U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 000-26751
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CyPost Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 98-0178674
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
900-1281 West Georgia St., Vancouver, British Columbia, Canada V6E 3J7
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(Address of Principal Executive Offices) (Zip Code)
(604) 904-4422
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 21,559,525 as of July 31,
2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission ("Commission"). While these statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim period, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto, which are included in the
Company's Annual Report on Form 10-KSB, as amended, for the fiscal year ended
December 31, 2000, previously filed with the Commission.
The accompanying notes are an integral part of these consolidated financial
statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(U.S. DOLLARS)
6/31/01 12/31/00
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(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
CASH $ 102,161 $ 250,631
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE 331,787 173,207
INSURANCE PROCEEDS RECEIVABLE 2,716 58,488
PREPAIDS AND DEPOSITS 152,390 250,534
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589,054 732,860
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 607,054 751,020
GOODWILL AND OTHER INTANGIBLES, NET OF 2,277,090 3,193,015
ACCUMULATED AMORTIZATION
OTHER ASSETS 9,323 5,371
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$ 3,482,521 $ 4,682,266
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LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 1,111,089 $ 1,026,666
LOANS 2,344,788 2,110,000
DEFERRED REVENUE 547,315 640,483
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TOTAL CURRENT LIABILITIES 4,003,192 3,777,149
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
SHARE CAPITAL
AUTHORIZED
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
30,000,000 COMMON STOCK
WITH A PAR VAUE OF $.001
ISSUED AND OUTSTANDING
PREFERRED STOCK -
NONE - -
COMMON STOCK 21,559,493 -
2001, 21,556,993 - 2000 21,560 21,557
PAID-IN CAPITAL 14,048,816 14,047,544
ACCUMULATED DEFICIT (14,587,243) (13,197,006)
CURRENCY TRANSLATION ADJUSTMENT (3,804) 33,022
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (520,671) 905,117
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$ 3,482,521 $ 4,682,266
============== =============
The accompanying notes are an integral part of these consolidated statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(U.S. DOLLARS)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ------------ -----------
REVENUE $ 955,376 $ 1,354,745 $ 2,019,199 2,394,305
DIRECT COSTS (484,358) (676,546) (913,029) (1,296,927)
------------ ------------ ------------ -----------
471,018 678,199 1,106,170 1,097,378
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EXPENSES
SELLING, GENERAL AND
ADMINISTRATIVE 723,047 1,403,834 1,345,999 2,411,617
AMORTIZATION
AND
DEPRECIATION 548,604 847,556 1,067,461 1,506,648
------------ ------------ ------------ -----------
1,271,651 2,251,390 2,413,460 3,918,265
------------ ------------ ------------ -----------
LOSS BEFORE OTHER
INCOME (EXPENSE) (800,633) (1,573,191) (1,307,290) (2,820,887)
------------ ------------ ------------ -----------
NET PROCEEDS FROM
FIRE INSURANCE - 22,274 - 129,545
INTEREST EXPENSE (41,621) (1,824,611) (82,947) (2,003,895)
MINORITY INTEREST - 92,700 - 108,656
------------ ------------ ------------ -----------
NET LOSS (842,254) (3,282,828) (1,390,237) (4,586,581)
------------ ------------ ------------ -----------
LOSS PER SHARE
BASIC & DILUTED (0.04) (0.16) (0.06) (0.22)
============ ============ ============ ===========
WEIGHTED AVERAGE
NUMBER OF SHARES 21,559,493 21,138,993 21,558,243 20,892,842
OUTSTANDING
============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated statements.
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(U.S. DOLLARS)
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(1,390,237) $(4,586,581)
Adjustments to reconcile net loss to cash used by
operating activities:
Amortization and depreciation 1,067,461 1,506,648
Interest expense 82,947 2,003,451
Fair value of stock issued for services 1,275 -
Net recovery from fire insurance - (129,545)
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(238,554) (1,206,027)
Changes in non-cash operating accounts 161,755 348,308
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NET CASH USED BY OPERATING ACTIVITIES (76,799) (857,719)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business - (300,000)
Purchase of property and equipment (71,671) (266,130)
Investment in software development - (74,447)
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NET CASH USED IN INVESTING ACTIVITIES (71,671) (640,577)
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CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds - 1,333,589
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NET CASH PROVIDED BY FINANCING ACTIVITIES - 1,333,589
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NET INCREASE IN CASH (148,470) (164,707)
CASH, BEGINNING OF PERIOD 250,631 415,779
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CASH, END OF PERIOD $ 102,161 $ 251,072
============ ============
The accompanying notes are an integral part of these consolidated statements
CYPOST CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
(U.S. DOLLARS)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared on the basis of
accounting principles applicable to a "going concern" which assume that
Cypost Corporation (the "Company") will continue in operation for at least
one year and will be able to realize its assets and discharge its
liabilities in the normal course of operations.
Several conditions and events cast doubt about the Company's ability
to continue as a going concern. The Company has incurred net losses of
approximately $14.6 million for the period from inception September 5, 1997
to June 30, 2001, has a working capital deficit of approximately $3.4
million at June 30, 2001, and requires additional financing for its
business operations.
The Company is streamlining operations and consolidating its ISP's to
enhance efficiency and reduce operating expenses. As a result of the
foregoing efforts, the operations of Intouch Internet Inc. and NetRover
Office Inc. have been fully consolidated into the Company's wholly-owned
subsidiary, NetRover Inc.
These consolidated financial statements do not reflect adjustments
that would be necessary if the Company were unable to continue as a going
concern. While management believes that the actions already taken or
planned, as described above, will mitigate the adverse conditions and
events which raise doubts about the validity of the "going concern"
assumption used in preparing these financial statements, there can be no
assurance that these actions will be successful.
If the Company were unable to continue as a going concern, then
substantial adjustments would be necessary to the carrying values of
assets, the reported amounts of its liabilities, the reported revenues and
expenses.
INTERIM FINANCIAL STATEMENTS
The interim condensed consolidated financial statements presented have
been prepared by the Company without audit and, in the opinion of the
management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of (a) the consolidated results of operations for the
three and six months ended June 30, 2001 and 2000, (b) the consolidated
financial position at June 30, 2001 and (c) the consolidated cash flows for
the six months ended June 30, 2001 and 2000. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2000 has
been derived from the consolidated financial statements that have been
audited by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. In 2000, the subsidiaries include CyPost
KK, Playa Corporation, ePost Innovations Inc., NetRover Inc., NetRover
Office Inc., Hermes Net Solutions Inc., and Intouch.Internet Inc. All of
the subsidiaries, except CyPost KK, are wholly owned. Later in 2000, the
Company sold its investment in CyPost KK and abandoned its investment in
Playa Corporation. Connect Northwest and Internet Arena are DBA of CyPost
Corporation. All significant inter-company transactions and balances have
been eliminated in consolidation.
2. LOANS
On June 18, 2001 at the request of Blue Heron Venture Fund, Ltd. (Blue
Heron), Blue Heron Notes in the aggregate principal amount of $2,085,000
were cancelled and on June 19, 2001 new promissory notes (the "Blue Heron
Shareholder Notes") in the aggregate principal amount of $2,319,788.24 were
issued to the shareholders of Blue Heron. The principal amount of the Blue
Heron Shareholder Notes is comprised of the $2,085,000 principal amount of
the Blue Heron Notes and the $234,788.24 in interest due on the Blue Heron
Notes at the time of cancellation. The Blue Heron Shareholder Notes are
unsecured and are payable on demand. $2,085,000 in principal amount of the
Blue Heron Shareholder Notes bear interest at 8% per annum. The balance of
the Blue Heron Shareholder Notes do not provide for the payment of
interest.
3. COMMITMENTS AND CONTIGENCIES
CANADA POST LITIGATION
On June 20, 2001 ePost Innovations, Canada Post and the Company
entered into a Settlement and Release Agreement effective as of May 30,
2001 (the "Settlement Agreement"). Pursuant to the Settlement Agreement,
the parties executed mutual releases and discontinued their respective
claims. The release by Canada Post to ePost Innovations was made subject to
the Company and ePost Innovations ceasing all use of the trade name EPOST
within Canada within 90 days of the effective date of the Settlement
Agreement and transferring all right, title and interest they had with
respect to the trade name and trademark EPOST and any goodwill associated
therewith to Canada Post upon execution of the Settlement Agreement. The
Company has yet to change the name of its subsidiary but intends to do so
within the time frame set forth in the Settlement Agreement. All other
terms of the Settlement Agreement have been complied with.
BERRY LITIGATION
On March 31, 2000, the Company commenced suit in the Supreme Court of
British Columbia, Action #S001822, Vancouver Registry against Tia Berry
(the "Tia Action"), the wife of Steven Berry ("Berry"), the former
President and Chief Executive Officer of the Company. In the Tia Action,
the Company claims $42,516 (CDN) from Tia Berry on account of monies paid
to her by the Company which she was not entitled to receive. Tia Berry has
filed a Statement of Defense in the Tia Action in which she alleges that
the payments which she received from the Company were to reimburse her for
business expenses which she had charged to her credit cards on behalf of
Berry. The Tia Action has not yet been set for trial.
On April 4, 2000, Berry commenced an action in the Supreme Court of
the State of New York, County of New York (Index No. 601448/2000), against
the Company and Continental Stock Transfer & Trust Company ("Continental"),
(the "New York Action"). In the New York Action, Berry claimed damages for
alleged conversion, fraud, breach of contract and breach of fiduciary duty
all arising from the alleged wrongful Stop Transfer Order which the Company
placed relating to 75,000 shares of the Company's Common Stock registered
in Berry's name and the Company's cancellation of a further 600,000 shares
(the "Contingent Shares"). The complaint in the New York Action claims
damages in excess of $3,000,000 with the precise amount to be determined at
trial.
Berry received the 600,000 Contingent Shares upon condition that he
would remain in the Company's employ as Chief Executive Officer for at
least two years. Berry commenced his employment with the Company on January
4, 1999, and resigned his employment with the Company on January 17, 2000.
Following Berry's resignation, the Company attempted to have a Stop
Transfer Order issued with respect to the 75,000 shares registered in
Berry's name and cancel the 600,000 Contingent Shares. The Stop Transfer
Order was not effective and Berry subsequently sold the 75,000 shares.
On May 19, 2000 CyPost and ePost Innovations commenced suit in the
Supreme Court of British Columbia, Action #S002798, Vancouver Registry,
against Berry and his wife, Tia Berry (the "BC Action"). In the BC Action,
the Company seeks an order directing Berry to return the 600,000 Contingent
Shares to the Company for cancellation or an order entitling the Company to
cancel the same on the basis that Berry did not fulfill the employment
conditions which were the condition precedent to his becoming the
beneficial owner of the Contingent Shares.
In the BC Action, the Company also claims at least Cdn$800,000 from
Berry on account of breach of fiduciary duty, negligence, breach of
statutory duties and breach of contract arising from Berry's failure to
properly carry out his employment responsibilities. In the BC Action, the
Company also claims Cdn$34,013 from Berry and Tia Berry on account of
conspiracy to defraud and injure the Company and ePost Innovations by
causing certain personal expenses to be paid by the Company rather than by
Berry and Tia Berry personally. The Company also claims punitive and
exemplary damages from Berry and Tia Berry in the BC Action.
On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in
the alternative, on the basis of forum non conveniens. On September 5,
2000, the court dismissed the New York Action on forum non conveniens
grounds, subject to the Company making certain stipulations in the New York
Action. Those stipulations have been made and the appeal period in the New
York Action has expired without Berry or any other party appealing the
September 5, 2000 order.
The issues raised by Berry and the Company in the New York Action will
be litigated in the BC Action together with the further issues raised by
the Company in the BC Action. The Company feels that Berry's claims in the
New York Action were without merit and that the Company will be successful
in obtaining an order declaring that Berry's 600,000 Contingent Shares be
cancelled and further entitling the Company to substantial damages. The
Company will vigorously pursue its position in all respects.
On December 21, 2000, Berry and Tia Berry commenced suit in the
Supreme Court of British Columbia, Action #S006790, Vancouver Registry,
against CyPost, ePost Innovations, Kelly Shane Montalban, J. Thomas W.
Johnston, Carl Whitehead and Robert Sendoh (the "Berry Action"). Statements
of Defense have been filed on behalf of the Company and the other
defendants.
The Plaintiffs in the Berry Action allege that the Tia Action, the BC
Action, and the action by Kelly Shane Montalban (Supreme Court of British
Columbia, Action #S002147, Vancouver Registry), against Berry for specific
performance of an option agreement (the "Montalban Action"), collectively,
amount to an abuse of process, malicious prosecution, unlawful interference
with the Plaintiffs' economic rights, or were commenced pursuant to a civil
conspiracy to injure the Plaintiffs.
In the Berry Action, the Plaintiffs seek a declaration that Berry is
entitled to the 600,000 Contingent Shares and claim unspecified damages
which are estimated at Cdn$2,000,000 based on the Statement of Claim. They
also claim punitive or aggravated damages and costs. The Company believes
that the allegations in the Berry Action are without merit and they will be
vigorously defended.
It is expected that the Tia Action, the BC Action and the Berry Action
will be consolidated for the purposes of trial due to the fact that there
are numerous issues of fact and law which are common to all of these
actions. The Company believes that trial will likely take place in the fall
of 2002.
A loss by the Company of the claim against it for monetary damages
would have a material adverse effect on the Company's future results of
operations, financial condition and liquidity; however, the Company does
not expect to lose this action and believes additionally that it would be
able to negotiate reasonable payment terms should it lose this suit.
SHANE MONTALBAN LITIGATION
On June 15, 2001, the Company filed a Summons and Complaint against
Kelly Shane Montalban, a principal shareholder of the Company, in the US
District Court for the Southern District of New York alleging liability by
Mr. Montalban to the Company for violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended. The suit seeks recovery of
short swing profits realized by Mr. Montalban and affiliated persons during
the period September 1999 through June 15, 2001 as the result of certain
purchases and sales of the Company's common stock by Mr. Montalban and such
affiliated persons.
The Company and Mr. Montalban are presently engaged in settlement
discussions to resolve the litigation. No assurance can be given, however,
that the parties will reach a settlement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements which are not historical facts
contained in this Report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Notes to the Consolidated
Financial Statements, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are
based on currently available operating, financial and competitive information,
and are subject to various risks and uncertainties. Future events and the
Company's actual results may differ materially from the results reflected in
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, dependence on existing and future key strategic
and strategic end-user customers, limited ability to establish new strategic
relationships, ability to sustain and manage growth, variability of operating
results, the Company's expansion and development of new service lines, marketing
and other business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
existing and past employees, risks associated with international sales, and
other risks described herein and in the Company's other SEC filings.
Overview
The Company is engaged in the business of providing Internet service
provider ("ISP") services ("ISP Services") for business and personal use.
Previously, the Company was also involved in developing certain software
products, which activities the Company no longer pursues.
The Company was a development stage company until the first quarter of
1999, when it began to broaden its strategic focus through the acquisition of
six ISPs. Currently, providing ISP Services is the focus of the Company's
business. The Company's business operations are presently conducted in the
United States and Canada.
The Company derives virtually 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
focusing on Web hosting and server co-location, anticipating a strong hold over
connectivity by the larger ISPs in a few years' time.
During 2000, the Company began streamlining and consolidating 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. During the second half of 2000, the Company began
-----------------
consolidating all aspects of customer support (including end user
technical issues) into the Chatham, Ontario facility. In early 2001,
customer support for Oregon ISP Services customers were consolidated into
the Chatham facility and by late-2001 it is expected that customer support
for all of the Company's ISP Services customers will be handled by the
Chatham facility.
- Billing and Collections. During the second half of 2000, the Chatham
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facility took over billing and collections for British Columbia customers,
in addition to continuing billing and collections for all other Canadian
customers. In early 2001 the billing and collections for the Oregon ISP
customers were consolidated into the Chatham facility, billing and
collections for the Washington ISP Services customers will be consolidated
in late-2001.
- Network Operations. During 2000, the Company reduced four maintenance and
------------------
repair teams to two regionally-based teams. A team based in Toronto
provides primary monitoring and repair of all servers and routers covering
all Canadian ISP Services customers and provides overflow assistance to
the Pacific Northwest, while a Seattle team provides primary monitoring
and repair of all servers and routers covering all of the Pacific
Northwest ISP Services customers and provides overflow assistance to
Canada.
The Company is also consolidating Web hosting and dedicated services into
Toronto, a process which began in late-2000 and is expected to be completed by
late-2001. Other ISP Services such as e-mail and user authentication (i.e.,
customer security) will continue to be handled from regional data centers.
Beginning in early 2001, all new Web hosting customers, wherever located, will
be hosted from Toronto.
The Company is also considering implementing other consolidated services to
achieve greater efficiency and cost savings.
Results of Operations for the Three Months Ended June 30, 2001 Compared to the
Three Months Ended June 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the three months ended June 30, 2001. These revenues are
attributable virtually entirely to the operations of the Company's ISP
businesses (Hermes Net Solutions, Inc., Intouch.Internet Inc., NetRover Inc.,
Connect Northwest Internet Services and Internet Arena) which the Company
acquired beginning late in the second quarter of 1999. The Company generated
net sales of $955,376 for the three months ended June 30, 2001 compared to
$1,354,745 for the three months ended June 30, 2000. The decrease in the above
noted revenue, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000, are primarily due to the discontinuation of Playa
Corporation during the fourth quarter of 2000, a decrease in marketing related
activities, and the softening of technology related sector spending.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $484,358,
were incurred for the three months ended June 30, 2001, compared to $676,546 for
the three months ended June 30, 2000. The decrease in the above noted expenses
for the three months ended June 30, 2001 compared to the three months ended June
30, 2000 results primarily from having renegotiated certain key
telecommunication agreements and receiving service level agreement credits from
certain telecommunication providers.
Selling, general and administrative expenses were $723,047 for the three
months ended June 30, 2001 compared to $1,403,834 for the three months ended
June 30, 2000. The decrease in the above noted expenses for the three months
ended June 30, 2001 compared to the three months ended June 30, 2000 results
primarily from a reduction in salaries and benefits and consolidation of the
operation of the Company's ISP businesses.
The Company has accrued interest of $41,621 for the three months ended June
30, 2001, compared to $1,824,611 for the three months ended June 30, 2000. The
interest expense is in respect of promissory notes (the "Blue Heron Notes")
issued by the Company in favor of Blue Heron Venture Fund, Ltd. ("Blue Heron"),
the Company's former principal creditor These notes in the aggregate principal
amount as at June 18, 2001 of $2,085,000 were unsecured, bore interest at 8% per
annum and were payable on demand. On June 18, 2001 at the request of Blue Heron,
these notes were cancelled and on June 19, 2001 new promissory notes (the "Blue
Heron Shareholder Notes") in the aggregate principal amount of $2,319,788 were
issued to the shareholders of Blue Heron. The principal amount of the Blue Heron
Shareholder Notes is comprised of the $2,085,000 principal amount of the Blue
Heron Notes and the $234,788 in interest due on the Blue Heron Notes at the time
of cancellation. The Blue Heron Shareholder Notes are unsecured and are payable
on demand. $2,085,000 in principal amount of the Blue Heron Shareholder Notes
bear interest at 8% per annum. The balance of the Blue Heron Shareholder Notes
do not provide for the payment of interest. See "Liquidity and Capital
Resources" below.
The Company had a net loss of $842,254, or $.04 per share, for the three
months ended June 30, 2001, compared to a net loss of $3,282,828, or $.16 per
share, for the three months ended June 30, 2000. The decrease in net loss for
the three months ended June 30, 2001 was primarily a result of significant
decreases in direct costs; selling, general and administrative expenses;
amortization and depreciation of the assets acquired in the fiscal year 1999;
and interest expense.
Results of Operations for the Six Months Ended June 30, 2001 Compared to the Six
Months Ended June 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the six months ended June 30, 2001. These revenues are
attributable virtually entirely to the operations of the Company's ISP
businesses (Hermes Net Solutions, Inc., Intouch.Internet Inc., NetRover Inc.,
Connect Northwest Internet Services and Internet Arena) which the Company
acquired beginning late in the second quarter of 1999. The Company generated
net sales of $2,019,199 for the six months ended June 30, 2001 compared to
$2,394,305 for the six months ended June 30, 2000. The decrease in the above
noted revenue, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000, are primarily due to the discontinuation of Playa
Corporation during the fourth quarter of 2000, a decrease in marketing related
activities, and the softening of technology related sector spending.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $913,029,
were incurred for the six months ended June 30, 2001, compared to $1,296,927 for
the six months ended June 30, 2000. The decrease in the above noted expenses for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000 results primarily from having renegotiated certain key telecommunication
agreements and receiving service level agreement credits from certain
telecommunication providers.
Selling, general and administrative expenses were $1,345,999 for the six
months ended June 30, 2001 compared to $2,411,617 for the six months ended June
30, 2000. The decrease in the above noted expenses for the six months ended June
30, 2001 compared to the six months ended June 30, 2000 results primarily from a
reduction in salaries and benefits and consolidation of the operation of the
Company's ISP businesses.
The Company has accrued interest of $82,947 for the six months ended June
30, 2001, compared to $2,003,895 for the six months ended June 30, 2000. The
interest expense is in respect of promissory notes (the "Blue Heron Notes")
issued by the Company in favor of Blue Heron Venture Fund, Ltd. ("Blue Heron"),
the Company's former principal creditor These notes in the aggregate principal
amount as at June 18, 2001 of $2,085,000 were unsecured, bore interest at 8% per
annum and were payable on demand. On June 18, 2001 at the request of Blue Heron,
these notes were cancelled and on June 19, 2001 new promissory notes (the "Blue
Heron Shareholder Notes") in the aggregate principal amount of $2,319,788 were
issued to the shareholders of Blue Heron. The principal amount of the Blue Heron
Shareholder Notes is comprised of the $2,085,000 principal amount of the Blue
Heron Notes and the $234,788 in interest due on the Blue Heron Notes at the time
of cancellation. The Blue Heron Shareholder Notes are unsecured and are payable
on demand. $2,085,000 in principal amount of the Blue Heron Shareholder Notes
bear interest at 8% per annum. The balance of the Blue Heron Shareholder Notes
do not provide for the payment of interest. See "Liquidity and Capital
Resources" below.
The Company had a net loss of $1,390,237, or $.06 per share, for the six
months ended June 30, 2001, compared to a net loss of $4,586,581, or $.22 per
share, for the six months ended June 30, 2000. The decrease in net loss for the
six months ended June 30, 2001 was primarily a result of significant decreases
in direct costs; selling, general and administrative expenses; amortization and
depreciation of the assets acquired in the fiscal year 1999; and interest
expense.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going concern
basis, which assumes that the Company will continue in operation for at least
one year and will be able to realize its assets and discharge its liabilities in
the normal course of business. The Company incurred a net loss for the six
months ended June 30, 2001 of $1,390,237, compared to a net loss for the six
months ended June 30, 2000 of $4,586,581. For the six months ended June 30,
2001, the Company had a working capital deficit of appromixately $3.4M, which is
primarily due to the Company's use of current assets to acquire its ISP and
Software Products businesses, and professional fees. These factors indicate that
the Company's continuation as a going concern is dependent upon its ability to
obtain adequate financing.
The Company has obtained most of its financing through Blue Heron. The
loans were made under agreements pursuant to which the Company could borrow up
to $16,000,000 in unsecured loans from Blue Heron. The loans were evidenced by
the Company's Convertible Demand Notes (the "Blue Heron Demand Notes"). The Blue
Heron Demand Notes bore interest at 8% per annum, were payable on demand and
were convertible into shares of the Company's Common Stock at the lender's
option, in which case Blue Heron would have waived its right to be paid interest
under the Blue Heron Demand Notes. On June 18, 2001 the Blue Heron Demand Notes
were cancelled and subsequently replaced by the Blue Heron Shareholder Notes.
During 1999, $4,000,000 of outstanding loans were converted into 4,500,000
shares of the Company's Common Stock. On August 16, 1999, $1,000,000 aggregate
principal amount of Blue Heron Demand Notes were converted into 1,500,000 shares
of Common Stock, at a conversion price of $0.67 per share. On November 24, 1999,
an aggregate additional principal amount of $3,000,000 of Blue Heron Demand
Notes were converted into an additional 3,000,000 shares of Common Stock, at a
conversion price of $1.00 per share.
During the fiscal year ended December 31, 2000, the Company borrowed an
additional $1,210,000 from Blue Heron, resulting in an aggregate outstanding
principal amount of the loans of $2,085,000 as of December 31, 2000. The Company
did not borrow any additional funds during the six months ended June 30, 2001.
Effective June 18, 2001 Blue Heron has withdrawn this credit facility, and
since the Blue Heron Shareholder Notes are payable on demand, the Company's
ability to continue operations is dependent upon the willingness of the Blue
Heron shareholders to forbear from demanding payment. The Company believes that
the Blue Heron shareholders will continue to forbear payment of the loans for
the immediately foreseeable future, but they are under no obligation to do so.
Should the Blue Heron shareholders demand payment, the Company would be required
to obtain financing from other sources to satisfy its obligations or would be in
default under the loans. 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.
During the fiscal year ended December 31, 2000, the Company borrowed an
aggregate of $125,000 from Pacific Gate Capital Corporation ("Pacific Gate"), a
corporation owned by Kelly Shane Montalban, a principal shareholder of the
Company, of which amount $25,000 was outstanding on June 30, 2001. These loans
bear interest at 8% per annum and are payable on demand. Since these loans are
payable on demand, the Company's ability to continue operations is dependent
upon the willingness of Pacific Gate to forbear from demanding payment. The
Company believes that Pacific Gate will continue to forbear payment of the loans
for the immediately foreseeable future, but it is under no obligation to do so.
Should Pacific Gate demand payment, the Company would be required to obtain
financing from other sources to satisfy its obligations or would be in default
under the loans. 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.
On April 11, 2001, the Company received a letter from Pacific Gate, stating
its willingness to renegotiate the terms of the Pacific Gate loans from demand
loans to terms loans. The actual terms of any such renegotiation are subject to
agreement between the Company and Pacific Gate, and no assurance can be given
that the parties will reach agreement on the new terms of the loans. No
substantive negotiations have commenced as of the date of filing this Report.
The Company's cash position during the six months ended June 30, 2001 was
$102,161, compared to $250,631 on December 31, 2000. This decrease is primarily
due to the Company not borrowing additional funds during the six months ended
June 30, 2001.
The Company's net cash used in operating activities totaled $76,799 during
the six months ended June 30, 2001, compared to $857,719 during the six months
ended June 30, 2000. This decrease is primarily due to the interest expense and
amortization and depreciation.
The Company's net cash used in investing activities totaled $71,161 during
the six months ended June 30, 2001, compared to $640,577 during the six months
ended June 30, 2000. This decrease is primarily due to the Company's is not as
aggressive as previous years in acquisitions.
The Company did not have any proceeds from financing activities during the
six months ended June 30, 2001, compared to $1,333,589 of such proceeds during
the six months ended June 30, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Canada Post Litigation
On June 11, 1999, Canada Post Corporation ("Canada Post") filed a Statement
of Claim in the Federal Court of Canada (Court File No. T-1022-99) in which it
sought injunctive and unspecified monetary relief for the allegedly "improper"
use by the Company's subsidiary, ePost Innovations, Inc., ("ePost Innovations"),
of certain marks and names which contain the component "post". On October 18,
1999, ePost Innovations filed its Defense and Counterclaim. In a motion heard
November 24, 1999, Canada Post Corporation challenged certain parts of the
Counterclaim and the Federal Court reserved judgment.
On May 25, 1999, ePost Innovations filed a statement of Claim in the
British Columbia Court (Court File No. C992649) seeking a declaration that the
public notice of Canada Post's adoption and use of CYBERPOSTE and CYBERPOST on
November 18, 1998 and December 9, 1998 respectively, did not affect the
Company's use of CyPost and ePost Innovations as trademarks and trade-names
prior to said dates. ePost Innovations sought summary judgment for such a
declaration and on September 14, 1999, the BC Court rejected summary judgment on
the basis that no right of ePost Innovations was being infringed and that a
trial of the issues was more appropriate.
On June 20, 2001 ePost Innovations, Canada Post and the Company entered
into a Settlement and Release Agreement effective as of May 30, 2001 (the
"Settlement Agreement"). Pursuant to the Settlement Agreement, the parties
executed mutual releases and discontinued their respective claims. The release
by Canada Post to ePost Innovations was made subject to the Company and ePost
Innovations ceasing all use of the trade name EPOST within Canada within 90 days
of the effective date of the Settlement Agreement and transferring all right,
title and interest they had with respect to the trade name and trademark EPOST
and any goodwill associated therewith to Canada Post upon execution of the
Settlement Agreement. The Company has yet to change the name of its subsidiary
but intends to do so within the time frame set forth in the Settlement
Agreement. All other terms of the Settlement Agreement have been complied with.
Berry Litigation
On March 31, 2000, the Company commenced suit in the Supreme Court of
British Columbia, Action #S001822, Vancouver Registry against Tia Berry (the
"Tia Action"), the wife of Steven Berry ("Berry"), the former President and
Chief Executive Officer of the Company. In the Tia Action, the Company claims
$42,516 (CDN) from Tia Berry on account of monies paid to her by the Company
which she was not entitled to receive. Tia Berry has filed a Statement of
Defense in the Tia Action in which she alleges that the payments which she
received from the Company were to reimburse her for business expenses which she
had charged to her credit cards on behalf of Berry. The Tia Action has not yet
been set for trial.
On April 4, 2000, Berry commenced an action in the Supreme Court of the
State of New York, County of New York (Index No. 601448/2000), against the
Company and Continental Stock Transfer & Trust Company ("Continental"), (the
"New York Action"). In the New York Action, Berry claimed damages for alleged
conversion, fraud, breach of contract and breach of fiduciary duty all arising
from the alleged wrongful Stop Transfer Order which the Company placed relating
to 75,000 shares of the Company's Common Stock registered in Berry's name and
the Company's cancellation of a further 600,000 shares (the "Contingent
Shares"). The complaint in the New York Action claims damages in excess of
$3,000,000 with the precise amount to be determined at trial.
Berry received the 600,000 Contingent Shares upon condition that he would
remain in the Company's employ as Chief Executive Officer for at least two
years. Berry commenced his employment with the Company on January 4, 1999, and
resigned his employment with the Company on January 17, 2000. Following Berry's
resignation, the Company attempted to have a Stop Transfer Order issued with
respect to the 75,000 shares registered in Berry's name and cancel the 600,000
Contingent Shares. The Stop Transfer Order was not effective and Berry
subsequently sold the 75,000 shares.
On May 19, 2000 CyPost and ePost Innovations commenced suit in the Supreme
Court of British Columbia, Action #S002798, Vancouver Registry, against Berry
and his wife, Tia Berry (the "BC Action"). In the BC Action, the Company seeks
an order directing Berry to return the 600,000 Contingent Shares to the Company
for cancellation or an order entitling the Company to cancel the same on the
basis that Berry did not fulfill the employment conditions which were the
condition precedent to his becoming the beneficial owner of the Contingent
Shares.
In the BC Action, the Company also claims at least Cdn$800,000 from Berry
on account of breach of fiduciary duty, negligence, breach of statutory duties
and breach of contract arising from Berry's failure to properly carry out his
employment responsibilities. In the BC Action, the Company also claims
Cdn$34,013 from Berry and Tia Berry on account of conspiracy to defraud and
injure the Company and ePost Innovations by causing certain personal expenses to
be paid by the Company rather than by Berry and Tia Berry personally. The
Company also claims punitive and exemplary damages from Berry and Tia Berry in
the BC Action.
On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in the
alternative, on the basis of forum non conveniens. On September 5, 2000, the
court dismissed the New York Action on forum non conveniens grounds, subject to
the Company making certain stipulations in the New York Action. Those
stipulations have been made and the appeal period in the Ne York Action has
expired without Berry or any other party appealing the September 5, 2000 order.
The issues raised by Berry and the Company in the New York Action will be
litigated in the BC Action together with the further issues raised by the
Company in the BC Action. The Company feels that Berry's claims in the New York
Action were without merit and that the Company will be successful in obtaining
an order declaring that Berry's 600,000 Contingent Shares be cancelled and
further entitling the Company to substantial damages. The Company will
vigorously pursue its position in all respects.
On December 21, 2000, Berry and Tia Berry commenced suit in the Supreme
Court of British Columbia, Action #S006790, Vancouver Registry, against CyPost,
ePost Innovations, Kelly Shane Montalban, J. Thomas W. Johnston, Carl Whitehead
and Robert Sendoh (the "Berry Action"). Statements of Defense have been filed
on behalf of the Company and the other defendants.
The Plaintiffs in the Berry Action allege that the Tia Action, the BC
Action, and the action by Kelly Shane Montalban (Supreme Court of British
Columbia, Action #S002147, Vancouver Registry), against Berry for specific
performance of an option agreement (the "Montalban Action"), collectively,
amount to an abuse of process, malicious prosecution, unlawful interference with
the Plaintiffs' economic rights, or were commenced pursuant to a civil
conspiracy to injure the Plaintiffs.
In the Berry Action, the Plaintiffs seek a declaration that Berry is
entitled to the 600,000 Contingent Shares and claim unspecified damages which
are estimated at Cdn$2,000,000 based on the Statement of Claim. They also claim
punitive or aggravated damages and costs. The Company believes that the
allegations in the Berry Action are without merit and they will be vigorously
defended.
It is expected that the Tia Action, the BC Action and the Berry Action will
be consolidated for the purposes of trial due to the fact that there are
numerous issues of fact and law which are common to all of these actions. The
Company believes that trial will likely take place in the fall of 2002.
A loss by the Company of the claim against it for monetary damages would
have a material adverse effect on the Company's future results of operations,
financial condition and liquidity; however, the Company does not expect to lose
this action and believes additionally that it would be able to negotiate
reasonable payment terms should it lose this suit.
Shane Montalban Litigation
On June 15, 2001, the Company filed a Summons and Complaint against Kelly
Shane Montalban, a principal shareholder of the Company, in the US District
Court for the Southern District of New York alleging liability by Mr. Montalban
to the Company for violations of Section 16(b) of the Securities Exchange Act of
1934, as amended. The suit seeks recovery of short swing profits realized by
Mr. Montalban and affiliated persons during the period September 1999 through
June 15, 2001 as the result of certain purchases and sales of the Company's
common stock by Mr. Montalban and such affiliated persons.
The Company and Mr. Montalban are presently engaged in settlement
discussions to resolve the litigation. No assurance can be given, however, that
the parties will reach a settlement.
ITEM 2. CHANGES IN SECURITIES
On or about May 15, 2001 the Company issued 7,500 shares of its restricted
common stock to Jeff Hoag of Celex Agency for services rendered. These shares
were issued pursuant to the exemption from registration provided by Sec. 4(2) of
the Securities Act of 1933, as amended, as this was a transaction by an issuer
not involving a public offering.
ITEM 5. OTHER INFORMATION
Effective June 8, 2001, Robert Adams resigned as the Company's president
and chief operating officer and as a director to focus his full attention to the
Company's six ISP's with the goal of building the subscriber base and increasing
revenues. Effective June 15, 2001, Angela Belcourt was appointed as a director
of the Company to fill the vacancy created by Mr. Adams' resignation. Effective
June 22, 2001, Ms. Belcourt was appointed as the Company's president,
secretary/treasurer and principal financial officer. Ms. Belcourt joined the
Company in 2000 serving as General Manager, Asia Pacific in which position she
managed the Company's Japanese subsidiary Playa Corporation. She is an active
member of the Canada Japan Society of British Columbia and has extensive
associations with the Japanese business community.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYPOST CORPORATION
DATE: August 14, 2001 By: /s/ Angela Belcourt
-------------------------------
Angela Belcourt
President and Treasurer
(Principal Financial Officer)