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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended September 30, 2002.
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _______ to _______
Commission file number 333-86331
UNIVERSE2U INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0433489
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8500 Leslie Street, Suite 500,
Thornhill, ON, Canada L3T 7M8
(Address of Principal (Zip Code)
Executive Offices)
30 West Beaver Creek Rd, Suite 109
Richmond Hill, ON, Canada L4B 3K1
(Formerly) (Zip Code)
(905) 731-9459
(Issuer's Telephone Number, Including Area Code)
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 [_]
State the number of shares outstanding of each of the issuer's common equity as
of September 30, 2002: 40,966,200 shares of Common Stock, $.00001 par value.
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INDEX Page #
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Unaudited Interim Consolidated Balance Sheet - September 30, 2002. 3
Unaudited Interim Consolidated Statements of Deficit for the nine
fiscal months ended September 30, 2002 and September 30, 2001. 4
Unaudited Interim Consolidated Statements of Operation for the nine
fiscal months ended September 30, 2002 and September 30, 2001. 5
Unaudited Interim Consolidated Statements of Operations for the three
fiscal months ended September 30, 2002 and September 30, 2001. 6
Unaudited Interim Consolidated Statements of Cash Flows for the nine
fiscal months ended September 30, 2002 and September 30, 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 3. Defaults upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 36
2
PART I. FINANCIAL INFORMATION.
Unaudited Consolidated Financial Statements
Quarter ended September 30, 2002.
The consolidated financial statements for the nine months ended September 30,
2002 include, in the opinion of management, all adjustments (which consist only
of normal recurring adjustments) necessary to present fairly the results of
operations for such period. Results of operations for the nine months ended
September 30, 2002, are not necessarily indicative of results of operations that
will be realized for the year ending December 31, 2002.
Universe2U Inc.
Unaudited Interim Consolidated Financial Statements
September 30, 2002
(expressed in U.S. dollars)
REVIEW ENGAGEMENT REPORT
To the Shareholders of
Universe2U Inc.
We have reviewed the interim consolidated balance sheet of Universe2U Inc. as at
September 30, 2002, and the interim consolidated statements of deficit,
operations and cash flows for the nine month and three month periods then ended.
Our review was made in accordance with generally accepted standards for review
engagements and accordingly consisted primarily of enquiry, analytical
procedures and discussion related to information supplied to us by the Company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles in the United States.
The Company has incurred losses to date, has a deficit, to September 30, 2002 of
$(18,279,592), has a working capital deficiency of $4,692,647 and used
$1,775,101 of cash for operating activities during the period. In addition, the
Company has been unable to meet its payroll obligations, trade obligations, and
long-term debt commitments as they become due. These factors raise substantial
doubt on the Company's ability to continue as a going concern. The accompanying
consolidated interim financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence as a result of the Company's inability to locate
sufficient financing (SEE NOTES 1, 8 AND 12).
SIGNED: "MOORE STEPHENS COOPER MOLYNEUX LLP"
CHARTERED ACCOUNTANTS
Toronto, Ontario
November 8, 2002
Universe2U Inc.
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (NOTE 4) ................................. $ 630,040
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $NIL) 34,949
Due from officers and directors (NOTE 3) ........................... 72,798
Prepaid expenses and deposits ...................................... 379,443
- ------------------------------------------------------------------------ ------------
1,117,230
Deferred charges (NOTE 8) .......................................... 779,603
Capital assets (AT COST LESS ACCUMULATED AMORTIZATION OF $293,249) . 279,440
- ------------------------------------------------------------------------ ------------
$ 2,176,273
======================================================================== ============
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (NOTE 5) ......................................... $ 654,510
Accounts payable and accrued liabilities ........................... 3,276,141
Income taxes payable ............................................... 52,865
Deferred revenue ................................................... 16,784
Current portion of loans payable (NOTE 6) .......................... 962,147
Convertible debenture (NOTE 7) ..................................... 847,430
- ------------------------------------------------------------------------ ------------
5,809,877
Loans payable (NOTE 6) ............................................. 5,033
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5,814,910
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COMMITMENTS AND CONTINGENCIES (NOTE 11) ................................ --
SHAREHOLDERS' EQUITY
Share capital (NOTE 8)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 41,233,725 Common shares .................. 412
Additional paid in capital (NET OF SHARE ISSUANCE COSTS OF $341,237) 16,281,254
Accumulated other comprehensive income ............................. 134,289
Deposit on net asset acquisition (NOTE 12A) ........................ (1,775,000)
Deficit ............................................................ (18,279,592)
- ------------------------------------------------------------------------ ------------
(3,638,637)
- ------------------------------------------------------------------------ ------------
$ 2,176,273
======================================================================== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Universe2U Inc.
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UNAUDITED INTERIM CONSOLIDATED STATEMENT OF DEFICIT
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------- ------------------
DEFICIT, BEGINNING OF PERIODS $(13,964,156) $ (4,661,716)
Net loss for the periods (4,315,436) (6,420,721)
- ------------------------------------------------------- ------------------
DEFICIT, END OF PERIODS ..... $(18,279,592) $(11,082,437)
======================================================= ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Universe2U Inc.
- --------------------------------------------------------------------------------
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
2002 2001
REVENUE ............................................ $ 155,899 $ 1,148,146
COST OF SALES ...................................... 434,330 1,659,292
- -------------------------------------------------------------------------- ------------
GROSS (LOSS) ....................................... (278,431) (511,146)
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EXPENSES
Selling, general and administration ............ 1,861,609 3,334,001
Stock based compensation (NOTE 8) .............. 809,533 2,251,345
Interest and financing costs ................... 1,157,249 129,764
Impairment of goodwill (NOTE 4) ................ 120,946 --
Depreciation and amortization .................. 87,668 131,004
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4,037,005 5,846,114
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LOSS FROM OPERATIONS ............................... (4,315,436) (6,357,260)
SHARE OF LOSS OF SIGNIFICANTLY INFLUENCED INVESTMENT -- (63,461)
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LOSS BEFORE PROVISION FOR INCOME TAXES ............. (4,315,436) (6,420,721)
Provision for income taxes ..................... -- --
- -------------------------------------------------------------------------- -----------
NET LOSS FOR THE PERIODS ........................... $ (4,315,436) $ (6,420,721)
========================================================================== ===========
NET LOSS PER SHARE - BASIC (NOTE 10) ............... $ (0.11) $ (0.17)
========================================================================== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ................ 40,114,713 37,274,984
========================================================================== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Universe2U Inc.
- -------------------------------------------------------------------------------
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(EXPRESSED IN U.S. DOLLARS)
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2002 2001
- ---------------------------------------------------------------- -----------
REVENUE ............................... $ 60,552 $ 212,106
COST OF SALES ......................... 75,820 410,334
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GROSS (LOSS) .......................... (15,268) (198,228)
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EXPENSES
Selling, general and administration 659,837 980,135
Stock based compensation (NOTE 8) . 310,201 496,130
Interest and financing costs ...... 396,527 19,211
Depreciation and amortization ..... 52,995 15,712
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1,419,560 1,511,188
- --------------------------------------------------------------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,434,828) (1,709,416)
Provision for income taxes ........ -- --
- --------------------------------------------------------------- -----------
NET LOSS FOR THE PERIODS .............. $ (1,434,828) $ (1,709,416)
=============================================================== ===========
NET LOSS PER SHARE - BASIC (NOTE 10) .. $ (0.03) $ (0.05)
=============================================================== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ... 41,167,445 37,879,275
=============================================================== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Universe2U Inc.
- --------------------------------------------------------------------------------
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss for the periods .............................. $(4,315,436) $(6,420,721)
Items not affecting cash
Amortization of capital assets and goodwill ....... 259,038 218,339
Amortization of deferred charges .................. 237,585 --
Stock option compensation (NOTE 8) ................ 809,533 2,251,345
Issuance of warrants .............................. 108,339 --
Issuance of shares for financing fees ............. 590,185 --
Equity loss of significantly influenced investment -- 63,461
Loss on disposal of capital assets ................ 216,729 --
- -------------------------------------------------------------------------------- ----------
(2,094,027) (3,887,576)
Other sources (uses) of cash from operations
Decrease in accounts receivable .................... 103,629 1,283,422
Decrease in inventory .............................. 33,674 140,102
(Increase) decrease in prepaid expenses and deposits (241,148) 26,739
Increase in accounts payable and accrued liabilities 402,819 1,196,501
Increase in deferred revenue ....................... 16,784 --
Increase in income taxes ........................... 3,168 6,854
- -------------------------------------------------------------------------------- ---------
(1,775,101) (1,233,958)
- -------------------------------------------------------------------------------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of capital assets ............................ (91,350) (29,364)
Proceeds on disposal of capital assets ................ 41,888 --
- -------------------------------------------------------------------------------- ---------
(49,462) (29,364)
- -------------------------------------------------------------------------------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on long-term debt .......................... (150,645) (15,779)
Proceeds from issue of share capital .................. -- 1,078,188
Increase (decrease) in bank indebtedness .............. 633,338 (121,426)
(Increase) decrease in related party advances ......... (27,754) 178,914
Proceeds from loans payable ........................... 1,052,692 --
Repayments on loans payable ........................... (85,512) --
Proceeds from convertible debenture ................... 1,000,000 --
- -------------------------------------------------------------------------------- ---------
2,422,119 1,119,897
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EFFECT OF EXCHANGE RATE CHANGES ON CASH ................... 32,484 124,656
- -------------------------------------------------------------------------------- ---------
INCREASE (DECREASE) IN CASH ............................... 630,040 (18,769)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIODS ........... -- 21,216
- -------------------------------------------------------------------------------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIODS ................. $ 630,040 $ 2,447
================================================================================ =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the periods for:
Income taxes ....................................... $ -- $ --
Interest ........................................... $ 93,395 $ 129,764
================================================================================ ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND CONSOLIDATION
- --------------------------------------------------------------------------------
GOING CONCERN BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States. This
assumes that Universe2U Inc. (the "Company") will be able to realize its
assets and discharge its liabilities in the normal course of business.
Should the Company be unable to continue as a going concern as a result of
the inability to locate sufficient financing, it may be unable to realize
the carrying value of its assets and to meet its liabilities as they become
due.
As at September 30, 2002, the Company has incurred significant losses and
has a deficit to date of $(18,279,592), has a working capital deficiency of
$4,692,647 and used $1,775,101 of cash for operating activities during the
period. In addition, the Company has been unable to meet its payroll
obligations, trade obligations, and long-term debt commitments as they
become due as a result of their cash flow deficiency.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary in order to make the financial statements not misleading have
been included. Results for the nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB filed on April 15, 2002 for the year ended December
31, 2001.
BASIS OF CONSOLIDATION
These financial statements have been prepared on a consolidated basis and
include 100% owned subsidiaries' assets and liabilities as well as the
revenues and expenses arising from their respective incorporation or
acquisition dates. Investments in entities over which the Company has
significant influence but not control are accounted for under the equity
method of accounting.
2. FOREIGN EXCHANGE
- --------------------------------------------------------------------------------
The Company's Canadian operations are self-sustaining and therefore their
assets and liabilities are translated into U.S. dollars, the basis of
presentation of these financial statements, using the period end rate of
exchange. Revenue and expenses of such operations are translated using the
average rate of exchange for the period. The related foreign exchange gains
and losses arising on translation of the Company's Canadian operations are
included in shareholders' equity until realized.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
3. TRANSACTIONS WITH RELATED PARTIES
- --------------------------------------------------------------------------------
As of September 30, 2002, the following balances were due from related
parties:
Officers and directors $ 72,798
The amounts due to and from officers and directors are non-interest
bearing, due on demand and have no fixed repayment terms.
4. GOODWILL (NOTE 12C)
- --------------------------------------------------------------------------------
On May 14, 2002, the Company completed the transaction with Wisper Inc. The
Company acquired broadband connectivity customers, supply contracts, agent
agreements, and the equipment serving those customers which include: (i) a
wireless network with towers in Brampton, Mississauga, and Georgetown,
Ontario; (ii) know how on deploying fixed wireless ISM networks; (iii)
customer care and trouble ticket application; (iv) sales agent agreements;
and (v) strategic agreements with key suppliers such as Bell Nexxia and
Futureway Communications. The customer base provides the Company with over
$344,000 CDN in recurring annual revenue. The physical assets have a
current net book value of approximately $136,000 CDN. This transaction was
accounted for under the purchase method of accounting. Results of
operations of the acquired business are included in the accompanying
financial statements since the date of acquisition. In accordance with SFAS
142 goodwill is not amortized on an annual basis but instead tested for
impairment. At September 30, 2002 the value of goodwill was considered to
be impaired and written off to income.
Inventory $ 9,662
Prepaid deposits 19,786
Capital assets 89,714
Current liabilities (76,157)
GOODWILL 120,946
- ---------------------------------------------------------------------
Total consideration $ 163,951
- ---------------------------------------------------------------------
In exchange for the Wisper Network assets, Wisper Inc. (CDNX: WIP) will
receive up to a maximum total of $344,000 CDN worth of Universe2U Inc.
shares and cash. The terms of the deal do not require the Company to pay
the cash or shares upfront; however, the Company will be assuming a net of
$115,470 CDN of liabilities associated with the assets and wholesale
expenses of the acquired business. The Company will pay $180,000 CDN in
cash or shares over a 12 month period and the balance of $48,530 in shares
with a one-year trade restriction. The Agreement has provisions for
additional purchase price adjustments.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
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5. BANK INDEBTEDNESS (NOTE 12B)
- --------------------------------------------------------------------------------
The Company's credit facility provides for an operating line to a maximum
of $2.5 million CDN that must be fully secured by cash deposits, a $1
million CDN contract forward facility, and credit cards with a spending
limit of $50,000. As at September 30, 2002, the operating line of
$1,000,000 CDN was being fully utilized. In addition to the cash deposits,
the Company has provided the following additional security for the credit
facilities: (i) a general security agreement over accounts receivable,
inventory, intangible assets, and capital assets; (ii) a general
postponement of all claims; (iii) an assignment of All Risk Business
Insurance; and (iv) corporate cross guarantees from all subsidiaries. The
operating line bears interest at the bank's prime lending rate plus 0.5% if
the facility is fully utilized and supported by cash deposits and at prime
plus 1.5% if the cash deposits are maintained at less than $2.5 million
CDN. The month end prime rate as at September 30, 2002 was approximately
4.5% (2001 - 6.25%).
6. LOANS PAYABLE
- --------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------ ---------
Loan payable, bearing interest of 45,000 Common shares of the Company, balance due at
maturity of February 18, 2002. Loan provides for a 60-day extension upon payment of a
fee of $10,000 CDN. Penalty provisions require a payment of 500,000 Common shares if
loan is not repaid by the end of the first 60-day period and an additional 250,000
Common shares if the loan is not repaid by the end of the second 60-day period ........... $ 49,951 $ --
Loan payable, bearing monthly interest payments of $8,834 CDN, balance due at maturity
of August 15, 2002. In addition, the Company must provide the lender with 5,500 Common
shares of the Company for each day the loan is outstanding to a maximum of 1,000,000
Common shares. The loan also provides for a 10% monthly payment penalty in the event of
default at maturity and a payment of 3 months interest for early termination of the loan. 504,032 --
Note payable, non-interest bearing, principal payments of $15,000 CDN due monthly with
balance due at maturity of May 14, 2003 (NOTE 4). 109,371 --
Notes payable to trade creditors, non-interest bearing, requiring monthly principal
repayments to July 2005. 20,390 --
- ----------------------------------------------------------------------------------------------------------- --------
Subtotal $ 683,744 $ --
- ----------------------------------------------------------------------------------------------------------- --------
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
6. LOANS PAYABLE - CONTINUED
- --------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Subtotal $ 683,744 $ --
Loan payable bearing interest at 8% per annum compounded monthly. The loan may be drawn
down in increments of between $10,000 and $50,000 to a maximum of $500,000. Any and all
outstanding amounts shall be repaid in full on the earlier of (i) such date as the
Company has adequate reserves as determined by the Audit Committee; or (ii) July 27,
2003. The Company shall also issue warrants to the lender under the loan agreement in
the amount corresponding to the fair market value of the Company's Common stock as of
the date of each draw down under the loan agreement. Each of such warrants shall be
exercisable at fair market value for 1.15 shares of restricted Company Common stock. 283,436 --
- --------------------------------------------------------------------------------------------------------- ------
967,180 --
Less: Current portion 962,147 --
- --------------------------------------------------------------------------------------------------------- ------
$ 5,033 $ --
========================================================================================================= ======
7. CONVERTIBLE DEBENTURE
- --------------------------------------------------------------------------------
As at September 30, 2002, the Company has received cash of $1,000,000 in
exchange for a one year Convertible Debenture ("Debenture") convertible
into shares of the Company's $0.00001 par value common stock and a separate
Common Stock Warrant ("Warrant") for the purchase of 1,000,000 shares of
common stock. The Debenture is due June 25, 2003 and provides for accrual
of interest at a rate of 12% per annum payable quarterly in cash or shares
at the option of the Company.
The Debenture is convertible into the Company's common stock at a
conversion price of the lesser of (1) $0.50 per share and (2) 55% of the
average of the lowest three intra-day trading prices during the twenty
trading days immediately preceding the applicable conversion date. The
beneficial conversion feature was ascribed a value of $73,250 which was
reported as a discount against the debenture.
The Warrants give the holder the right to purchase 1,000,000 shares of the
Company's common stock at an exercise price of $0.30 per share subject to
an anti-dilution provision. The Warrants are exercisable on the date of
grant and expire on June 25, 2004. The Warrants were assigned a value by
the Company equal to approximately $0.10 per warrant or $102,700 based on
the exercise price of the warrant and the trading price of the Company's
common stock at the date of grant.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBENTURE - CONTINUED
- --------------------------------------------------------------------------------
The Debentures bear a mandatory prepayment penalty of 130% of the principal
and all accrued interest being prepaid plus any other amounts owing under
the Debentures. The Company's right to prepay without penalty expires 30
days after issuance of the Debentures.
The Debentures are secured by a second charge on all of the Company's
assets and 3,000,000 shares of common stock owned by the Company's
Chairman, pending entering into a subordination agreement with the existing
primary lender, Laurentian Bank of Canada.
The investors committed to purchase additional Debentures in the amount of
$500,000 on the same terms as above. The final installment of $500,000 is
due within 10 days following the effective date of a Registration Statement
which is expected to be completed subsequent to the period end.
8. SHARE CAPITAL
- --------------------------------------------------------------------------------
STOCK OPTIONS
On June 9, 2000, the Board of Directors adopted the Company's 2000 Equity
Incentive Plan ("the Plan"). The Plan provides for the potential grant of
options and other securities to employees, directors and consultants of the
Company and its subsidiaries. The purpose of the Plan is to provide an
incentive to such persons with respect to Company activities. The terms of
the awards under the Plan are determined by a Board appointed committee.
The Plan was approved and ratified by the shareholders within twelve months
of the adoption date. Under the terms of the Plan as approved by the
shareholders, 1,500,000 shares of common stock may be issued, with
replenishment available under the Plan each year at the discretion of the
Board (or the committee of the Board) up to an amount equal to 10% of the
Company's outstanding stock. As of September 30, 2002, 4,207,500 (2001 -
1,057,547) options were granted or outstanding under the Plan. Such options
have been granted at exercise prices ranging from $0.01 to $1.00 per share
and as of September 30, 2002, options to purchase 1,670,733 (2001 - NIL)
shares of common stock of the Company were vested.
As of September 30, 2002, an aggregate of 1,008,250 (2001 - 2,296,750)
non-Plan stock options were outstanding that had been granted to employees,
directors and consultants of the Company and its subsidiaries. Such options
had been granted at exercise prices of $0.01 per share and as of September
30, 2002, options to purchase 1,008,250 (2001 - 1,379,047) shares of common
stock of the Company were vested.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
8. SHARE CAPITAL - CONTINUED
- --------------------------------------------------------------------------------
The Company accounts for stock-based compensation under the provisions of
APB No. 25 "Accounting for Stock Issued to Employees" for issuances to
employees and directors, for services as a director, and, accordingly,
recognizes compensation expense for stock option grants to the extent that
the estimated fair value of the stock exceeds the exercise price of the
option at the measurement date. Issuances to consultants are accounted for
under the fair value method of SFAS 123. During the period, certain options
were re-priced from original exercise prices of between $3.75 to $5.00 to
$0.75 per share as a result of market conditions. The re-priced options are
accounted for using variable plan accounting as prescribed by FIN 44. This
non-cash compensation expense is charged against operations over the
vesting period of the options or service period, whichever is shorter, and
was $809,533 for the period (2001 - $2,251,345). In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation", the fair value of each
fixed option granted is estimated on the date of grant using the
Black-Scholes option pricing model, using the following weighted average
assumptions:
OPTION ASSUMPTIONS 2002 2001
- -------------------------------------------------------------- ----
Dividend yield $ - $ -
Expected volatility 75% 75%
Risk free interest rate 4.28% 4.8%
Expected option term 5.0 5.0
Fair value per share of options granted $ 2.02 $ 2.66
- ------------------------------------------------------------- -------
Compensation expense recorded under FAS No. 123 would have been
approximately $1,951,058 for 2002 (2001 - $3,858,562), increasing the loss
per share by $0.03 in 2002 (2001 - $0.04).
As at September 30, 2002, details of options outstanding were as follows:
OUTSTANDING EXERCISABLE
- ---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- ---------------------------------------------------------------------------------------------
December 31, 2000 1,661,000 $ 0.95 1,188,250 $ 0.06
Granted ....... 2,253,762 $ 2.72 1,162,500 $ 0.66
Exercised ..... (263,547) $ 0.44 -- $ --
Expired ....... (546,214) $ 3.08 -- $ --
- --------------------------------------------------------------------------------------------
December 31, 2001 3,105,001 $ 1.90 2,350,750 $ 0.36
Granted ....... 2,753,096 $ 0.75 305,000 $ 0.67
Exercised ..... (500,596) $ 0.44 -- $ --
Expired ....... (141,751) $ 2.73 -- $ --
- --------------------------------------------------------------------------------------------
September 30, 2002 5,215,750 $ 0.41 2,655,750 $ 0.39
- --------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
8. SHARE CAPITAL - CONTINUED
- --------------------------------------------------------------------------------
As at September 30, 2002, stock options expire as follows:
- --------------------------------------------------------------------------------
NUMBER EXERCISE NUMBER
OUTSTANDING PRICE EXERCISABLE
- --------------------------------------------------------------------------------
2004 400,000 $ 0.01 400,000
2005 788,250 $ 0.09 788,250
2006 567,500 $ 0.75 567,500
2007 1,140,000 $ 0.63 900,000
2008 1,320,000 $ 0.46 --
2009 850,000 $ 0.31 --
2010 100,000 $ 0.51 --
2011 50,000 $ 0.51 --
- --------------------------------------------------------------------------------
5,215,750 $ 0.41 2,655,750
- --------------------------------------------------------------------------------
As at September 30, 2002, details of share purchase warrants outstanding
were as follows:
- --------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE EXPIRY DATE
- --------------------------------------------------------------------------------
621,500 $ 5.00 2002
377,257 $ 4.96 2003
1,171,663 $ 0.45 2004
24,274 $ 0.58 2005
375,000 $ 4.00 2006
- --------------------------------------------------------------------------------
2,569,694 $ 2.54
- --------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
8. SHARE CAPITAL - CONTINUED
- --------------------------------------------------------------------------------
CONTINUITY OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL COMPREHEN- OTHER COMP-
COMMON PAR PAID IN SIVE INCOME REHENSIVE
SHARES VALUE CAPITAL (LOSS) INCOME (LOSS) DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 ....... 36,758,500 $ 367 $ 6,330,042 $ (75,138) $ (4,661,716) $ 1,593,555
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss for the period . -- -- -- $ (9,302,440) -- (9,302,440) (9,302,440)
Exchange differences .... -- -- -- 216,461 216,461 -- 216,461
------------
Total comprehensive
(loss) ............... $ (9,085,979)
------------
Private placements ...... 343,452 3 915,252 -- -- 915,255
915,251
Conversion of liability . 671,992 7 624,650 -- -- 624,657
Exercise of options ..... 263,547 3 263,698 -- -- 263,701
Financing commitment
fee (NOTE 8) ......... 375,000 4 1,162,496 -- -- 1,162,500
Deposit on net asset
acquisition (NOTE 12A) 500,000 5 1,774,995 -- -- 1,775,000
Stock option
compensation ......... -- -- 2,425,519 -- -- 2,425,519
Issuance of warrants .... -- -- 785,428 -- -- 785,428
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 ....... 38,912,491 $ 389 $ 14,282,080 $ 141,323 $(13,964,156) $ 459,636
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss for the period . -- -- -- $ (4,315,436) -- (4,315,436) (4,315,436)
Exchange differences .... -- -- -- (7,034) (7,034) (7,034)
------------
Total comprehensive
(loss) ............... $ (4,322,470)
------------
Conversion of liability . 55,277 -- 21,841 -- -- 21,841
Exercise of options ..... 724,504 7 396,042 -- -- 396,049
Financing fees .......... 1,541,453 16 590,169 -- -- 590,185
Stock option
compensation ......... -- -- 809,533 -- -- 809,533
Issuance of warrants .... -- -- 108,339 -- -- 108,339
Beneficial conversion
feature on debenture . -- -- 73,250 -- -- 73,250
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 2002 ...... 41,233,725 $ 412 $ 16,281,254 $ 134,289 $(18,279,592) $ (1,863,637)
- ------------------------------------------------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
8. SHARE CAPITAL - CONTINUED
- --------------------------------------------------------------------------------
LOCK-UP AGREEMENT
On April 11, 2002, the Board of Directors approved the Company's proposed
Refinancing Plan to raise additional capital through private financing. The
key component of the Refinancing Plan was to temporarily reduce the number
of publicly tradable Company shares by requesting the Company's
stockholders submit their shares of common stock to a voluntary lockup for
a period of one year. The Company sought to obtain a minimum of 29 million
shares for inclusion in the lockup representing approximately 80% of all
outstanding Company shares. Any decision whether to enter into financing
arrangements during the effective period of the lockup agreement will be at
the sole discretion of the Board of Directors. During the effective period
of the lockup, stockholders participating in the lockup may not engage in
any of the following:
a. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
derivative securities,
b. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock or any derivative securities, or
c. make any open market transactions relating to shares of common stock
or any derivative securities and will not make any demand for or
exercise any right with respect to, the registration of any shares of
common stock or any derivative securities.
Effective June 6, 2002, certain of our existing stockholders holding an
aggregate of 32,829,765 shares of stock, including shares underlying then
outstanding options, agreed to lock-up their shares and options. The
Lock-up Agreement generally prohibits sales of such shares until April 30,
2003, subject to certain exceptions.
COMMON STOCK PURCHASE AGREEMENTS
(a) On August 1, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion") pursuant to
which Fusion agreed to purchase directly from the Company on each
trading day during the term of the agreement, $15,000 of common stock
up to an aggregate of $12.0 million. The agreement was to have an
initial term of 40 months, but was subsequently extended to 52 months,
with an optional six-month extension at the Company's discretion. The
purchase price of shares of common stock will be equal to a price
based upon future market price of the common stock without any fixed
discount to the market price. The Company has the right to set a
minimum purchase price at any time. Fusion may not purchase shares
under the agreement if Fusion or its affiliates would beneficially own
more than 4.9% of the aggregate outstanding common stock immediately
after the purchase. The Company has the right to increase this
limitation to 9.9%. Under the terms of the agreement Fusion received
375,000 shares of common stock and warrants to purchase 375,000 shares
of common stock at an exercise price of $4.00 per share, as a
commitment fee. The combined fair value of the 375,000 shares and the
375,000 warrants to purchase 375,000 shares of $1,162,500 is being
charged to operations over the term of the agreement. The Company
intends to utilize the Fusion facility upon registration of the shares
with the Securities and Exchange Commission that is expected to be
finalized subsequent to the period end.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
8. SHARE CAPITAL - CONTINUED
- --------------------------------------------------------------------------------
(b) On March 13, 2001, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") for the purchase of 219,729 shares of
common stock for $550,000 with an investor. The Purchase Agreement
contains gross-up provisions so that in the event the Company's common
stock trades at a lower price than the original purchase price,
additional shares of common stock will be issued to the investor. All
such shares are entitled to registration rights. The Purchase
Agreement also provided redemption rights to the Company to redeem
such shares. In order for the Company to maintain its rights to
continue the redemption provisions under the Purchase Agreement, the
Company is obligated to pay a monthly fee to the investor. The Company
and the investor agreed to continue the Company's redemption rights on
the shares beyond the originally contemplated period of two months;
however, the Company was unable to make requisite payments after
August 2001. The investor agreed to continue the Company's redemption
rights. In April 2002, the Company and the investor amended the
Purchase Agreement so that in consideration of the investor not
exercising its gross up or registration rights, the Company would make
all payments in respect of the past-due fees, of approximately
$95,000, to maintain the Company's rights to redeem the shares and in
addition pay the investor a fee equal to 13.25% on the original
purchase price of the shares for a period of up to 6 months. Upon such
payments and payment of the original purchase price for the shares,
the Company may exercise its redemption rights at any time at its sole
discretion.
9. INFORMATION ON OPERATING SEGMENTS
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Company's subsidiaries were organized into operating segments based on
the nature of products and services provided and into geographical segments
based on the location of customers. The Company's operations were
classified into four reportable operating segments; Fiber Construction and
Maintenance Services ("FC&MS"), Fiber Network and System Engineering and
Design ("FN&SED"), Sales and Marketing ("S&M"), and Network Services ("NS")
and also into two reportable geographic regions; Canada and the United
States. In the current year, the Company is no longer organized into
operating segments.
The FC&MS segment was responsible for building and maintaining the telecom
infrastructure including long-haul network builds, regional networks,
community networks, and in-building networks. The focus was on physical
infrastructure to support telecommunications encompassing fiber, wireless
and copper based telecommunications.
The FN&SED segment was responsible for all engineering and design
activities including permits, designs, mapping, GIS, structural design,
engineered drawings, network design, equipment specifications, research and
development and the securing and perfecting of rights of ways.
The S&M segment was responsible for all direct sales, which involve the
sale of telecom infrastructure products to telecommunication companies,
telecommunication services on behalf of telecommunications companies and
services on behalf of the right of way owners. The segment also acted as
broker for sales of rights of ways.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
9. INFORMATION ON OPERATING SEGMENTS - CONTINUED
- --------------------------------------------------------------------------------
The NS segment was a support service for the other operating segments.
The accounting policies of the segments are the same as those described in
the Company's annual financial statements. The Company evaluated financial
performance based on measures of gross revenue and profit or loss from
operations before income taxes. The following tables set forth information
by operating segment as at, and for the nine month period ended September
30, 2001.
Information by operating segment as at and for the nine month period ended
September 30, 2001:
- -------------------------------------------------------------------------------------------
FC&MS FN&SE S&M NS TOTAL
- -------------------------------------------------------------------------------------------
Revenue ......... $ 303,053 324,031 302,885 218,177 $ 1,148,146
Interest expense $ 18,838 211 3,796 10,608 $ 33,453
Amortization of
capital assets $ 89,158 18,651 11,334 90,264 $ 209,407
Loss before
income taxes . $(2,031,256) (695,847) (648,179) (884,326) $(4,259,608)
Total assets .... $ 552,199 122,137 80,969 682,752 $ 1,438,057
Capital assets .. $ 444,689 107,279 45,072 571,795 $ 1,168,835
- -------------------------------------------------------------------------------------------
Reconciliations to consolidated results as at and for the nine month period
ended September 30, 2001:
- ---------------------------------------------------------------------------
SEGMENTED CORPORATE TOTAL
- ---------------------------------------------------------------------------
Revenue ................ $ 1,148,146 -- $ 1,148,146
Loss before income taxes $(4,259,608) (2,161,113) $(6,420,721)
Total assets ........... $ 1,438,057 1,314,660 $ 2,752,717
- ---------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
Information by geographic region as at and for the nine-month period ended
September 30, 2002:
- ------------------------------------------------------------------------------------
CANADA UNITED STATES TOTAL
- ------------------------------------------------------------------------------------
Revenue ......................... $ 153,945 1,954 $ 155,899
Interest expense ................ $ 741,043 416,206 $ 1,157,249
Amortization of capital assets .. $ 253,874 5,164 $ 259,038
Income (loss) before income taxes $(2,764,966) (1,550,470) $(4,315,436)
Total assets .................... $ 459,706 1,716,567 $ 2,176,273
Capital assets .................. $ 279,440 -- $ 279,440
- ------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
9. INFORMATION ON OPERATING SEGMENTS - CONTINUED
- --------------------------------------------------------------------------------
Information by geographic region as at and for the nine-month period ended
September 30, 2001:
- --------------------------------------------------------------------------------
CANADA UNITED STATES TOTAL
- --------------------------------------------------------------------------------
Revenue ...................... $ 1,101,691 46,455 $ 1,148,146
Interest expense ............. $ 33,338 115 $ 33,453
Amortization of capital assets $ 203,888 5,519 $ 209,407
Loss before income taxes ..... $(4,099,700) (159,908) $(4,259,608)
Total assets ................. $ 1,401,688 36,369 $ 1,438,057
Capital assets ............... $ 1,142,350 26,485 $ 1,168,835
- --------------------------------------------------------------------------------
Revenues are attributed to countries based on location of customers.
10. EARNINGS PER SHARE
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings per
Shares" which requires companies to report basic and fully diluted earnings
per share ("EPS") computations effective with the Company's quarter ending
December 31, 1997. Basic EPS excludes dilution and is based on the
weighted-average common shares outstanding and diluted EPS gives effect to
potential dilution of securities that could share in the earnings of the
Company. Diluted EPS has not been presented as it is anti-dilutive as a
result of having incurred losses in each period. Options that may
potentially dilute EPS in the future are listed in note 8.
- ----------------------------------------------------------------------------------------------
Nine months ended September 30
2002 2001
- ----------------------------------------------------------------------------------------------
Basic EPS Computation:
Net loss for the periods .......... $ (4,315,436) $ (6,420,721)
Weighted average outstanding shares 40,114,713 37,274,984
Basic EPS ......................... $ (0.11) $ (0.17)
==============================================================================================
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEASE COMMITMENTS
At September 30, 2002, the Company's total obligations, under various
operating leases for equipment and occupied premises, exclusive of realty
taxes and other occupancy charges, are as follows:
2002 $ 4,883
2003 13,882
2004 13,882
2005 13,882
2006 13,882
2007 6,941
- -------------------------------------------------------
Total $67,352
- -------------------------------------------------------
The Company was in arrears with respect to several of their operating lease
commitments at year-end. Arrears payments plus accrued interest are
included in current liabilities as at September 30, 2002.
CONTRACTUAL COMMITMENTS
On April 8, 2002, the Company executed a Marketing Agreement with EBI
Communications, Inc. ("EBI") where it became a reseller for the EBI's Voice
over IP service and their Least Cost Routing Gateway. The Company has the
right to market and sell the products to the worldwide markets directly or
through other agents. The product will be sold under a private label and
brand the products as Universe2U - Least Cost Router, Voice2U, or other
such name. It is contemplated that the two parties will work
collaboratively on product development; with the Company providing product
feature input/packaging and EBI doing the technical research and
development. There are two conditions precedent for this Agreement to
become binding on the parties: (i) EBI and Universe2U must work together to
secure financing for $750,000, at terms acceptable to both parties and (ii)
to set up the necessary back office to support the generation of LCRR,
marketing cost and fund the inventory. There is to be final acceptance
testing of the product by the Company.
EMPLOYMENT CONTRACTS
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The majority of agreements
continue until terminated by the executive or the Company and do not
provide for severance payments of any kind upon termination. The agreements
include a covenant against competition with the Company, which extends for
a period of time after termination for any reason. As of September 30,
2002, the minimum annual commitment under these agreements was
approximately $198,000.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES - CONTINUED
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
At September 30, 2002, the Company and its wholly owned subsidiaries are
involved in various suits, claims, proceedings, and investigations that
arise from time to time in the normal course of business.
Certain of the proceedings relate to wrongful dismissal actions brought
against the Company by former employees, claims of misappropriation of
confidential information by competitors, and claims of breach of contract
by service providers. The Company is unable to ascertain the ultimate
aggregate amount of monetary liability or operational impact of these
identified legal proceedings that seek damages of material or indeterminate
amounts due to the current status of the claims. The Company therefore
cannot determine whether these actions will, individually or in aggregate,
have a material adverse effect on the business, results of operations, and
financial condition of the Company. No amount has been accrued in the
accounts in respect of these matters. The defendants in these legal
proceedings include the Company and certain named directors and officers of
the Company who intend to vigorously defend these claims.
Other proceedings related to default judgments, orders to pay, statements
of claim, and small claims court actions served against the Company by
secured and unsecured suppliers and other service providers for unpaid
accounts. The full amount of all identified claims plus an estimate of
interest and costs that may be awarded has been accrued in the accounts in
respect of these matters as at September 30, 2002. The Company is working
with the creditors to establish suitable payment arrangements. Subsequent
to the period end, several of the secured creditors exercised their rights
to repossess equipment and vehicles provided to the Company.
12. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
Subsequent to the period end, the following events occurred:
(a) The Company continues to negotiate the acquisition of substantially
all of the operating assets of Digital Global Internet Inc. ("DGI"), a
Baltimore, Maryland based company. A non-refundable deposit of 500,000
common shares valued at $1,775,000 was made in connection with the
acquisition. The acquisition was originally expected to be completed
within 75 days of the term sheet dated December 14, 2001; however, it
has not yet closed. The Company had previously announced on June 12,
2001 the signing of a Term Sheet with DGI, however, the Company and
DGI were not able to come to mutually acceptable definitive terms on
the basis of that June 2001 Term Sheet. The Company believes that the
contemplated revised structure for the acquisition of DGI will
facilitate the closing of the transaction; however there can be no
assurance in this regard.
(b) On October 18, 2002, Canada Customs and Revenue Agency ("CCRA") issued
a requirement to pay to the Laurentian Bank of Canada. This demand
allows CCRA to garnishee the Company's bank account as a result of the
Company's overdue employee source deductions.
Universe2U Inc.
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS - CONTINUED
- --------------------------------------------------------------------------------
(c) On October 25, 2002, the Company entered into negotiations with MIPPS
Inc. ("MIPPS"), a wireless Internet Service provider, to become the
new service provider for the Company's Internet customers acquired
from Wisper Inc. (NOTE 4). The agreement is to be effective October
28, 2002. Under the proposed agreement, the Company will receive a
commission equal to 12.5% of net revenue generated from contracts
transferred to MIPPS, contract renewals, and new customers added to
the MIPPS network and a commission equal to 6.5% of net revenue
generated on upgraded contracts. In addition, MIPPS will become an
agent for the Company for its voice2u product and will be entitled to
a 12.5% commission on additional customers brought to the Company's
network.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with our Unaudited Interim
Consolidated Financial Statements for the third quarter ended September 30,
2002.
We provide broadband connectivity and content delivery solutions to communities
that have traditionally been underserved by telecommunications companies. These
communities include municipalities, schools, hospitals and commercial,
governmental, industrial, and residential complexes whose location makes it more
difficult or costly to provide broadband access. We provide these communities
with consulting and management services for design, development, operation,
marketing, and sales. In May 2002, we acquired Wisper Network's broadband
business to provide us with a network footprint in the Greater Toronto Area. On
November 1, 2002, we established an operating partnership with MIPPS Inc. where
MIPPS would become the service providers for our broadband customers. (See Part
II Other Information Item 5. Other for details).
Universe2U will continue to provide sales and marketing to attract broadband
customers. We received a percentage of the recurring revenue. As a network
partner, we will work with communities to make their network ventures successful
by providing a community branded broadband solution, were we would arrange to
provide wireless telecommunications services and resell DSL service to small and
medium-sized enterprises in communities that we believe have traditionally been
underserved by telecommunications providers. We intend to expand our business by
exploiting the anticipated increased connectivity of our customers and offering
a range of enhanced services including Internet-based telephony under the name
"voice2u" and managed e-community portals. At the end of the quarter, we have
approximately 200 customers for our services, all of which are located in
Canada. Our activities are presently limited to Canada and the United States. We
are not a telecommunications carrier nor do we provide regulated
telecommunications services.
In early 2001, we commenced a strategic shift in our business strategy to our
present model. Prior to that time, we expected to build our relationships with
communities through our infrastructure expertise as our business primarily
involved design, construction and maintenance of broadband infrastructure as a
third party contractor for large telecommunications companies and electric
utilities building their own telecommunications network. While that business
resulted in multi-million dollar build-out contracts, it was dependent on the
health of the telecom industry and the financial health of our telecom
customers. It was also labor-intensive and limited in its ability to produce
recurring revenue streams from value-added products and services. Revenues from
design, construction, and maintenance services (and sales of related products)
were approximately $1.22 million in 2001 and $5.65 million in 2000. The decrease
reflects adverse conditions in the telecom market as well as our change in
business strategy.
We will operate by deploying a commission-only sales force for our products. In
connection with our new focus, we disposed of a number of capital assets,
reduced our employee base from approximately 180 employees to our current level
of 4 employees, and implemented other cost-cutting measures.
GENERAL
Our goal is to become a leading business strategy, which includes the following
key elements:
o "Partner" With Communities - Our goal is to be viewed as a partner
with communities in the successful deployment and operation of
broadband networks. We believe that access owners, including
municipalities, can play a key role in marketing broadband access and
related products and services to their constituents. We will seek
mutually beneficial compensation arrangements with these groups (e.g.
co-branding/co-marketing agreements, revenue-sharing arrangements and
leverage existing assets) in order to motivate these groups to promote
broadband-based products and services to their constituents. We intend
to seek equity participation in certain projects. We also intend to
offer community portals, which would act as a vehicle through which
value-added features could be offered to community constituents. We
refer to our partnership with these groups as "SmartCommunities."
o Offer Comprehensive Broadband Solutions - Our goal is to provide the
facilitate complete broadband solutions including network design,
project management for network construction, broadband connectivity
through reseller arrangements, wireless connectivity installation,
Internet-based telephony, managed e-community portals, and a
comprehensive portfolio of broadband content and value-added services.
o Target Underserved Communities - We will seek to exploit anticipated
growth in broadband access and related services, particularly among
smaller communities. A recent Nielson/NetRatings survey concluded that
44.8% of United States Internet broadband users live in the top 10
largest metropolitan areas. Further, the Gartner Group predicts that
broadband Internet access penetration will exceed 75% by 2005 up from
50% in 2002. Roughly, two-thirds of the North American population is
located smaller communities. In addition, some areas in major centers
are underserved. Thus, we expect the growth rate of broadband in
smaller communities to double that of the major metropolitan areas.
o Leverage Experience and Relationships - Our historical activities
designing, engineering, constructing, and maintaining networks for
communities have provided our management with valuable industry
experience and relationships in our target markets. It has also played
an important role in shaping our new business strategy. We intend to
leverage our industry experience and relationships to successfully
implement our business.
o Grow Through Qualified Acquisitions and Strategic Relationships - We
intend to pursue business partnering, acquisitions, and other
strategic relationships to expand our customer base, our ability to
offer turnkey solutions and geographic presence. We believe that the
communication services industry is highly fragmented, consisting of a
large number of smaller, regional businesses and presents significant
opportunities for consolidation. We plan to target those businesses
with high quality management and strong performance records and to
integrate such acquired operations into our organization.
Our Company is the product of an acquisition, completed on May 17, 2000, in
which Paxton Mining Corporation, a Nevada corporation, acquired all of the
outstanding shares of Universe2U Inc. In connection with the acquisition, the
management of our Company changed and our Company's name became Universe2U.
Before the acquisition, under the name Paxton Mining Corporation, we were an
early stage development company organized to acquire, explore, and develop
mining properties. Following the acquisition, we ceased any mining-related
activities.
OPERATING SEGMENTS
Operations are evaluated based on two reportable geographic segments: Canada and
the United States. Before the Company's refocus of its business, operations were
organized into segments based on the nature of products and services provided.
The Company's operations were classified into four reportable operating
segments:
o Fiber Construction and Maintenance Services ("FCMS") is responsible
for building and maintaining the telecom infrastructure including
long-haul network builds, regional networks, community networks, and
in-building networks. The focus is on physical infrastructure to
support telecommunications encompassing fiber, wireless and copper
based telecommunications.
o Fiber Network and System Engineering and Design ("FN&SED") is
responsible for all engineering and design activities including
permits, designs, mapping, GIS, structural design, engineered
drawings, network design, equipment specifications, research and
development and the securing and perfecting of rights-of-ways.
o Sales and Marketing ("S&M") is responsible for all direct sales, which
involve the sale of telecom infrastructure products to
telecommunication companies, telecommunication services on behalf of
telecommunications companies and services on behalf of the
right-of-way owners. The segment also acts as broker for sales of
rights-of-ways.
o Network Services ("NS") is a support service for the other operating
segments.
Following the refocus the Company is no longer organized into reportable
operating segments other than geographic segments.
REVENUES AND EXPENSES
We generate revenues from reselling voice, data, and other telecommunications
services; and the direct deliver of services. We are transitioning for the
position where the majority of our revenues are derived for one-time services to
where we expect to be generating the majority of our revenues on a monthly
recurring basis; however there can be no assurance in this regard.
We believe that our ability to generate revenues in the future will be affected
primarily by the following factors, some of which we cannot control:
o Our ability to obtain customers before our competitors do;
o The demand for our services;
o Our ability to grow our direct sales business through our Agents to
drive the organic growth;
o Our ability to achieve adequate margins on materials and wholesale
services;
o Our ability to acquire the needed financing for network projects;
o The level of competition we face from other telecommunications
services providers, including price and margins for communications
services over time; and
o Possible regulatory changes, including regulations requiring building
owners to give access to competitive providers of communications
services
Our cost of sales consists primarily of the wholesale cost and the associated
costs such as labor, equipment leases, and capital asset amortization expense.
We expect these costs to increase in aggregate dollar amount as we continue to
grow our business but to decline as a percentage of revenues with respect to
material costs due to economies of scale, expected improvements in technology
and price competition from an increased number of vendors, however, there can be
no assurance in this regard.
Selling expenses include sales salaries and commission payments and marketing,
advertising and promotional expenses. We expect to incur significant sales and
marketing expenses as we continue to grow our business and build our brand.
General and administrative expenses include costs associated with the recruiting
and compensation of corporate administration, customer care and technical
services personnel as well as costs of travel, entertainment, back office
systems, legal, accounting and other professional services. We expect these
costs to increase significantly as we expand our operations, but decline as a
percentage of revenues due to economies of scale, however there can be no
assurance in this regard.
We intend to pursue business partnering, acquisitions, and other strategic
relationships to expand our customer base, our ability to offer turnkey
solutions and geographic presence. We expect these activities to significantly
affect our results of operations and require us to raise additional capital.
However there can be no assurance as to the level of such activities, if any, in
the future.
AMALGAMATION
As at December 31, 2000, the Company amalgamated the wholly owned subsidiaries
formerly operating as Fiber Optics Corporation of Canada Inc., Canadian Cable
Consultants Inc., and Photonics Engineering & Design Inc., into Universe2U
Canada Inc.
We expect to amalgamate Coastal Networks Inc., MultiLink Networks Inc., and
Universe2U Rights-of-Way Agency Inc. into a single entity during the current
fiscal year.
RESULTS OF OPERATIONS
Certain accounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation adopted in the current
period financial statements.
REVENUES
Total revenues decreased $152,000, or 71% to $61,000 for the three months ended
September 30, 2002 from $212,000 for the three months ended September 30, 2001.
Total revenues decreased $992,000, or 86% to $156,000 for the nine months ended
September 30, 2002 from $1,148,000 for the nine months ended September 30, 2001.
The decrease is largely attributable to a reduction in the volume of network
design, engineering, construction, and maintenance work from our third party
contracting activities. We believe that the reduction in volume of work is
principally attributable to poor overall conditions in the network engineering
and construction markets. In addition, we changed our business strategy to focus
on further developing our broadband delivery model. Approximately 80% of the
revenue generated in the three months ended September 30, 2002 is attributable
to new business model. The expansion of our network was much slower than
planned. The churn rate of the former Wisper customers was higher than expected
and Futureway Communication Inc. our largest supplier of DSL services
discontinued their reseller model. We viewed the relationship with Futureway as
being very important to our growth. In spite of being Futureway's largest
reseller, we were not able to develop new mutually suitable agreement with
Futureway.
COST OF SALES
Cost of sales decreased $335,000 or 82%, to $76,000 for the three months ended
September 30, 2002 from $410,000 for the three months ended September 30, 2001.
Cost of sales decreased $1,225,000 or 74%, to $434,000 for the nine months ended
September 30, 2002 from $1,659,000 for the nine months ended September 30, 2001.
The decrease corresponds to the decrease in revenue, which is offset by the
fact, that some of the Company's cost of sales is fixed. These fixed costs
include equipment rental, lease commitments for equipment, amortization costs,
salaries to sales, and technical staff. In the short term, we are unable to
reduce these costs proportionally with the reduction of the revenue.
GROSS PROFIT
Gross profit for the three months ended September 30, 2002 was a negative
$15,000 (-25% of revenues) versus a negative $198,000 (-93% of revenues) in
2001. Gross profit for the nine months ended September 30, 2002 was a negative
$278,000 (-176% of revenues) versus a negative $511,000 (-45% of revenues) in
2001. The decrease in gross profit reflects the inactivity in the construction
area while continuing to pay the lease costs of the equipment and other
continued fixed costs as the Company continued to refocus its business strategy.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administration expenses decreased $320,000, or 33%; to
$660,000 for the three months, ended September 30, 2002 from $980,000 for the
three months ended September 30, 2001. Selling, general and administration
expenses decreased $1,472,000, or 44%; to $1,862,000 for the nine months, ended
September 30, 2002 from $3,334,000 for the nine months ended September 30, 2001.
The decrease is largely attributed to our shift in business strategy and
associated reductions in administrative, executive, management and other support
salaries, and their associated overhead expenses and a reduction in printing and
other office costs.
STOCK BASED COMPENSATION
Stock based compensation expense for the three months ended September 30, 2002
was $310,000 versus $496,000 for the three months ended September 30, 2001.
Stock based compensation expense for the nine months ended September 30, 2002
was $810,000 versus $2,251,000 for the nine months ended September 30, 2001. The
Company accounts for stock-based compensation under the provisions of APB No. 25
"Accounting for Stock Issued to Employees" and accordingly, recognizes
compensation expense for stock options to the extent the estimated fair value of
the stock exceeds the exercise price of the option at the measurement date.
Issuances to consultants are accounted for under the fair value method of SFAS
123. The compensation expense is charged against operations ratably over the
vesting period of the options or the service period, whichever is shorter. As at
September 30, 2002, there were 5,215,750 stock options outstanding with a
weighted average exercise price of $0.41.
INTEREST AND FINANCING COSTS
Interest and financing increased $377,000 or 1964% to $397,000 for the three
months ended September 30, 2002, from $19,000 for the three months ended
September 30, 2001. Interest and financing increased $1,027,000 or 792% to
$1,157,000 for the nine months ended September 30, 2002, from $130,000 for the
nine months ended September 30, 2001. This was a direct result of increased
financing necessary for capital expenditures and to fund the operating losses.
During the first nine months of the current year, the Company experienced cash
flow shortages on a number of occasions and had been unable to meet all of its
payable obligations on a timely basis. The company is late in remitting payroll
withholding and sales taxes to the tax authorities.
GOODWILL
In accordance with SFAS 142, goodwill is not amortized on an annual basis but
instead tested for impairment. At June 30, 2002, the value of goodwill
$121,000 associated with Wisper transaction was considered to be impaired and
written off to income in the three months ended June 30, 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2,000 or 27% to $76,000 for the three
months ended September 30, 2002, from $74,000 for the three months ended
September 30, 2001. Depreciation and amortization decreased $80,000 or 37% to
$138,000 for the nine months ended September 30, 2002, from $218,000 for the
nine months ended September 30, 2001. The decrease was the result of a
substantial reduction in capital assets primarily in the construction divisions.
NET LOSS
The Company incurred losses before income taxes for the three months ended
September 30, 2002 of $1.43 million compared to a loss before income taxes of
$1.71 million for the three months ended September 30, 2001. Non-cash stock
based compensation accounted for $310,000 of the loss in the three months ended
September 30, 2002, compared to $496,000 for the three months ended September
30, 2001. The Company incurred losses before income taxes for the nine months
ended September 30, 2002 of $4.32 million compared to a loss before income taxes
of $6.42 million for the nine months ended September 30, 2001. Non-cash stock
based compensation accounted for $810,000 of the loss in the nine months ended
September 30, 2002, compared to $2,251,000 for the nine months ended September
30, 2001.
WORKFORCE
Since the beginning of the fiscal year, we adjusted our workforce from a peak of
19 people to our current level of 4.
LIQUIDITY AND CAPITAL RESOURCES
Our company has incurred losses since inception and, at September 30, 2002, has
a deficit as of $(18,279,592) and a working capital deficiency of $(4,692,647).
We have been unable to consistently meet our payroll obligations, trade
obligations, and long-term debt commitments as they become due. These factors
raise substantial doubt as to our ability to continue as a going concern. See
the Review Engagement Report on the Interim Consolidated Financial Statements
included herein as well as the Notes referred to in such report.
During the quarter, we experienced cash flow shortages on a number of occasions
and had been unable to meet all of its payable obligations on a timely basis.
Universe2U Canada Inc. was late in remitting payroll withholding and sales taxes
to the tax authorities.
Our operations have been funded to date through a combination of cash flow from
operations and equity and debt financings. Based on our current plan of
operation, we anticipate that our existing cash resources, including available
credit lines and existing credit commitments will not be sufficient to satisfy
our operations beyond the next 6 months.
In an effort to improve our ability to obtain equity-based financing, effective
June 6, 2002, certain of our existing stockholders holding an aggregate of
32,829,765 shares of common stock, including shares underlying then outstanding
options, agreed to lock-up their shares and options pursuant to an agreement
each of them entered into with our company (the "Lock-up Agreement"). The
Lock-up Agreement generally prohibits sales of such shares until April 30, 2003,
subject to certain exceptions.
For the nine months ended September 30, 2002, the Company's net cash used in
operating activities was $1,775,000 ($1,234,000 in 2001). This amount includes
adjustments for non-cash items comprised of depreciation and amortization of
$259,000 ($218,000 in 2001), stock option compensation of $810,000 ($2,251,000
in 2001), amortization of deferred charges of $174,000 (Nil in 2001), the
issuance of warrants and shares related to financing arrangements of $699,000
(Nil in 2001), and losses from significantly influenced investments and
disposals of capital assets totaling $217,000 ($63,000 in 2001).
For the nine months ended September 30, 2002, net cash used in investing
activities was $49,000 principally attributable to the sale of capital assets.
For the nine months ended September 30, 2001, net cash used in investing
activities was $29,000, which consisted of additions to property, plant, and
equipment.
For the nine months ended September 30, 2002, net cash provided by financing
activities of $2.4 million, included net proceeds from the increase in bank
indebtedness of $633,000 and net proceeds on term debt and convertible
debentures of $1,871,000 and an increase in due from related parties of $28,000.
For the nine months ended September 30, 2001 net cash provided by financing
activities of $1.1 million included net proceeds from the issue of share capital
of $1,078,000 offset by net repayments on long-term debt of $16,000, and a
decrease in bank indebtedness of $121,000 and the net decrease in due from
related parties of $179,000.
Universe2U Canada's acquisition of the broadband business of Wisper Networks, we
will be committed to pay the purchase price as follows: $344,000 CDN, of which
$180,000 CDN is payable in 12 monthly installments of $15,000 CDN in cash, or
under certain circumstances, shares of common stock or shares of common stock at
market value. In addition, we may assume some of the liabilities as part of the
transaction and are deducted from the purchase price, currently the total
liabilities are estimated at $115,000 CDN, and to date we have assumed
approximately $10,000 of Wisper Networks liabilities. The agreement also
provides for adjustments to the purchase price based upon annual recurring
revenue during the 60 days following the date of the agreement, May 14, 2002,
which is currently estimated to be $344,000 CDN. The resulting balance will be
paid in shares price at $0.69 on May 15, 2003, subject to registration with the
Ontario Securities Commission.
FUSION EQUITY LINE
On November 1, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which Fusion agreed to purchase shares
of our common stock on each trading day during the term of the agreement in an
amount not to exceed $15,000 per day (unless our stock price exceeds $7.00 per
share), up to an aggregate of $12.0 million during the term of the agreement.
The agreement was to have an initial term of 40 months, but was recently
extended to 52 months, with an optional six-month extension at our discretion.
The purchase price of the shares of common stock will be equal to the lowest
sale price of our common stock on the purchase date; or the average of the three
(3) lowest closing sale prices of our common stock during the fifteen (15)
consecutive trading days prior to the date of a purchase by Fusion.
We have the right to suspend or limit purchases and to terminate the agreement
at any time. Notwithstanding the foregoing, Fusion may not purchase shares of
common stock under the common stock purchase agreement if Fusion or its
affiliates would beneficially own more than 4.9% of our then aggregate
outstanding common stock immediately after the proposed purchase. If the 4.9%
limitation is ever reached, we have the option to increase this limitation to
9.9%. If the 9.9% limitation is ever reached, this limitation will not limit
Fusion's obligation to fund the daily purchase amount. Fusion must liquidate
holdings to remain below the 9.9% threshold, however it does not limit their
funding obligation.
We have the right to set a minimum purchase price ("floor price") at any time.
If our stock price trades at a level that results in a purchase price below the
floor price, Fusion will not be permitted or obligated to purchase our stock
under the agreement. Currently, the floor price is $2.50. We can increase or
decrease the floor price at any time upon one trading day prior notice to
Fusion.
Fusion has agreed that neither it nor any of its affiliates shall engage in any
direct or indirect short-selling or hedging of our common stock during any time
prior to the termination of the common stock purchase agreement.
Fusion may terminate the common stock purchase agreement without any liability
or payment to the Company upon the occurrence of certain events including our
failure to maintain an effective registration covering resale of the purchased
shares, our failure to maintain trading in our common stock, in each case for
certain periods of time, our default of payment obligations in excess of $1
million, actual or threatened bankruptcy by us and our material breach of the
representations and warranties contained in the agreement.
In consideration for its commitment under the agreement, we issued to Fusion,
for no additional consideration, 375,000 shares of our common stock, and
warrants to purchase 375,000 shares of our common stock at an exercise price of
$4.00 per share. Unless an event of default occurs, Fusion must maintain
ownership of 375,000 shares of our common stock (i) for a period of 40 months
from the date of the common stock purchase agreement, or (ii) until such date as
the common stock purchase agreement is terminated.
Until the termination of the common stock purchase agreement, we have agreed not
to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless we have
obtained Fusion's prior written consent.
To gain Fusion's consent to proceed with the June 2002 Private Placement and in
consideration for Fusion's extension of the agreement term to 52 months, we
reduced the exercise price of the warrants to $1.00.
On July 31, 2002, we applied for an order granting withdrawal of its
Registration Statement on Form S-3, File No. 333-66940, filed with the
Securities and Exchange Commission on November 6, 2001, covering resale of the
shares to be purchased by Fusion. We intend to file a new registration statement
covering such shares following effectiveness of the pending registration
statement covering resale of the June 2002 private placement shares. We will not
be able to draw upon the Fusion facility until such registration statement is
declared effective.
PALM TRADING CREDIT FACILITY
In July 2001, we established a line of credit with Palm Trading Limited
("Palm"). We may draw upon the line of credit in one or more traunches in an
aggregate principal amount not to exceed $500,000 (the "Credit Line"). Each draw
down may be for a minimum of $10,000 up to a maximum of $50,000. Outstanding
balances accrue interest at a rate of 8% per annum, compounded monthly. We may
draw upon the credit line approximately once per month. The line of credit shall
be repaid on the earlier of such date as we have adequate cash reserves, as
determined by our Audit Committee, or July 27, 2003. Upon each draw down under
the line of credit, we are obligated to issue warrants to Palm based on the
following formula:
# of Warrants = (Funds Advanced / 20-day Average Trading Price) * 15%
Each warrant is exercisable at a price that is 15% greater than the 20-day
average trading price prior to the date of issuance. For financial statement
purposes, the fair value of the warrants is estimated on the date of grant using
the Black-Scholes pricing model. At September 30, 2002, 43,155 warrants had been
issued in connection with this loan.
LAURENTIAN BANK CREDIT FACILITY
On February 22, 2002, we established a credit facility with Laurentian Bank of
Canada. The facilities provide for an operating line of credit up to $2.5
million CDN, a $1 million CDN contract forward facility, and credit cards with a
$50,000 spending limit. The line of credit is to be fully secured by cash
deposits. The line of credit bears interest at the bank's prime lending rate
plus 0.5% if the facility is fully utilized and supported by cash deposits and
at prime plus 1.5% if the cash collateral is less than $2.5 million CDN. In
addition, we have provided Laurentian Bank a general security interest covering
substantially all of our assets, as well as corporate cross guarantees from our
subsidiaries.
At September 30, 2002, $800,000 CDN was being utilized under the line of credit.
To fund the cash collateral, on February 15, 2002 we borrowed $800,000 CDN from
1463549 Ontario Inc., an unrelated third party investor. The loan requires
monthly interest only payments of $8,834.34 CDN and matures on November 15,
2002. The loan bears a 10% monthly payment penalty in the event of default at
maturity and a penalty for early termination equal to three months of interest.
We agreed to pay all costs associated with establishing the loan. We also agreed
to issue to the lender, upon maturity or earlier repayment and for no additional
consideration, 5,500 shares of our common stock for each day the loan is
outstanding up to a maximum of 1,000,000 shares. These shares do not bear
registration rights.
As part of the credit facility with Laurentian, we obtained a $1,000,000 CDN
contract forward facility. The facility permits us to borrow up to 70% of the
value of the contracts the bank deems is qualified.
JUNE 2002 CONVERTIBLE DEBT FINANCING
On June 25, 2002, we entered into an agreement with AJW Partners, LLC, New
Millennium Capital Partners II, LLC, Pegasus Capital Partners, LLC, and AJW/New
Millennium Offshore, Ltd. for the private placement of $1,500,000 principal
amount of secured convertible debentures. The debentures are convertible into
shares of our common stock in accordance with an agreed upon formula (see
below). Under the agreement, the investors purchased an aggregate of $500,000
principal amount of debentures on June 25, 2002, the second installment of
$500,000 was paid on August 9, 2002, within 10 days of our filing this resale
registration statement and the remaining and the investors are committed to
purchase the balance of $500,000 within 10 days following the effective date of
such registration statement. For each $1.00 principal amount of debentures
purchased, the investors will also receive a warrant to purchase one share of
our common stock, resulting in warrants to purchase an aggregate of 1,500,000
shares of our common stock being issued upon completion of the investors' full
funding commitment. The warrants are exercisable in full on the date of grant at
an exercise price $0.30 per share (subject to antidilution adjustment) and
expire June 25, 2005.
We intend to utilize the proceeds of the financing for launching voice2u, our
Internet-based telephony product, expanding our wireless network, marketing and
sales promotion, internal corporate infrastructure development, and general
working capital requirements.
The primary terms of the debentures are as follows:
o Entire principal amount will mature on June 25, 2003.
o The debentures bear interest at 12% per annum with interest payments
due quarterly, payable in cash or shares of Common Stock at our option
o The debenture holders have the option to convert any unpaid principal
(plus accrued and unpaid interest and other amounts owing under the
debentures) into shares of our common stock at any time after the
original issue date at the then applicable conversion price (subject
to certain limitations).
o The conversion price per share in effect on any conversion date shall
be the lesser of (i) $0.50 per share and (ii) 55% of the average of
the lowest three intra-day trading prices during the twenty trading
days immediately preceding the applicable conversion date.
o The debentures bear a mandatory prepayment penalty of 130% of the
principal and all accrued interest being prepaid (plus any other
amounts owing under the debentures). Our right to prepay the
debentures expires 30 days after issuance of the debentures.
o The Debentures are secured by all of our assets as well as the assets
of our subsidiaries. Pending entering into of a subordination
agreement with our existing primary lender, Laurentian Bank of Canada,
the Debentures are also secured by 3,000,000 shares of Common Stock
owned by Mr. Angelo Boujos, our Chairman, and a principal stockholder
of our company.
o The Debentures include significant penalties if we fail to pay amounts
owing under the Debentures in a timely manner and if we otherwise
breach our obligations under the Debentures.
The shares of common stock issuable upon conversion of the Debentures and
exercise of the Warrants have been included in a registration statement for
resale by the selling security holders pursuant to a registration rights
agreement between us and the selling security holders. The registration
statement has not yet been declared effective.
OTHER
As of September 30, 2002, we were owed, on a net basis, an aggregate of
approximately $73,000 from officers and directors. Amounts due to and from
officers and directors are non-interest bearing, due on demand and have no fixed
repayment term.
At September 30, 2002, we owed approximately $50,000 under a loan from the FSC
Group that was originally scheduled to mature on February 18, 2002. The loan
bore interest of 45,000 shares of common stock. Due to cash constraints, we
continue to extend the maturity of the loan to and thereby became obligated
pursuant to the terms of the loan to issue an aggregate of 750,000 additional
shares of common stock to the lender.
Our current plan includes strategic acquisitions or internal growth to expand
the scope of our business into new geographic areas of target markets in North
America. For all of our operations, materials, supplies, and equipment are
readily available; therefore, we anticipate being able to schedule capital
expenditures simultaneously with anticipated funding. Most of the capital
expenditures are expected to sales and marketing areas where requirements are
expected to mirror revenue growth. We intend to reduce the requirement for cash
flow to fund operating equipment as much as possible by leasing a substantial
portion of our operating equipment. We expect the significant cash flow
requirements will be for strategic acquisitions and internal growth.
By comparison, our approach is to outsource most construction and installation
activities only marginally with increased capital expenditures.
Not including cash flow requirements for strategic acquisitions and major
projects where we may take an equity position, we currently estimate that our
capital requirements for the period from September 30, 2002 to December 31, 2002
at approximately $1.6 million.
Our plan includes estimates which are forward-looking statements that may change
if circumstances related to third party materials and labor costs, revenue
growth expectations, construction, change of regulatory regime requirements and
opportunities to deploy the Company's strategy do not occur as expected.
GOING CONCERN CONSIDERATIONS
We have incurred losses to date and have a deficit, to date, of $(18,279,592)
and a working capital deficiency of $(4,692,647). In addition, we have been
unable to consistently meet our payroll obligations, trade obligations, and
long-term debt commitments as they become due. These factors raise substantial
doubt on the Company's ability to continue as a going concern. The liquidity of
the Company has been adversely affected by continuing losses and shortage of
cash resources. We continue to seek financing both in the form of debt and
equity and its ability to continue as a going concern is dependant on the
success of these efforts. Please refer to Note 1 of, and the Review Engagement
Report on, the Interim Consolidated Financial Statements for the nine months
ended September 30, 2002. The Management believes that the remaining $500,000
tranche of the $1.5 million private placement financing, the Palm Trading Credit
Facility, and Fusion financing facility may alleviate some of the Company's cash
flow needs, however, there can be no assurance in this regard.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no items that relate to "trading portfolios." We did not
include trade accounts payable and trade accounts receivable in the "other than
trading portfolio" because their carrying amounts approximate fair value. We may
from time to time enter into interest rate protection agreements.
We are subject to market risks due to fluctuation in foreign currency exchange
rates as the Company reports in US dollars yet the bulk of the corporation's
assets are located in Canada. We have not made significant use of financial
instruments to minimize the exposure to foreign currency fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations", that supersedes APB Opinion 16 and various related pronouncements
was effective for all business combinations initiated after September 30, 2001.
In general, SFAS 141 states that all business combinations are accounted for as
purchase transactions with the pooling-of-interests method being no longer
acceptable. In addition, SFAS 141 establishes new rules concerning recognition
of intangible assets arising in a purchase business combination and requires
enhanced disclosure of information in the period in which a business combination
is completed. The Company will adopt this standard on all future acquisitions.
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill, and Other
Intangible Assets" supersedes APB Opinion 17 and related interpretations and is
effective for the Company on January 1, 2002. In general, SFAS 142 establishes
new rules on accounting for goodwill and other intangible assets acquired in a
business combination. In addition, SFAS 142 reaffirms that intangibles acquired
in other than a business combination be initially recognized at fair value and
that the costs of internally developed intangible assets be charged to expense
as incurred. The adoption of this standard is not expected to have a material
impact on the Company.
Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" replaces SFAS 121 and provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, SFAS 144 also expands the scope of
a discontinued operation to include a component of an entity, and it eliminates
the current exemption to consolidation when control over a subsidiary is likely
to be temporary. The standard is effective for us as of January 1, 2002. The
adoption of this standard is not expected to have a material impact on our
company.
FORWARD LOOKING STATEMENTS
Statements included in this quarterly report on Form 10-QSB which are not
historical in nature, are intended to be, and are hereby identified as
"forward-looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by words including "anticipate", "await",
"envision", "foresee", "aim at", "believe", "intends", "estimates", "expect",
"anticipate" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, are subject to significant risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Readers are directed to the
Company's registration statement on Form SB-2 filed in July 2002 and other
filings with the U.S. Securities and Exchange Commission for additional
information and a presentation of the risks and uncertainties that may affect
the Company's business and results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings previously
reported in the Company's periodic reports filed with the U.S. Securities and
Exchange Commission. The Company and/or its affiliates are party to a number of
lawsuits. Litigation in general can be expensive and disruptive to normal
business operations and the results of complex legal proceedings are difficult
to predict. The Company believes it has defenses in each of the suits currently
pending against it and intends to vigorously contest each of the matters. An
unfavorable resolution of one or more of the currently ongoing lawsuits could
adversely affect the business, results of operations, or financial condition.
Further information regarding status of pending proceedings may be found in the
Company's annual report on Form 10-KSB for the year ended December 31, 2001 as
well as the Company's registration statement on Form SB-2 filed with the
Commission in July 2002.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information.
Effectiveness of our Disclosure Controls And Procedures - On November 11, 2002,
we issued our Policy on "Disclosure Control System Requirements and
Responsibilities". During the quarter, we examined our current practices and
established disclosure controls and procedures. Based on our evaluation we have
had effective informal disclosure controls and procedures in place. These
practices will be formalized to align with our Policy.
On October 18, 2002, the Canada Customs and Revenue Agency has served notice of
its intent to start actions to collect $1,138,088.64 CDN and has place a placed
a garnishee on Universe2U Canada Inc. bank account.
October 22,2002, the Workplace Safety and Insurance Board advised Universe2U
Canada Inc. of its intent to collect approximately $75,000 CDN outstanding from
CableTec Communications Inc. and Universe2U Canada Inc. and provided an
extension for 60 days.
Effective October 17, 2002, Mr. Gilbert Chalifoux, the COO Universe2U Canada,
left the organization. This impaired our ability to continue as a direct
"hand-on" provider of broadband services. Effective October 28, 2002, MIPPS Inc.
became the new service provider for all the Universe2U Internet Customers. We
are working with MIPPS, a leader in wireless Internet Service provision, to
ensure that you will be receiving the highest level of service at all times. We
will receive a percentage of the installation and recurring revenue. We also
expect to use MIPPS as our service provider using our community-branding model.
We will make our leasing plan available to MIPPS. We expected to be able to keep
our network operational until at least November 15, 2002 to provide MIPPS
adequate time to transition the customers, however, on November 7th Raco Remote
Access Company Ltd. our co-location provider cut the services this disconnection
impaired MIPPS ability to make the transition and Futureway Communications
refused to provide an alternative connection to the Internet. Thus, the number
of customers where we will receive an ongoing royalty for will be much lower
than expected. However, our broadband operation was consuming cash at the rate
of approximately $20K CDN per month. This will now be a positive contribution.
We were able to reduce our staff compliment by 6 employees.
Item 6. Exhibits and Reports
Reports on Form 8-K:
On July 2, 2002, we filed a current report on Form 8-K with the U.S. Securities
and Exchange Commission relating to a $1.5 million funding commitment.
Exhibits:
Exhibit No. Description of document
- ----------- -------------------------------------------------------
99.1 Certification Of Chief Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. 1350.
99.2 Universe2U Inc. Policy 9 "Disclosure Control System Requirements and
Responsibilities" issued November 11, 2002.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSE2U INC.
By: /s/ Kim Allen Date: November 19, 2002
--------------------
Kim Allen, Chief Executive Officer, (and principal financial officer)
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
In connection with the accompanying Quarterly Report on Form 10-QSB of
Universe2U Inc. for the quarter ended September 30, 2002, the undersigned hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
(1) such Quarterly Report on Form 10-QSB for the quarter ended June 30,
2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in such Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2002 fairly presents, in all material
respects, the financial condition, and results of operations of
Universe2U Inc.
November 19, 2002 /s/ Kim Allen
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Kim Allen
Chief Executive Officer and
Principal Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
In connection with the accompanying Quarterly Report on Form 10-QSB of
Universe2U Inc. for the quarter ended September 30, 2002, and pursuant to
recently adopted rules of the U.S. Securities and Exchange Commission (the
"SEC") implementing Section 302 of the Sarbanes-Oxley Act of 2002, I, Kim Allen,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Universe2U Inc.;
2. Based on their knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on their knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 19, 2002 /s/ Kim Allen
Kim Allen,
Chief Executive Officer and Principal
Financial Officer
Policies & Procedures Manual
Disclosure Control System Requirements and Responsibilities
1
Issue Date: Nov 11, 2002
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Universe2U will disclose all material financial and nonfinancial information. Employees
Policy Statement play an important role in collecting, analyzing, and determining the materiality of
financial and nonfinancial information, regardless of whether the CEO decides to make
these individuals Disclosure Committee members.
Employees shall forward information to the Disclosure Committee for determination of
materiality.
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The principal executive and financial officers of all companies that file periodic
CEO & CFO Responsibilities reports with the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act"), are required to:
a) certify as to the reliability and accuracy of both the financial and
non-financial information contained in their company's periodic
reports; and
b) take personal responsibility for their company's compliance with their
respective obligations to create, maintain and regularly evaluate the
effectiveness of a system of "disclosure controls and procedures"
designed to capture, and timely report, all financial and non-financial
information required to be disclosed under the federal securities laws.
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Universe2U will include in their SEC reports a separate management report on the internal
Management Report on The accounting controls of a company that would state:
Internal Accounting Controls
a) management's responsibilities for establishing and maintaining adequate internal
controls and procedures for the company's financial reporting;
b) management's conclusions about the effectiveness of the company's internal
controls and procedures as of the end of the most recently completed fiscal
year; and
c) that the outside auditor has attested to, and reported on, management's
evaluation of the company's internal controls and procedures for financial
reporting.
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1. Review annual reports on Form 10-K of Universe2U Inc.;
CEO & CFO Responsibilities
2. To ensure, based on their knowledge, that the annual report does not contain any
Annual Report untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the
annual report;
3. To ensure, based on their knowledge, that the financial statements, and other
financial information included in the annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in the annual report;
4. To establish and maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
annual report; and
c) presented in the annual report their conclusions about the effectiveness of the
disclosure controls and procedures based on their evaluation;
5. To disclose, based on their most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls;
6. To indicate in the annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their most 33 recent evaluations, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
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1. To review all quarterly report on Form 10-Q of Universe2U Inc.;
CEO & CFO Responsibilities
2. To ensure, based on their knowledge, that the quarterly reports do not contain
Quarterly Report any untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
quarterly report;
3. To ensure, based on their knowledge, that the financial statements, and other
financial information included in the quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in the quarterly report;
4. To establish and maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the quarterly report is being
prepared;
b) evaluate the effectiveness of the registrant's disclosure controls and
procedures on a quarterly prior to the filing date of a quarterly
report; and
c) presented in quarterly reports conclusions about the effectiveness of the
disclosure controls and procedures;
5. To disclose, based on their most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls;
6. To indicate in the quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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The disclosure committee membership include the following persons deemed to have the
Disclosure Committee level of interest and expertise relevant to the SEC reporting process: CEO, Chairman, the
principal accounting officer or controller; the general counsel (or other senior legal
officer with primary responsibility for SEC disclosure compliance who reports to the
general counsel); the principal risk management officer; the chief investor relations
officer (or other officer with equivalent responsibilities); and any other employee the
CEO views as contributing to the process, such as internal auditors and compliance
personnel, heads of all consolidated subsidiaries and other business units.
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Failure to adhere to the policy and the established practices and procedures will lead to
Non-compliance disciplinary action up to and including discharge.
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AT UNIVERSE2U, WE SUPPORT THE HIGHLY ETHICAL AND ADMINISTRATIVELY EFFECTIVE BUSINESS
Rationale PRACTICES.
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