U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. ONE
TO
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal Year Ended: December 31, 1999
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
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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 (IRS Employer
of incorporation or organization) Identification No.)
900-1281 West Georgia St.
Vancouver, British Columbia V6E 3J7
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (604) 904 -4422
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Securities registered under Section 12(b) of the Act: NONE
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Securities registered under Section 12(g) of the Act: Common Stock, par value
$.0001 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 disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. [ ]
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Aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of January 31, 2000. $ 26,470,070
State issuer's revenues for its most recent fiscal year. $ 1,020,347
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Transitional Small Business Disclosure Format (check one):
Yes |_|; No |X|
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"): NONE,
however certain exhibits hereto are incorporated by reference to the Form 10-SB
and amendment thereto previously filed by the Registrant with the Commission.
Item Number and Caption Page
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PART I
1. Description of Business...........................................
2. Description of Property...........................................
3. Legal Proceedings.................................................
4. Submission of Matters to a Vote of Security Holders...............
PART II
5. Market for Common Equity and Related Stockholder Matters..........
6. Management's Discussion and Analysis or Plan of Operations........
7. Financial Statements..............................................
8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..............................................
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................
10. Executive Compensation............................................
11. Security Ownership of Certain Beneficial Owners and Management....
12. Certain Relationships and Related Transactions....................
13. Exhibits and Reports on Form 8-K..................................
Item 1. Description of Business.
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(a) Business Development.
CyPost Corporation (hereinafter referred to as the "Registrant", the
"Issuer", or as "CyPost"), a Delaware corporation, was formed on September 5,
1997 under the name "E Post Corporation" to operate as the parent company of two
wholly-owned, sister subsidiaries: ePost Innovations, Inc., a corporation
organized under the laws of British Columbia, Canada ("ePost Canada") and CyPost
USA, Inc., a Delaware corporation formed on September 5, 1997 by the Company
("CyPost USA"). Shortly after its formation, ePost Corporation changed its name
to "CyPost Corporation" to minimize potential trademark difficulties with third
parties. ePost Canada was formed on March 27, 1997 and was acquired by the
Issuer on September 15, 1997 (the "Acquisition"). Prior to the Acquisition,
ePost Canada was a wholly owned subsidiary of Mushroom Innovations, Inc. a
corporation organized under the laws of British Columbia ("MII"). Under the
terms of the Acquisition, the Issuer acquired from MII all of the issued and
outstanding shares of ePost Canada, as well as all intellectual property rights
then owned by ePost Canada, in exchange for 2,000,000 shares of CyPost's Common
Stock. On October 29, 1998, CyPost acquired all of the issued and outstanding
capital stock of Communication Exchange Management Inc., a British Columbia
corporation, from MII in exchange for 4,180,000 CyPost shares. Communication
Exchange Management Inc. remains a wholly owned subsidiary of CyPost. Unless
otherwise stated herein, all dollar amounts refer to U.S. Dollars ("USD$")--not
Canadian Dollars ("CDN$).
PRIOR TO THE FIRST QUARTER OF 1999, CYPOST WAS A DEVELOPMENT STAGE
COMPANY. IT BEGAN OFFERING THE FIRST OF ITS SIX VERSIONS OF ENCRYPTION SOFTWARE
FOR SALE DURING MARCH 1999. ON JUNE 30, 1999, IT COMPLETED THE FIRST OF ITS
ACQUISITIONS OF INTERNET SERVICE PROVIDERS ("ISP'S"). SINCE THAT TIME, IT HAS
ACQUIRED SEVERAL MORE ISP'S WHOSE REVENUES ACCOUNT FOR THE BULK OF THE COMPANY'S
OPERATIONS. IN FEBRUARY 2000, CYPOST ACQUIRED PLAYA CORPORATION, A JAPANESE-
BASED PROVIDER OF ELECTRONIC INSTANT MESSAGING SERVICES.
Through various acquisitions, CyPost conducts its business through the
subsidiaries listed on Exhibit 21.
(b) Business of the Issuer.
THE ISSUER IS A HOLDING COMPANY, THE PRINCIPAL ASSETS OF WHICH consist of
the capital stock of CyPost USA, the capital stock of ePost Canada and the
capital stock of the other subsidiaries listed on Exhibit 21. To date, the
ISSUER, THROUGH ITS OPERATING SUBSIDIARIES, HAS BEEN LARGELY INVOLVED IN THREE
separate, but complementary businesses, i.e.(i)the development and sale of
software products using email encryption to enhance user security and
convenience ("Software Products"), (ii) providing internet connection services
TO SUBSCRIBERS AND (III) PROVIDING INSTANT MESSAGING AND ELECTONIC GREETING CARD
SERVICES. (Unless otherwise qualified herein, the term "Company" shall be used
to refer to the business operations of the Registrant and its consolidated
SUBSIDIARIES.) THE COMPANY IS CURRENTLY SELLING THREE versions of its "Navaho"
SOFTWARE ENCRYPTION PROGRAMS (NAVAHO LOCK 2.4, NAVAHO ZIPSAFE AND NAVAHO LOCK
WITH VOICE) WHICH ENCOMPASSES THE FIRST THREE BUSINESS MODEL DESCRIBED BELOW,
THE REMAINING BUSINESS MODEL IS IN THE INITIAL PLANNING STAGES AND SHOULD BE
ROLLED OUT BY YEAR ENDING DECEMBER 31, 2000. The Company is developing or
partnering with a number of companies to provide products and services to its
INTERNET SERVICE PROVIDER CUSTOMERS THROUGH AN Application server model which
promotes server level distribution of products rather than end user solutions.
On February 23, 2000, the Company completed the acquisition of Playa Corporation
developers of the "Yabumi" instant messaging and e-greeting card service. The
"Yabumi" community of users numbers approximately 85,000 and is located
PRIMARILY in Japan.
Markets for Software Products.
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The Company has developed the Navaho family of software products for the
following markets:
1) Personal Use--consumers who have little or no technical knowledge
of computers and computer programs but who wish to keep electronic
correspondence private.
2) Professional Use--professional business users such as attorneys,
accountants, medical doctors, as well those who need secure communication
capability while traveling
3) Small Businesses--companies between 10-50 employees with a small,
or no Information Services department and who operate out of a single location
4) Enterprise--large businesses with more than 50 employees and who
use corporate intranets including LAN's and WAN's, Extranets, and government
institutions
Products
The Company currently offers six (6) different security encryption
software products each of which bear the name "Navaho". (See discussion of these
under "Status of any publicly announced new product or service").
Distribution Method of Software Products and ISP Service.
The CyPost family of Software Products are delivered both digitally over
the Internet and through distributors who sell shrink-wrapped versions. CyPost's
website, www.cypost.com, offers a full description of its products and the
chance for viewers to make a "cyber-purchase " of its software. In addition,
consumers are able to purchase products directly from popular online retail
sites such as www.beyond.com, www.egghead.com, www.cdw.com, and
www.futureshop.com to name a few. CyPost has entered into a distribution
agreement with Digital River, Inc., a company that provides proprietary software
delivery technology to more than 2000 software publishers and online retailers.
The Company has also negotiated with several distribution competitors of Digital
River, Inc. who offer similar capabilities including ReleaseNow.com, NetSales,
Inc. and ShopNow.com. The Company estimates that its Navaho products are
currently available at more than 1000 secure websites.
CyPost's acquisition strategy includes the acquisition of Internet Service
providers with a target of acquiring an additional 50,000-100,000 subscribers to
add to its approximately 20,000 existing subscribers. This network of service
provider subscribers become a direct marketing and distribution channel for
CyPost. The Company plans to market the Navaho family of products including
Navaho Express (a promotional version of Navaho Lock with Voice) to the client
base in early 2000. CyPost will also distribute a line of privacy and protection
solutions through industry partnerships such as content management solutions and
anti-virus protection.
Further to the ISP distribution network, the Company plans to secure a
relationship with a major advertising firm to work as representatives of the
aforementioned Navaho Express, the promotional version of the Navaho products.
This relationship will leverage the advertising firm's client base and their
need for one to one marketing tools.
Status of any publicly announced new product or service.
Navaho Lock: Navaho Lock software enables consumers to send and receive
secure email and attachments such as documents, spreadsheets, digital sound
files, and business presentation. The program is intuitive, simple to operate,
and exceptionally fast. The product's unique combination of features include:
full integration with all major e-mail programs; built-in file compression for
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faster transmission times; a user-friendly GUI (Graphical User Interface); and
CyPost's exclusive "drag-and-drop" feature that enables users to encrypt and
compress files simply by dragging and dropping them into an encryption field.
Users can select the strength of privacy protection according to their needs, by
simply specifying 40-, 56-, 112-, 128-, or 3DES 168-bit encryption algorithms.
Navaho Lock is available for purchase at www.cypost.com and over 1000
secure distribution sites on the Internet. This product has received favorable
product reviews from PC Magazine, Portable Computing, Secure Computing Magazine,
CNN Interactive, and PC World Online.
Navaho Lock version 2.4 uses private key, or symmetric key, encryption.
Many regard this as superior to public key encryption. In comparison, the
largest-selling competing software relies on an "asymmetric" method of
encryption commonly known as "public/private key". In a public/private key
approach, a publicly available algorithm is used in combination with two
corresponding private keys that generally must be issued by a third party. Not
only is public key encryption notoriously slow (approximately 1,000 times slower
than symmetrical encryption), but the approach also exposes users to the
additional costs and risks involved in relying on a third party to verify the
identity of the sender.
Navaho Lock with Voice: Currently in the final stages of beta testing,
Navaho Lock with Voice software is the successor to Navaho Lock v2.4.
Incorporating all the features of CyPost's original product, Navaho Lock with
Voice allows the user to send and receive compressed and encrypted document
packages, as well as private voice messages, over the Internet. It is expected
to be released in the 1st quarter of 2000.
Summary of new features include:
o Ability to send and receive encrypted Voice E-mail
o Addition of a shredder for securely deleting data from the hard disk
o A new and improved streamlined user interface for greater ease of
use
o Numerous changes to increase user productivity and maximize usage
Navaho Viewer: Navaho Viewer provides an alternative for those
consumers not wanting to purchase the full working copy of Navaho Lock,
but who require the ability to read encrypted files sent to them by
friends or colleagues. Navaho Viewer is available for download free at
CyPost's web site and numerous web sites on the Internet.
Navaho ZipSafe: The third product in CyPost's Navaho family of
security and encryption software, Navaho ZipSafe, was released in March
1999. The file-security software, designed to ensure the privacy of data
on laptops and home PCS, is an extension of CyPost's Navaho product line.
Utilizing the same advanced encryption and compression technology used in
Navaho Lock and offering comparable ease-of-use features (including a
user-friendly GUI and similar "drag-and-drop" methodology), ZipSafe has
the ability to encrypt and then condense files by as much as 70% in a
matter of seconds. This product enables users to secure all computer
files, folders, and directories on a local hard drive such as that found
on a laptop computer. Navaho ZipSafe is available on a free thirty (30)
day trial basis.
Navaho Express: The promotional version of the single user Navaho
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product, Navaho Express offers a unique one to one marketing opportunity
for any business concerned about their clients' privacy and protection.
This product integrates the functionality of Navaho Lock with Voice and a
promotional HTML window allowing the sponsor company to communicate offers
and promotions directly to their client base.
Competition-Encryption Software
CyPost's Navaho line of privacy and protection solutions face
competition from a number of rival products. The largest and most
noteworthy competitors are: Network Associates Inc., InvisiMail
International Ltd., and OpenSoft Corporation. The following table compares
these products to Navaho Lock, version 2.4. Based on Navaho Lock's
superior functionality and easy-to-use features (including its file
compression capability, "drag-and-drop" routine, and user-friendly
interface), CyPost believes that Navaho Lock is well positioned to compete
successfully in the marketplace.
Competitive Comparisons
Product Comparison Table
EATURE NAVAHO LOCK 2.4 PGP 6.5 RPK INVISIMAIL Deluxe MAILSECURE 2.4
Company CyPost Corp. Network InvisiMail Baltimore Associates Intl.Technologies
Price $39.95 $39.95 $49.95 $49.95
Key Strength 40/168 bit 1024-4906 bit 607-1279 bit 128/2048 bit
secret key public key public key public key
Target user Single, Multi Single, Multi Single, Multi Single Exportable
outside U.S. Y Y N N
Encryption Method Symmetric Asymmetric Asymmetric Asymmetric
File Compression Y N Y N
Drag & Drop Encryption Y Y N N
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Evaluation
Version
Available Y Y Y Y
Attachment
Feature Y Y Y Y
Key Lengths With Similar Resistance to Brute-Force Attacks
Symmetric Key Length Public Key Length
56 bits 384 bits
64 bits 512 bits
80 bits 768 bits
112 bits 1792 bits
128 bits 2304 bits
168 bits 3840+ bits
Competition - Encryption Software
Network Associates Inc. (Nasdaq: NETA), a public company
headquartered in Santa Clara, California is the world's largest
independent network security and management software company, and the
tenth largest independent software company with more than 30 million users
worldwide, $612 million in revenue in fiscal 1997, and over 1,500
employees worldwide.
Network Associates has the largest market share of email encryption
software. Its PGP Personal Privacy software program is the most well known
email encryption software program currently on the market. PGP Personal
Privacy's unique selling proposition is they use the strongest encryption
available in the United States using PGP's strong public/private key
technology with at least 128 bit keys. It was voted as the easiest email
encryption program to use in the September 1998 issue of PC World
Magazine. PGP Personal Privacy ($39.95) is available for purchase at the
Network Associates web site as well as most Internet shareware download
sites.
Notable differences between PGP Personal Privacy and Navaho Lock with
Voiceare encrypted voice email, document shredding, a Drop area which
allows for one-step drag and drop file encryption, built in file
compression, and use of symmetric key encryption which is faster and less
cumbersome to set up than public/private key.
Baltimore Technologies (London Stock Exchange: BLM), a public company
headquartered in Dublin, Ireland develops and markets security products
and services for a wide range of e-commerce and enterprise applications.
Its products include Public Key Infrastructure (PKI) systems,
cryptographic toolkits, security applications and hardware cryptographic
devices.
The company was formed in December 1998 by the merger of two companies,
Baltimore Technologies and Zergo Holdings plc. BALTIMORE now employs over
500 people across over twenty global locations, and reported Unaudited pro
forma group revenues for the 12 months to 31 December 1998 of $30 million
Baltimore's email encryption software, named MailSecure is an S/MIME
plugin for Microsoft email clients, Lotus Notes and Eudora. Unlike Navaho
Lock, MailSecure is based on public key infrastructure technology.
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InvisiMail International Ltd., founded in 1997, specializes in secure
Internet commerce and communications solutions for a wide range of
applications. Developed using RPK Security, Inc.'s core technology, the
RPK Encryptonite Engine(tm), the InvisiMail range of products supports
secure message-based applications including Client Services, E-Commerce,
and EDI.
InvisiMail International Ltd., email encryption program called InvisiMail
Deluxe automatically encrypts and decrypts e-mail using 607- 1279bit
public/private key encryption and signs files using DSA Digital File
Signing. The program was selected in the September 1999 issue of PC
Magazine as the Editors Choice for email encryption.
Based on Navaho Lock with Voice's superior functionality and easy-to-use
features (including encrypted voice email, document shredding, file
compression capability, one-step "drag-and-drop" encryption, and
user-friendly interface), CyPost believes that Navaho Lock with Voice is
well positioned to compete successfully in the marketplace.
Market - ISP Division
CyPost Network of Service Providers: Through ISP acquisitions,
CyPost has established approximately 20,000 subscribers to date. The
Company hopes to acquire a target of 50,000 to 100,000 ISP customers. Its
goal is not to establish itself as a competitor of the large service
providers, including telecommunication and cable companies, but rather to
establish a niche market in response to the growing concerns for privacy
and protection. The CyPost network offers a range of services including
web hosting, connectivity, custom programming, roaming services, web
design and e-commerce solutions. These services will be extended to
include privacy and protection solutions such as the previously mentioned
content management and anti-virus solutions as well as a number of other
testing and solution consulting services for network security issues, such
as testing the integrity of client networks. The company has negotiated an
arrangement with UUNet Canada to provide connectivity across the country
and plans to enter into a similar arrangement in the U.S. These agreements
allow the CyPost Network of Service Providers to offer subscribers the
convenience that larger Service Providers can offer while maintaining
focus on excellent customer service and solutions to protect their privacy
rather than merely providing points of connectivity.
THE 'NICHE' MARKET THAT THE COMPANY HOPES TO SERVE WILL FOCUS ON END TO
END SECURE COMMUNICATION SERVICES AND SOLUTIONS FOR SMALL TO MEDIUM
SIZED BUSINESSES. THESE CUSTOMERS TEND TO REQUIRE BOTH EXTRA
HAND-HOLDING (WHICH LARGER TELECOMMUNICATION COMPANIES MAY NOT PROVIDE
UNDER HIGH- VOLUME, LOW-COST SERVICE STRUCTURES) AND ADDITIONAL
SERVICES (AS SMALLER COMPANIES ARE LESS LIKELY TO HAVE DEDICATED
INDIVIDUALS TO MANAGE NETWORKING ISSUES, WEB PROGRAMMING, AND OTHER
TECHNICAL ISSUES). CYPOST DOES NOT BELIEVE THAT LARGER ISPS WILL FAIL
TO ADDRESS SECURITY ISSUES ALTOGETHER, BUT RATHER THE SMALLER COMPANIES
WITH SPECIFIC SECURITY NEEDS, MAY BE OVERLOOKED. THE COMPANY ALSO
BELIEVES THAT ITS RANGE OF PRODUCTS DUE TO ITS 'FOCUS' ON SECURITY WILL
BE GREATER THAN THOSE OF THE LARGER ISPS WHO ARE UNDER MORE PRESSURE TO
OBTAIN LARGER QUANTITIES OF SUBSCRIBERS, RATHER THAN CYPOST'S FOCUS ON
FEWER CLIENTS BUT OFFERING MORE SERVICES TO EACH.
Competition - ISP Division
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The CyPost Network of Service providers operates in the extremely
competitive Internet services market. The fragmented U.S. consumer ISP
market has been dominated to date by approximately seven companies.
According to a July 1999 report by Cahners In-Stat Group however, the
market share of the dominant players in the U.S. consumer ISP market is
being threatened by new business models. The report cites despite the
enormous marketing dollars allocated to advertising, AOL's market share
slipped 2.8% between the final quarter of 1997 and the first quarter of
1999, while MSN saw its marketshare drop by more than half during the same
period.
Moreover, the report notes that during 1998 the combined subscriber
base for non-traditional service providers grew 137 percent, compared to
only 37 percent growth among traditional ISPs (including AOL, MSN,
Mindspring, Earthlink, Prodigy, and Flashnet).
DESPITE THE FACT THAT NON-TRADITIONAL ISP'S ARE GROWING MORE QUICKLY
THAN TRADITIONAL ISP'S, MANY OBSERVERS ANTICIPATE OVER THE NEXT SEVERAL
YEARS FURTHER CONSOLIDATION WITHIN THE ISP MARKET. RECENT MERGER
ACTIVITY HAS SEEN BUSINESS COMBINATIONS BETWEEN AOL AND NETSCAPE; MCI
WORLDCOM AND SPRING AND EARTHLINK AND MINDSPRING. It is not CyPost's
intent to compete head to head with these large ISP's but to compete in
the growing security niche markets by providing value-added privacy and
protection solutions in addition to providing connectivity to business
and individuals.
Our competitors include many large companies that have substantially
greater market presence, financial, technical, marketing and other
resources than we have. The Company competes directly or indirectly with
the following types of companies:
- established online services, such as America Online, the
Microsoft Network, Earthlink and Prodigy;
- local, regional and national ISPs;
- national telecommunications companies, such as AT&T and GTE;
- regional Bell operating companies; and
- online cable services.
Competition in the future is likely to increase and we believe this
will happen as diversified telecommunications and media companies acquire
ISPs, and as ISPs consolidate into larger, more competitive entities.
Competitors may bundle other services and products with Internet
connectivity services, potentially placing the CyPost Network of Service
providers at a significant competitive disadvantage. In addition,
competitors may charge less than we do for Internet services, forcing us
to reduce and/or prevent us from raising our fees. Subsequently future
revenue growth and earnings may suffer.
Government Regulation
The Company believes that the design features of the Navaho products
are unique in connecting to existing Crypto Service Providers and using
them without itself containing any direct encryption coding. Because of
this feature, the Navaho products fall outside of government regulations
such as the munition or export laws that previously restricted other forms
of software encryption programs. The term "crypto service provider" is
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short for "cryptographic service provider" and refers to the computer
language by which cryptographic standards and algorithms are implemented
or used. Different "crypto service providers " use different programming
assumptions and data formatting protocols. Thus one software encryption
program may work well one type of crypto service provider but not
necessarily work well with another type. The result is that it is
difficult to design encryption software that will be readily compatible
with the widely varying crypto service provider formats/protocols which
are in use today in today's digital communication environment. In
contrast, CyPost's "Navaho" family of Software Products is readily
compatible with a broad range of provider formats/protocols.
Dependence on Key Customers
THE COMPANY DERIVES THE BULK OF ITS REVENUES FROM ITS ISP AND
ELECTRONIC MESSAGING OPERATIONS AND AS SUCH ENJOYS THE BENEFIT OF A
BROADLY DIVERSIFIED CUSTOMER BASE OF APPROXIMATELY 115,000 LOCATED
THROUGHOUT ONTARIO, THE CANADIAN AND PACIFIC NORTHWEST AND IN JAPAN.
WITH RESPECT TO ITS DIRECT SOFTWARE SALES WHICH COMPRISED
APPROXIMATELY 1.5% OF ITS 1999 REVENUES, THE COMPANY HAS DERIVED A
SIGNIFICANT PORTION OF ITS SALES REVENUES FROM A "PREFERRED PROVIDER
CONTRACT". UNDER THIS MARCH 1999 AGREEMENT, THE CANADIAN BAR
ASSOCIATION, BRITISH COLUMBIA BRANCH will license 250 copies of Navaho
Lock and Navaho ZipSafe. In addition, clients of these bar members will
be able, for a fee, to license their own versions of these programs.
The Company is actively seeking to broadly market its products and
has taken a number of steps to actively market its products including use
of a variety of print and communications media to build consumer awareness
such as direct mailings, featured appearances of Company personnel on
various television and radio shows broadcast in the U.S. and Canada
(Caspar Weinberger's World Business Review, Dave Chalk's Computer Show;
Dotto's Cafe, CKNW radio and CKWX radio), and features in selected
magazines (Security Magazine, PC Magazine Online, Portable Computing, PC
Magazine OnLine, Portable Computing , Computer Paper, and Canadian Bar).
The Company has hired a director of marketing and anticipates
hiring a director of sales in the near future. In addition, during 1999
the Company has concluded acquisitions of five internet service
providers. See "The 1999 Acquisitions and the Company's Broadened
Strategic Focus".
Research and Development
The Company has abandoned its former development of the CyPost
Terminal, a type of communications software designed to operate on a
remote terminal network. Since December 1998, the Company has focused its
research and development efforts on refinements and/or improvements to its
Software Products. The Company has introduced six (6) versions of its
"Navaho" encryption software during 1999. It is currently developing
English and other language versions of the "Yabumi" Instant Messaging
software which it acquired when it bought Playa Corporation in February of
2000. Any monies expended on research and development will be absorbed
directly by the Company and cannot be "passed through" to customers in the
form of any "cost plus" type of contract.
The 1999 Acquisitions and the Company's Broadened Strategic Focus
THE COMPANY HAS ACQUIRED FIVE (5) Internet service providers during
1999.
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Acquisition of Hermes Net Solutions, Inc. and Intouch Internet Inc.:
Effective June 30, 1999, the Company purchased all the issued and
outstanding shares of Hermes Net Solutions, Inc. for a cash consideration
of $528,000 USD. Also effective June 30, 1999, the Company purchased all
the issued and outstanding shares of Intouch.Internet Inc. for a purchase
price of $293,000 USD. The consideration for this purchase consisted of
cash of $265,510 USD and the issuance of 6,570 pre-split, or 9,855
post-split, common shares valued at $28,000 USD. Both acquisitions have
been accounted for by the purchase method of accounting. In both
acquisitions, the net assets acquired consisted primarily of goodwill and
customer lists which will be amortized over three years on the straight
line basis.
Acquisition of NetRover Inc. and NetRover Office Inc.: On October 4,
1999, the Company purchased all the issued and outstanding shares of
NetRover Inc. and NetRover Office Inc. for a purchase price of $2,700,000
USD. The purchase price was satisfied by a cash payment of
$2,000,000 USD, and the issue of 219,000 post-split common shares valued
at $680,000 USD. These purchases have been accounted for under the
purchase method of accounting.
Acquisition of Connect Northwest and Internet Arena: On October 24,
1999, the Company purchased the assets of the business of Connect
Northwest for a net purchase price of $1,400,000 USD. The purchase price
was satisfied by a cash payment of $670,000 USD and the issuance of
147,985 of the Company's common shares. On November 9, 1999, the Company
purchased the assets of the business of Internet Arena for a purchase
price of $600,000 USD. The purchase price was satisfied by a cash payment
of $242,000 USD, the issuance of 100,698 of the Company's post-split
common shares, and a deferred cash payment of $58,000 USD due in January,
2000. These purchases have been accounted for under the purchase method of
accounting.
ISP's provide several complementary features to CyPost's business
strategy. CyPost gains the advantage of an existing client base who, it is
hoped, will become significant purchasers of encryption products while the ISP
gains the ability to work hand-in-hand with an encryption services provider.
ALSO, MUCH OF AN ISP'S BUSINESS IS SERVICE-BASED AND BASED ON NINE MONTHS OF
OPERATING HISTORY HAVE PROVIDED predictable cash flows. CyPost has undertaken
negotiations to license software which will protect against virus transmission
at the ISP level and is developing programs to regulate content and provide
"Family Safe Surfing"at the Server level.
THE ISPS GENERATE MONTHLY REVENUES FROM CONNECTIVITY SERVICES,
SERVER CO-LOCATIONS, WEB HOSTING, EMAIL SERVICES (LISTSERVS FOR CORPORATE
EMAILINGS) AS WELL AS LUMP SUM PAYMENTS FOR CUSTOM PROGRAMMING AND OTHER
SPECIFIC PROJECTS. AN EXAMPLE OF CUSTOM OR SPECIFIC PROJECTS IS HERMES
GENERATING REVENUE FROM CREATING A SECURE AREA ON A WEB SITE FOR A GRAPHIC
DESIGN FIRM'S CLIENTS TO VIEW THEIR WORKS IN PROGRESS, WITHOUT FEAR OF
COMPETITOR'S EYES. THE BULK OF THE REVENUE CAN BE ATTRIBUTED TO CONNECTIVITY
CURRENTLY, ALTHOUGH THE ENTIRE CYPOST NETWORK OF SERVICE PROVIDERS IS MOVING
TOWARDS FOCUSING ON THE CUSTOM PROJECTS, WEB HOSTING AND SERVER CO-LOCATION,
ANTICIPATING A STRONG HOLD OVER CONNECTIVITY BY THE LARGER ISPS IN A FEW YEARS
TIME. A BRIEF SURVEY OF THE VARIOUS MEMBERS OF THE CYPOST NETWORK OF SERVICE
PROVIDERS IS PROVIDED BELOW:
HERMES NET SOLUTIONS
BASED IN VANCOUVER, BRITISH COLUMBIA, HERMES SERVICES 800 BUSINESS CLIENTS. THEY
OFFER A RANGE OF SERVICE FROM CONNECTIVITY (VARIETY OF DIAL UP SPEEDS TO ADSL),
SERVER CO-LOCATION, WEB HOSTING, CUSTOM PROGRAMMING AND EMAIL SERVICES.
INTOUCH INTERNET, INC.
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BASED IN VANCOUVER, BRITISH COLUMBIA, INTOUCH HAS 2000 RESIDENTIAL/SMALL OFFICE
HOME OFFICE ("SOHO") CLIENTS. INTOUCH HAS AN EXCELLENT "COMMUNITY" FEEL, AND IS
PRIMARILY FOCUSED ON DIAL UP CONNECTIVITY, BASIC WEB HOSTING AND EMAIL SERVICES.
HERMES AND INTOUCH HAVE BEEN INTEGRATED (STAFFING AND TECHNICALLY) AND
ESSENTIALLY RUN AS A SINGLE UNIT.
NETROVER INC.
NETROVER, BASED IN TORONTO AND CHATHAM, ONTARIO, IS THE LARGEST OF CYPOST'S
ISPS. CURRENTLY WITH 14,000 RESIDENTIAL AND SMALL BUSINESS CLIENTS, NETROVER
OFFERS INEXPENSIVE PACKAGES FOCUSING ON WEB HOSTING AND DIAL UP AS WELL AS SOME
SERVER CO-LOCATION. NETROVER'S MANAGEMENT OFFERS CYPOST EXPERIENCE WITH
INTEGRATING ISPS (THEY HAD COMPLETED 3 ACQUISITIONS WHEN WE PURCHASED THEM IN
OCTOBER 1999). NETROVER HAS A DIVISION CALLED NETROVER OFFICE INC. WHICH FOCUSES
MORE SPECIFICALLY WITH THE COMPANY'S BUSINESS CLIENTELE. NETROVER CURRENTLY
OFFERS DIAL UP SERVICE THROUGH A PARTNERSHIP WITH UUNET IN CANADA, AND HAS DIAL
UP AVAILABILITY ACROSS CANADA. WITH THIS NATIONAL REACH, CYPOST WILL USE THE
NETROVER BRAND FOR EXPANSION.
CONNECT NORTHWEST
CNW, BASED IN MT. VERNON AND SEATTLE, WASHINGTON, HAS OVER 1800 BUSINESS AND
RESIDENTIAL SERVICES. MORE FOCUSED ON CUSTOM WORK, CNW'S MANAGEMENT EXPERIENCE
INCLUDES ETHICAL HACKING AND OTHER SECURITY MONITORING. CNW ALSO OFFERS WEB
HOSTING, DIAL UP AND DSL CONNECTIVITY TO ITS CLIENTS.
INTERNET ARENA
INTERNET ARENA, BASED IN PORTLAND, OREGON, WITH 1500 PRIMARILY RESIDENTIAL/SOHO
CLIENTS, OFFERS A SIMILAR RANGE OF SERVICES TO INTOUCH INTERNET. INTERNET ARENA
WAS A STRATEGIC ACQUISITION GEOGRAPHICALLY AS IT OPENED UP THE PACIFIC NORTHWEST
AND A LINK TO THE LARGE CALIFORNIA MARKET.
CyPost is also actively seeking further opportunities to ally with
ISP's and other cyber-businesses both within North America and abroad. On
February 22, 2000, the Company concluded the purchase of Playa Corporation, the
developers of YABUMI instant messaging and e-greeting technologies. YABUMI is
based in Japan and with its 85,000 current users offers a promising opportunity
for both community-building as well as rolling out an integrated and private
solution for instant messaging using the existing messaging technology as the
base. The purchase price was $3,000,000 with $300,000 being paid in cash with
THE BALANCE PAID IN 785,455 shares.
The Yabumi website at Yabumi.com currently generates over 500,000
visitors per month and offers several "value added" communications services.
Yabumi "Instant Messaging" Software allows users to instantly receive
ecommunications by way of a desktop notification. This allows message recipients
to bypass the need for frequent checking of email mailboxes and permits "real
time messaging". The Yabumi software to do this, Yabumi v.2.1, is available via
a free download and can be downloaded in approximately 2 minutes or less by a
user using a 56K modem. In keeping with CyPost's design philosophy, the software
is easy to install and its user interface is extremely "user friendly". In
addition to its ease of use, the program also features real time chat line
capabilities and will easily allow attachment of files and URL's. The number of
Yabumi users has grown by approximately 25% during the last 3 months of 1999 and
CyPost anticipates that an additional 100,000 Japanese users may be added by the
end of 2000. Yabumi is particularly popular among young Japanese woman who are a
demographically important group for marketing purposes. The Company has recently
introduced a MacIntosh-compatible version of its "Instant Messaging Software" as
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well as a "Business to Business" version designed for use in a networked
computing environment.
CyPost believes that the Yabumi software can be readily "localized" for
use in English- language and other cultural settings. The task of translating
and making the software compatible with existing CyPost technolgicy. has already
begun and will use both internal and outsourced software development personnel.
CyPost anticipates that English-language versions of the Yabumi technology will
be developed during the first six months of 2000 and will be available for
product introduction during the second half of 2000.
Item 2. Description of Property.
The Company entered into a net lease with respect to its new office
premises located at 900-1281 West Georgia St.,Vancouver, British Columbia (the
"Premises") for approximately 6500 square feet of office space. The term of the
lease is for 60 months and ends on June 1, 2005. The monthly rent under this
lease is $12,171 CDN$ or approximately $7,911 USD. The Company believes that it
could secure comparable office space in the event that it needed to do so.
Item 3. Legal Proceedings.
ON JUNE 11, 1999, CANADA POST CORPORATION FILED A STATEMENT
OF CLAIM IN THE FEDERAL COURT OF CANADA IN WHICH IT SOUGHT INJUNCTIVE AND
UNSPECIFIED MONETARY RELIEF FOR THE ALLEGEDLY "IMPROPER USE BY THE COMPANY OF
CERTAIN MARKS AND NAMES WHICH CONTAIN THE COMPONENT "POST". ON OCTOBER 18, 1999,
THE COMPANY FILED ITS DEFENCE AND COUNTERCLAIM. IN A MOTION HEARD NOVEMBER 24,
1999, CANADA POST CORPORATION CHALLENGED CERTAIN PARTS OF THE COUNTERCLAIM AND
THE FEDERAL COURT RESERVED JUDGMENT. THERE HAS BEEN NO PRE-TRIAL DISCOVERY AND
NO TRIAL DATE HAS BEEN SET.
ON MAY 25, 1999, THE COMPANY FILED A STATEMENT OF CLAIM IN THE BC COURT
SEEKING A DECLARATION THAT THE PUBLIC NOTICE OF CANADA POST CORPORATION'S
ADOPTION AND USE OF CYBERPOSTE AND CYBERPOST ON NOVEMBER 18, 1998 AND DECEMBER
9, 1998 RESPECTIVELY, DID NOT AFFECT THE COMPANY'S USE OF CYPOST AND EPOST AS
TRADE-MARKS AND TRADE-NAMES PRIOR TO SAID DATES. THE COMPANY SOUGHT SUMMARY
JUDGMENT FOR SUCH A DECLARATION AND ON SEPTEMBER 14, 1999, THE BC COURT REJECTED
SUMMARY JUDGMENT ON THE BASIS THAT NO RIGHT OF THE COMPANY WAS BEING INFRINGED
AND THAT A TRIAL OF THE ISSUES WAS MORE APPROPRIATE. THE REJECTION IS PENDING
APPEAL. THERE HAS BEEN NO PRE-TRIAL DISCOVERY (EXCEPT TO THE EXTENT THAT SOME
WAS DONE AS PART OF THE SUMMARY JUDGMENT APPLICATION) AND NO TRIAL DATE HAS BEEN
SET.
On or about April 13, 2000, Steven Berry, the former CEO of CyPost
brought an action in the civil court of the State of New York, New York County
(Manhattan). The suit alleges claims of conversion, fraud, wrongful
cancellation, breach of contract and breach of fiduciary duty and names CyPost
and Continental Stock Transfer & Trust Company as defendants, and seeks damages
of $3 Million per claim. It also sought injunctive relief via an Order to Show
Cause which has been denied by the court. The suit arises out of the Company's
cancellation of stock awarded to Mr. Berry in contemplation, and upon the
condition, of his remaining in the employ of the Company. Mr. Berry resigned
from the Company on January 17, 2000 citing personal reasons for his departure.
The Company believes his claims to be without merit and intends to contest them
vigorously.
Item 14: Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of fiscal 1999
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to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market Price for Common Equity
and Related Shareholder Matters.
1. (a) The Issuer's Common Stock is listed on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board under the trading
symbol of "POST". The Common Stock became listed on September 21, 1998.
Prior to that time, there had been no trading in the Issuer's Common
Stock. Pending the resolutions of comments previously received in the
ordinary course from the SEC when it filed its Form 10-SB Registration
Statement, the OTC "Bulletin Board" has placed an "E" symbol on the
Company's stock. The Company has filed an Amendment No. 1 to its Form
10-SB with the SEC. The Company, its attorneys and accountants have
submitted their responses to these SEC comments and are awaiting
processing of them by the SEC. The Company is required to resolve these
comments with the SEC before April 14, 2000 in order to retain its OTC
Bulletin Board eligibility. Should these comments not be resolved by such
time, the Company's Common Stock will be removed from the OTC and will be
traded in the "pink sheets" which is generally regarded as a less liquid
trading forum. The Company will be able to reapply for listing on the OTC
as soon as it resolved all comments with the SEC.
Accordingly, the high and low bid prices for the Issuer's Common
Stock for each quarter since its date of listing, as reported by National
Quotation Bureau, LLC, are as follows:
QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- -------------
1999 Q4 (10/01-12/31) $6.50 $3.00
1999 Q3 (7/1-9/30) $8.25 $3.00
1999 Q2 (4/1 -6/30) $3.00 $1.78
1999 Q1 (01/01 - 03/31) $1.78 $0.83
1998 Q4 (10/01- 12/31) $0.89 $0.05
These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.
(b) The approximate number of record holders of the Issuer's
Common Stock according to its transfer agent is 74. Included
in this number
are shares held by Cede & Co., the nominee for Depository Trust Company, a
stock clearing house for financial institutions. The Issuer has not
contacted stock brokerage firms shown on the Issuer's stock transfer records to
determine the number of beneficial holders whose stock is held in "street name",
or the name of the brokerage house with which a shareholder's account is
maintained.
(c) The Issuer has not paid any cash dividends on its Common Stock,
nor does it intend to do so in the foreseeable future. Under the General
Corporation Law of the State of Delaware, the Issuer may only pay
dividends out of capital and surplus, or out of certain delineated
retained earnings, all as defined in the General Corporation Law. There
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can be no assurance that the Issuer will have such funds legally available
for the payment of dividends in the event that the Issuer should decide to
do so.
(d) On June 30, 1999, the Company issued 6,570 pre-split, or 9,855
post-split shares of its common stock to the former owners of
InTouch.Internet, Inc. as partial payment for the Company's acquisition of
that company. These shares were issued under the Section 4(2) exemption
for transactions by an issuer not involving a public offering under the
Securities Act.
On August 13, 1999, the Company issued 1,000,000 pre-split, or
1,500,000 post-split, shares of its common stock to Blue Heron Venture
Fund Ltd ("Blue Heron") pursuant to Regulation S under the Securities Act.
No underwriting commissions, fees, or discounts were paid in connection
therewith.
On September 29, 1999, the Company agreed to issue 219,000 post
split shares of its common stock to the former owners of NetRover, Inc.
The shares issued in the Net Rover transaction were disclosed in the 8-K
Report filed by the
Company on October 2, 1999. The shares issued in the Net Rover acquisition
were issued pursuant to the Section 4(2) Securities Act statutory
exemption for transactions by an issuer not involving a public offering.
On October 26, 1999, the Company issued 147,985 shares of its common
stock to the former owners of Connect Northwest Internet Services LLC as
partial payment for the Company's acquisition of that entity. These shares
were issued under the Section 4(2) Securities Act exemption for
transactions by an issuer not involving a public offering.
On November 4, 1999 the Company issued 3,000,000 shares of its
common stock to Blue Heron in consideration of which Blue Heron cancelled
indebtedness owing from the Company in the aggregate principal amount of
$3,000,000 together with accrued interest. These shares were issued
directly to Blue Heron pursuant to Regulation S under the Securities Act
and no underwriting commissions, fees or discounts were paid in connection
therewith.
On November 9, 1999, the Company issued 20,140 shares of its common
stock to the former owners of Internet Arena, Inc. as partial payment for
the Company's acquisition of that entity. These shares were issued under
the Section 4(2) Securities Act exemption for transactions by an issuer
not involving a public offering.
Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General: End of development stage activities and commencement of business
operations
Cypost produces and markets computer privacy protection technologies
and provides Internet conductivity to business and residential customers.
From the Company's inception date until approximately mid-March of 1999,
the Company was considered a development stage enterprise. Since that
time, the Company has (i) publicly marketed six (6) software encryption
products under its "Navaho" trademark, (ii) acquired five U.S. and
Canadian Internet service providers during the year ending December 31,
1999, and (iii) acquired Playa Corporation, the developers of "Yabumi"
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Japanese-language instant messaging and greeting card services, with an
existing customer base of 85,000 customers.
The Company's results of operations for the year ending December 31, 1999 should
be viewed with considerable caution due to the following factors:
1) Results of operations for the year ending December 31, 1999 do not
reflect a full year's worth of operating performance but rather nine (9) months
of operations as the Company only commenced substantial business operations in
the second quarter of 1999.
2) The Company completed five (5) acquisitions of ISP's and most of its
revenues are based on these. The future growth rate of the present customer base
cannot be predicted with certainty and it is not certain that the Company will
be able to continue its strategy of expansion by acquisition.
3) Inherent in any acquisitions are costs which arise from integration of
operations into the Company's existing business operations. Many of these may be
viewed as one-time, non- recurring charges which are not likely to be repeated
in future performance periods.
Due to these factors, the 1999 results of operations discussed below may not be
an accurate indication of future performance. In addition, comparison of results
for the year ended December 31, 1999 with those for the year ended December 31,
1998 are difficult to make due to the basic dissimilarity between a developing
stage company and a company that has commenced substantial business operations.
Results of operations for the year ended December 31, 1999 and for the
year ended December 31, 1998.
The Company commenced substantial business operations during the second
quarter of 1999 and its revenues are attributed to operations during that time
frame. These revenues are attributable virtually entirely to the operations of
the various Internet service providers which the Company acquired during the
year ending December 31, 1999. The Company generated revenues of $1,020,347 for
the year ended December 31, 1999. It had no revenues for the prior year when the
Company was entirely a development stage company.
DIRECT COSTS OF $563,118 FOR THE YEAR ENDED DECEMBER 31, 1999 CONSIST OF
TELECOMMUNICATION CHARGES IN RESPECT OF PROVIDING INTERNET CONNECTION SERVICES
TO CUSTOMERS. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF $2,007,779 FOR THE
YEAR ENDED DECEMBER 31, 1999 INCLUDES $342,888 FOR SALES AND MARKETING, $707,799
FOR SALARIES AND BENEFITS, $425,604 FOR PROFESSIONAL SERVICES, AND $531,488 FOR
GENERAL AND ADMINISTRATIVE EXPENSES. DEVELOPMENT COSTS OF $209, 303 FOR THE YEAR
ENDED DECEMBER 31, 1999 REPRESENT AMOUNTS INCURRED IN DEVELOPING THE COMPANY'S
ENCRYPTION SOFTWARE PRODUCTS. THE INCREASE IN THE ABOVE NOTED COSTS DURING 1999
OVER 1998 RESULTS FROM THE COMPANY EMERGING FROM THE DEVELOPMENT STAGE IN 1999
AND COMMENCING REVENUE GENERATING ACTIVITIES.
Liquidity and capital resources
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
of $4,491,123 for the year ending December 31, 1999 versus $275,539 for the year
ending December 31, 1998. Although expense items included non-cash charges of
$2,731,270 (amortization and depreciation charges of $518,770 and interest
expenses of $2,212,500), the Company has not generated positive cash flow from
operations. These factors indicate that the Company's continuation as a going
concern is dependent upon its ability to obtain adequate financing.
Although the Company's cash position at December 31, 1999 had improved to
$415,779, as compared to $47,212 at December 31, 1998, the improvement in cash
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position can be attributed to loans made to the Company by Blue Heron Venture
Fund, Ltd. These loans were made under agreements with that lender under which
the Company may draw up to $16 million in unsecured loans. These loans bear
interest at 8% per annum and are payable on demand. The outstanding portion of
these loans are convertible into Common Stock of the Company at prices ranging,
at present, from $1.00 to $2.50 per share. The lender is free to withdraw this
line of credit at any time, and since the loans are payable on demand the
Company's ability to continue operations is dependent upon the willingness of
its lender to forebear from demanding payment. The Company believes that its
lender will continue to refrain from demanding payment for the immediately
foreseeable future, but it is under no obligation to do so. Should the Company's
lender demand payment the Company would be required to seek financing from other
sources. It does not believe that bank borrowing would be available to it under
present circumstances, and there can be no assurance that the necessary
financing could be obtained from other sources. Even if the necessary funding
were available, it might be available only on terms which management would not
find acceptable.
Item 7. Financial Statements.
Registrant's Consolidated Financial Statements as of December 31, 1999 and
for the year ending December 31, 1999, and the independent auditor's report of
Arthur Andersen LLP, independent public accountant, with respect thereto, appear
in pages F1 -F16 of this Report on Form 10-KSB.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None. As disclosed in the 8-K filed on October 19, 1999, CyPost has
engaged Arthur Andersen LLP to act as its auditor.
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons;Compliance with Section 16(a) of the Exchange Act.
Directors of the Company serve for a term of one year or until their
successors are elected. Officers are appointed by, and serve at the
pleasure of, the Board. Profiles of the current Directors and Executive
Officers of the Issuer are set forth below:
Robert Sendoh, 47, Director and Chief Executive Officer
Mr.Sendoh acted as a Director throughout 1999 and in January, 2000
succeeded to the position of Chief Executive Officer formerly occupied by
Steven Berry. Bob has successfully conceived and operated three separate
companies and brings a wealth of business knowledge and financial
understanding to the Company. After receiving his B.A. in Economics from
Meiji University in Tokyo in 1973, he founded KKG Incorporated, a project
planning and development firm, also located in Tokyo, Japan. KKG
Incorporated was responsible for the planning and construction of major
shopping centers, golf courses and residential complexes around the world.
Dissatisfied with the lack of spreadsheet and product management software
for businesses, Bob developed his own, as well as implementing a highly
efficient security and communication system to maintain and expand the
reputation of his company. After moving to Vancouver, Canada in 1991, Bob
started his own sailing school, Windvalley Sailing School, which now has
franchises located in Singapore and Japan. He is currently an
Instructor/Director, and Evaluator with the International Sail and Power
Association, a non-profit organization.
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Rounding out his business expertise, Bob is also a co-owner of EPPE
Sportswear, which manufactures and markets their high quality snowboarding
apparel internationally.
Carl Whitehead, 28, Director and Head of Strategic Acquisitions and
Partnerships
During the period 1996-99, Carl was a corporate officer and director
in Mushroom Innovations, Inc. and ePost Innovations, Inc., two
technology-oriented companies the latter of which was acquired by CyPost.
Between 1993-97 he was the founder and owner of Futuresite Productions, a
computer service company which supplies, maintains, and services, home and
business computers in the lower mainland. Specializing in the Windows95
environment and TCP/IP protocols he naturally embraced this opportunity to
develop CyPost into a competitive leader in the software industry. Carl
has completed secondary business courses in accounting and finance.
James T. Johnston, 59, Director.
Mr. Johnston joined our Board in order to fill the vacancy created
by the resignation of Steve Berry. Mr. Johnston is, and has been, a
licensed pilot for Canadian Airlines for 34 years and an airline Captain
for 28 years. Mr. Johnston has been active in representing the airline
pilot's union in a number of capacities and has been involved in several
high-level contract negotiations.
Steven M. Berry, 40, acted as Director, Chief Executive Officer and
President during 1999. Mr. Berry resigned from all positions, including
directorships, held with CyPost and its subsidiaries on January 17, 2000
citing personal reasons for his departure.
Item 10. Executive Compensation.
Steven M. Berry became Chief Executive Officer and Chief Operating
Office in January of 1999 and received an annual salary of $120,000. Mr.
Berry had previously rendered consulting services to the Company prior to
his formal installation as Chief Executive Officer and President. In
connection with his agreement to become Chief Executive Officer, Mr. Berry
was awarded 400,000 pre-split, or 600,000 post-split shares. Prior to that
time, Carl Whitehead exercised primary executive responsibilities. Neither
Mr. Whitehead nor any other executive officer received cash compensation
in excess of $100,000 for the years 1997 and 1998. For the year ending
December 31, 1998, Mr. Whitehead received cash compensation and expense
reimbursement of $10,000.
Mr. Robert Sendoh currently serves without pay as Chief Executive
Officer of the CyPost. In addition, all directors currently serve without
pay.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
(a) Security Ownership of Certain Beneficial Owners.
The following information relates to those persons known to the
Issuer to be the beneficial owner of more than five percent (5%) of the
Common Stock, par value $.001 per share, the only class of voting
securities of the Issuer outstanding.
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Name and Amount and
Title of Address of Nature of
Percentage
Class Beneficial Owner Beneficial Ownership
of Class*
Common Stock, par value Kelly Shane Montalban 6,062,550 Million
shares 29.9%
$0.001 per share P.O Box 700, direct and indirect
beneficial
British Columbia VON 2EO ownership
* Based on 20,327,038 shares issued and outstanding. Mr. Montalban's
holdings indicated above include shares owned by Blue Heron Venture Fund
Ltd. and Pacific Gate Capital Fund, the beneficial ownership of which is
attributed to Mr. Montalban.
----------
The Company has not contacted stock brokerage firms holding shares
of the Company's Common Stock in "street name" to determine whether there
are additional substantial shareholders of the Company. 4,311,432 shares
or 21.29% of the Common Stock outstanding is held in the name of Cede &
Co., a nominee for Depository Trust Company, a stock clearing house
servicing financial institutions.
(b) Security Ownership of Management.
The number of shares of Common Stock of the Issuer owned by the
Directors and Executive Officers of the Issuer is as follows:
Name and Amount and
Title of Address of Nature of
Percentage
Class Beneficial Owner Beneficial Ownership
of Class*
Common stock, par value Carl Whitehead 327,000 shares
1.615%
$0.001 per share 20 Oceanview Road direct ownership
Vancouver, British
Columbia VON 2EO
Common stock, par value Robert Sendoh 330,000 shares
1.615%
$0.001 per share 990 Beach Avenue, #304 direct ownership
Vancouver, British
Columbia V6Z 2N9
All Officers and Directors (2 persons): 657,000
shares 3.23%
----------
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* Based on 20,327,038 shares issued and outstanding. Forward-Looking
Statements
Item 12. Certain Relationships and Related Transactions.
On September 17, 1997, CyPost purchased all of the shares of ePost
Canada Inc., a corporation organized, controlled, and operated by Mr.
Whitehead. At the time of the negotiation and the actual purchase of these
shares, Mr. Whitehead was not affiliated with CyPost and was neither an
officer, director, nor a shareholder of CyPost. As a result of that
transaction, Mr. Whitehead became a substantial shareholder in CyPost, and
subsequent to that transaction became an officer and a Director of CyPost.
On September 18, 1998, CyPost acquired, through a stock purchase,
Communications Exchange Management, Inc., a corporation indirectly
controlled by Mr. Whitehead. At the time of this transaction, Mr.
Whitehead was an officer, Director and large shareholder of CyPost. The
transaction was approved by a majority of CyPost's Directors. The Company
issued 4,180,000 shares of common stock valued at $0.04 per share for an
aggregate consideration of $4,180 in asset cost and has charged operations
with an additional $167,200 as compensation expense. The Company acquired
all the issued stock of Communications Exchange Management and its assets
consisting of source code written for data encryption software, personal
information management and electronic mail functionality along with the
intellectual property rights to a number of other projects.
CyPost has secured financing through its issuance of certain 8 %
Demand Notes payable to Blue Heron Venture Capital Fund Ltd. ("Blue
Heron"), a corporation in which Kelly Shane Montalban is deemed to have an
"indirect pecuniary" interest as a result of Mr. Montalban's status as
investment adviser for Blue Heron. The Demand Notes are unsecured and are
convertible into common stock at such terms as may be agreed upon by the
holder and the obligor. Between May and June of 1999, at a time when
CyPost had virtually no operating revenues, it obtained $1 Million in
financing through issuance of these Demand Notes. These Demand Notes were
later converted into common shares with $ 1 Million of principal and
associated accrued interest being converted at a price of $1 per share.
Between July and November of 1999, the Company executed various further
demand notes with similar terms and in November 1999, an aggregate
principal amount of $3 Million together with associated accrued interest
was converted at a price of $1 per share. Each borrowing and the execution
of the associated Demand Note was approved by a disinterested majority of
Directors.
In connection with its February 2000 acquisition of Playa Corporation,
CyPost borrowed an additional $300,000 from Blue Heron, the terms of which are
substantially similar to those described above.
Item 13. Exhibits List and Reports on Form 8-K.
(a) Exhibit No. Description
----------- -----------
2 Certificate of Incorporation of Registrant*
2.1 Certificate of Amendment to Certificate of
Incorporation of Registrant *
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2.2 Amended and Restated Certificate of
Incorporation *
2.3 ByLaws *
6.1 Preferred Supplier Agreement with Canadian
Bar Association **
6.2 Lease re: CyPost headquarters (W. Georgia St.)
(Omitted - will be supplied on request)
8.1 Acquisition Agreement dated as of
September 17, 1997 between the Issuer and
ePost Canada *
8.2 Share Purchase Agreement dated as of
October 29,1998 between the Issuer and
Mushroom Innovations, Inc.*
8.3 Share Purchase Agreement dated as of June
30, 1999 regarding acquisition of Hermes
Net Solutions Inc. shares *
8.4 Share Purchase Agreement dated as of June
30, 1999 regarding acquisition of
InTouch.Internet Inc. shares *
8.5 ACQUISITION AGREEMENT DATED AS OF OCTOBER 4 1999
BETWEEN THE ISSUER AND NET ROVER INC ***
8.6 ACQUISITION AGREEMENT DATED AS OF
OCTOBER 4, 1999 BETWEEN THE ISSUER AND
NET ROVER OFFICE INC ****
8.7 ACQUISITION AGREEMENT DATED AS of
OCTOBER 26, 1999 BETWEEN THE ISSUER AND
CONNECT NORTHWEST SERVICES *****
21 List of Subsidiaries
23 Consent of Arthur Andersen LLP, Certified
Public Accountants
27 Financial Statement Schedule
*Incorporated by reference from the Registration Statement on Form 10-SB
filed with the Commission on July 19, 1999.
**Incorporated by reference from Amendment No. 1 to the Registration
Statement on Form
*** INCORPORATED BY REFERENCE FROM THE FORM 8-K
FILED WITH THE COMMISSION ON.
**** INCORPORATED BY REFERENCE FROM THE FORM 8-K
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FILED WITH THE COMMISSION ON OCTOBER 12, 1999.
***** INCORPORATED BY REFERENCE FROM THE FORM 8-K FILED WITH THE
COMMISSION ON NOVEMBER 12, 1999.
10-SB filed with the Commission on March 9, 2000.
(b) The Registrant filed the following 8-K Reports during the last
quarter of 1999:
1. October 12, 1999 re: acquisition of Net Rover Inc. and Net Rover
Office Inc.
(Item 2)
2. October 19, 1999 re: change in Registrant's Certifying Accountant
(Item 4)
3. November 12, 1999 re: acquisition of Connect Northwest Services
LLC assets
(Item 2)
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYPOST CORPORATION
DATE: APRIL 14, 2000 By: /s/
----------------------------
Robert Sendoh
Chief Executive Officer
<PAGE>
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
To the Shareholders of
CYPOST CORPORATION:
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEET OF CYPOST
CORPORATION (a Delaware corporation) as of December 31, 1999 and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyPost Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
year then ended in accordance with accounting principles generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1, the
Company has incurred operating losses since its inception and requires
additional financing to continue operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
The consolidated financial statements of CyPost Corporation as of December 31,
1998 and for the periods ended December 31, 1998 and 1997 were audited by
another auditor whose report dated March 12, 1999 expressed an unqualified
opinion with an explanatory going concern paragraph on those statements.
"ARTHUR ANDERSEN LLP"
Vancouver, British Columbia
March 23, 2000.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(U.S. Dollars)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
CASH ............................................................... $ 415,779 $ 47,212
Accounts receivable, net of allowance for
DOUBTFUL ACCOUNTS OF $34,000 (1998- $NIL) ....................... 233,188 --
PREPAIDS AND DEPOSITS .............................................. 173,319 27,998
OTHER ASSETS ....................................................... 69,389 28,657
----------- -----------
891,675 103,867
PROPERTY AND EQUIPMENT, NET ........................................... 599,582 22,330
GOODWILL AND OTHER INTANGIBLES, net of
AMORTIZATION OF $458,758 (1998- $NIL) .............................. 5,036,785 --
----------- -----------
$ 6,528,042 $ 126,197
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE ................................................... $ 849,300 $ 11,090
ACCRUED LIABILITIES ................................................ 133,937 --
LOANS .............................................................. 875,000 --
DEFERRED REVENUE ................................................... 626,143 --
PURCHASE OF INTERNET ARENA ......................................... 240,000 --
----------- -----------
2,724,380 11,090
----------- -----------
SHAREHOLDERS' EQUITY
Share capital
Authorized
5,000,000 preferred stock with a par value of $.001
30,000,000 common stock with a par value of $.001
Issued and outstanding
Nil preferred stock
20,246,480 COMMON STOCK (1998- 13,264,500) ................... 20,246 13,264
PAID-IN CAPITAL .................................................... 8,533,002 343,416
DEFICIT ............................................................ (4,766,662) (275,539)
CURRENCY TRANSLATION ADJUSTMENT .................................... 17,076 33,966
----------- -----------
3,803,662 115,107
----------- -----------
$ 6,528,042 $ 126,197
=========== ===========
</TABLE>
Approved by the Directors:
...................................................................... Director
...................................................................... Director
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars)
<TABLE>
<CAPTION>
Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE .............................. $ 1,020,347 $ -- $ --
DIRECT COSTS ......................... 563,118 -- --
------------ ------------ ------------
457,229 -- --
------------ ------------ ------------
EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 2,007,779 183,046 --
AMORTIZATION AND DEPRECIATION ..... 518,770 6,233 --
DEVELOPMENT ....................... 209,303 86,260 --
------------ ------------ ------------
2,735,852 275,539 --
------------ ------------ ------------
(2,278,623) (275,539) --
INTEREST EXPENSE ..................... 2,212,500 -- --
------------ ------------ ------------
NET LOSS ............................. $ (4,491,123) $ (275,539) $ --
============ ============ ============
LOSS PER SHARE, BASIC AND DILUTED .... $ (0.28) $ (0.04) $ --
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ................ 15,816,232 7,720,603 961,644
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)
<TABLE>
<CAPTION>
Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C> <C>
NET LOSS ............................ $(4,491,123) $ (275,539) $ --
Add items not affecting cash
AMORTIZATION AND DEPRECIATION .... 518,770 6,233 --
INTEREST EXPENSE ................. 2,212,500 -- --
NON-CASH EXPENSES ................ -- 9,500 --
----------- ----------- -----------
(1,759,853) (259,806) --
Changes in non-cash operating
accounts
ACCOUNTS RECEIVABLE .......... (90,017) -- --
PREPAIDS AND DEPOSITS ........ (109,550) (27,998) --
OTHER ASSETS ................. (15,972) 9,966 --
ACCOUNTS PAYABLE ............. 583,787 9,125 1,965
ACCRUED LIABILITIES .......... 61,417 -- --
DEFERRED REVENUE ............. 149,921 -- --
----------- ----------- -----------
(1,180,267) (268,713) 1,965
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisitions of businesses, less cash
THEREIN OF $115,953 .............. (3,612,066) -- --
PROPERTY AND EQUIPMENT, NET ......... (270,100) (11,310) (17,730)
----------- ----------- -----------
(3,882,166) (11,310) (17,730)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
LOAN ................................ 4,875,000 -- --
SALE OF COMMON STOCK ................ 556,000 323,000 20,000
----------- ----------- -----------
5,431,000 323,000 20,000
----------- ----------- -----------
INCREASE IN CASH .......................... 368,567 42,977 4,235
CASH, BEGINNING OF PERIOD ................. 47,212 4,235 --
----------- ----------- -----------
CASH, END OF PERIOD ....................... $ 415,779 $ 47,212 $ 4,235
=========== =========== ===========
CASH PAID DURING THE PERIOD FOR
INTEREST ............................... $ -- $ -- $ --
INCOME TAXES ........................... -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in
NUMBER AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
Incorporation date, September 5, 1997
Issued for acquisition of
<S> <C> <C> <C> <C> <C>
ePOST Innovations, Inc. .................... 3,000,000 $ 3,000 $ (1,000) $ -- $ 2,000
ISSUED ON SALE OF UNITS ....................... 600,000 600 19,400 -- 20,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ........................ 3,600,000 3,600 18,400 -- 22,000
Issued on sale of units ....................... 2,400,000 2,400 77,600 -- 80,000
Issued for cash ............................... 57,000 57 18,943 -- 19,000
Issued for legal services ..................... 22,500 22 7,478 -- 7,500
Issued for acquisition of
Communication Exchange Management, Inc. ..... 6,270,000 6,270 (2,090) -- 4,180
Issued for exercise of warrants ............... 915,000 915 243,085 -- 244,000
Offering expenses ............................. -- -- (20,000) -- (20,000)
NET LOSS ...................................... -- -- -- (275,539) (275,539)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ........................ 13,264,500 13,264 343,416 (275,539) 81,141
Issued for acquisition of InTouch.Internet Inc. 9,855 10 28,515 -- 28,525
Issued for acquisition of NetRover Inc. .......
and NetRover Office Inc. .................... 219,000 219 679,324 -- 679,543
Issued for acquisition of Connect Northwest ... 147,985 148 659,852 -- 660,000
Issued for acquisition of Internet Arena ...... 20,140 20 59,980 -- 60,000
Issued for loan conversion .................... 4,500,000 4,500 3,995,500 -- 4,000,000
Issued for exercise of warrants ............... 2,085,000 2,085 553,915 -- 556,000
Beneficial conversion feature on loans ........ -- -- 2,212,500 -- 2,212,500
NET LOSS ...................................... -- -- -- (4,491,123) (4,491,123)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ........................ 20,246,480 $ 20,246 $ 8,533,002 $(4,766,662) $ 3,786,586
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CYPOST CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(U.S. Dollars)
1. NATURE OF OPERATIONS AND GOING CONCERN
CyPost Corporation was formed on September 5, 1997 under the laws of the
State of Delaware and its head office is located in Vancouver, Canada.
CyPost Corporation and its subsidiaries (the "Company") generate revenues
from value-added protected internet connection services, web-site hosting,
advertising sales, promotional opportunities, and sales of privacy and
protection products. The Company's activities also include determining the
feasibility of encryption software products, beginning initial programming
and product development, conducting market research, and undertaking
various private placement offerings. The Company emerged from the
development stage in 1999 and commenced revenue generating activities.
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 before
interest expense of approximately $2.5 million for the period from
inception September 5, 1997 to December 31, 1999, has a working capital
deficiency, and requires additional financing for its business operations.
As of December 31, 1999, the Company has $11.1 million of funding
available which can be drawn against a promissory note agreement with a
lender; however, the lender has the option, at any time, to withdraw its
offer to lend this amount.
The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its
software products, and market penetration and profitable operations from
its internet connection services. The Company is actively pursuing
alternative financing and has had discussions with various third parties,
although no firm commitments have been obtained. Management is also
pursuing acquisitions of other businesses with existing positive cash
flows. In addition, management is working on attaining cost and efficiency
synergies by consolidating the operations of the businesses acquired.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern".
While management believes that the actions already taken or planned, as
described above, will mitigate the adverse conditions and events which
raise doubt about the validity of the "going concern" assumption used in
preparing these financial statements, there can be no assurance that these
actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of
assets, the reported amounts of its liabilities, the reported revenues and
expenses, and the balance sheet classifications used.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which
are wholly owned, include ePost Innovations Inc., NetRover Inc., NetRover
Office Inc., Hermes Net Solutions Inc. and InTouch.Internet Inc.
FOREIGN CURRENCY TRANSLATION
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 shareholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS
The Company has, where practicable, estimated the fair value of financial
instruments based on quoted market prices or valuation techniques such as
present value of estimated future cash flows. These fair value amounts may
be significantly affected by the assumptions used, including the discount
rate and estimates of cash flow. Accordingly, the estimates are not
necessarily indicative of the amounts that could be realized in a current
market exchange. Where these estimates approximate carrying value, no
separate disclosure of fair value is shown.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the
straight-line method over a period of five years. Maintenance and repairs
are charged against operations and betterments are capitalized.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income
attributable to common shareholders by the weighted average number of
common shares outstanding during the respective periods. Diluted earnings
(loss) per share is computed similarly, but also gives effect to the
impact that convertible securities, such as warrants, if dilutive, would
have on net earnings (loss) and average common shares outstanding if
converted at the beginning of the year. The effects of potential common
shares such as warrants would be antidilutive in each of the periods
presented in these financial statements.
The number of shares used in calculating basic and diluted earnings (loss)
per share is 15,816,232 for 1999 (1998- 7,720,603).
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's primary source of revenue is earned from internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are
provided. Revenues applicable to future periods are classified as deferred
revenue.
DIRECT COSTS
Direct costs consist of telecommunications charges in respect of providing
internet connection services to customers. These costs are expensed as
incurred.
SELLING AND MARKETING COSTS
Selling and marketing costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of software
development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the
completion of beta testing of a working product. The establishment of
technological feasibility and the ongoing assessment of the recoverability
of these costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and changes in
software and hardware technology. No software development costs have been
capitalized by the Company to date.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists and goodwill related
to acquisitions accounted for under the purchase method of accounting.
Amortization of these purchased intangibles is provided on the
straight-line basis over the respective useful lives of the intangible
assets which is estimated to be three years.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired.
The Company considers factors such as significant changes in the
regulatory or business climate and projected future cash flows. Impairment
losses are measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
INCOME TAXES
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.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' figures
to the current year presentation.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires the recognition of all derivatives as either assets
or liabilities and the measurement of those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133", issued in
August 1999, postpones for one year the mandatory effective date for
adoption of SFAS No. 133 to January 1, 2001.
The Company does not currently engage in derivative trading or hedging
activities; hence, SFAS No. 133 and SFAS No. 137 will not have a material
impact on its financial position or results of operations.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation under a fair value based method. Alternatively,
stock-based employee compensation can be accounted for under APB No. 25,
"Accounting for Stock Issued to Employees", under which no compensation is
recorded.
The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and
106", revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements
for pension and other postretirement benefits to the extent practicable,
requires additional information on changes in benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer considered useful.
The Company does not offer any pension or other postretirement benefits.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The
implementation of SOP 98-1 does not have a material impact on the
Company's financial position or results of operations.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities". SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
implementation of SOP 98-5 does not have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. The Company believes its
revenue recognition practices are in conformity with the guidelines
prescribed in SAB No. 101.
3. ACQUISITIONS
During 1999, the Company completed a number of business and asset
acquisitions. These acquisitions are accounted for using the purchase
method, and accordingly, these consolidated financial statements include
the results of operations from the date of acquisition of each respective
business.
NETROVER INC. AND NETROVER OFFICE INC.
On October 4, 1999, the Company acquired all of the shares of NetRover
Inc. and NetRover Office Inc. for Cdn. $4 million (U.S. $2.7 million). The
consideration for the purchase included cash of Cdn. $3 million (U.S. $2
million) and 219,000 shares of common stock for Cdn. $1 million (U.S.
$680,000). NetRover Inc. and NetRover Office Inc. are based in Toronto,
Canada.
The purchase included goodwill and other intangibles of Cdn. $4.2 million
(U.S. $2.9 million) which will be amortized on a straight-line basis over
its estimated useful life of three years.
HERMES NET SOLUTIONS INC.
On June 30, 1999, the Company acquired all of the shares of Hermes Net
Solutions Inc. for cash consideration of Cdn. $777,000 (U.S. $528,000).
Hermes Net Solutions Inc. is based in Vancouver,
Canada.
The purchase included goodwill and other intangibles of Cdn. $644,000
(U.S. $437,000) which will be amortized on a straight-line basis over its
estimated useful life of three years.
INTOUCH.INTERNET INC.
On June 30, 1999, the Company acquired all of the shares of
InTouch.Internet Inc. for Cdn. $428,000 (U.S. $293,000). The consideration
for the purchase included cash of Cdn. $386,000 (U.S. $265,000) and 9,855
shares of common stock for a value of $42,000 (U.S. $28,000).
InTouch.Internet Inc. is based in Vancouver, Canada.
The purchase included goodwill and other intangibles of Cdn. $470,000
(U.S. $322,000) which will be amortized on a straight-line basis over its
estimated useful life of three years.
<PAGE>
3. ACQUISITIONS (CONTINUED)
INTERNET ARENA
On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $242,000, amount payable of $58,000 and 100,698
shares of common stock for a value of $300,000. As of December 31, 1999,
20,140 shares of common stock were issued and the remaining 80,558 were
issued subsequent to year end. Internet Arena is based in Oregon, United
States.
The purchase included goodwill and other intangibles of $536,000 which
will be amortized on a straight-line basis over its estimated useful life
of three years.
CONNECT NORTHWEST
On October 27, 1999, the Company purchased certain assets and liabilities
of the business of Connect Northwest for $1.4 million. The consideration
for the purchase included cash of $670,000, amount payable of $70,000 and
147,985 shares of common stock for a value of $660,000. Connect Northwest
is based in Washington State, United States.
The purchase included goodwill and other intangibles of $1.3 million which
will be amortized on a straight-line basis over its estimated useful life
of three years.
During 1998 and 1997, the Company completed two business acquisitions
which are described below.
EPOST INNOVATIONS, INC.
On September 17, 1997, the Company acquired ePOST Innovations, Inc., a
wholly-owned subsidiary of Mushroom Innovations, Inc. ("Mushroom"). The
Company and Mushroom have officers and directors in common.
The Company issued 3,000,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of ePost
Innovations, Inc. The shares of common stock were valued at $.001 per
share for an aggregate consideration of $2,000. The Company acquired all
the rights, title and interest to all the assets owned by ePost
Innovations, Inc., and those assets consisted of proprietary knowledge of
various computer software products under development by ePost Innovations,
Inc.
The transaction has been accounted for as a related party transfer and is
accounted for using historic costs (as if the entities had always been
together) with the recording of the net assets acquired at their
historical book value. Operating results prior to the date of acquisition
were not significant.
COMMUNICATION EXCHANGE MANAGEMENT, INC.
On September 18, 1998, the Company acquired Communication Exchange
Management, Inc. ("CEM"), a subsidiary of Mushroom. The Company issued
6,270,000 shares of common stock valued at $4,180 for consideration of all
of the issued and outstanding stock of CEM.
The transaction has been accounted for as a related party transfer and is
accounted for using historic costs (as if the entities had always been
together) with the recording of the net assets acquired at their
historical book value. Operating results prior to the date of acquisition
were not significant.
<PAGE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
1999 1998
------------- -------------
<S> <C> <C>
OFFICE AND COMPUTER EQUIPMENT $ 1,008,405 $ 28,563
LESS- ACCUMULATED DEPRECIATION (408,823) (6,233)
------------- --------------
$ 599,582 $ 22,330
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following:
1999 1998
------------- -------------
CUSTOMER LISTS $ 3,663,000 $ -
GOODWILL 1,832,543 -
------------- -------------
5,495,543 -
LESS- ACCUMULATED AMORTIZATION (458,758) -
------------- -------------
$ 5,036,785 $ -
============= =============
</TABLE>
6. LOANS
During 1999, the Company borrowed $4,875,000 pursuant to two promissory
note agreements. The loans are unsecured, bear interest at 8% per annum,
and the principal and accrued interest are due on demand. The lender may
elect to convert the loans into shares of common stock of the Company as
follows:
<TABLE>
<CAPTION>
SHARES
PRINCIPAL PRE-SPLIT POST-SPLIT
<S> <C> <C> <C>
$ 1,000,000 1,000,000 1,500,000
3,000,000 2,000,000 3,000,000
875,000 437,500 656,250
</TABLE>
At the commitment dates of the promissory notes, the conversion prices
were less than the fair values of the common stock, hence a beneficial
conversion feature is attached to these convertible notes. The amount of
this beneficial conversion feature is $2,212,500 and has been recorded as
interest expense and additional paid-in-capital for the year ended
December 31, 1999.
<PAGE>
6. LOANS (CONTINUED)
During 1999, $4,000,000 of loans were settled by the issuance of common
stock valued at $4,000,000. At December 31, 1999, the loans balance is
$875,000. Subsequent to year end, the Company borrowed an additional
$625,000 against the promissory note. This will result in an interest
charge for the beneficial conversion feature of $243,750 in the first
quarter of 2000.
The fair values of the loans at December 31, 1999 are not practicable to
estimate because of the conversion features associated with the loans;
accordingly, it is not possible to estimate the present value of the
future cash flows with any reasonable degree of precision.
Subsequent to year end, the lender has offered to lend a further
$10,000,000 to the Company under similar terms except that the loans are
convertible to 4,000,000 shares of common stock at a conversion price of
$2.50 per share. The lender has the option to withdraw its offer to lend
any amount of the $10,000,000 at any time.
7. SHARE CAPITAL
AUTHORIZED STOCK
The Company is authorized to issue:
(a) 30,000,000 shares of common stock at a par value of $0.001 per
share.
(b) 5,000,000 shares of preferred stock at a par value of $.001 per
share. The Board of Directors of the Company has the authority,
without further action by the holders of the outstanding shares of
common stock, to issue shares of preferred stock from time to time
in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value, if different
from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or
exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the
liquidation preference of such class or series. The designations,
rights and preferences of any shares of preferred stock would be set
forth in a Certificate of Designation which would be filed with the
Secretary of State of the State of Delaware.
SHARE SPLIT
On September 24, 1999, the Company effected a three-for-two subdivision of
its shares of common stock. All share, per share, unit, and warrant
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to this subdivision.
COMMON STOCK SUBSCRIBED
As at December 31, 1999, the Company is obligated to issue 80,558 shares
of common stock as consideration for the purchase of the assets of
Internet Arena and this obligation has been reported as a liability of
$240,000 on the balance sheet. These shares were issued subsequent to year
end.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
SALE OF UNITS AND WARRANTS
In 1997, the Company offered for sale to persons who qualified as
"accredited investors" as defined under Regulation D promulgated by the
Securities and Exchange Commission 3,000,000 units at $0.05 per unit. Each
unit consists of one share of the Company's common stock and one warrant
to purchase one share of common stock at $0.27 per share.
In 1997, the Company sold 600,000 units for aggregate consideration of
$20,000. In 1998, the Company sold an additional 2,400,000 units for
aggregate consideration of $80,000 less offering expenses of $20,000.
During 1998, the Company issued 915,000 shares of common stock through the
exercise of 915,000 warrants for aggregate consideration of $244,000. As
of December 31, 1998, 2,085,000 warrants were outstanding. These warrants
were exercised for 2,085,000 shares of common stock during 1999 and at
December 31, 1999, there are no warrants outstanding.
PRIVATE PLACEMENT
Pursuant to a private placement pursuant to Rule 504 of Regulation D, the
Company offered on March 26, 1998, 57,000 shares of common stock at $0.33
per share. As of April 30, 1998, the Company sold an aggregate 57,000
shares of common stock for an aggregate consideration of $19,000. On April
30, 1998, the Company sold 22,500 shares of common stock pursuant to Rule
504 of Regulation D to Kaplan Gottbetter and Levenson, LLP in
consideration for $7,500 in legal fees valued at $0.33 per share.
8. INCOME TAXES
In accordance with SFAS 109, "Accounting for Income Taxes", income taxes
are accounted for under the liability method. Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial statement reporting and the tax bases of the assets and
liabilities, and are measured at the enacted tax rates that will be in
effect when the differences are expected to reverse. Such differences
principally arise from the timing of income and expense recognition for
accounting and tax purposes.
The application of SFAS 109 does not have any material effect on the
assets, liabilities, or operations for the periods presented in these
consolidated financial statements. Deferred tax assets arising from the
Company's net operating loss carryforwards have been fully offset by a
valuation allowance.
<PAGE>
8. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $600,000 which are available to
offset future taxable income. The Company's utilization of these
carryforwards may be restricted due to changes in ownership of
subsidiaries during the year. The components of the deferred tax asset as
of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
NET OPERATING LOSS CARRYFORWARDS $ 270,000 $ 82,000
LESS- VALUATION ALLOWANCE 270,000 82,000
------------- -------------
$ - $ -
</TABLE>
9. COMMITMENTS
The Company leases office space and equipment, and its lease payments in
the next five years and thereafter are as follows:
2000 $ 1,236,000
2001 1,091,000
2002 293,000
2003 122,000
2004 109,000
THEREAFTER 55,000
-------------
$ 2,906,000
<PAGE>
10. PRO FORMA DISCLOSURES ON BUSINESS COMBINATIONS (UNAUDITED)
As described in Note 3, the Company completed various business and asset
acquisitions during 1999. The following presents unaudited pro forma
financial information as though each of the transactions occurred on
January 1, 1999 and 1998.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1999
<TABLE>
<CAPTION>
CYPOST HERMES INTOUCH NETROVER
<S> <C> <C> <C> <C>
Revenue $ 13,000 $ 428,000 $ 322,000 $ 1,812,000
Net income (loss) (4,050,000) 24,000 35,000 138,000
Internet Connect
ARENA NORTHWEST TOTAL
Revenue $ 537,000 $ 653,000 $ 3,765,000
Net income (loss) (53,000) (90,000) (3,996,000)
Loss per share (0.25)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
CYPOST HERMES INTOUCH NETROVER
Revenue $ - $ 205,000 $ 406,000 $ 1,852,000
Net income (loss) (276,000) 90,000 (22,000) 11,000
Internet Connect
ARENA NORTHWEST TOTAL
Revenue $ 342,000 $ 535,000 $ 3,340,000
Net income (loss) (221,000) (29,000) (447,000)
Loss per share (0.06)
</TABLE>
11. NON-CASH INVESTING AND FINANCING ACTIVITIES
Loans of $4 million were converted into shares of common stock of the
Company.
<PAGE>
12. SUBSEQUENT EVENT
ACQUISITION OF PLAYA CORPORATION
On February 23, 2000, the Company completed the acquisition of Playa
Corporation (a Japan company), developer of Yabumi instant messaging and
e-greeting card services. The acquisition totals $3 million, comprised of
$300,000 in cash and $2.7 million in the Company's shares of common stock.
Exhibit 21
Subsidiaries
(All Wholly-Owned)
Jurisdiction
Name Incorporation
ePost Innovations, Inc....................................... BC,Canada
CyPost USA, Inc.............................................. Delaware
Hermes Net Solutions, Inc.................................... BC, Canada
Net Rover Inc. .............................................. Ontario,
Canada
Net Rover Office Inc. ....................................... Ontario,
Canada
Connect Northwest Internet Services, LLC .................... Washington state
Internet Arena, Inc. ........................................ Oregon
Playa Corporation............................................ Japan
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
We consent to the inclusion in the CyPost Corporation Form 10-KSB of our audit
report dated March 23, 2000 to the shareholders of CyPost Corporation on the
consolidated balance sheet as of December 31, 1999 and the related consolidated
statements of operations, cash flows and shareholders' equity for the year then
ended.
"ARTHUR ANDERSEN LLP"
Vancouver, British Columbia
March 23, 2000
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 416
<SECURITIES> 0
<RECEIVABLES> 267
<ALLOWANCES> 34
<INVENTORY> 0
<CURRENT-ASSETS> 892
<PP&E> 600
<DEPRECIATION> 0
<TOTAL-ASSETS> 6528
<CURRENT-LIABILITIES> 2724
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 3784
<TOTAL-LIABILITY-AND-EQUITY> 6528
<SALES> 1020
<TOTAL-REVENUES> 1020
<CGS> 563
<TOTAL-COSTS> 563
<OTHER-EXPENSES> 2736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2213
<INCOME-PRETAX> (4491)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4491)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
