U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal Year Ended: December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-26751
CyPost Corporation
(Exact name of small business issuer as specified in its charter)
Delaware 98-0178674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
900-1281 West Georgia St.
Vancouver, British Columbia, Canada V6E 3J7
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (604) 904-4422
Securities registered under Section 12(b) of the Act: NONE
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: $2,953,778
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.) $303,920.25 as of March 31, 2003.
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: 30,392,025 as of March 31, 2003.
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]
CYPOST CORPORATION
ANNUAL REPORT ON FORM 10-KSB
For the Year Ended December 31, 2002
TABLE OF CONTENTS
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Item Number Caption Page
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PART I
1. Description of Business . . . . . . . . . . . . . . . . . . . . 5
2. Description of Property . . . . . . . . . . . . . . . . . . . .18
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 20
4. Submission of Matters to a Vote of Security Holders . . . . . . .21
PART II
5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .22
7. Financial Statements . . . . . . . . . . . . . . . . . . . . . .27
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . .27
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 29
11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12. Certain Relationships and Related Transactions . . . . . . . . . 31
PART IV
13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . .F-1
Forward Looking Statements
----------------------------
Certain statements contained in this Annual Report on Form 10-KSB that are not
related to historical results, including, without limitation, statements
regarding the issuer's business strategy and objectives, future financial
position and expectations about future operations, are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and involve risks and uncertainties. Although the Company
believes that the assumptions on which these forward-looking statements are
based are reasonable, there can be no assurance that such assumptions will prove
to be accurate and actual results could differ materially from those discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, regulatory policies,
competition from other similar businesses, and market and general economic
factors. All forward-looking statements contained in this Annual Report on Form
10-KSB are qualified in their entirety by this statement.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
-------
CyPost Corporation ("CyPost") is engaged in the business of providing Internet
connection and related services (the "ISP Services") for business and personal
use. See "ISP Business" below. 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 (the "Software Products"), which
activities the Company no longer pursues. As used in this Annual Report on Form
10-KSB, the term "Company" refers to CyPost and its consolidated subsidiaries.
CyPost was incorporated on September 5, 1997, under the laws of the State of
Delaware. The original name of CyPost was "ePost Corporation", which name was
changed shortly after incorporation to CyPost Corporation.
The Company was a development stage company until the first quarter of 1999,
when it began to offer the first of its Navaho brand Software Products and
broaden its strategic focus through the acquisition of six Internet service
providers (collectively, "ISPs" or individually, an "ISP"). Currently, providing
ISP Services is the focus of the Company's business. The Company derives all of
its revenues from its ISP Services. No single customer accounts for a
significant portion of the Company's revenue. The Company's business operations
are presently conducted in Canada and the United States. Dollar values in this
Report are expressed in U.S. Dollars, unless indicated otherwise. On December
31, 2002, one Canadian Dollar ("CDN") was worth $.63440 U.S. Dollars.
The Company's principal executive offices are located at 900-1281 West Georgia
Street Vancouver, British Columbia, V6E 3J7, Canada. The Company's telephone
number is (604) 904-4422, and its website is www.cypost.com.
ISP Business
------------
Overview
The Company offers a full range of consumer Internet access services and a broad
selection of business services, both of which are offered nationwide in the
United States and Canada. The Company's services are tailored to the specific
demands of both its business and residential customers and include connectivity,
server co-location, domain name registration, e-mail (list servers for corporate
e-mailing), shared and dedicated web hosting, Ethernet and other value-added
services, including customer care available 24 hours a day, seven days a week,
365 days a year. Over time, these functions may be expanded to include
additional privacy and protection solutions such as managed anti-virus,
firewall, secure connections from personal computers to corporate networks
(Virtual Private Network ("VPN")), intrusion detection and filtering services.
The Company's ISP business focuses on a niche market of small to medium-sized
businesses and residential customers primarily in second and third tier markets,
rather than larger businesses and residential customers in large metropolitan
cities. The Company believes that it provides critically important high levels
of customer service, competitive pricing, and a wide variety of plans and
options for business that are key concerns for this market.
Through a vendor agreement with WorldCom Canada Ltd. ("WorldCom"), successor in
interest to UUNet Canada, Inc., the Company provides Internet access services to
approximately 100 communities in Canada, in which approximately 95% of the
Canadian population resides. The Company through a vendor agreement with Dialup
USA Inc. ("Dialup") provides Internet access services nationwide across 50
states in the U.S. As of December 31, 2002, the Company had approximately 14,350
business and residential ISP customers.
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
focusing on shared and dedicated hosting, server co-location, and domain name
registration, anticipating a strong hold over connectivity by the larger ISPs in
a few years' time. The Company believes that many large and medium size
businesses have already established a Web presence on the Internet, but that
many small companies and residential customers in second and third tier markets
have yet to make this move. As a result, the Company intends to focus its
marketing efforts on this segment of the business community as well as second
and third tier markets across the US and Canada by offering services at a
competitive price point, and by providing tools that will enable customers to
build a Web presence with minimal cost or expertise.
While the Internet is growing at an exponential rate, the managed security
service market is currently in its infancy. The Company plans to offer certain
managed security services including anti-virus detection systems, spam
filtering, managed firewalls, developing VPNs and providing intrusion detection
services. The Company will continue to explore additional opportunities to
expand into the managed security service market in order to provide greater
value-added services to its ISP customers. The Company will require third-party
financing in order to expand into the managed security service market. There can
be no guaranty that such financing will be available or, if it is available,
that it will be on terms acceptable to the Company. See "Risk Factors -
Significant Capital Investment" below, and Part II, Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The Company's ISP business began in mid-1999 with the acquisition of six ISP
providers acquired by the Company. The CyPost Network of Service Providers
consists of (i) the following wholly-owned subsidiaries: NetRover Inc.
("NetRover") and NetRover Office Inc. ("NetRover Office"), both of which are
located in Toronto; and Hermes Net Solutions Inc. ("Hermes") and Intouch
Internet Inc. ("Intouch"), both of which are located in Vancouver, and (ii) the
following DBAs: Connect Northwest Internet Services ("CNW") in Mount Vernon and
Seattle, Washington; and Internet Arena ("Internet Arena") in Portland, Oregon.
See "CyPost Network of Service Providers" below. Despite the fact that each of
the Company's ISP businesses operates under its own trade name, most of the
customer care, network operations and administration functions have now been
centralized. See "Consolidation of ISP Operations" below. This has given the
Company's ISP businesses the ability to enjoy the benefits of promoting
themselves as regional providers, while obtaining the economic benefits of
centralized network operations, technical support and administration.
On August 1, 2002 CyPost incorporated Fibra Communications Inc. to provide low
cost bandwidth and wholesale Internet services to ISP's and bulk users of
Internet services to second and third tier Metropolitan Markets. Currently Fibra
services the Portland Metropolitan market, however the business has not achieved
profitability and there can be no assurances that it will do so in the
foreseeable future.
Industry Background
-------------------
Growth of the Internet and Electronic Commerce
The Internet is a collection of computer networks that links millions of public
and private computers to form the largest computer network in the world, the
Worldwide Web (the "Web"). It has become an important global communications
medium, enabling millions of people to obtain and share information and conduct
business electronically, and is a critical tool for information and
communications for many users. The Internet has grown rapidly in recent years,
both in the number of Web users and websites. Many factors are driving the
growth in the number of Web users and websites, including the large and growing
number of personal computers, advances in the performance and speed of personal
computers and modems, easier access to the Internet and the increasing
importance of the Internet for communications, information and commerce. For
many businesses, the Internet has created a new communications and sales channel
enabling large numbers of geographically dispersed organizations and consumers
to be reached quickly and cost-effectively.
Evolution of the Internet Services Market
Today, the Internet services market consists primarily of Internet access.
Access services include dial-up and high-speed Digital Subscribe Lines ("DSL")
access for individuals and small businesses and high-speed dedicated access
primarily for larger organizations. The rapid development and growth of the
Internet have resulted in a highly fragmented industry, consisting of more than
5,000 ISPs in the U.S. and Canada, most of which operate as small, local
businesses. The Internet services industry is expected to undergo substantial
consolidation, especially among mid-sized ISPs, over the next few years.
ISPs vary widely in geographic coverage, customer focus and the nature and
quality of services provided to subscribers. Few ISPs offer nationwide coverage,
have a brand name with nationwide recognition or can grow significantly without
additional investment in infrastructure. ISPs may concentrate on specific types
of customers that differ from the target markets of other ISPs. Services offered
by ISPs can range from simple dial-up access to highly organized, personalized
access coupled with value-added services. The Company believes that consumers
generally focus on speed and reliability of access, ease of use, customer
service and price, as they evaluate ISPs. In addition, the Company believes many
business customers want all their Internet-based requirements, such as Internet
access, Web hosting and electronic commerce applications, met by a single
provider.
Internet operations, including Web hosting, domain name registration and
electronic commerce, are increasingly becoming critical to businesses. However,
many businesses lack the resources and expertise to develop, maintain and
enhance, on a cost-effective basis, successful Internet operations. As a result,
businesses increasingly use outside companies to enhance website reliability and
performance, provide continuous operation of their Internet-based functions and
reduce operating expenses. By outsourcing these services, companies can focus on
their business rather than using their resources to support Internet operations.
There is increasing demand for ISPs to offer electronic commerce or Web hosting
services that businesses can establish quickly and easily. An increasing number
of ISPs supplement their basic Internet access services with a variety of
commercial services that facilitate electronic commerce, such as Web hosting,
co-location, domain name registration and other value-added services. These
services expand an ISP's potential revenue sources from basic monthly access
fees to other fees such as set-up and maintenance charges. In addition, some
larger and more sophisticated ISPs market other Internet-based services, such as
paging, long-distance and cellular telephone services, to both consumers and
business customers.
The Company's ISP Solutions
The Company offers a full range of consumer Internet access services and a broad
selection of business services, both of which are offered nationwide in the
United States and Canada, at competitive prices. The Company believes that its
services provide customers with the following benefits:
Fast and Reliable Quality Service. The Company's systems and network
infrastructure are designed to provide consumer and business customers with fast
and reliable quality service through its use of industry leading hardware and
software solutions, and its state-of-the-art data center, that is monitored on
a 24 hours a day, seven days a week basis by its engineers and third-party
network providers. In addition, the Company offers bilingual customer support in
English and French, for its French-speaking customers, and additional online
customer support at www.helptek.net.
Cost-Effective Access. The Company offers high quality Internet
connectivity and enhanced business services at price points that are generally
lower than those charged by other ISPs with Canadian national coverage. The
Company offers pre-bundled access services packages under monthly or prepaid
plans.
Nationwide U.S. and Canadian Network Coverage. Through a vendor agreement
with Dialup USA Inc. ("Dialup"), the Company provides Internet access services
nationwide across 50 states in the US. Through a vendor agreement with WorldCom,
the Company provides Internet access services to approximately 100 communities
in Canada, in which approximately 95% of the Canadian population resides. See
"Dependence on Key Suppliers" below. The Company has additional
telecommunications agreements with other vendors in Canada and the Pacific
Northwest.
Summary of ISP Services Offered
-------------------------------
Narrowband Access
The Company offers a range of narrowband (low-speed) access including dial-up,
to both residential and business customers. This service is offered in various
competitively priced plans designed to meet the needs of customers. The price
plans for all Internet services vary and are subject to change.
The price plans for the Company's narrowband Internet service vary depending on
the region and are subject to change. The Company offers a variety of plans
which include a fixed number of hours to unlimited plans. Fixed hourly plans
start at $10.00 for 10 hours and unlimited dial-up plans range from $14.00 to
$24.00 per month.
Broadband Access
Broadband access consists of high-speed, high-capacity access services such as
DSL. The Company continues to explore a cost effective broadband solution
similar to its VPOP dialup agreement with WorldCom, thereby eliminating the
majority of capital expenditures required for setting up and maintaining DSL
networks, as well as eliminating the need of any leased lines for the transit of
bandwidth. DSL services were available through CNW, Internet Arena and NetRover
as of December 31, 2002, however, in an effort by the Company to eliminate
low/negative margin services and to move to a non-facilities based operation,
the Company on October 30, 2002 sold its approximately 486 CNW DSL customers to
Isomedia.com for $41,175.
On February 20, 2003 the Company sold approximately 81 NetRover DSL customers to
Warlight Industries dba Internet Lightspeed for $26,300. On March 31, 2003 the
Company sold approximately 183 Internet Arena DSL customers to Internet
Professional and Network Solutions Inc for $25,000.00.
E-Mail
The Company offers a range of basic and enhanced e-mail services to individuals
and businesses. Often, the decision is made to outsource services to a provider
in order to avoid the financial cost, time and expertise requirements of
maintaining e-mail services internally. While the geographic coverage of the
Company's e-mail services customer base is worldwide, the Company targets
prospective customers in Canada and the U.S.
Customer Security
The Company offers password protected access to all of its customers. The
Company also offers some e-mail filtering services to limit computer viruses
from being delivered to mailboxes. In addition, the Company employs monitoring
mechanisms to block e-mail from companies that are known to generate junk
e-mail, commonly known as "spam."
Web Hosting
The Company offers a range of basic and enhanced Web hosting services to
individuals and businesses wishing to place their own website on the Internet.
Often the decision is made to outsource services to a provider in order to avoid
the financial cost, time and expertise requirements of self-hosting the website
and obtaining enhanced services internally. While the geographic coverage of the
market for Web hosting services is worldwide, the Company targets prospective
customers in Canada and the U.S.
Web hosting can be differentiated into shared or dedicated hosting, both of
which the Company offers. Shared hosting involves multiple customers who have
their websites hosted on a shared computer server. Dedicated server hosting is
available to customers that prefer not to host their websites on a shared
server. Dedicated servers provide significantly more server and network
resources than those available from a shared server and give customers the
ability to run complex, high volume or high bandwidth websites and applications.
The Company offers a number of dedicated server options at various prices
depending upon the specific hardware configuration, level of service and data
transfer rates required by the customer. The Company hosts customer websites and
indirectly provides access to the Internet through its Network of Service
Providers.
The Company's principal price plans for Web hosting are currently as follows:
- WebHost Classic $6.95 per month includes 5 megabytes of storage space,
website statistics and personalized e-mail
- WebHost Bronze $19.95 per month includes 10 megabytes of storage space,
1000 megabytes of data transfer, detailed website statistics and
personalized e-mails
- WebHost Silver $29.95 per month includes 20 megabytes of storage space,
1500 megabytes of data transfer, detailed website statistics and
personalized e-mails
- WebHost Gold $34.95 per month includes 40 megabytes of storage space,
2000 megabytes of data transfer, detailed website statistics and
personalized e-mails
Server Co-Location
The Company provides server co-location services, whereby a customer gains
access to the Company's Internet support and maintenance services, high-speed
Internet connections, security systems and appropriate physical environment for
the server (e.g., static free, air-conditioned environments).
The Company's pricing policy for this service varies and is largely dependent on
the customer's individual requirements.
Customer Care
-------------
A critical factor in selecting an ISP is quality and availability of technical
support and customer care. With increasing complexity of today's technology, an
effective ISP must offer customers a clearly defined means of reporting and
resolving unexpected problems.
The Company is committed to customer service and support demonstrated by its
outstanding customer service record, 24 hours a day, seven days a week, 365 days
a year coverage, and local service and support. The Company's Network Operations
Centers and technical support staff offer customers individualized support for
their business-critical Internet solutions and provide network monitoring 24
hours a day, seven days a week, 365 days a year, in both English and French, for
the Company's French-speaking customers, and additional online customer support
at www.helptek.net.
The Company's Customer Care Center is the communications hub of the Company's
network. The Customer Care Center is comprised of monitoring engineers, call
analysts, Internet systems engineers, key senior technical agents and billing
services staff.
The Company has established detailed protocols to effectively assess and route
customer communications, service or trouble requests and event notification or
alerts. In this way, the Company can ensure that its clients are operating at
peak performance at all hours of the day and night.
Network Operations Centers
--------------------------
The Company's main network operation center is located in Etobicoke (suburban
Toronto), Ontario. This operation center monitors network traffic, quality of
services and security issues, as well as the performance of the equipment
located at each of its physical locations, to ensure reliable service. The
operation center is monitored on a 24 hours a day, seven days a week, 365 days a
year basis, and maintains responsibility for communications between internal
departments (customer care) as well as with external providers of services.
High-Quality Data Centers
-------------------------
The Company operates all of its core servers from four Internet Data Centers.
With locations in both Canada and the U.S., these data centers provide the
physical environment necessary to keep servers up and running 24 hours a day,
seven days a week, 365 days a year.
The Toronto data center includes HVAC temperature systems with separate cooling
zones, physical security features, including state of the art smoke detection
and fire suppression systems, motion sensors and 24 hours a day, seven days a
week and 365 days secure access, as well as video camera surveillance. This
facility delivers high levels of reliability through redundant sub-systems such
as on-site power with multiple backup generators.
Global Backbone, High Performance Network Architecture
------------------------------------------------------
The Company invests significant resources in developing a scalable network
infrastructure. The Company's strategy is to outsource the process of building a
scalable national or regional dial-up network. This eliminates the need for the
Company to purchase equipment, negotiate leases throughout Canada and the U.S.
to house the equipment, and provide Internet connectivity to all these
locations. By outsourcing its network and dial-up infrastructure, the Company
also has the ability to offer its services in areas where network costs would be
prohibitive. Because it is not committed to leasing or building its own network,
the Company can take advantage of the market opportunities that develop due to
technological advances or regulatory changes. In addition, in some cases the
Company has negotiated agreements with its telecommunication suppliers that are
priced on a per customer basis, including its principal telecommunications
agreements with WorldCom in Canada and Dialup in the U.S. As a result, the
Company is only billed for the clients that actually use these services. In such
cases, the Company's telecommunication costs only increase if the customer base
increases. Conversely, if the customer base decreases, the Company's
telecommunications costs decrease. Thus, the Company does not need to build its
own network and work to fill any spare capacity that may exist. The Company has
entered into agreements with telecommunications network suppliers for network
capacity. These agreements are for fixed terms from one to five years.
The Company plans to modify its network over time to enhance its performance,
provide access demanded by the market and allow it to serve a larger subscriber
base. The Company's goal is to minimize both network costs and exposure to
technological obsolescence of equipment.
Wherever feasible, the Company makes its network fault tolerant with redundant
equipment. Such actions include standby equipment to handle additional capacity
if a server has to be replaced for reasons such as malfunction of a hard drive
or software. The redundancy allows for operations to continue as efficiently as
possible, while the failure can be isolated to a particular piece of equipment.
In most cases, the availability of redundancy of equipment or excess capacity
allows for the alternative processing of data until the defective equipment or
software can be replaced or repaired. These measures, along with continuous
monitoring, are designed to minimize network downtime and provide early
identification of potential sources of failure. The Company believes that it
will require third-party financing to acquire the additional equipment required
to further enhance the reliability of its network. There can be no guarantee
that such financing will be available or, if available, it will be available on
terms acceptable to the Company. See "Risk Factors - Significant Capital
Investment" below.
Dependence on Key Suppliers
---------------------------
On November 8, 2001, the Company entered into an Amendment agreement with
WorldCom, which provides network infrastructure for some of the Company's ISP
Services operations. The term of the agreement is two years, commencing on May
1, 2001 and terminating on April 30, 2003 with a minimum payment of $90,000 CDN
per month. The Company is currently negotiating the terms and conditions of an
extension with WorldCom.
Marketing
---------
The Company is actively seeking to market broadly its ISP Services and has taken
a number of steps in that direction, including the use of a variety of print and
communications media. The Company intends to market its services to resellers
and wholesalers, as well as enter into strategic partnerships and joint
ventures.
Consolidation of ISP Services Operations
----------------------------------------
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:
- Customer Support. The Company has consolidated all aspects of customer
support (including end user technical issues) for its Oregon, Washington
and Canadian ISP customers into the Chatham, Ontario facility.
- Billing and Collections. Billing and collections for all ISP customers
are presently handled from the Chatham facility. The Company is also
upgrading its billing platform to an industry specific application that
will further streamline provisioning and billing of services.
The Company has completed its consolidation of its Web hosting and dedicated
services to its Toronto data center. Other ISP Services such as e-mail and user
authentication (i.e., customer security) are also in the process of being
consolidated to the main data center in Toronto. The Company is also considering
implementing other consolidated services to achieve greater efficiency and cost
savings.
Network of Service Providers
----------------------------
The Company's Network of Service Providers consists of the following entities:
NetRover/NetRover Office/Intouch. NetRover, based in Toronto, Etobicoke
(suburban Toronto) and Chatham, Ontario, is the largest of the Company's ISP
Services entities, currently serving approximately 12,700 residential and small
business customers throughout Canada. NetRover offers inexpensive packages
focusing on Web hosting and dial-up connections, as well as dedicated hosting
and domain name registration.
NetRover currently offers dial-up service with the network infrastructure
provided through WorldCom and has dial-up availability across Canada. With this
national reach, the Company intends to use the NetRover trade name for
expansion. The Chatham facility is the backbone of the Company's customer
support and billing functions.
Hermes. The ISP operation based in Vancouver, British Columbia, operating as
Hermes Net Solutions ceased business on August 1, 2002 as part of the Companies
ongoing review and streamlining of low margin services and divisions.
Internet Arena. Based in Portland, Oregon, Internet Arena serves approximately
350 primarily residential and small office/home office customers in Oregon.
Internet Arena is primarily focused on dial up connectivity, shared hosting and
server colocation.
CNW. Based in Mt. Vernon and Seattle, Washington, CNW serves approximately 2,100
business and residential customers in Washington. More focused on custom work,
CNW's experience includes ethical hacking and other security monitoring. CNW
also offers dial-up, DSL connectivity and Web hosting for its customers. On
March 7, 2003, the Company sold significantly all the assets of CNW including
its 2,100 business and residential customers. "See Subsequent Events section in
the notes to the financial statements"
Competition
-----------
The market for providing Internet access services is extremely competitive and
highly fragmented. As there are no significant barriers to entry, the Company
expects that competition will continue to intensify. Many of the Company's ISP
competitors in connectivity, wholesale services and value-added services include
large companies that have substantially greater market presence, financial,
technical, marketing and other resources than the Company.
The Company competes directly or indirectly with the following types of
companies:
- established online services, such as Bell Sympatico, Sprint Canada and
Look Communication in Canada
- America Online, the Microsoft Network, Earthlink and Prodigy in the US
- local, regional and national ISPs
- national telecommunications companies, such as AT&T and Verizon
- regional Bell operating companies
- online cable services in Canada and the U.S.
The Company believes that the primary competitive factors determining success as
an ISP are:
- a reputation for reliability and high-quality service
- effective customer support
- access speed
- pricing
- scope of geographic coverage
The Company believes that it competes favorably based on these factors,
particularly due to:
- its emphasis on providing fast and reliable, high quality services and
superior customer service and support
- its policy of pricing services at prices lower than or competitive to
those of other national ISPs
- its policy to focus on second- and third-tier markets where competition
from larger ISPs is reduced
- its goal to establish a niche market in response to the growing concerns
for privacy and protection, rather than establishing itself as a competitor
of the large ISPs, including telecommunication and cable companies
Competition in the future is likely to increase and the Company believes this
will happen as diversified telecommunications and media companies acquire ISPs,
and as ISPs consolidate into larger, more competitive entities.
Moreover, competitors may bundle security services and products with Internet
connectivity services, potentially placing the Company at a significant
competitive disadvantage. In addition, competitors may charge less than the
Company does for Internet services, forcing the Company to reduce and/or
preventing the Company from raising its fees. In such event, future revenue
growth and earnings could suffer. The Company will attempt to compete against
such companies by offering various value-added services, such as managed
security services from partners to its ISP customers. While other larger ISPs
offer some security solutions (many are offering client-end filtering as an
example), the Company is reviewing the entire spectrum of services available
in-house or through partnerships, to ensure that the Company has a thorough
selection of security options to utilize and offer its customers.
Government Regulation
---------------------
Internet access and online services are not subject to direct regulation in
Canada and the U.S. However, changes in the laws and regulations relating to the
telecommunications and media industry could impact the Company's business. For
example, the U.S. Federal Communications Commission could begin to regulate the
Internet and online services industry. The Company is unable to predict the
impact such regulation in either Canada or the U.S. would have on the Company's
business, financial condition and results of operations.
In addition, from time to time, legislative and regulatory proposals from
various international bodies and foreign and domestic governments in the areas
of telecommunications regulation, particularly related to the infrastructures on
which the Internet rests, access charges, encryption standards and related
export controls, content regulation, consumer protection, advertising,
intellectual property, privacy, electronic commerce, and taxation, tariff and
other trade barriers, among others, have been adopted or are under
consideration. The Company is unable to predict which, if any, of the proposals
under consideration may be adopted and, with respect to proposals that have been
or will be adopted, whether they will have a beneficial or an adverse effect on
the Company's business, financial condition and results of operations.
Similarly, the Company is unable to predict the effect on the Company from the
potential future application of various domestic and foreign laws governing
content, export restrictions, privacy, consumer protection, export controls on
encryption technology, tariffs and other trade barriers, intellectual property
and taxes.
Proprietary Rights
------------------
The Company has registered the NetRover trade name in Canada, but has not
registered that name in the U.S. since, until recently, NetRover ISP Services
have been offered exclusively in Canada. The Company has applied for
registration in the U.S. of the CyPost trade name. While the Company believes
trade name identification is important to the Company's ISP Services business,
the Company does not believe that any one trade name is essential to the success
of the Company's operations.
The Company has not registered the Navaho brand name and will not do so. If the
Company pursues Software Products development again in the future, it is likely
to do so under a different brand name.
Employees
---------
At December 31, 2002, the Company had 35 full-time employees, of whom 7 are
management, 1 are marketing, and 27 are administration and 11 were considered to
be either temporary or part-time employees of whom all are administration. None
of the Company's employees was subject to collective bargaining agreements at
year-end.
Risk Factors
------------
In addition to other information in our Annual Report on Form 10-KSB, you should
consider the following important factors in evaluating the Company and its
business. These factors may have a significant impact on our business, financial
condition or results of operations. We are involved in litigation, which, if not
resolved favorably, would significantly increase our losses. The Company is
currently involved in the following two lawsuits: Tami Hellen Allan, and Berry
Litigation. If we do not prevail in these lawsuits, our losses could
significantly increase. See Item 3 "Legal Proceedings".
Early-Stage Company
We were incorporated on September 5, 1997. From 1997 through the first quarter
of 1999, we focused on developing our Software Products business. Thereafter, we
focused on our ISP Services business as we began to acquire our ISP operating
businesses. It is the ISP Services business on which we focus presently. Our
limited operating history makes an evaluation of our business and prospects very
difficult, and our business strategy and mix is still evolving. Our ability to
operate profitably is unproven and uncertain. You must consider our business and
prospects in light of the risks and difficulties we encounter as an early stage
company in the new and rapidly evolving market of the Internet, and the rapidly
changing environment of software development. These risks and difficulties
include, but are not limited to:
- a complex and unproven business system
- lack of sufficient customers, orders, net sales or cash flow
- difficulties in managing rapid growth in personnel and operations
- high capital expenditures associated with our business systems and
technologies particularly the cost of broadband solutions
- lack of widespread acceptance of the Internet as a means of gathering and
exchanging information and purchasing products
We cannot be certain that our business strategy will be successful or that we
will successfully address these risks. Our failure to address any of the risks
described above could have a material adverse effect on our business, financial
condition and results of operations.
Overall Industry Risks
Our business and prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in the new and rapidly evolving market
for dial-up, , DSL connectivity services, server co-location, Web hosting and
e-mail services. To address these risks, we must market our services and build
our trade names effectively, provide scalable, reliable and cost-effective
services, continue to grow our infrastructure to accommodate additional
customers and increased use of our network bandwidth, expand our channels of
distribution, continue to respond to competitive developments and retain and
motivate qualified personnel.
Dependence Upon the Internet and Internet Infrastructure Development
Our success depends largely upon continued growth in the use of the Internet and
increased demand for our ISP Services. Critical issues concerning the commercial
use of the Internet, including security, reliability, cost, ease of access,
quality of service and necessary increases in bandwidth availability, remain
unresolved and are likely to affect the development of the market for our
services. The adoption of the Internet for information retrieval and exchange,
commerce and communications, particularly by those enterprises that have
historically relied upon alternative means of information gathering, commerce
and communications, generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand and market acceptance of
the Internet are subject to a high level of uncertainty and depend upon a number
of factors, including growth in consumer access to and acceptance of new
interactive technologies, the development of technologies that facilitate
interactive communication between organizations and targeted audiences and
increases in the speed of user access. If the Internet, as a commercial or
business medium, fails to develop further or develops more slowly than expected,
our business, financial condition and results of operations could be materially
adversely affected.
Intense Competition From More Traditional ISPs
The Internet and e-commerce market is extremely competitive. Our competition is
comprised of local, regional, national and international companies. Many of our
existing and potential competitors are larger and have substantially greater
resources than we do. We expect this competition in the Internet and e-commerce
markets to intensify as our competitors offer more competitive services. The
number and nature of competitors and the amount of competition we will
experience will vary by market area. The principal competitive factors that
affect our business are breadth of product selection, quality, service, price
and customer loyalty. If we fail to effectively compete in any one of these
areas, we may lose existing and potential customers, which would have a material
adverse effect on our business, financial condition and results of operations.
Complex Business System and Operational Difficulties
Our business systems and technologies are based on the complex integration of
numerous software and hardware subsystems that utilize advanced algorithms to
manage the entire process from the receipt and processing of orders and services
at our customer service and administration centers. We have, from time to time,
experienced operational "bugs" in our systems and technologies, which have
resulted in order and service errors and interruptions. Operational difficulties
may arise from one or more factors including electro-mechanical equipment
failures, computer server or system failures, network outages, software
performance problems or power failures. We expect operational difficulties to
continue to occur from time to time, and it is possible that our operations
could be adversely affected. Computer viruses, electronic break-ins or other
similar disruptive problems could also adversely affect our website. In
addition, fires, floods, earthquakes, power losses, telecommunications failures,
break-ins and similar events could damage our systems or cause them to fail
completely. For instance, a fire on January 31, 2000, at our Etobicoke (suburban
Toronto), Ontario facility caused service interruption for 36 hours. The
efficient operation of our business systems is critical to consumer acceptance
of our services. If we are unable to meet customer demand or service
expectations as a result of operational issues, we may be unable to develop
sustainable, customer relationships, which could have a material adverse effect
on our business, financial condition and results of operations.
Dependence on Telecommunication Providers
Our success also depends upon the capacity, scalability, reliability and
security of our network infrastructure, including the telecommunications
capacity leased from WorldCom 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.
Significant Capital Investment
We require substantial amounts of working capital to further build, equip and
market certain aspects of our ISP Services in the markets in which we seek to
operate. Our competitors have developed or may develop equipment and systems
that are more highly automated or less capital-intensive than ours. This could
enable them to commence operations in a particular geographic market before we
are able to do so, which could harm our competitive position. In addition,
because of the substantial capital costs associated with the development of our
ISP business, we may be unable to achieve profitability or reduce our operating
losses if we do not process sufficient order volumes or significantly expand our
customer base.
As the total number of our ISP customers increases, and their usage of bandwidth
increases, we will need to make additional investments in our infrastructure to
maintain adequate service, the availability of which may be limited or the cost
of which may be significant. Additional network capacity may not be available
from third-party suppliers as we need it, and, as a result, our ISP network may
not be able to achieve or maintain a sufficiently high capacity of service,
especially if the usage of our subscribers increases. Our failure to achieve or
maintain high-capacity data transmission could significantly reduce consumer
demand for our services and have a material adverse effect on our business,
results of operations and financial condition. To accommodate a higher degree of
scalability from the present infrastructure, we may have to increase spending on
capital assets, such as upgrading and partially replacing existing capital
assets and increasing bandwidth.
At present, we lack the capital to pursue our Software Products business. Any
continued development of Software Products would require significant amounts of
capital from third parties. We do not have any agreements for that funding and
we cannot say if that funding will be available in the future.
The rate at which our capital is utilized is affected by the pace of our
expansion. 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 currently anticipate that our available funds will
be sufficient to meet our anticipated needs for working capital and capital
expenditures with respect to our existing ISP Services business for at least the
next 12 months. We must either raise additional funds to support aspects of our
business for 2003 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 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.
The Loss of the Services of One or More of Our Key Personnel, or our Failure to
Attract, Integrate New Hires and Retain Other Highly Qualified Personnel in the
Future Could Harm our Business
The loss of the services of one or more of our key personnel could harm our
business. We depend on the continued services and performance of our senior
management and other key personnel. Our future success also depends upon the
continued service of our executive officers and other key personnel. The
competition for talented employees is intense and our ability to attract and
retain key employees is a function of a number of factors, some of which are
beyond our control, such as the value of other opportunities perceived to be
available elsewhere. Mr. Javan Khazali is the only executive officers or key
employee that is bound by an employment agreement. Our relationships with all
the other officers and key employees are at will.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has entered into a net lease with Mansa Holdings Ltd. in respect to
its office premises located at 900-1281 West Georgia St., Vancouver, British
Columbia for approximately 6,500 square feet of office space. The term of the
lease is for 60 months and ends on June 1, 2005. The current monthly net rent
under this lease is $6,019 CDN$. The property taxes and operating expenses are
currently estimated at 6,437 CDN$ per square feet per month. The lease contains
escalation clauses throughout the term. For the period between June 1, 2003 and
May 31, 2005 the monthly net rent under this lease will be $6,566 CDN$ per
month.
Customer Support and Billing Center
-----------------------------------
On November 2nd, 2000, NetRover Inc. entered into an assignment of a net lease
between H.V.M. Holdings Inc. (Landlord) and Garden Green Realty Inc. (Previous
Tenant) in respect to NetRover's office premises located at 405 Riverview Drive,
Chatham, Ontario for approximately 2,100 square feet of office space. The term
of the lease starts December 1st , 2000 and ends on May 31st , 2003. The
current monthly net rent under this lease is $ 1,420 CDN$. The property taxes
and operating expenses are currently estimated at $1,800. CDN$ per month. The
lease contains escalation clauses throughout the term. For the period between
May 31st 2001 and May 31, 2002 the monthly net rent under this lease will be
$1,420 CDN$ per month. For the period between May 31st 2002 and May 31, 2003 the
monthly net rent under this lease will be $1,509 CDN$ per month
Administration / Accounting
---------------------------
On June 13th, 2000, NetRover Inc. amended the net lease with The Imperial Life
Assurance Company of Canada in respect to Net rover's office premises located at
93 Skyway Ave., Suite 106, (previously unit 105) Etobicoke, Ontario for
approximately 1,700 square feet of office space. The term of the lease is for 3
years starting July 1,2000 and endings on July 31, 2003. The monthly net rent
throughout the term of the lease is $1,435 CDN$. The property taxes and
operation expenses are currently estimated at $1,413 CDN$ per month.
Network Operations Center
---------------------------
On January 15th, 2002, the Company entered into a Lease Amendment Agreement with
890 West Pender Ltd. in respect to this location. The term of the lease is for
one year commencing February 1st, 2002 and ending on January 31st, 2003. The
monthly gross rent throughout the term of the lease is $1,087 CDN$ per month.
This lease was not renewed.
Network Operations Center
---------------------------
The Company has entered into an assignment of a lease with American Property
Management in respect to two offices located at 1016 & 1008 SW Taylor Street,
Portland, Oregon comprising approximately 1,902 and 457 square feet of space,
respectively. The term of the lease ended January 31, 2002. The monthly net rent
is $2,801 per month. The additional expenses are currently estimated at $284
per month. (Internet access in the amount of $232 per month and water usage in
the amount of $52 per month.) The Company did not renew the office space located
at 1008 SW Taylor Street, Portland, Oregon, which comprised of 457 square feet.
Subsequently, on February 6th, 2002, the Company entered into a Lease
Amendment Agreement with American Property Management in respect to its office
located at 1016 SW Taylor Street, Portland, Oregon. for approximately 1902
square feet of office space. The term of the lease is for one year commencing
February 1st, 2002 and ending on January 31st, 2003. The monthly gross rent
throughout the term of the lease is $2,377 per month. The additional expenses
are currently estimated at $284 per month. (Internet access in the amount of
$232 per month and water usage in the amount of $52 per month). The Company did
not renew the office space located at 1016 SW Taylor Street, Portland, Oregon,
which comprised of 1,902 square feet.
The Company entered into a lease with Alco Properties in respect to its office
located at 414 SW 10th Avenue, Portland, Oregon comprising of approximately 624
square feet of space. The term of the lease ends Feb 28, 2003. The monthly net
rent is $2,200 per month. The additional expenses are currently estimated at
$200 per month.
Sales and Regional customer support
---------------------------------------
The Company entered into an Amendment and Novation Agreement dated December 27,
1999 with Timothy B. White Properties and Connect Northwest LLC in respect to an
office located at 117 North First Street, Mount Vernon, Washington. The lease
ends August 31, 2003. The current net rent under the lease is $ 3200 per month.
In addition the Company is responsible for 87% of the electrical bill which are
currently estimated at $231 per month. The lease contains escalation clauses
throughout the term. For the period between September 1, 2000 and August 31,
2001 the monthly net rent was $3,000. For the period between September 1, 2001
and August 31, 2002 the monthly net rent under this lease will be $3,200 per
month. For the period between September 1, 2002 and August 31st, 2003 the
monthly net rent under this lease will be $3,400 per month. The company has the
option to renew the lease for 1 additional term of 5 years.
Network Operations Center
---------------------------
On August 8th, 2001, the Company entered into a Lease Amendment Agreement with
Sixth and Virginia Properties, in respect to this location. The term of the
lease is for three years commencing September 1st, 2001 and ending on August 31,
2004. The lease contains escalation clauses throughout the term. For the period
between September 1, 2001 and August 31 , 2003 the monthly net rent under this
lease will be $1,225 per month. For the period between, and September 1, 2003
to August 31, 2004 the monthly net rent under this lease will be $1,287 per
month.
ITEM 3. LEGAL PROCEEDINGS
Berry
-----
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 denied the allegations.
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"). Berry received 600,000 contingent shares upon
condition that he would remain in the Company's employ as Chief Executive
Officer for at least two years, which he did not. Following Berry's resignation,
the Company attempted to cancel the 600,000 Contingent Shares. 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. 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 and 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 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.
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). Management of
the Company intends to vigorously defend the case.
All of the above actions are in the pretrial discovery stage. Accordingly the
ultimate outcome cannot be determined. A loss by the Company of the claim for
monetary damages as a result of any of the above litigation 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 any of
these action and believes additionally that it would be able to negotiate
reasonable payment terms should it lose any of these suit. Due to the inherent
uncertainties of litigation, the Company cannot predict the outcome of any
litigation to which it is a party, including the above litigation.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Due to an amendment to the Company's article of incorporation on January 29,
2002, the authorized capital stock of the Company currently consists of
205,000,000 shares, of which 200,000,000 shares are designated as Common Stock
and 5,000,000 shares are designated as Preferred Stock, par value $.001 per
share.
The Company's Common Stock was first listed on the Over the Counter Bulletin
Board ("OTCBB") on September 24, 1998, under the symbol "POST." Prior to that
time, there was no market for the Company's Common Stock.
On March 27, 2001, the Company's Common Stock re-commenced trading on the OTCBB,
where it currently trades under the symbol "POST".
The table below sets forth, for the periods indicated, the high and low bid
prices of the Common Stock, for the period January 1, 2001 through December 31,
2002, as reported by Yahoo! Historical Prices.
2002 2001
-------------------- --------------------
High Bid Low Bid High Bid Low Bid
1st Quarter $0.25 $0.07 $04.52 $0.06
2nd Quarter $0.13 $0.04 $0.53 $0.07
3rd Quarter $0.08 $0.03 $0.11 $0.05
4th Quarter $0.06 $0.03 $0.35 $0.03
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
There were approximately 95 record holders of the Company's Common Stock as of
March 31, 2003.
The Company has never declared or paid any cash dividends and does not intend to
pay cash dividends in the foreseeable future on the shares of Common Stock. Cash
dividends, if any, that may be paid in the future to holders of Common Stock
will be payable when, as and if declared by the Board of Directors of the
Company, based upon the Board's assessment of the financial condition of the
Company, its earnings, need for funds, capital requirements, and other factors,
including any applicable laws. The Company is not a party to any agreement
restricting the payment of dividends.
Recent Sales of Unregistered Stock
----------------------------------
None that have not been previously disclosed on Forms 10QSB during 2002.
Year 2002 Stock Reward Plan
-------------------------------
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.
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, Treasurer and Director 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. As of December 31, 2002 all vested and unvested options
for Mr. Adams and Ms. Allan have been cancelled.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT
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'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 functional currency of the Company is U.S. dollars. Dollar values are
expressed in U.S. Dollars, unless indicated otherwise. On December 31, 2002, one
Canadian Dollar ("CDN") was worth $0.63440 U.S. Dollars.
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. The Company has consolidated all aspects of customer support
(including end user technical issues) for its Oregon, Washington and Canadian
ISP customers into the Chatham, Ontario facility.
o Billing and Collections. Billing and collections for all ISP customers
are presently handled from the Chatham facility. The Company is also upgrading
its billing platform to an industry specific application that will further
streamline provisioning and billing of services.
o Network Operations. The Company's main network operation center is
located in Etobicoke (suburban Toronto), Ontario. This operation center monitors
network traffic, quality of services and security issues, as well as the
performance of the equipment located at each of its physical locations, to
ensure reliable service. The operation center is monitored on a 24 hours a day,
seven days a week, 365 days a year basis, and maintains responsibility for
communications between internal departments (customer care) as well as with
external providers of services.
The Company has completed its consolidation of its Web hosting and dedicated
services to its Toronto data center. Other ISP Services such as e-mail and user
authentication (i.e., customer security) are also in the process of being
consolidated to the main data center in Toronto.
The Company is also considering implementing other consolidated services to
achieve greater efficiency and cost savings.
During Q4 of 2001, the Company signed an agreement with Dialup USA Inc, a
leading ISP wholesale aggregator, to provide nationwide 56K dialup access to
potentially over 5600 points of presence (POP's) in the United States.
Also during Q4 of 2001, the Company launched NetRoverUSA Online Inc, a
national ISP operating in the United States offering consumers a reliable,
affordable alternative to the "Bigger ISP's".
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001
All of the Company's revenue was earned from ISP Services during the fiscal
year ended December 31, 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 revenue of $2,953,778 during fiscal 2002, compared to
$3,706,386 during fiscal 2001, a 20% decrease. This decrease is primarily due to
a decrease in marketing related activities, and the softening of technology
related sector spending.
Direct costs, which consist primarily of telecommunications charges
associated with providing Internet connection services to customers, were
$1,458,758 during fiscal 2002, compared to $1,858,619 during fiscal 2001, a 22%
decrease. 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 remained relatively the same
at $2,686,348 during fiscal 2002, compared to $2,686,348 during fiscal 2001.
This 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
associated with the softening of technology related sector spending.
Amortization and depreciation was $1,138,550 during fiscal 2002, compared
to $2,151,090 during fiscal 2001, a decrease of 47%. 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 year ended December 31, 2002. The
impact of the adoption as it relates to existing goodwill reduced amortization
expense by $453,895 for the year ended December 31, 2002.
As a result of the above, the Company's loss from operations decreased by
21% to $2,329,878 during fiscal year 2002, compared to $2,959,263 during fiscal
year 2001.
The Company incurred net interest expense of $3,706 during fiscal 2002,
compared to $117,935 during fiscal 2001, a decrease of 97%. The amount expensed
in fiscal 2001 consists of interest expense attributable to interest for Blue
Heron and Pacific Gate Capital Corporation ("Pacific Gate") loans.
During 2001, the Company recognized income of $2,498,449 with respect to
the settlement of certain litigation related to short swing profits with one of
our shareholders.
As a result of the foregoing, the Company's net loss increased by 310% to
$2,340,293, or $.09 per share, for the fiscal year ended December 31, 2002,
compared to a net loss of $570,352, or $.03 per share, for the fiscal year ended
December 31, 2001. The reduced loss in fiscal 2001 was primarily a result of the
increase in other revenue due to a recovery of short swing profits from a
principal shareholder.
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 year
ended December 31, 2002 of $2,340,293, compared to a net loss for the year ended
December 31, 2001 of $570,352. For the year ended December 31, 2002, the Company
had a working capital deficit of $2,182,344, 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 to continue operating.
Since our inception, the Company has experienced negative cash flow from
operations. In the past, the Company has funded its operating losses and capital
expenditures borrowings of debt and convertible debt from private sources.
Management continues to evaluate alternative means of financing to meet the
Company's needs on terms that are attractive to it. The Company must either
raise additional funds to support aspects the business for 2003 or it will be
forced to curtail or sell certain aspects of its business operations,
particularly in terms of the growth of and further enhancements to its ISP
Services business, or recommencing research and development of Software
Products. As a result of a number of fixed lease and other operating commitments
the Company needs between $500,000 and $4,500,000 to support current operations,
grow and further enhance its ISP services business, and between $250,000 and
$500,000 to recommence the research and development of the Software Products. If
financing were made available management would first apply the proceeds to
support current operations and to the further enhancement of the Company's ISP
services business. Management cannot be certain that additional financing will
be available on favorable terms when required, or at all. If the Company is
unable to obtain sufficient additional capital when needed, it could be forced
to alter its business strategy, delay or abandon some of its expansion plans, or
sell assets. Any of these events could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
if the Company raises 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 its Common Stock and stockholders
may experience dilution.
The Company's cash position on December 31, 2002 decreased by 82% to
$13,061, compared to $73,124 on December 31, 2002. This decrease is primarily
due to a decrease in revenues during the year ended December 31, 2002.
The Company's net cash used in operating activities totaled $49,799 during
the fiscal year ended December 31, 2002, compared to $91,885 during the fiscal
year ended December 31, 2001, a decrease of 46%. The decrease in cash used from
operations is due to an increase in accounts payable and the Company's mandate
of reducing its direct costs in order to bring the Company's expenses in line
with its revenues.
The Company's net cash used in investing activities totaled $58,019 during
the fiscal year ended December 31, 2002, compared to $61,388 during the fiscal
year ended December 31, 2001, a decrease of 5%. 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 year ended December 31, 2002.
During 2002, the Company received $79,300 loan proceeds from Ms. Beverly
Montalban, of which principal and interest in the amount $53,230 was outstanding
on December 31, 2002. The note accrues interest at the rate of 40% per annum.
The Company did not have any proceeds from financing activities during the year
ended December 31, 2001.
In an effort by the Company to eliminate low/negative margin services and to
move to a non-facilities based operation, the Company on October 30, 2002 sold
its approximately 486 CNW DSL customers to Isomedia.com for $41,175.
On February 20, 2003 the Company sold approximately 81 NetRover DSL customers to
Warlight Industries dba Internet Lightspeed for $26,300 ($CDN 41,461). On March
31, 2003 the Company sold approximately 183 Internet Arena DSL customers to
Internet Professional and Network Solutions Inc for $25,000.00.
On March 7, 2003, the Company sold certain assets of its dBA Connect Northwest
Operations, consisting of customer list, trade name, computer hardware and
software for $170,184 cash and the assumption of the prepaid liability by the
buyer in the amount of $32,214. The net book value of such assets was
approximately $163,000 at December 31, 2002.
The Company is involved in various litigation for which 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 these actions and believes
additionally that it would be able to negotiate reasonable payment terms should
it lose these suits. 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
The Company's success depends upon the capacity, scalability, reliability
and security of its network infrastructure, including the telecommunications
capacity leased from WorldCom Canada Ltd. and other telecommunications network
suppliers. The Company depends on such companies to maintain the operational
integrity of its telecommunications networks. Therefore, its 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 could
have a material adverse effect on the Company's business, financial condition
and results of operations. Management cannot be certain that telecommunication
capacity will be available on favorable terms when required, or at all. If the
Company is unable to obtain sufficient capacity when needed, it could be forced
to alter its business strategy, delay or abandon some of its business aspects or
sell assets. Any of these events could have a material adverse effect on the
Company's 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
The Company's 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. Management believes the following critical accounting policies affect
the Company's more significant estimates and assumptions used in the preparation
of its financial statements. The Company's significant estimates and assumptions
are reviewed and any required adjustments are recorded on a quarterly basis.
Carrying value of a certain intangible asset, customer list. As of December
31, 2002, the net book value of the customer list was $8,140. Management has
estimated the useful life of this intangible asset to be three years, however
management has 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 December 31, 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 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are submitted as a separate
section of this Annual Report on Form 10-KSB commencing on Page F-1 immediately
following Part IV of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Refer to form 8-K filed on October 30, 2002 with the Securities and Exchange
Commission, notifying a change in the registrants certifying accountant.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information concerning the directors
and executive officers of the Company as of March 31 2003:
Name Age All Positions with the Company
Javan Khazali 39 CEO, Director and Treasurer
Pezhman Sharifi 29 Chief Operating Officer
Javan Khazali became CEO on April 8, 2002. Mr. Khazali joined the Company in
July of 2001 as Vice President of Administration and was elected Director and
Treasurer February 8, 2002. Mr. Khazali is responsible for the day to day
operations of CyPost, including the development and continuing management of our
business and training programs. Mr. Khazali has held various senior management
positions including from 1993 to 2000 Mr. Khazali was Managing Partner of two
local restaurants where he was responsible for supervision of 45 employess.
Prior to this, from 1991 to 1993 Director of Operations for nine restaurants
where he was responsible for supervision of 300 plus employees, and from 1985 to
1992 Operation Manager for 10 high-end chain restaurants in the U.S. and Canada.
Mr. Sharifi joined CyPost in October of 1998 and was appointed COO on August 1,
2002. Mr. Sharifi is responsible for the infrastructure integration and
consolidation of CyPost and its ISP divisions. He also handles contract
negotiations with Telecommunication providers, divestitures, acquisitions and
SEC compliance. Mr. Sharifi also seeks out new technologies and strategic
partnerships. Mr. Sharifi, from 1997 until he joined CyPost in 1998, operated
his own Internet consulting practice specializing in Internet marketing, web
design and hosting for high growth companies. Mr. Sharifi holds a bachelor of
arts degree in psychology from the University of British Columbia, Canada.
The present term of each director expires at the next Annual Meeting of
Stockholders of the Company. Executive officers are elected at the Annual
Meeting of the Board of Directors held immediately following the Annual Meeting
of Stockholders and serve at the pleasure of the Board of Directors.
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who beneficially own
more than 10% of a registered class of the Company's equity securities, to file
reports of beneficial ownership and changes in beneficial ownership of the
Company's securities with the SEC on Forms 3 (Initial Statement of Beneficial
Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5
(Annual Statement of Beneficial Ownership of Securities). Directors, executive
officers and beneficial owners of more than 10% of the Company's Common Stock
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Except as otherwise set forth herein, based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports were required, the Company believes that
for the period from January 1, 2002 through December 31, 2002, all directors,
executive officers and greater than 10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or awarded by the Company
during each of the fiscal years ended December 31, 2002 and December 31, 2001 to
all the persons that served as the Company's Chief Executive Officer. No
executive officers of the Company received compensation in excess of $100,000
during the fiscal year ended December 31, 2002:
Name Position Year Cash Stock Based Other
Compensation Compensation
------------------- ------------- ---- -------------- -------------- -----
Robert Sendoh (1) Former 2001 $ 3,770
Chairman of
the Board And
Former Chief
Executive
Officer
------------------- ------------- ---- -------------- -------------- -----
Robert Adams (2) Former 2001 $ 36,072
President and
Former Chief
Operating
Officer
------------------- ------------- ---- -------------- -------------- -----
Angela Belcourt (3) Former 2001 $ 22,246
President and
Former
Director
------------------- ------------- ---- -------------- -------------- -----
Sandra Warren, (4) Former 2002 $ 12,815
President and
Former 2001 $ 41,706
Director
------------------- ------------- ---- -------------- -------------- -----
Javan Khazali (5) Director and 2002 $ 36,230 (7) $ 30,000 (6)
CEO
------------------- ------------- ---- -------------- -------------- -----
[1] Mr. Sendoh was Chairman of the Company from September 5, 1997 until November
5, 2001 and continued as a Director until February 8, 2002. Mr. Sendoh was
Chief Executive Officer of the Company from January 17, 2000 through August 31,
2000.
(2) Mr. Adams served as President and Chief Operating Officer of the Company
from July 25, 2000 to June 8, 2001. Mr. Adams resigned from all positions with
the Company on September 28, 2001.
(3) Ms. Belcourt was appointed President June 8, 2001. Ms. Belcourt resigned as
a Director from the Company for health reasons on October 12, 2001, and
subsequently resigned as President on October 30, 2001.
(4) Ms. Warren became a Director on October 12, 2001 and was appointed as
President on October 30, 2001. Ms. Warren was appointed as Secretary on February
8, 2002. Ms. Warren resigned from all positions with the Company on April 23,
2002.
(5) Mr. Khazali became a Director on February 8, 2002 and was appointed as CEO
on April 8, 2002.
(6) Pursuant to the 2002 Stock Reward Plan, on September 19, 2002, Mr. Khazali
received 1,000,000 shares of the Company's common stock valued at $0.03 per
share.
(7) As of December 31, 2002, pursuant to an Employment agreement, the Company
owes additionally $17,704 to Mr. Khazali, which is included in accounts payable
and accrued liabilities. Mr. Khazali has agreed to defer payment on the balance
owing to him until such time as the Company's cash flow permits.
Employment Agreements
The Company has an employment agreement with Javan Khazali. The employment
agreement provides for Mr. Khazali employment by the Company as its Chief
Executive Office at an annual salary of $120,000 and upon the completion of 180
days of service a bonus of $25,000. The employment agreement has an initial term
of three years commencing on October 1, 2002 and ending on September 30, 2005.
The employment agreement will automatically renew for successive terms, unless
notice of non-renewal is given by either the Company or Mr. Khazali at least 90
days prior to the expiration of the then applicable term of the contact. Bonuses
may be awarded to Mr. Khazali based on his annual review, which takes place each
January. In addition, Mr. Khazali is eligible for increases in his base salary,
in the discretion of the Company. The Company currently does not have any key
person insurance.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to all persons,
or groups of persons, known by the Company to own beneficially more than five
percent of the Common Stock of the Company, and as to the beneficial ownership
thereof of the directors and executive officers of the Company, individually and
as a group, all as at March 31, 2002:
Name and Address Number of Shares Percentage
-------------------------------- ---------------- -----------
J. Thomas W. Johnston (1) 956,000 3.15%
900-1281 West Georgia Street
Vancouver, British Columbia
V6E 3J7
Canada
-------------------------------- ---------------- -----------
Javan Khazali (2) 1,302,000 4.28%
-------------------------------- ---------------- -----------
All officers and directors as a 2,934,350 9.67%
group [3 persons]
-------------------------------- ---------------- -----------
(1) Includes 25,000 shares owned by Mr. Johnston's wife and an aggregate of
75,000 shares owned in trust for Mr. Johnston's three daughters.
(2) Includes 262,000 shares owned by Mr. Khazali's wife
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 20, 2001 the Company entered into a Settlement Agreement (the
"Settlement Agreement") with Mr. Montalban with regard to a lawsuit it had
instituted against him on June 15, 2001 seeking recovery of short swing profits
realized by Mr. Montalban and other persons whose purchases and sales of Company
common stock were attributed to Mr. Montalban in violation of the Securities
Exchange Act of 1934, as amended. Pursuant to the Settlement Agreement, Mr.
Montalban paid the Company an aggregate of approximately $2,498,449 (the
"Recovery Amount"), which amount represented recovery in full of Mr. Montalban's
short swing profits. He did so by delivering to the Company for cancellation (1)
Blue Heron Shareholder Notes in the aggregate principal amount of $2,319,788,
which notes had been previously purchased by or assigned to Mr. Montalban; (2)
the accrued interest of $42,384 due on the principal portion of the Blue Heron
Shareholder Notes at the time of cancellation; (3) 8% demand notes of the
Company dated August 25, 2000 and September 11, 2000, respectively, in the
aggregate principal amount of $25,000 issued to Pacific Gate Capital
Corporation, a corporation owned by Mr. Montalban; and (4) the accrued interest
of $2,066 due on the principal portion of the Pacific Gate Capital Notes at the
time of cancellation. The balance of the Recovery Amount was paid by Mr.
Montalban's issuance to the Company of a five (5) year, 5% promissory note,
dated September 20, 2001, in the principal amount of $109,211. In consideration
of the execution of the Settlement Agreement and payment of the Recovery Amount,
on October 9, 2001 the Company voluntarily dismissed its action.
On October 1, 2001 the Company entered into a consulting agreement with Pacific
Gate Capital Corporation a corporation affiliated to Mr. Montalban, for a one
year period in the amount of $27,750 minimum per month for providing certain
services to the Company. This agreement was subsequently cancelled. For the year
ended December 31, 2002 and 2001 the consulting payments reduced the principal
amount of $109,211 owed by Mr. Montalban by $17,750 and $53,250, respectively.
As of December 31, 2002, Mr. Montalban owes the Company a total of $41,413.
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 December 31, 2002, pursuant to this agreement, the Company owes
approximately $112,300 to Roundtable Strategies Ltd., which is included in
accounts payable and accrued liabilities. On August 12, 2002, 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. Mr. Johnston resigned as
Director and Chairman on March 31, 2003.
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.
The Company has an employment agreement with Javan Khazali. The employment
agreement provides for Mr. Khazali's employment by the Company as its Chief
Executive Office at an annual salary of $120,000 and a bonus of $25,000 upon the
completion of 180 days of service. The employment agreement has an initial term
of three years commencing on October 1, 2002 and will automatically renew for
successive terms, unless notice of non-renewal is given by either the Company or
Mr. Khazali at least 90 days prior to the expiration of the then applicable term
of the contract. Bonuses may be awarded to Mr. Khazali based on his annual
review, which takes place each January. In addition, Mr. Khazali is eligible for
increases in his base salary, in the discretion of the Company.
On October 25, 2002, Ms. Beverly Montalban loaned the Company $79,300, with
interest and principal payable over the six months ending April 2003. The note
accrues interest at the rate of 40% per annum. As of December 31, 2002 the
balance outstanding was $53,230.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report
Exhibits:
The following exhibits listed are filed as part of this Report:
FINANCIAL STATEMENTS INCLUDED IN ITEM 7:
Independent Auditors' Reports
Kingery, Crouse & Hohl, P.A. F-2
Good Swarz Brown & Berns LLP. F-3
Consolidated Balance Sheet as of December 31, 2002 F-4
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for
the years ended December 31, 2002 and 2001 F-7
Notes to the Consolidated Financial Statements F-8
10.10 Employment Agreement dated October 1, 2002 between Javan Khazali and
CyPost Corporation
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Khazali
ITEM 14. 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 our
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 the
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.
Signatures
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Title Name Date Signature
--------------------------- ------------- -------------- -----------------
Principal Executive Officer Javan Khazali April 15, 2003 /s/ Javan Khazali
Principal Accounting Javan Khazali April 15, 2003 /s/ Javan Khazali
Officer
Principal Financial Officer Javan Khazali April 15, 2003 /s/ Javan Khazali
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE NAME TITLE DATE
--------- ---- ----- ----
/s/ Javan Khazali Javan Khazali Director April 15, 2003
CERTIFICATIONS
I, Javan Khazali, certify that:
1. I have reviewed this annual report on Form 10KSB of CyPost Corporation;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the issuer as of, and for, the periods presented in this annual report.
4. I and the issuer's other certifying officers are 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, including its consolidated subsidiaries, is
made known to us by others within those entities, 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 March 31 2003 ("Evaluation Date"); and
(iii) Presented in the report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. I and the issuer's other certifying officers have disclosed, based on our
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; 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; and
(6) I and the issuer's other certifying officers 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: April 15, 2003
/s/ Javan Khazali
JAVAN KHAZALI
Chief Financial Officer and CEO
CYPOST CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports
Kingery, Crouse & Hohl, P.A. F-2
Good Swarz Brown & Berns LLP. F-3
Consolidated Balance Sheet as of December 31, 2002 F-4
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for
the years ended December 31, 2002 and 2001 F-7
Notes to the Consolidated Financial Statements F-8
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors of
CyPost Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of CyPost
Corporation and Subsidiaries (the "Company") as of December 31, 2002, and the
related consolidated statements of operations, stockholders' deficit 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.
We conducted our audit in accordance with auditing standards 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 the Company as of
December 31, 2002, 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 recurring losses from
operations, various contingent liabilities, a stockholders' deficit and
requirements for a significant amount of capital financing to proceed with its
business plan. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Kingery Crouse & Hohl P.A.
Tampa, Florida
April 15, 2003
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CyPost Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet (not presented
herein) and the related consolidated statement of operations, stockholders'
equity, and cash flows of CyPost Corporation and Subsidiaries (the "Company")
for the year ended December 31, 2001. 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.
We conducted our audit in accordance with auditing standards 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 as of December 31, 2001
(not presented herein), the results of operations and cash flows of the Company
for the year ended December 31, 2001 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 or classification of liabilities that may result should the Company
be unable to continue as a going concern.
Los Angeles, California
April 1, 2002
GOOD SWARTZ BROWN & BERNS LLP.
Los Angeles, California
April 1, 2002
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
=======================================================================
ASSETS
CURRENT ASSETS:
CASH $ 13,061
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $50,161 80,254
PREPAID EXPENSES 57,844
NOTE RECEIVABLE & ACCRUED INTEREST - RELATED PARTY 41,413
-------------
TOTAL CURRENT ASSETS 192,572
-------------
PROPERTY AND EQUIPMENT NET OF ACCUMULATED DEPRECIATION 313,458
-------------
INTANGIBLES:
CUSTOMER LISTS 3,711,270
GOODWILL 1,832,543
LESS ACCUMULATED AMORTIZATION (5,081,778)
-------------
INTANGIBLES, NET 462,035
-------------
DEPOSITS 102,829
OTHER ASSETS 8,560
-------------
$ 1,079,454
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
ACCOUNTS PAYABLE & ACCRUED LIABILITIES 1,901,610
NOTE PAYABLE - RELATED PARTY 53,230
DUE TO BANK 31,668
DEFERRED REVENUE 388,408
-------------
TOTAL CURRENT LIABILITIES 2,374,916
-------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' DEFICIT:
SHARE CAPITAL
AUTHORIZED:
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
200,000,000 COMMON STOCK WITH A PAR VALUE OF $.001
ISSUED AND OUTSTANDING:
PREFERRED STOCK - NONE -
COMMON STOCK - 30,391,993 30,393
ADDITIONAL PAID-IN CAPITAL 14,778,733
DEFICIT (16,107,651)
CURRENCY TRANSLATION ADJUSTMENT 3,063
-------------
TOTAL STOCKHOLDERS' DEFICIT (1,295,462)
-------------
$ 1,079,454
-------------
=======================================================================
See accompanying notes to the consolidated financial statements.
CYPOST CORPORATION AND SUBSIDIRIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
===================================================================
2002 2001
------------ ------------
REVENUES $ 2,953,778 $ 3,706,386
DIRECT COSTS 1,458,758 1,858,619
------------ ------------
EXCESS OF REVENUES OVER DIRECT COSTS 1,495,020 1,847,767
------------ ------------
EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE 2,686,348 2,655,940
AMORTIZATION AND DEPRECIATION 1,138,550 2,151,090
------------ ------------
3,824,898 4,807,030
------------ ------------
LOSS FROM OPERATIONS (2,329,878) (2,959,263)
------------ ------------
OTHER INCOME (EXPENSE):
SETTLEMENT INCOME - 2,498,449
NET RECOVERY FROM FIRE INSURANCE - 11,449
IMPAIRMENT LOSS ON LONG LIVED ASSETS (6,709) (3,052)
INTEREST, NET (3,706) (117,935)
------------ ------------
TOTAL OTHER INCOME(EXPENSE) (10,415) 2,388,911
------------ ------------
NET LOSS $(2,340,293) $ (570,352)
============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (0.09) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 25,923,192 21,719,418
============ ============
===================================================================
See accompanying notes to the consolidated financial statements.
CYPOST CORPORATION AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
=================================================================================================================
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN TRANSLATION
NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- -------- ----------- ------------- ------------- ------------
BALANCE, DECEMBER 31, 2000 21,556,993 $ 21,557 $14,047,544 $(13,197,006) $ 33,022 $ 905,117
Issued for services 1,000,000 1,000 84,000 - - 85,000
Issued for services 400,000 400 99,600 - - 100,000
Issued for services 230,000 230 57,270 - - 57,500
Issued for services 2,500 3 1,272 - - 1,275
Cumulative translation adjustment - - - - (24,234) (24,234)
Net Loss - - - (570,352) - (570,352)
---------- -------- ----------- ------------- ------------- ------------
BALANCE, DECEMBER 30, 2001 23,189,493 23,190 14,289,686 (13,767,358) 8,788 554,306
Issued Stock Options 2,500 3 247 - - 250
Issued for services 1,700,000 1,700 168,300 - - 170,000
Issued for services 2,300,000 2,300 227,700 - - 230,000
Issued Stock Reward Plan 3,200,000 3,200 92,800 - - 96,000
Cumulative translation adjustment - - - - (5,725) (5,725)
Net Loss - - - (2,340,293) - (2,340,293)
---------- -------- ----------- ------------- ------------- ------------
BALANCE, DECEMBER 31, 2002 30,391,993 $ 30,393 $14,778,733 $(16,107,651) $ 3,063 $(1,295,462)
========== ======== =========== ============= ============= ============
=================================================================================================================
See accompanying notes to the consolidated financial statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
===============================================================================
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,340,293) $ (570,352)
Adjustments to reconcile net loss to
cash used in operating activities:
Settlement income - (2,498,449)
Depreciation 221,798 288,592
Amortization 916,752 1,862,498
Provision for bad debt (21,206) 38,615
Accrued interest (income) expense (1,964) 120,294
Net recovery from fire insurance - (11,449)
Consulting fees offsetting note receivable -
related party 17,750 52,373
Impairment loss on long-lived assets 6,709 3,052
Fair value of stock issued for services 496,000 243,775
Changes in assets and liabilities:
Accounts receivable 79,264 (3,719)
Insurance receivable - 58,488
Prepaid expenses (11,862) 88,635
Deposits (10,220) 23,308
Other assets (77) (3,114)
Accounts payable and accrued liabilities 626,024 407,503
Increase in due to bank 31,668 -
Deferred revenue (60,140) (191,935)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (49,799) (91,885)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58,019) (72,837)
Gross proceeds received from insurance company - 14,105
Payment of insurance related claims - (2,656)
------------ ------------
NET CASH USED IN INVESTING ACTIVITES (58,019) (61,388)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 250 -
Proceeds from note payable - related party 79,300 -
Repayments of note payable - related party (26,070)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITES 53,480 -
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES (5,725) (24,234)
------------ ------------
NET DECREASE IN CASH (60,063) (177,507)
CASH, BEGINNING OF YEAR 73,124 250,631
------------ ------------
CASH, END OF YEAR $ 13,061 $ 73,124
============ ============
OTHER CASH INFORMATION
Interest paid $ 5,670 $ -
============ ============
Taxes paid $ - $ -
============ ============
===============================================================================
See accompanying notes to the consolidated financial statements.
CYPOST CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
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 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 $16.1 million. Since its inception, the Company has a working
capital deficiency at December 31, 2002 of approximately $2.18 million, and
requires additional financing for its business operations. The Company is also
involved in certain litigation that could adversely impact its results of
operations and cash flow if it is unable to prevail in such matters.
The Company's future capital requirements will depend on numerous factors
including, but not limited to, the Company development activities, and is able
to generate 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, management is working on
attaining cost and efficiency synergies by consolidating the operations of
Company's subsidiaries.
These financial statements do not reflect any adjustments that would be
necessary to the carrying values of assets, the reported amounts of its
liabilities, revenues and expenses, and the balance sheet classifications used
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The subsidiaries include, NetroverUSA Online
Inc. (formerly known as ePost Innovations Inc.), NetRover Inc., NetRover Office
Inc., Hermes Net Solutions Inc., Intouch.Internet Inc. and Fibra Communications,
LLC. Connect Northwest and Internet Arena are DBA's of CyPost Corporation. All
significant inter-company transactions and balances have been eliminated in
consolidation.
FUNCTIONAL CURRENCY AND 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, 2002
one Canadian Dollar (Cdn) was exchangeable for .63440 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. Estimates that are critical to the
accompanying financial statements include estimates related to certain
contingent liabilities discussed at Note 11. It is at least reasonably possible
that our estimates could change in the near term with respect to these matter.
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, and receivables.
With respect to cash, during the year ended December 31, 2002, the Company
maintained all of its cash in deposit accounts with four financial institutions,
which deposit accounts at times may have exceeded federally insured limits. The
Company has not experienced any losses in such accounts.
Substantially all of our revenues and receivables arise primarily from
agreements to provide ISP services to customers in Canada and the United States
of America, mainly in the Pacific Northwest. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral as
management believes that the Company has certain collection measures in-place to
limit the potential for significant losses. Substantially all of the
receivables included in the accompanying consolidated balance sheet were
recovered subsequent to December 31, 2002.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the allowance for doubtful accounts on a regular
basis through periodic reviews of the collectibility of the receivables in light
of historical experience, adverse situations that may affect the customer's
ability to repay, and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
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 three to five years. Maintenance and repairs are
charged against operations and betterments are capitalized.
LOSS PER SHARE
Loss per share has been computed in accordance with SFAS 128. Basic loss
per share is computed by dividing net loss attributable to common shareholders
by the weighted average number of common shares outstanding during the
respective periods. Diluted 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 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 operating 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 that arise from
providing Internet connection services to customers. These costs are expensed as
incurred.
ADVERTISING COSTS
The Company expenses advertising costs as they are incurred. These
expenses approximated $49,974 and $62,393 for the years ended December 31, 2002
and 2001, respectively
GOODWILL
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," which was required to be adopted effective
January 1, 2002. Under SFAS 142 goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed, at a minimum, annually. As discussed
below, separable intangible assets that are not deemed to have an indefinite
life will continue to be amortized over their useful lives. Prior to December
31, 2001, goodwill created through the purchase of certain assets was being
amortized over a period of three years using the straight-line method. If SFAS
142 would have been applied in the fiscal year ended December 31, 2001, then the
net loss for such year would have declined by approximately $610,000. The
impact of the adoption as it relates to existing goodwill reduced amortization
expense by $453,895 for the year ended December 31, 2002.
OTHER INTANGIBLES
Other intangibles are being amortized over the respective useful lives
which is estimated to be three years using the straight-line method. Estimated
aggregate amortization expense arising from these intangibles is expected to
approximate the remaining $8,000 during 2003.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically review our long-lived assets for indications of impairment.
If the value of an asset is considered impaired, an impairment loss is
recognized. During the years ended December 31, 2002 and 2001, we recognized
impairment losses aggregating $6,709 and $3,052, respectively, on certain
equipment. These amounts are included in other expenses in our December 31, 2002
and 2001 consolidated statements of operations. The impairment losses resulted
because we are projecting negative cash flows for the foreseeable future;
accordingly, the assets have been written down to their estimated fair market
values (as determined by management).
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.
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 normally recorded if
the issue price is equivalent to the fair market value.
The Company has elected to follow the accounting provisions of APB No. 25
to account for its stock based employee compensation, and to furnish the
proforma disclosures required under SFAS No.123. For stock issued to
non-employees, the Company records the fair value of the equity granted in
compliance with SFAS No.123.
RECLASSIFICATIONS
Certain 2001 balances have been reclassified to conform to the current
year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS
141 addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope to this Statement are to be accounted for
using one method, the purchase method. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001. The Company adopted
SFAS 141 beginning January 1, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligation. (SFAS 143) requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is a cost
by increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 will be
effective for exit or disposal activities initiated after December 31, 2002.
Management does not anticipate that the adoption of SFAS No. 143, as required on
January 1, 2003, will have a material impact on the Company's consolidated
financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.144, Accounting for the Impairment of
Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assts.
This Statement supersedes FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
Under SFAS 144, discontinued operations are no longer measured on a net
realizable value basis, and future operating losses are no longer recognized
before they occur. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted SFAS 144 beginning January 1, 2002. The adoption of SFAS No. 144
did not have a significant impact on the Company's consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires that the liability for
a cost associated with an exit or disposal activity be recognized at its fair
value when the liability is incurred. Under previous guidance, a liability for
certain exit costs was recognized at the date that management committed to an
exit plan, which was generally before the actual liability has been incurred.
SFAS No. 146 will be effective for exit or disposal activities initiated after
December 31, 2002. Management does not anticipate that the adoption of SFAS No.
146, as required on January 1, 2003, will have a material impact on the
Company's consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123." This
standard amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for companies that voluntarily change to the
fair value based method of accounting for stock-based employee compensation. It
also requires prominent disclosure about the effects on reported net income of a
company's accounting policy decisions with respect to stock-based employee
compensation in both annual and interim financial statements. The transition
provisions and annual disclosure requirements are effective for all fiscal years
ending after Dec. 15, 2002, while the interim period disclosure requirements are
effective for all interim periods beginning after Dec. 15, 2002. The adoption
of SFAS No. 148 did not have a significant impact on the Company's consolidated
financial position or results of operations.
3. COMPREHENSIVE LOSS
The following table reflects the calculation of the Company's comprehensive
loss for the years ended December 31, 2002 and 2001:
December 31,
------------------------
2002 2001
------------ ----------
Net Loss $(2,340,294) $(570,352)
Other Comprehensive Loss
Foreign currency translation loss (5,725) (24,234)
------------ ----------
Comprehensive Loss $(2,346,019) $(594,586)
============ ==========
4. PROPERTY AND EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment consist of the following at December 31, 2002:
Office furniture $ 76,935
Leasehold improvement 11,313
Computer hardware and software 1,188,505
-----------
1,276,753
Less accumulated depreciation (963,295)
-----------
$ 313,458
===========
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consists of the following at December 31,
2002:
Customer lists $ 3,711,270
Goodwill 1,832,543
------------
5,543,813
Less accumulated amortization (5,081,778)
------------
$ 462,035
============
6. NOTE RECEIVABLE - RELATED PARTY
On September 20, 2001 the Company entered into a Settlement Agreement (the
"Settlement Agreement") with Mr. Montalban with regard to a lawsuit it had
instituted against him on June 15, 2001 seeking recovery of short swing profits
realized by Mr. Montalban and other persons whose purchases and sales of Company
common stock were attributed to Mr. Montalban in violation of the Securities
Exchange Act of 1934, as amended. Pursuant to the Settlement Agreement, Mr.
Montalban paid the Company an aggregate of approximately $2,498,449 (the
"Recovery Amount"), which amount represented recovery in full of Mr. Montalban's
short swing profits. He did so by delivering to the Company for cancellation (1)
Blue Heron Shareholder Notes in the aggregate principal amount of $2,319,788,
which notes had been previously purchased by or assigned to Mr. Montalban; (2)
the accrued interest of $42,384 due on the principal portion of the Blue Heron
Shareholder Notes at the time of cancellation; (3) 8% demand notes of the
Company dated August 25, 2000 and September 11, 2000, respectively, in the
aggregate principal amount of $25,000 issued to Pacific Gate Capital
Corporation, a corporation owned by Mr. Montalban; and (4) the accrued interest
of $2,066 due on the principal portion of the Pacific Gate Capital Notes at the
time of cancellation. The balance of the Recovery Amount was paid by Mr.
Montalban's issuance to the Company of a five (5) year, 5% promissory note,
dated September 20, 2001, in the principal amount of $109,211. In consideration
of the execution of the Settlement Agreement and payment of the Recovery Amount,
on October 9, 2001 the Company voluntarily dismissed its action.
On October 1, 2001 the Company entered into a consulting agreement with
Pacific Gate Capital Corporation a corporation affiliated to Mr. Montalban, for
a one year period in the amount of $27,750 minimum per month. This agreement was
subsequently cancelled. For the year ended December 31, 2002 and 2001 the
consulting payments reduced the principal amount of $109,211 owed by Mr.
Montalban by $17,750 and $53,250, respectively.
As of December 31, 2002, Mr. Montalban owes the Company a total of $41,413.
7. NOTE PAYABLE - RELATED PARTY
On October 25, 2002, Ms. Beverly Montalban loaned the Company $79,300, with
interest and principal payable over the six months ending April 2003. The note
accrues interest at the rate of 40% per annum. As of December 31, 2002 the
balance outstanding was $53,230.
8. 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 $0.001 per share
ISSUANCE OF SHARES
On March 31, 2001, the Company reflected the issuance of 2,500 shares of
its common stock in an aggregate amount of $1,275 to one consultant at the
closing price of $0.51 per share in consideration for his providing certain
services to the Company. These shares were issued on May 16, 2001.
On November 16, 2001, the Company issued 1,000,000 shares of its common
stock in an aggregate amount of $85,000 to Adam Gottbetter at the closing price
of $0.085 per share in consideration for his providing legal services to the
Company.
On December 11, 2001, the Company issued 400,000 shares of its common stock
in an aggregate amount of $100,000 to Martin and Associates at the closing price
of $0.25 per share in consideration of them providing legal services to the
Company.
On December 11, 2001, the Company issued 230,000 shares of its common stock
in an aggregate amount of $57,500 to Andrew Stack, LLP at the closing price of
$0.25 per share in consideration of them providing legal services to the
Company.
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 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. As of December 31, 2002 all vested and unvested options for
Mr. Adams and Ms. Allan have been cancelled.
The following table summarized information concerning activity associated
with the various option grants:
Options Exercise Price
---------- ---------------
Options outstanding at December 31, 2000 - $ -
Options granted 1,125,000 0.10
Options exercised (2,500) 0.10
Options cancelled (625,000) 0.10
---------- ---------------
Options outstanding at December 31, 2001 497,500 $ 0.10
Options granted - 0.10
Options exercised (2,500) 0.10
Options cancelled (495,000) 0.10
---------- ---------------
Options outstanding at December 31, 2002 - $ 0.10
========== ===============
The Company applies APB No. 25, "Accounting for Stock Issued to Employees",
and related interpretations in accounting for its plan. Accordingly, no
compensation expense has been recognized for its stock-based compensation plan
other than for the stock options granted to consultants. Had our compensation
expense for stock-based compensation plans been determined based upon fair
values at the grant dates for awards under this plan in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," our net loss and pro forma net
loss per share amounts would have been as follows:
2002 2001
----------- ----------
Net loss as reported $2,340,293 $(570,352)
Proforma net loss 2,350,293 (605,352)
Net loss per share as reported (0.09) (0.03)
Proforma net loss per share (0.09) (0.03)
For purposes of pro forma disclosures, the estimated fair value of the
options are amortized over the options' vesting period.
The Black-Scholes option valuation modes was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because of the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's option.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using a dividend yield of 0% and the
following weighted average assumptions:
Expected stock price volatility 239%
Risk free interest rate 4%
Expected lives (in years) 1
9. INCOME TAXES
At December 31, 2002, the Company had net operating loss carry forwards for
income tax purposes of approximately $12,230,000 which are available to offset
any future taxable income earned in various years ending December 31, 2022. The
amount and ultimate realization of any benefit derived is dependent, in part,
upon the tax laws in effect, the future earnings of the Company, and other
future events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carry forwards the Company
has established a valuation allowance equal to the amount of the tax effect of
the loss carry forward and, therefore no deferred tax asset has been recognized
for the loss.
The Company has no deferred tax liabilities. The components of the
deferred tax asset as of December 31, 2002 (assuming an effective income tax
rate of approximately 25%) are approximately as follows:
Current deferred income tax asset:
Allowance for doubtful accounts $ 12,000
Less valuation allowance (12,000)
------------
Current deferred income tax asset $ -
============
Non-current deferred tax asset:
Net operating loss carryforwards $ 2,997,000
Amortization of intangibles 702,000
Other 2,000
------------
Subtotal 3,701,000
Less valuation allowance (3,701,000)
------------
Non-current deferred income tax asset $ -
============
The income tax benefit consists of the following for the year ended
December 31, 2002:
Current $ -
Deferred 435,000
Change in valuation allowance (435,000)
------------
$ -
============
10. OTHER 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
was then the Company's Director and Chairman). The agreement was for a one year
period in the amount of $9,000 minimum per month for providing certain services
to the Company.
On August 12, 2002, Mr. Johnston agreed to defer payment on the balance
owing to Roundtable Strategies Ltd. until such time as the Company's cash flow
permits.
As of December 31, 2002, pursuant to this agreement, the Company owes
approximately $112,300 to Roundtable Strategies Ltd., which is included in
accounts payable and accrued liabilities.
Mr. Johnston resigned as Director and Chairman on March 31, 2003.
11. COMMITMENTS AND CONTINGENCIES
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
Cdn$42,516 from Tia Berry on account of monies paid to her by the Company which
she was not entitled to receive. Tia Berry has denied the allegations.
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"). Berry received 600,000 contingent
shares upon condition that he would remain in the Company's employ as Chief
Executive Officer for at least two years, which he did not. Following Berry's
resignation, the Company attempted to cancel the 600,000 Contingent Shares. In
the BC Action, the Company seeks an order directing Berry to return the 600,000
Contingent Shares to the Company for cancellation 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. 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 and
Cdn$34,013 from Berry and Tia Berry on account of conspiracy to defraud and
injure the Company by causing certain personal expenses to be paid by the
Company rather than by Berry and Tia Berry personally. 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. Because the case is in the
discovery stage, the ultimate resolution of this matter cannot be determined.
Accordingly, no provision for any loss that may result upon its resolution has
been made in the accompanying consolidated financial statements.
ALLAN LITIGATION
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. Allan claims that she has sustained damages as a result of a
wrongful termination in the amount of Cdn$600,000.
The Company believes that the allegations in the Allan Action are without
merit and they will be vigorously defended. Because the case is in the
discovery stage, the ultimate resolution of this matter cannot be determined.
Accordingly, no provision for any loss that may result upon its resolution has
been made in the accompanying consolidated financial statements.
OTHER LITIGATION
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.
LEASE COMMITMENTS
The Company leases office space and equipment under non-cancelable
operating leases expiring thru 2007, and having initial or remaining lease terms
in excess of one year as of December 31, 2002. The total lease expense under the
operating leases was $326,723 and $321,601 for the years ended December 31,
2002 and 2001, respectively. The following is a schedule by years of future
minimum lease payments required under the non-cancelable operating leases:
2003 $251,587
2004 131,304
2005 49,285
2006 628
2007 314
--------
$433,118
========
The Company entered into non-canceable agreements with several companies
that provide network infrastructure for some of the Company's Internet Services
Provider services. The minimum payments in the next three years are as follows:
2003 $ 797,652
2004 227,393
2005 55,747
----------
$1,080,792
==========
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Javan Khazali. The employment
agreement provides for Mr. Khazali's employment by the Company as its Chief
Executive Office at an annual salary of $120,000 and a bonus of $25,000 upon the
completion of 180 days of service. The employment agreement has an initial term
of three years commencing on October 1, 2002 and will automatically renew for
successive terms, unless notice of non-renewal is given by either the Company or
Mr. Khazali at least 90 days prior to the expiration of the then applicable term
of the contract. Bonuses may be awarded to Mr. Khazali based on his annual
review, which takes place each January. In addition, Mr. Khazali is eligible for
increases in his base salary, in the discretion of the Company.
DEPENDENCE ON KEY SUPPLIERS
The Company's success depends upon the capacity, scalability, reliability
and security of its network infrastructure, including the telecommunications
capacity leased from WorldCom and other telecommunications network suppliers.
The Company depends on such companies to maintain the operational integrity of
their own telecommunications networks. Therefore, its 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 the
Company could have a material adverse effect on the Company's 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 United States Bankruptcy Code.
Chapter 11 reorganization is not a liquidation, but 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 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.
12. SUBSEQUENT EVENTS
During the months of February and March 2003, the Company sold various
customer lists, operating assets, trade names, and related goodwill for gross
consideration of approximately $253,000. The net book value of such assets at
December 31, 2002 approximated $163,000.