARTY 40,931
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TOTAL CURRENT ASSETS 216,849
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 361,073
INTANGIBLES
CUSTOMER LISTS 3,710,470
GOODWILL 1,832,543
LESS ACCUMULATED AMORTIZATION (5,045,321)
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INTANGIBLES, NET 497,692
DEPOSITS 98,247
OTHER ASSETS 8,552
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$ 1,182,413
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
ACCOUNTS PAYABLE & ACCRUED LIABILITIES 1,678,162
DUE TO BANK 26,501
DEFERRED REVENUE 410,124
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TOTAL CURRENT LIABILITIES 2,114,787
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COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (DEFICIT)
SHARE CAPITAL
AUTHORIZED
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
200,000,000 COMMON STOCK WITH A PAR VAUE OF $.001
ISSUED AND OUTSTANDING
PREFERRED STOCK - NONE -
COMMON STOCK 30,391,993 30,393
PAID-IN CAPITAL 14,778,733
ACCUMULATED DEFICIT (15,745,881)
CURRENCY TRANSLATION ADJUSTMENT 4,381
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (932,374)
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$ 1,182,413
=============
See accompanying notes to the consolidated condensed financial statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUE $ 716,798 $ 856,644 $ 2,265,998 $ 2,875,843
DIRECT COSTS 264,250 545,458 1,124,358 1,458,487
------------ ------------ ------------ ------------
452,548 311,186 1,141,640 1,417,356
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EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 584,637 492,164 2,064,691 1,838,163
AMORTIZATION AND DEPRECIATION 320,381 517,122 1,053,577 1,584,583
------------ ------------ ------------ ------------
905,018 1,009,286 3,118,268 3,422,746
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (452,470) (698,100) (1,976,628) (2,005,390)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
SETTLEMENT INCOME - 2,498,599 - 2,498,599
IMPAIRMENT LOSS OF LONG LIVED ASSETS 326 - (3,378) -
INTEREST EXPENSE, NET 481 (37,348) 1,482 (120,295)
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSE) 807 2,461,251 (1,896) 2,378,304
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (451,663) $ 1,763,151 $(1,978,524) $ 372,914
============ ============ ============ ============
BASICAND DILUTED INCOME (LOSS) PER SHARE $ (0.02) $ 0.08 $ (0.08) $ 0.02
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 25,609,384 21,559,493 24,417,222 21,558,660
============ ============ ============ ============
See accompanying notes to the consolidated condensed financial statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $(1,978,524) $ 372,914
Adjustments to reconcile net loss to cash used by
operating activities:
Settlement Income - (2,498,599)
Amortization and depreciation 1,053,577 1,584,583
Bad debt expense (36,131) (2,361)
Interest (income) expense (1,482) 120,295
Consulting fees offsetting note receivable 17,750 -
Impairment loss of long-live assets 3,378 -
Fair value of stock issued for services 496,000 1,275
Changes in assets and liabilities
Accounts receivable 70,638 (29,010)
Insurance receivable - 58,488
Prepaid expenses (14,650) 76,169
Deposits (5,638) 24,559
Other assets (69) (3,186)
Accounts payable and accrued liabilities 402,576 445,466
Increase in Due to Bank 26,501 -
Deferred revenue (38,424) (145,744)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,498) 4,849
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (52,987) (72,871)
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NET CASH USED IN INVESTING ACTIVITIES (52,987) (72,871)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 250 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 250 -
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES (4,407) (27,606)
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NET DECREASE IN CASH (61,642) (95,628)
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CASH, BEGINNING OF YEAR 73,124 250,631
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CASH, END OF PERIOD $ 11,482 $ 155,003
============ ============
OTHER CASH INFORMATION
Interest paid $ - $ -
============ ============
Taxes paid $ - $ -
============ ============
See accompanying notes to the consolidated condensed financial statements.
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern" which assume that CyPost Corporation
(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 $15.7 million for the period from inception September 5, 1997 to
September 30, 2002, has a working capital deficit of approximately $1.9 million
at September 30, 2002, 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 consolidated 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
doubts 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.
BASIS OF PRESENTATION
The interim consolidated financial statements presented have been prepared
by the Company without audit and, in the opinion of the management, reflect all
adjustments of a normal recurring nature necessary for a fair statement of (a)
the consolidated results of operations for the three and nine months ended
September 30, 2002 and 2001, (b) the consolidated financial position at
September 30, 2002 and (c) the consolidated cash flows for the nine months ended
September 30, 2002 and 2001. Interim results are not necessarily indicative of
results for the entire year ending December 31, 2002.
The consolidated financial statements and notes are condensed as permitted
by Form 10-QSB and do not contain certain information included in the annual
financial statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-KSB.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements, actual results may differ from those estimates.
Dollar values in the accompanying consolidated financial statements are
expressed in U.S. Dollars, unless indicated otherwise. On September 30, 2002 one
Canadian Dollar ("CDN") was exchangeable for .63360 U.S. Dollars.
RECLASSIFICATIONS
Certain reclassifications of 2001 amounts have been made to conform to the
presentation as of September 30, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Accounting
for Goodwill and Other Intangibles." Under SFAS 142 goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually (or
more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Companies are required to immediately
adopt the amortization provisions of SFAS 142 as it relates to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The
Company adopted SFAS 142 in accordance with the provisions of the statement.
SFAS 142 may not be applied retroactively.
The Company's goodwill balance prior to the adoption of SFAS 142 was being
amortized over three years. The impact of the adoption as it relates to existing
goodwill reduced amortization expense by $436,884 for the nine month ended
September 30, 2002.
The Company amortizes its' customer list over three years.
As of September 30, 2002, Goodwill and other intangibles consisted of the
following:
Goodwill, net of amortization $ 453,895
Customer list, net of amortization 43,797
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$ 497,692
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3. COMPREHENSIVE INCOME
The following table reflects the calculation of the Company's comprehensive
income for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
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Net Gain (Loss) $ (451,663) $1,763,151 $(1,978,524) $ 372,914
Other Comprehensive Gain (Loss)
Foreign currency translation gain (loss) 42,472 9,220 (4,407) (27,606)
-------------- ---------- ------------ ------------
Comprehensive Gain (Loss) $ (409,191) $1,772,371 $(1,982,931) $ 345,308
============== ========== ============ ============
4. NET LOSS PER SHARE
SFAS 128 requires dual presentation of basis and diluted "Earnings per
Share" ("EPS"). Basic EPS represents the weighted average number of shares
outstanding divided into net income during the reported period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
However, the Company has not included potential common stock in the calculation,
as such inclusion would have an anti-dilutive effect.
5. SHARE CAPITAL
AUTHORIZED STOCK
Due to an amendment to the Company's article of incorporation on January
29, 2002, the Company is now authorized to issue:
(a) 200,000,000 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
ISSUANCE OF SHARES
On April 26, 2002, the Company issued 1,700,000 shares of its common stock
in an aggregate amount of $170,000 to two consultants and one lawyer at the
closing price of $0.10 per share in consideration for their providing consulting
and legal services to the Company.
On July 23, 2002 the Board of Directors of the Company granted 2,300,000
shares of its common stock in an aggregate amount of $230,000 to two consultants
and two lawyers at the price of $0.10 per share in consideration for their
providing consulting and legal services to the Company. These shares were issued
on September 19, 2002.
On August 5, 2002 the Board of Directors of the Company adopted the 2002
Stock Reward Plan, whereby the Board may grant up to 5 million shares of common
stock to employees, officers, directors, key consultants and advisors. The Board
granted 3,200,000 shares of its common stock in an aggregate amount of $96,000
to six employees and one Director at the price of $0.03 per share in
consideration for their providing their services to the Company. These shares
were issued on September 19, 2002.
STOCK OPTIONS
On January 10, 2001, the Company issued an option to purchase 1,000,000
shares of the Company's common stock to Robert Adams, who, at such time, was
serving as President, Chief Operating Officer, Secretary and Treasurer of the
Company. On that date, the Company also issued an option to purchase 125,000
shares of the Company's common stock to Tami Allan, who, at that time was
serving as Vice President of North American Operations of the Company. The
exercise price of each option is $.10 per share and vests over time. The options
were issued pursuant to the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), for
transactions by an issuer not involving a public offering. Mr. Adams and Ms.
Allan are no longer employees of the Company. On December 10, 2001, Mr. Adams
gave notice to the Company indicating that he wished to exercise 2,500 options
pursuant to the non-qualified stock option agreement. These shares were issued
on August 5, 2002, however for purposes of financial statement presentation, all
shares were deemed issued as of March 31, 2002. As of September 30, 2002 all
vested and unvested options for Mr. Adams and Ms. Allan have expired or have
been cancelled.
6. COMMITMENTS AND CONTIGENCIES
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. An Examination for Discovery
of Sandra Lynn Warren took place on February 19,2002 in conjunction with this
action. 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 for 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. The trial date has been set for Monday, January 20, 2003.
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, although no assurance can
be given that this will be the case. 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. An Examination for Discovery of Kelly Shane Montalban took place over
two days on January 31, 2002 and February 1, 2002 in conjunction with this
action.
The Tia Action, the BC Action and the Berry Action may 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.
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 has entered into negotiations to settle outstanding litigation.
On February 5, 2002, counsel for Steven and Tia Berry presented to counsel for
the Company an offer to settle the Tia Action, the BC Action, the Berry Action
and the Montalban Action ("All Actions"). On March 4, 2002, counsel for the
Company sent to counsel for Steven and Tia Berry a counter-offer to settle All
Actions. On March 12, 2002, counsel for the Company received a letter for Steven
and Tia Berry rejecting the counter-offer to settle of March 2, 2002. The
Company has entered into settlement negotiations motivated by the best interests
of the Company but without any admission of liability.
DOMINION ACTION
On September 13, 2001, Dominion Information et al ("Dominion") commenced
suit in the Supreme Court of British Columbia, Action # S015127, Vancouver
Registry (the "Dominion Action") against Hermes Net Solutions, CyPost
Corporation and Stephen Choi, a former shareholder, director and secretary of
Hermes Net Solutions until June 30, 1999. As of June 30, 1999, Hermes was a
wholly owned subsidiary of CyPost Corporation. In the Dominion Action, Dominion
claims $19,339 (CDN) from the defendant Hermes Net Solutions pursuant to an
agreement whereby Dominion published advertisements on behalf Hermes Net
Solutions. In the alternative, Dominion claims that CyPost Corporation was
unjustly enriched by the amount claimed. The defendants Hermes Net Solutions and
CyPost Corporation filed a Statement of Defense in the Dominion Action in which
they state that the defendant Stephen Choi did not have authority to enter any
agreement on their behalf. Furthermore, the Statement of Defense denies the
existence of an agreement, any benefit from an agreement or any unjust
enrichment from an agreement.
On February 16, 2002, settlement terms were proposed by Dominion. Hermes
Net Solutions and CyPost Corporation decided it would be in their best interest
to settle this litigation by making a lump sum payment and twelve monthly
payments commencing April 1, 2002 and to March 1, 2003. When Hermes Net
Solutions has completed the payment schedule in March, 2003, Dominion will file
the Consent Dismissal Order, dismissing the Dominion Action.
CNW ACTION
On January 14, 2002, Connect Northwest Internet Services, LLC, a Washington
limited liability company, d/b/a Skagit County Networking LLC ("CNW") commenced
suit in the Superior Court of Washington for King County, Case No.
02-2-01906-4SEA, against CyPost Corporation (the "CNW Action"). In the CNW
Action, CNW claims $30,529 (U.S.) plus interest, costs and attorney's fees from
the Company on account of monies owing pursuant to an asset purchase agreement
of October 27, 1999.
On February 13, 2002, the Company was able to settle this litigation. The
Company agreed to make a lump sun payment of $6,000 U.S. to CNW by February 28,
2002 followed by payments of $4,000 U.S. on the 15th of each month thereafter
until August 15, 2002 for a total payment of $30,000 U.S. Once the Company has
made its final payment CNW will dismiss the action.
TAMI HELEN ALLAN
On November 2, 2001, Tami Helen Allan ("Allan") commenced suit in the
Ontario Superior Court of Justice of Chatham-Kent, against NetRover Inc., CyPost
Corporation, Robert Sendoh, Kelly Shane Montalban, Angela Belcourt and J. Thomas
W. Johnston (the "Allan Action"). In the Allan Action, Allan claims that as a
result of the wrongful termination of Allan's employment, Allan has sustained
damages including loss of salary in the amount of $600,000 (CDN).
On November 9, 2001 the Company filed a Notice of Defense.
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.
DEPENDENCE ON KEY SUPPLIERS
In July 2002 WorldCom, Inc., the parent company of WorldCom Canada Ltd.,
filed for protection under Chapter 11, of the United States tax code. Chapter 11
reorganization is not a liquidation, rather a medium for financially troubled
United States companies to restructure their debt and resume operations.
WorldCom Canada Ltd. was not a part of this filing, nor have they filed for
bankruptcy protection in the interim. The Company currently depends on the
WorldCom Canada Ltd.'s infrastructure for a significant portion of its revenue.
The Company has not experienced any disruption of service and does not
anticipate any service disruptions in the future as a result of any
reorganization of WorldCom Canada Ltds' parent company. Notwithstanding the
aforementioned, the Company has had preliminary discussions with other providers
as a contingency.
7. RELATED PARTY TRANSACTIONS
On November 1, 2001 the Company entered into a consulting agreement with
Roundtable Strategies Ltd., a corporation owned by J. Thomas W. Johnston who is
serving as a Director and Chairman of the Company, for a one year period in the
amount of $9,000 minimum per month for providing certain services to the
Company.
As of September 30, 2002, pursuant to this agreement, the Company owes
approximately $102,800 to Roundtable Strategies Ltd., which is included in
accounts payable and accrued liabilities.
The agreement also provided Roundtable Strategies Ltd. an option to
purchase 1,000,000 shares of the Company's common stock. The exercise
price of each option is $.10 per share and exercisable for a term of
one year after the termination of the agreement.
The agreement contains an automatic renewal term of the same length
except where either party has expressed in writing the desire to
terminate the agreement. In August 2002 the Company notified
Roundtable Strategies Ltd. that it would not renew the agreement.
On August 12, 2002 the option portion of the agreement was rescinded
and deemed null and void. Also, Mr. Johnston has agreed to defer
payment on the balance owing to Roundtable Strategies Ltd. until such
time as the Company's cash flow permits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements, which are not historical facts
contained in this Report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Notes to the Consolidated
Financial Statements, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are
based on currently available operating, financial and competitive information,
and are subject to various risks and uncertainties. Future events and the
Company's actual results may differ materially from the results reflected in
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, dependence on existing and future key strategic
and strategic end-user customers, limited ability to establish new strategic
relationships, ability to sustain and manage growth, variability of operating
results, the Company's expansion and development of new service lines, marketing
and other business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
existing and past employees, risks associated with international sales, and
other risks described herein and in the Company's other SEC filings.
Overview
The Company is engaged in the business of providing Internet service
provider ("ISP") services ("ISP Services") for business and personal use.
Previously, the Company was also involved in developing certain software
products, which activities the Company no longer pursues.
The Company was a development stage company until the first quarter of
1999, when it began to broaden its strategic focus through the acquisition of
six ISPs. Currently, providing ISP Services is the focus of the Company's
business. The Company's business operations are presently conducted in the
United States and Canada.
The Company derives all of its revenues from its ISP Services. At present,
most of the revenue from ISP Services can be attributed to connectivity,
although the Company's network of ISP Services is moving towards expanding its
Web hosting services.
The Company continues to streamline and consolidate its ISP Services
operations to enhance efficiency and reduce operating expenses. The Company has
embarked on a program to centralize ISP Services to the greatest extent
possible, as follows:
o Customer Support. During 2001, the Company began consolidating all
----------------
aspects of customer support (including end user technical issues) for its Oregon
ISP customers into the Chatham, Ontario facility. The Washington state ISP
customer support is expected to be consolidated into the Chatham facility by the
end of Q4 2002.
o Billing and Collections. In 2001 the billing and collections for the Oregon
-----------------------
ISP customers were consolidated into the Chatham facility, billing and
collections for the Washington ISP Services customers is expected to be
consolidated by the end of Q4 2002. To facilitate this project, the Company
purchased Rodopi billing software and is currently deploying the system across
all its' ISP's.
o Network Operations. The Company has two regionally-based maintenance
------------------
and repair teams. A team based in Toronto provides primary monitoring and repair
of all servers and routers covering all Canadian ISP Services customers and
provides overflow assistance to the Pacific Northwest, while a Seattle team
provides primary monitoring and repair of all servers and routers covering all
of the US ISP Services customers and provides overflow assistance to Canada.
The Company is also consolidating Web hosting and dedicated services into
Toronto, a process which began in late-2000 and is expected to be completed by
the end of Q4 2002. Other ISP Services such as e-mail and user authentication
(i.e., customer security) will continue to be handled from regional data
centers. Currently, all new Web hosting customers, wherever located
geographically, are hosted from Toronto.
The Company is also considering implementing other consolidated services to
achieve greater efficiency and cost savings.
Results of Operations for the Three Months Ended September 30, 2002 Compared to
the Three Months Ended September 30, 2001
All of the Company's revenue was earned from its ISP operations during the three
months ended September 30, 2002. These revenues are attributable entirely to
the operations of the Company's ISP businesses (Hermes Net Solutions, Inc. and
NetRover Inc., and the Connect Northwest Internet Services and Internet Arena
DBAs) which the Company acquired beginning late in the second quarter of 1999.
The Company generated net sales of $716,798 for the three months ended September
30, 2002 compared to $856,644 for the three months ended September 30, 2001.
This decrease is due to a decrease in marketing related activities, and the
prolonged softening of technology related sector spending.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $264,250,
were incurred for the three months ended September 30, 2002, compared to
$545,458 for the three months ended September 30, 2001. This decrease results
primarily from having renegotiated or terminated certain telecommunication
agreements, a decrease in overall usage, and the accrual of certain credits to
be received from certain telecommunication providers.
Selling, general and administrative expenses were $584,637 for the three months
ended September 30, 2002 compared to $492,164 for the three months ended
September 30, 2001. This increase results primarily from an increase in
professional fees and salaries and benefits including securities issued under
our 2002 Stock Award Plan; offset by a reduction in marketing related
activities, office and general expenses.
Amortization and depreciation expenses were $320,381 for the three months ended
September 30, 2002, compared to $517,122 for the three months ended September
30, 2001. This decrease is primarily due to the Company conforming to the new
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142) provisions issued by the Financial Accounting
Standards Board. The provisions of this Statement are required to be applied
starting with fiscal years beginning after December 15, 2001. The Company has
determined that the net goodwill associated with these assets in the amount of
$453,895 were not impaired. As a result, the Company did not amortize these
assets for the period ending September 30, 2002. Under the old rules, the
Company would have amortized $131,571 for the three months ended September 30,
2002.
The Company incurred net interest expense of $(481) for the three months ended
September 30, 2002, compared to $37,348 for the three months ended September 30,
2001. This decrease is primarily the result of the Company not borrowing any
additional funds during the three months ended September 30, 2002; and pursuant
to the September 20, 2001 Montalban Settlement Agreement, the Blue Heron loan
balance was canceled and deemed to have been paid in full.
The Company had a net loss of $451,663, or $.02 per share, for the three months
ended September 30, 2002, compared to a net income of $1,763,151, or $.08 per
share, for the three months ended September 30, 2001. The increase in net loss
was primarily a result of a decrease in other revenue due to a recovery of short
swing profits from a principal shareholder as well as decrease in revenues and
an increase in selling, general and administrative expense, offset by the
decrease in direct costs, amortization and depreciation of the assets and
interest expense.
Results of Operations for the Nine Months Ended September 30, 2002 Compared to
the Nine Months Ended September 30, 2001
All of the Company's revenue was earned from its ISP operations during the nine
months ended September 30, 2002. These revenues are attributable entirely to
the operations of the Company's ISP businesses (Hermes Net Solutions, Inc. and
NetRover Inc., and the Connect Northwest Internet Services and Internet Arena
DBAs) which the Company acquired beginning late in the second quarter of 1999.
The Company generated net sales of $2,265,998 for the nine months ended
September 30, 2002 compared to $2,875,843 for the nine months ended September
30, 2001. This decrease is due to a decrease in marketing related activities,
and the prolonged softening of technology related sector spending.
Direct costs, which consist primarily of telecommunications charges in respect
of providing Internet connection services to customers, of $1,124,358, were
incurred for the nine months ended September 30, 2002, compared to $1,458,487
for the nine months ended September 30, 2001. This decrease results primarily
from having renegotiated or terminated certain telecommunication agreements, a
decrease in overall usage, and the accrual of certain credits to be received
from certain telecommunication providers.
Selling, general and administrative expenses were $2,064,691 for the nine months
ended September 30, 2002 compared to $1,838,163 for the nine months ended
September 30, 2001. This increase results primarily from an increase in
professional fees and salaries and benefits including securities issued under
our 2002 Stock Award Plan; offset by a reduction in marketing related
activities, office and general expenses.
Amortization and depreciation expenses were $1,053,577 for the nine months ended
September 30, 2002, compared to $1,584,583 for the nine months ended September
30, 2001. This decrease is primarily due to the Company conforming to the new
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142) provisions issued by the Financial Accounting
Standards Board. The provisions of this Statement are required to be applied
starting with fiscal years beginning after December 15, 2001. The Company has
determined that the net goodwill associated with these assets in the amount of
$453,895 were not impaired. As a result, the Company did not amortize these
assets for the period ending September 30, 2002. Under the old rules, the
Company would have amortized $436,884 for the nine months ended September 30,
2002.
The Company incurred net interest expense of $(1,482) for the nine months ended
September 30, 2002, compared to $120,295 for the nine months ended September 30,
2001. This decrease is primarily the result of the Company not borrowing any
additional funds during the nine months ended September 30, 2002; and pursuant
to the September 20, 2001 Montalban Settlement Agreement, the Blue Heron loan
balance was canceled and deemed to have been paid in full.
The Company had a net loss of $1,978,524, or $.08 per share, for the nine months
ended September 30, 2002, compared to a net income of $372,914, or $.02 per
share, for the nine months ended September 30, 2001. The increase in net loss
was primarily a result of a decrease in other revenue due to a recovery of short
swing profits from a principal shareholder as well as decrease in revenues and
an increase in selling, general and administrative expense, offset by the
decrease in direct costs, amortization and depreciation of the assets and
interest expense.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going concern
basis, which assumes 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 business. The Company incurred a net loss for the nine
months ended September 30, 2002 of $1,978,524, compared to a net income for the
nine months ended September 30, 2001 of $372,914. For the nine months ended
September 30, 2002, the Company had a working capital deficit of $1,897,938,
which is primarily due to the Company's general operating activities and
professional fees. These factors indicate that the Company's continuation as a
going concern is dependent upon its ability to obtain adequate financing.
The Company has accrued interest of $2,720 on its' note receivable as of
September 30, 2002.
The Company's cash position during the nine months ended September 30, 2002 was
$11,482, compared to $73,124 on December 31, 2001. This decrease is primarily
due to a decrease in revenues during the nine months ended September 30, 2002.
The Company's net cash provided by (used in) operating activities totaled
$(4,498) during the nine months ended September 30, 2002, compared to $4,849
during the nine months ended September 30, 2001. This decrease is primarily due
to a decrease in revenues during the nine months ended September 30, 2000.
The Company's net cash used in investing activities totaled $52,987 during the
nine months ended September 30, 2002, compared to $72,871 during the nine months
ended September 30, 2001. This decrease is primarily due to the Company making
fewer purchases of property, plant and equipment in order to conserve its
available cash during the nine months ended September 30, 2002.
The Company received $250 from the issuance of Common Stock during the
nine months ended September 30, 2002. The Company did not have any proceeds from
financing activities during the nine months ended September 30, 2001.
Since our inception, we have experienced negative cash flow from
operations. In the past, we have funded our operating losses and capital
expenditures borrowings of debt and convertible debt from private sources. We
continue to evaluate alternative means of financing to meet our needs on terms
that are attractive to us. We must either raise additional funds to support
aspects of our business for 2002 or we will be forced to curtail certain aspects
of our business operations, particularly in terms of the growth of and further
enhancements to our ISP Services business, or recommencing research and
development of Software Products. We need a minimum of $500,000 and a maximum of
$4,500,000 to support current operations, grow and further enhance our ISP
services business, and a minimum of $250,000 and a maximum of $500,000 to
recommence the research and development of the Software Products. If financing
were made available we would first apply the proceeds to support current
operations and to the further enhancement of our ISP services business. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we are unable to obtain sufficient additional
capital when needed, we could be forced to alter our business strategy, delay or
abandon some of our expansion plans or sell assets. Any of these events could
have a material adverse effect on our business, financial condition and results
of operations. In addition, if we raise additional funds through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our Common Stock and
our stockholders may also experience dilution.
Dependence on Key Suppliers
Our success depends upon the capacity, scalability, reliability and
security of our network infrastructure, including the telecommunications
capacity leased from WorldCom Canada Ltd. and other telecommunications network
suppliers. We depend on such companies to maintain the operational integrity of
their own telecommunications networks. Therefore, our operating results depend,
in part, upon the pricing and availability of telecommunications network
capacity from a limited number of providers in a consolidated market. A material
increase in pricing or decrease in telecommunications capacity available to us
could have a material adverse effect on our business, financial condition and
results of operations. We cannot be certain that telecommunication capacity will
be available to us on favorable terms when required, or at all. If we are unable
to obtain sufficient capacity when needed, we could be forced to alter our
business strategy, delay or abandon some of our business aspects or sell assets.
Any of these events could have a material adverse effect on our business,
financial condition and results of operations.
In July 2002 WorldCom, Inc., the parent company of WorldCom Canada Ltd., filed
for protection under Chapter 11, of the Unites States tax code. Chapter 11
reorganization is not a liquidation, rather a medium for financially troubled
United States companies to restructure their debt and resume operations.
WorldCom Canada Ltd. was not a part of this filing, nor have they filed for
bankruptcy protection in the interim. The Company currently depends on the
WorldCom Canada Ltd.'s infrastructure for a significant portion of it's
revenue.
The Company has not experienced any disruption of service and does not
anticipate any service disruptions in the future as a result of any
reorganization of Worldcom Canada Ltds' parent company. Notwithstanding the
aforementioned, the Company has had preliminary discussions with other providers
as a contingency.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
Carrying value of the intangible asset, customer list. As of September 30,
2002, the net book value of the customer list was $43,797. Management has
estimated the useful life of this intangible asset to be three years, however we
have no means of identifying specific customers acquired as a result of the
purchased customer list. Should revenues associated with the customer lists
decrease, this asset could become partially or fully impaired.
Carrying value of the intangible asset, goodwill. As of September 30, 2002,
the net book value of goodwill was $453,895. Management reviews the un-amortized
goodwill associated with its various acquisitions, comparing the un-amortized
goodwill to the estimated current acquisition costs. Should the estimated
current acquisition costs decrease, this asset could become partially or fully
impaired.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (who also effectively serves
as the Principal Financial Officer), of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer concluded that our disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information we are
required to disclose in the reports we file under the Securities Exchange Act of
1934, within the time periods specified in the SEC's rules and forms. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of this
evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. An Examination for Discovery
of Sandra Lynn Warren took place on February 19,2002 in conjunction with this
action. 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 for 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. The trial date has been set for Monday, January 20, 2003.
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, although no assurance can
be given that this will be the case. 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. An Examination for Discovery of Kelly Shane Montalban took place over
two days on January 31, 2002 and February 1, 2002 in conjunction with this
action.
The Tia Action, the BC Action and the Berry Action may 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.
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 has entered into negotiations to settle outstanding litigation.
On February 5, 2002, counsel for Steven and Tia Berry presented to counsel for
the Company an offer to settle the Tia Action, the BC Action, the Berry Action
and the Montalban Action ("All Actions"). On March 4, 2002, counsel for the
Company sent to counsel for Steven and Tia Berry a counter-offer to settle All
Actions. On March 12, 2002, counsel for the Company received a letter for Steven
and Tia Berry rejecting the counter-offer to settle of March 2, 2002. The
Company has entered into settlement negotiations motivated by the best interests
of the Company but without any admission of liability.
DOMINION ACTION
On September 13, 2001, Dominion Information et al ("Dominion") commenced
suit in the Supreme Court of British Columbia, Action # S015127, Vancouver
Registry (the "Dominion Action") against Hermes Net Solutions, CyPost
Corporation and Stephen Choi, a former shareholder, director and secretary of
Hermes Net Solutions until June 30, 1999. As of June 30, 1999, Hermes was a
wholly owned subsidiary of CyPost Corporation. In the Dominion Action, Dominion
claims $19,339 (CDN) from the defendant Hermes Net Solutions pursuant to an
agreement whereby Dominion published advertisements on behalf Hermes Net
Solutions. In the alternative, Dominion claims that CyPost Corporation was
unjustly enriched by the amount claimed. The defendants Hermes Net Solutions and
CyPost Corporation filed a Statement of Defense in the Dominion Action in which
they state that the defendant Stephen Choi did not have authority to enter any
agreement on their behalf. Furthermore, the Statement of Defense denies the
existence of an agreement, any benefit from an agreement or any unjust
enrichment from an agreement.
On February 16, 2002, settlement terms were proposed by Dominion. Hermes
Net Solutions and CyPost Corporation decided it would be in their best interest
to settle this litigation by making a lump sum payment and twelve monthly
payments commencing April 1, 2002 and to March 1, 2003. When Hermes Net
Solutions has completed the payment schedule in March, 2003, Dominion will file
the Consent Dismissal Order, dismissing the Dominion Action.
CNW ACTION
On January 14, 2002, Connect Northwest Internet Services, LLC, a Washington
limited liability company, d/b/a Skagit County Networking LLC ("CNW") commenced
suit in the Superior Court of Washington for King County, Case No.
02-2-01906-4SEA, against CyPost Corporation (the "CNW Action"). In the CNW
Action, CNW claims $30,529 (U.S.) plus interest, costs and attorney's fees from
the Company on account of monies owing pursuant to an asset purchase agreement
of October 27, 1999.
On February 13, 2002, the Company was able to settle this litigation. The
Company agreed to make a lump sun payment of $6,000 U.S. to CNW by February 28,
2002 followed by payments of $4,000 U.S. on the 15th of each month thereafter
until August 15, 2002 for a total payment of $30,000 U.S. Once the Company has
made its final payment CNW will dismiss the action.
TAMI HELEN ALLAN
On November 2, 2001, Tami Helen Allan ("Allan") commenced suit in the
Ontario Superior Court of Justice of Chatham-Kent, against NetRover Inc., CyPost
Corporation, Robert Sendoh, Kelly Shane Montalban, Angela Belcourt and J. Thomas
W. Johnston (the "Allan Action"). In the Allan Action, Allan claims that as a
result of the wrongful termination of Allan's employment, Allan has sustained
damages including loss of salary in the amount of $600,000 (CDN).
On November 9, 2001 the Company filed a Notice of Defense.
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.
ITEM 2. CHANGES IN SECURITIES
On January 10, 2001, the Company issued an option to purchase 1,000,000
shares of the Company's common stock to Robert Adams, who, at such time, was
serving as President, Chief Operating Officer, Secretary and Treasurer of the
Company. On that date, the Company also issued an option to purchase 125,000
shares of the Company's common stock to Tami Allan, who, at that time was
serving as Vice President of North American Operations of the Company. The
exercise price of each option is $.10 per share and vests over time. The options
were issued pursuant to the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), for
transactions by an issuer not involving a public offering. Mr. Adams and Ms.
Allan are no longer employees of the Company. On March 31, 2002, the Company
reflected the issuance of 2,500 shares of its common stock in an aggregate
amount of $250 to Mr. Robert Adams at $0.10 per share pursuant to a stock option
agreement. These shares were issued on August 5, 2002, however for purposes of
financial statement presentation, all shares were deemed issued as of March 31,
2002. As of September 30, 2002 all vested and unvested options for Mr. Adams and
Ms. Allan have expired or have been cancelled.
On July 23, 2002 the Board of Directors of the Company granted 2,300,000 shares
of its common stock in an aggregate amount of $230,000 to two consultants and
two lawyers at the price of $0.10 per share in consideration for their providing
consulting and legal services to the Company. These shares were issued on
September 19, 2002.
On August 5, 2002 the Board of Directors of the Company adopted the 2002
Stock Reward Plan, whereby the Board may grant up to 5 million shares of common
stock to employees, officers, directors, key consultants and advisors. The Board
granted 3,200,000 shares of its common stock in an aggregate amount of $96,000
to six employees and one Director at the price of $0.03 per share in
consideration for their providing their services to the Company. These shares
were issued on September 19, 2002.
ITEM 5. OTHER INFORMATION
RELATED PARTY TRANSACTIONS
On November 1, 2001 the Company entered into a consulting agreement with
Roundtable Strategies Ltd., a corporation owned by J. Thomas W. Johnston who is
serving as a Director and Chairman of the Company, for a one year period in the
amount of $9,000 minimum per month for providing certain services to the
Company.
As of September 30, 2002, pursuant to this agreement, the Company owes
approximately $102,800 to Roundtable Strategies Ltd., which is included in
accounts payable and accrued liabilities.
The agreement also provided Roundtable Strategies Ltd. an option to
purchase 1,000,000 shares of the Company's common stock. The exercise
price of each option is $.10 per share and exercisable for a term of
one year after the termination of the agreement.
The agreement contains an automatic renewal term of the same length
except where either party has expressed in writing the desire to
terminate the agreement. In August 2002 the Company notified
Roundtable Strategies Ltd. that it would not renew the agreement.
On August 12, 2002 the option portion of the agreement was rescinded
and deemed null and void. Also, Mr. Johnston has agreed to defer
payment on the balance owing to Roundtable Strategies Ltd. until such
time as the Company's cash flow permits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
99.1 Sarbanes-Oxley Act Exhibit
(b) Reports on Form 8-K
On October 31, 2002 the Company filed an 8-K notifying the SEC
that there was a Change in Auditors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYPOST CORPORATION
By: /s/ Javan Khazali
-----------------------------
Javan Khazali
Chief Executive Officer
(Principal Financial Officer)
DATE: November 14, 2002
CERTIFICATIONS
I, Javan Khazali, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CyPost Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact, or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial position, results of operations, and cash
flows of the issuer as of, and for, the periods presented in this quarterly
report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer is made known to me,
particularly during the period in which the periodic reports are being
prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of September 30, 2002; and
(iii) Presented in the report our conclusions about the effectiveness of
the disclosure controls and procedures based on my evaluation as of
the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the issuer's
auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize and report financial data and have identified for
the issuer's auditors any material weaknesses in internal controls
(none were so noted); and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal
controls (none were so noted); and
6. I have indicated in the report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Javan Khazali
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President, CEO, and Principal Financial Officer