-------------
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 March 31, 2001.
(_) 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.)
30 West Beaver Creek Road,
Suite 109, Richmond Hill, ON, Canada L4B 3K1
- ------------------------------------ -------
(Address of Principal (Zip Code)
Executive Offices)
(905) 881-3284
------------------------------------------------
(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 March 31, 2001: 36,978,225 shares of Common Stock, $.00001 par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2001.
Condensed Consolidated Statements of Deficit for the three
fiscal months ended March 31, 2001 and March 31, 2000.
Condensed Consolidated Statements of Income for the three
fiscal months ended March 31, 2001 and March 31, 2000.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis Of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION.
Unaudited Consolidated Financial Statements
Quarter ended March 31, 2001.
The consolidated financial statements for the three months ended March 31, 2001
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 periods. Results of operations for the three months ended
March 31, 2001, are not necessarily indicative of results of operations that
will be realized for the year ending December 31, 2001.
Universe2U Inc.
Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
2
MOORE STEPHENS COOPER MOLYNEUX LLP
CHARTERED ACCOUNTANTS
8th Floor, 701 Evans Avenue Telephone: (416) 626-6000
Toronto, Ontario Facsimile: (416) 626-8650
Canada M9C 1A3 E-mail: info@mscm.ca
Review Engagement Report
To the Shareholders of
Universe2U Inc.
We have reviewed the interim consolidated balance sheet of Universe2U Inc. as at
March 31, 2001, and the interim consolidated statements of deficit, operations
and cash flows for the three month period 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 and has a deficit, to date, of
$(7,190,945). This raises 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 note 1).
"Signed: Moore Stephens Cooper Molyneux LLP"
Chartered Accountants
Toronto, Ontario
May 11, 2001
3
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Balance Sheet
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 69,570
Accounts receivable (net of allowance for doubtful accounts of $219,266) 755,574
Due from officers and directors (note 3) 154,626
Due from related parties (note 3) 85,414
Inventory 93,422
Prepaid expenses and deposits 103,842
- -------------------------------------------------------------------------------- ---------------
1,262,448
Capital assets (at cost less accumulated amortization of $567,999) 1,331,271
- -------------------------------------------------------------------------------- ---------------
$ 2,593,719
================================================================================ ===============
Liabilities
Current liabilities
Bank indebtedness $ 179,523
Accounts payable and accrued liabilities 1,810,639
Income taxes payable 41,185
Current portion of capital lease obligations 9,573
Current portion of long-term debt (note 4) 7,793
- -------------------------------------------------------------------------------- ---------------
2,048,713
Long-term debt (note 4) 20,427
- -------------------------------------------------------------------------------- ---------------
2,069,140
- -------------------------------------------------------------------------------- ---------------
Commitments and contingencies (note 9) -
- -------------------------------------------------------------------------------- ---------------
Shareholders' equity
Share capital (note 5)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 36,978,225 Common shares 369
Additional paid in capital (net of share issuance costs of $341,237) 7,773,000
Accumulated other comprehensive (loss) (57,845)
Deficit (7,190,945)
- -------------------------------------------------------------------------------- ---------------
524,579
- -------------------------------------------------------------------------------- ---------------
$ 2,593,719
================================================================================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Deficit
for the three month periods ended March 31, 2001 and March 31, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------- -----------
Deficit, beginning of periods $ (4,661,716) $ (477,221)
Net loss for the periods (2,529,229) (10,419)
- ---------------------------------------------------------------- -----------
Deficit, end of periods $ (7,190,945) $ (487,640)
================================================================ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Operations
for the three month periods ended March 31, 2001 and March 31, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------ -------------
Revenue $ 638,816 $ 1,510,519
Cost of sales 768,409 883,327
- ------------------------------------------------------------------------------------ -------------
Gross profit (129,593) 627,192
- ------------------------------------------------------------------------------------ -------------
Expenses
Selling, general and administration 1,397,341 579,019
Stock based compensation (note 5) 892,960 4,670
Interest and financing costs 38,485 13,222
Interest expense - related parties (note 3) - 6,102
Depreciation and amortization 56,690 17,038
- ------------------------------------------------------------------------------------ -------------
2,385,476 620,051
- ------------------------------------------------------------------------------------ -------------
Loss from operations (2,515,069) 7,141
Share of loss of significantly influenced investment (14,160) -
- ------------------------------------------------------------------------------------ -------------
Loss before provision for income taxes (2,529,229) 7,141
Provision for income taxes - 17,560
- ------------------------------------------------------------------------------------ -------------
Net loss for the periods $ (2,529,229) $ (10,419)
==================================================================================== =============
Net loss per share - basic (note 7) $ (0.07) $ (0.00)
==================================================================================== =============
Weighted average shares outstanding 36,802,445 35,204,000
==================================================================================== =============
The accompanying notes are an integral part of these consolidated financial
statements.
6
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Cash Flows
for the three month periods ended March 31, 2001 and March 31, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------- ----------
Cash flow from operating activities
Net loss for the periods $ (2,529,229) $ (10,419)
Items not affecting cash
Depreciation and amortization 71,393 29,645
Stock option compensation (note 5) 892,960 4,670
Imputed interest - 6,102
Equity loss of significantly influenced investment 14,160 -
Future income taxes - (11,757)
- -------------------------------------------------------------------------------------------- ----------
(1,550,716) 18,241
Other sources (uses) of cash from operations
Decrease (increase) in accounts receivable 730,945 (241,113)
Decrease in inventory 87,011 39,493
Decrease in prepaid expenses and deposits 27,529 29,690
Increase in accounts payable and accrued liabilities 237,576 365,099
Increase in income taxes payable - 29,400
- -------------------------------------------------------------------------------------------- ----------
(467,655) 240,810
- -------------------------------------------------------------------------------------------- ----------
Cash flow from investing activities
Purchase of capital assets (22,866) (78,814)
- -------------------------------------------------------------------------------------------- ----------
Cash flow from financing activities
Repayments on long-term debt (7,450) (15,012)
Proceeds from issue of share capital 550,000 -
Proceeds from debenture - 343,512
Decrease in bank indebtedness (20,527) (69,432)
Decrease in related party advances (15,611) (138,315)
- -------------------------------------------------------------------------------------------- ----------
506,412 120,753
- -------------------------------------------------------------------------------------------- ----------
Effect of exchange rate changes on cash 32,463 (2,133)
- -------------------------------------------------------------------------------------------- ----------
Increase in cash 48,354 280,616
Cash and cash equivalents, beginning of periods 21,216 15,286
- -------------------------------------------------------------------------------------------- ----------
Cash and cash equivalents, end of periods $ 69,570 $ 295,902
=========================================================================================== ==========
Supplemental cash flow information
Cash paid during the periods for:
Income taxes $ - $ -
Interest $ 26,494 $ 12,773
=========================================================================================== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(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 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 March 31, 2001, the Company has incurred losses and has a deficit,
to date, of $(7,190,945).
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 three months ended March
31, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2001. For further
information, refer to the combined financial statements and footnotes
thereto included in Universe2U Inc.'s ("the Company") Form 10-KSB filed on
April 2, 2001 for the year ended December 31, 2000.
On May 17, 2000, Universe2U Inc. (formerly Paxton Mining Corporation)
issued 250,000 shares for 100% of the shares of Universe2U Canada Inc. For
accounting purposes, the acquisition is being recorded as a
recapitalization of Universe2U Canada Inc., with Universe2U Canada Inc. as
the acquiror. The 250,000 shares issued are treated as issued by
Universe2U Inc. for cash and are shown as outstanding for all periods
presented in the same manner as for a stock split. Prior to the
acquisition there were 5,510,200 shares outstanding in Universe2U Inc. In
addition, the recapitalization reflects 4,000,000 shares tendered for
cancellation and the declaration of a stock dividend on a 19 to 1 basis,
representing 33,443,800 shares, which formed part of the acquisition
transaction. The consolidated financial statements of the Company reflect
the results of operations of Universe2U Inc. and Universe2U Canada Inc.
from January 1, 2001 to March 31, 2001. The consolidated financial
statements prior to May 17, 2000 reflect the results of operations and
financial position of Universe2U Canada Inc. Pro forma information on this
transaction is not presented as, at the date of this transaction,
Universe2U Inc. is considered a public shell and accordingly, the
transaction will not be considered a business combination.
8
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Consolidation - continued
- --------------------------------------------------------------------------------
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock
options to purchase 200,000 shares at a price of $7.50 Canadian. This
transaction was accounted for under the purchase method of accounting. The
total cost of the acquired net assets was $1,500,000 Canadian, which was
equal to the purchase price of the CableTec stock. The results of
operations of the acquired entity are included in the accompanying
financial statements since the date of acquisition.
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.
3. Transactions with Related Parties
- --------------------------------------------------------------------------------
As of March 31, 2001, the following balances were due from related
parties:
Officers and directors $ 154,626
Loans to significantly influenced companies $ 85,414
The amounts due to and from commonly controlled and significantly
influenced companies are non-interest bearing, due on demand and have no
fixed repayment terms.
The amounts due to and from officers and directors are interest bearing,
due on demand and have no fixed repayment terms. During the period, the
Company imputed interest of nil (2000 - $6,102) to officers and directors
on advances made to the Company. The payment of interest was waived by the
officers and directors in the prior period.
On June 9, 2000, the Board of Directors adopted a resolution to convert a
loan of $428,968 previously made by an officer and director of the Company
into 100,000 common shares of the Company.
9
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
4. Long-Term Debt
- --------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------- -----------
Promissory note bearing interest at prime plus 3% per annum
with monthly principal repayments of $1,378 plus interest,
repaid during the prior year, secured by a general security
agreement and a limited guarantee by an officer and director
of the Company; $ - $ 152,201
Promissory note bearing interest at prime plus 2.5% per
annum with monthly principal repayments of $2,735 plus
interest, repaid during the prior year, secured by a general
security agreement and a limited guarantee by an officer and
director of the Company; - 140,863
Term loan bearing interest at 8.9% per annum, with monthly
principal and interest payments of $317, maturing in
December 2004, secured by the vehicle; 11,904 15,533
Term loan bearing interest at 1.9% per annum, with monthly
principal and interest payments of $525, maturing in March
2002, secured by the vehicle; 16,316 -
- ----------------------------------------------------------------------------------- -----------
28,220 308,597
Less: Current portion 7,793 54,756
- ----------------------------------------------------------------------------------- -----------
$ 20,427 $ 253,841
=================================================================================== ===========
The month end prime rate as at March 31, 2001 was approximately 6.75%
(2000 - 7.0%).
The promissory notes payable represented government assisted Small
Business Loans that became payable once the Company became publicly owned.
As a result of the reverse acquisition on May 17, 2000, the notes were
repaid in full in the prior year.
Principal repayments on long-term debt are as follows:
2001 $ 5,922
2002 8,361
2003 9,184
2004 4,753
- --------------------------------------------------------------------------------
Total $ 28,220
================================================================================
10
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. 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 is subject to shareholder approval and ratification within twelve
months of the adoption date. Under the original terms of the Plan,
1,500,000 shares of common stock were reserved for issuance in year 2000,
with automatic replenishment each subsequent year up to the lesser of
1,000,000 shares of 10% of the Company's outstanding stock. As of March
31, 2001, no options were granted or outstanding under the Plan.
As of March 31, 2001, an aggregate of 1,871,000 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 ranging from $0.01 per share to $5.00 per share
and as of March 31, 2001, options to purchase 600,000 shares of common
stock of the Company were vested.
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. This non-cash compensation
expense is charged against operations ratably over the vesting period of
the options or service period, whichever is shorter, and was $892,960 for
the period (2000 - $4,670). 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
2001 2000
- --------------------------------------------------------------------- -------
Dividend yield - -
Expected volatility 75% -
Risk free interest rate 5.8% -
Expected option term 5.0 -
Fair value per share of options granted $3.41 -
- --------------------------------------------------------------------- -------
11
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
Compensation expense recorded under FAS No. 123 would have been
approximately $1,139,062 in 2001 (2000 - $56,024), increasing the loss per
share by $0.01 in 2001 (2000 - nil).
As at March 31, 2001, details of options outstanding were as follows:
Outstanding Exercisable
- ------------------------------------------------------------------------------------------------------------------
weighted average weighted average
number exercise price number exercise price
- ------------------------------------------------------------------------------------------------------------------
December 31, 1999 700,000 $ 0.01 - $ -
Granted - first quarter 47,000 $ 0.01 - $ -
Granted - second quarter 887,000 $ 1.59 - $ -
Granted - third quarter 55,000 $ 5.00 - $ -
Expired - third quarter (5,500) $ 0.01 - $ -
Granted - fourth quarter 27,500 $ 5.34 - $ -
Expired - fourth quarter (50,000) $ 5.00 - $ -
- ------------------------------------------------------------------------------------------------------------------
December 31, 2000 1,661,000 $ 0.95 - $ -
Granted - first quarter 210,000 $ 0.24 - $ -
- ------------------------------------------------------------------------------------------------------------------
March 31, 2001 1,871,000 $ 0.87 - $ -
- ------------------------------------------------------------------------------------------------------------------
As at March 31, 2001, stock options expire as follows:
- ------------------------------------------------------------------------------------------------------------------
number exercise number
outstanding price exercisable
- ------------------------------------------------------------------------------------------------------------------
2001 200,000 $ 0.01 -
2004 800,000 $ 0.01 -
2005 703,500 $ 0.01 -
2005 145,000 $ 5.00 -
2005 12,500 $ 5.75 -
2006 10,000 $ 4.81 -
- ------------------------------------------------------------------------------------------------------------------
1,871,000
- ------------------------------------------------------------------------------------------------------------------
As at March 31, 2001, details of share purchase warrants outstanding were as follows:
- ------------------------------------------------------------------------------------------------------------------
number exercise expiry
outstanding price date
- ------------------------------------------------------------------------------------------------------------------
440,500 $ 5.00 2005
- ------------------------------------------------------------------------------------------------------------------
12
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
Continuity of stockholders' equity
- --------------------------------------------------------------------------------
accumulated
other comp-
common par paid in rehensive
shares value capital income (loss) deficit total
- -----------------------------------------------------------------------------------------------------------------------
Recapitalization
as a result of merger
(see Note 1) 35,204,000 $352 $43,528 - - $ 43,880
- -----------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - - (39,540) (39,540)
Exchange differences - - - 10,228 - 10,228
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) - - - 10,228 (39,540) (29,312)
Imputed interest - - 3,672 - - 3,672
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1998 35,204,000 352 47,200 10,228 (39,540) 18,240
- -----------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - - (426,723) (426,723)
Exchange differences - - - (27,319) - (27,319)
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) - - - (27,319) (426,723) (454,042)
Stock option
compensation - - 20,267 - - 20,267
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1999 35,204,000 352 67,467 (17,091) (466,263) (415,535)
- -----------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - - (4,195,453) (4,195,453)
Exchange differences - - - (58,047) - (58,047)
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) - - - (58,047) (4,195,453) (4,253,500)
Conversion of
debentures 833,000 8 668,665 - - 668,673
Conversion of share-
holder advances 100,000 1 428,967 - - 428,968
Private placements 621,500 6 2,766,306 - - 2,766,312
Stock option
compensation - - 2,387,958 - - 2,387,958
Imputed interest - - 10,679 - - 10,679
- -----------------------------------------------------------------------------------------------------------------------
December 31, 2000 36,758,500 $367 $6,330,042 $ (75,138) $(4,661,716) $ 1,593,555
- -----------------------------------------------------------------------------------------------------------------------
13
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
Continuity of stockholders' equity
- --------------------------------------------------------------------------------
accumulated
other comp-
common par paid in rehensive
shares value capital 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 -- -- -- -- (2,529,229) (2,529,229)
Exchange differences -- -- -- 17,293 -- 17,293
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) -- -- -- (17,293) (2,529,229) (2,511,936)
Private placement 219,725 2 549,998 -- -- 550,000
Stock option
compensation -- -- 892,960 -- -- 892,960
- ------------------------------------------------------------------------------------------------------------------------
March 31, 2001 36,978,225 $369 $7,773,000 $ (57,845) $(7,190,945) $ 524,579
- ------------------------------------------------------------------------------------------------------------------------
The 219,725 common shares issued in a private placement during the quarter
were priced on March 1, 2001 and are subject to anti-dilution price
protection until March 13, 2002. Upon notice from the investor, the shares
issued shall have their respective original purchase price of $2.50 per
share reset in accordance with the reset formula. The reset formula allows
for an additional number of shares to be issued based on the difference
between the original purchase price and the average of the publicly quoted
high and low trading price of the Company's common stock during the five
days prior to notice to the Company of the exercise of the Reset Right
(the "High-Low Average Price"). The additional shares to be issued will be
calculated by: (i) subtracting the High-Low Average Price from the
original purchase price; (ii) multiplying the difference thereof by the
number of shares that are the subject of the Reset Right notice from the
investor; and (iii) dividing the product thereof by the original purchase
price.
The Company, at its sole discretion, has the right to redeem the purchased
shares for a period of 25 days from the date of Closing at the original
purchase price of the shares plus a redemption fee of 2% of the original
purchased price. The Company may also extend the redemption period for an
additional 25 days upon payment of a fee equivalent to 2% of the original
purchase price of the shares. The redemption period may be extended twice
upon payment of the required fees for a maximum total redemption period of
75 days.
14
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
6. Information on Operating Segments
- --------------------------------------------------------------------------------
General description
The Company's subsidiaries are 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 can
be 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.
The FC&MS segment 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.
The FN&SED segment 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.
The S&M segment is responsible for all direct sales, which involve the
sale of telecom infrastructure products to telecommunication companies,
telecommunication services on behalf of tele-communications companies and
services on behalf of the right of way owners. The segment also acts as
broker for sales of rights of ways.
The NS segment is 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 evaluates 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 three month period ended March 31,
2001 and the three month period ended March 31, 2000.
Information by operating segment as at and for the three month period
ended March 31, 2001:
- ------------------------------------------------------------------------------------------------------------------
FC&MS FN&SE S&M NS Total
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 262,619 94,797 209,635 71,765 $ 638,816
Interest expense $ 9,380 860 3,665 948 $ 14,583
Amortization of
capital assets $ 30,119 6,260 3,951 27,810 $ 68,140
Loss before
income taxes $ (939,068) (126,719) (216,862) (277,200) $ (1,559,849)
Total assets $ 1,125,001 198,701 270,713 841,373 $ 2,435,788
Capital assets $ 441,087 114,057 52,793 679,911 $ 1,287,848
Capital asset additions $ 4,264 -- -- -- $ 4,264
- ------------------------------------------------------------------------------------------------------------------
15
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
6. Information on Operating Segments - continued
- --------------------------------------------------------------------------------
Reconciliations to consolidated results as at and for the three month
period ended March 31, 2001:
- --------------------------------------------------------------------------------
Segmented Corporate Total
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 638,816 -- $ 638,816
Loss before income taxes $ (1,559,849) (969,380) $ (2,529,229)
Total assets $ 2,435,788 157,931 $ 2,593,719
Capital assets $ 1,287,848 43,423 $ 1,331,271
Capital asset additions $ 4,264 18,602 $ 22,866
- ------------------------------------------------------------------------------------------------------------------
Information by operating segment as at and for the three month period
ended March 31, 2000:
- ------------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 1,004,504 244,453 261,562 -- $ 1,510,519
Interest expense $ 8,894 3,251 7,179 -- $ 19,324
Amortization of
capital assets $ 20,208 7,278 2,159 -- $ 29,645
Income (loss) before
income taxes $ (134,548) 134,759 11,600 -- $ 11,811
Total assets $ 1,374,492 192,829 252,735 -- $ 1,820,056
Capital assets $ 325,495 136,806 34,548 -- $ 496,849
Capital asset additions $ 74,598 -- 4,216 -- $ 78,814
- --------------------------------------------------------------------------------------------- -------------
- ------------------------------------------------------------------------------------------------------------------
Reconciliations to consolidated results as at and for the three month
period ended March 31, 2000:
- ------------------------------------------------------------------------------------------------------------------
Segmented Corporate Total
- ---------------------------------------------------------------------------------------------- ---------------
Revenue $ 1,510,519 -- $ 1,510,519
Income (loss) before income taxes $ 11,811 (4,670) $ 7,141
Total assets $ 1,820,056 -- $ 1,820,056
Capital assets $ 496,849 -- $ 496,849
Capital asset additions $ 78,814 -- $ 78,814
- ---------------------------------------------------------------------------------------------- ---------------
16
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
6. Information on Operating Segments - continued
- --------------------------------------------------------------------------------
Geographic information
Information by geographic region as at and for the three-month period
ended March 31, 2001:
- -----------------------------------------------------------------------------------------------------------
Canada United States Total
- -----------------------------------------------------------------------------------------------------------
Revenue $ 627,661 11,155 $ 638,816
Interest expense $ 15,394 11,100 $ 26,494
Amortization of capital assets $ 69,406 1,987 $ 71,393
Loss before income taxes $ (1,496,509) (1,032,720) $ (2,529,229)
Total assets $ 2,478,534 115,185 $ 2,593,719
Capital assets $ 1,301,255 30,016 $ 1,331,271
Capital asset additions $ 22,866 -- $ 22,866
- -----------------------------------------------------------------------------------------------------------
Information by geographic region as at and for the three-month period
ended March 31, 2000:
- -----------------------------------------------------------------------------------------------------------
Canada United States Total
- ---------------------------------------------------------------------------------------- -------------
Revenue $ 1,510,519 -- $ 1,510,519
Interest expense $ 19,215 109 $ 19,324
Amortization of capital assets $ 29,356 289 $ 29,645
Income (loss) before income taxes $ 44,298 (37,157) $ 7,141
Total assets $ 1,801,949 18,107 $ 1,820,056
Capital assets $ 489,278 7,571 $ 496,849
Capital asset additions $ 73,807 5,007 $ 78,814
- ---------------------------------------------------------------------------------------- -------------
Revenues are attributed to countries based on location of customers.
7. 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
5.
Three months ended March 31
2001 2000
- ----------------------------------------------------------------------------------------
Basic EPS Computation:
17
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
Net loss for the periods $ (2,529,229) $ (10,419)
Weighted average outstanding shares 36,802,445 35,204,000
Basic EPS $ (0.07) $ (0.00)
- ------------------------------------------------------------------------------------------
8. Acquisition
- --------------------------------------------------------------------------------
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock
options to purchase 200,000 shares at a price of $7.50 Canadian per share.
This transaction was accounted for under the purchase method of
accounting. The total cost of the acquired net assets was $1,500,000
Canadian, which was equal to the purchase price of the CableTec stock. The
results of operations of the acquired entity are included in the
accompanying financial statements since the date of acquisition.
9. Commitments and Contingencies
- --------------------------------------------------------------------------------
Lease commitments
At March 31, 2001, 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:
2001 $ 370,125
2002 424,385
2003 303,790
2004 183,131
2005 44,933
- --------------------------------------------------------------------------------
Total $ 1,326,364
================================================================================
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. Certain
agreements do provide for severance payments of six months of regular
compensation provided the termination is not voluntary or for cause. The
agreements include a covenant against competition with the Company, which
extends for a period of time after termination for any reason. As of March
31, 2001, the minimum annual commitment under these agreements was
approximately $787,000.
Contractual commitments
The Company has a commitment to pay its joint venture partner,
T-Enterprises Inc., the sum of $200,000 worth of its shares upon the date
of closing of the first right-of-way transaction completed by the joint
venture or one of the Company's subsidiaries, Multilink Network Services
Inc.
18
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Cash Flows
for the three month periods ended March 31, 2001 and March 31, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
9. Commitments and Contingencies - continued
- --------------------------------------------------------------------------------
Legal proceedings
The Company and/or its affiliated companies are parties to lawsuits which
arose in the normal course of business. 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
they have defenses in each of the suits they are currently involved in and
will 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.
On March 16, 2001, a competitor commenced a lawsuit against one of the
Company's subsidiaries and two of its employees. The plaintiff formerly
employed the two employees. The lawsuit seeks damages in the amount of $7
million (Canadian) as well as an injunction restraining the Company from
soliciting customers of the plaintiff and/or using confidential
information of the plaintiff. The Company has filed a notice of intent to
defend with the court. At this stage in the proceedings the Company is
unable to determine the probable outcome. The Company disputes the
allegations and intends to vigorously defend these proceedings.
No amounts have been accrued in the accounts in respect of any of these
matters.
10. Comparative Figures
- --------------------------------------------------------------------------------
Certain accounts in the prior period financial statements have been
reclassified for comparative purposes to conform with the presentation
adopted in the current period financial statements.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with our Condensed Consolidated
Financial Statements for the first quarter ended March 31, 2001.
General
Our Company is the product of an acquisition, completed on May 17, 2000, in
which Paxton Mining Corporation acquired all of the outstanding shares of
Universe2U Inc. Upon completion of the acquisition, we changed our corporate
name to Universe2U Inc. In connection with the acquisition, the management of
the Company changed. We also elected to change our fiscal year end from June 30
of each year to December 31 of each year.
Prior to 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.
Our Company provides telecommunications access solutions to communities,
communications carriers and other corporate and government customers in North
America. We are a facilities-based provider of advanced fiber optic solutions
and high-bandwidth connectivity that enables high-speed access to the Internet,
telecommunications, and other data networks. We provide open access networks
that are available to all service providers. We are not a carrier nor do we
provide regulated telecommunications services.
Our operations focus on the following areas:
. SmartNetworks
. SmartCommunities
. SmartBuildings
. SmartLinks
. SmartServices
. Infrastructure Services;
. Customer Value Creation Services; and
. SmartOffices
We are currently pursuing a two-pronged business strategy:
. to be a "SmartNetworks" pioneer in developing SmartCommunities networks
in partnership with local governments; SmartBuilding networks in
partnership with institutions and business; and SmartLinks in partnership
with rights-of-way owners, where we may take an equity position in the
network; and
. to deliver SmartServices for our SmartNetworks and provide the design
and build fiber optic networks and market telecommunication services
for major telephone and cable television companies.
We believe that our two-pronged business strategy promotes high-speed access
growth opportunities in Tier 2 and Tier 3 communities, where roughly two-thirds
of the North American population are located, as well as in the high population
density urban areas where most investment in high-speed network infrastructure
has been focused to date.
In addition, our strategy enables us to pursue the growth areas of in-building
networks and linking networks to connect communities together.
20
We can provide turnkey service offerings. Instead of contractual project
clients, we expect to target strategic alliances, partnerships and joint
ventures where equity ownership is an integral component of the deal structure.
Our SmartCommunities networks, SmartBuildings networks and SmartLinks models
will all be designed on this basis. Where initially the primary revenue stream
is expected to be from the individual operations, the long term revenue stream
and profitability are anticipated to be driven by our equity/partnership model
in all three network applications.
We have experienced operating losses and expect to continue to generate losses
into the foreseeable future while we continue to expand our customer base and
internal information systems.
The Company's operations are organized into segments based on the nature of
products and services provided and into geographical segments based on the
location of customers. The Company's operations can be classified into four
reportable operating segments: Fiber Construction and Maintenance Services
("FCMS"), 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.
The FC&MS segment 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.
The FN&SED segment 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.
The S&M segment 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.
The NS segment is a support service for the other operating segments.
We generate revenues from engineering and design work, building networks,
selling voice, data and other telecommunications services. The majority of our
revenues are generated on non-recurring charges for one-time services. The
remainder is derived from charges on a monthly recurring basis. We expect future
contracts to have duration between 12 and 18 months. The value of our contracts
could increase significantly, if we become the supplier of the fiber optic
cable, and depending on the fiber count a customer selects, however there can be
no assurance in this regard.
We have ongoing relationships with Windsor Utility Commission and Grimsby Power.
We continue to build their networks through a series of purchase orders. We are
supplying the fiber optic cable and the major components needed to build their
networks. We expect these to be long-term relationships.
Most other revenue is obtained through purchase orders ranging in value from a
few thousand dollars to over a quarter of a million dollars.
21
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:
. our ability to acquire the needed financing for infostructure
projects;
. our ability to grow our engineering, design, construction and direct
sales business to drive the organic growth;
. our ability to obtain customers before our competitors do;
. our ability to achieve adequate margins on materials;
. the demand for our network services;
. the level of competition we face from other telecommunications
services providers, including price and margins for communications
services over time;
. the ability of the "new" entrants into the telecommunications industry
to pay for our services on a timely basis; and
. possible regulatory changes, including regulations requiring building
owners to give access to competitive providers of communications
services.
Our cost of sales consists primarily of costs of infrastructure materials, and
associated costs of installation 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 materials 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.
As of 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. The Company plans to amalgamate CableTec Communications Inc. into
Universe2U Canada Inc. during the current fiscal year.
Many companies in our industry experienced weak results in the first quarter. In
addition to the disappointing performance, consolidation and restructuring
resulted in many of the telecommunications companies reducing the amount of
outsourcing of their work. This had a dramatic effect on our total revenues, as
presented below. We shifted our focus from a primary strategy of designing and
building, fiber optic networks and marketing telecommunication services for
major telephone and cable television companies; to developing SmartNetworks:
"SmartCommunity" in partnership with local governments; "SmartBuildings"
networks
22
in partnership with institutions, businesses; and "SmartLinks" in partnership
with right-of-way owners, where we may take an equity position in the network.
Our SmartServices offering supports our SmartNetworks and we continue to sell
services to the telecommunications companies and directly to business.
Through our equity partnership model, we expect to facilitate innovative
financing structures for governmental organizations and public sector groups who
are under enormous pressure to provide more services with shrinking revenues. We
expect to aggressively implement this focused attack on the market. We believe
our strategy will energize and support communities in their effort to bring
universal access and open networks to their communities. We believe there is an
under-supply in our target markets of the kinds of services that we offer and we
believe there is still a great deal of opportunity for us to operate in this
arena. We also believe that we have initiated the right business model at the
most opportune time and we have committed our energies and resources to
executing this strategy.
During the first quarter of 2001, we added two vital components to our turnkey
offering, Network Solutions and Technology Solutions. These units have been
built organically. We believe that Network Solutions offers a breakthrough value
proposition to small and medium sized businesses in terms of making price points
significantly lower for enhanced data services over broadband and delivery of
true turnkey networks integration solution. Network Solutions delivers bandwidth
to a client company's front door as well as extends and integrates it with their
existing local network infrastructure. Our SmartOffices component offers the
final step in our commitment to universal access, providing complete network
services to all types of businesses ranging from small offices to multi-campus
enterprises.
Our Technology Solutions provide leadership in the design, integration and
support of high-end enterprise class networking solutions. We specialize in
first assessing, then leveraging, relevant technologies to provide real
solutions to customers needs. We help our clients meet their business goals
through the proper use of enabling technologies. We are pragmatic: we do not
implement technology solely for technology's sake. We include the following in
our Technology Solutions development programs:
1. Facilitate the development of information technology architectures and
strategies;
2. Provide structured project management;
3. Design/implement global and enterprise networking solutions;
4. Supplement clients resources by providing negotiating skills on
contracts and terms with vendors/carriers; and
5. Design/build powerful eCommerce solutions.
RESULTS OF OPERATIONS
Total revenues decreased $872 thousand, or 58% to $639 thousand for the quarter
ended March 31, 2001 from $1.5 million for the quarter ended March 31, 2000. For
the quarter ended March 31, 2001, the total revenue for the FC&MS operating
segment was $262 thousand. For the quarter ended March 31, 2001, the total
revenue for the FN&SE operating segment was $95 thousand. For the quarter ended
March 31, 2001, the total revenue for the S&M operating segment was $210
thousand. For the quarter ended March 31, 2001, the total revenue for the NS
operating segment was $72 thousand. Cost of sales decreased $115 thousand or 13%
to $768 thousand for the quarter ended March 31, 2001 from $883 thousand for the
quarter ended March 31, 2000.
23
Gross profit for the quarter ended March 31, 2001 was negative $130 thousand
(-20% of revenues) versus $627 thousand (42% of revenues) in 2000. Selling,
general and administration expenses increased $818 thousand, to $1.4 million
(219% of revenues) for the quarter ended March 31, 2001 from $579 thousand (38%
of revenues) for the quarter ended March 31, 2000.
Stock based compensation expense for the quarter ended March 31, 2001 was $893
thousand versus $5 thousand for the quarter ended March 31, 2000. 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. The
compensation expense is charged against operations ratably over the vesting
period of the options or the service period, whichever is shorter. Much of the
stock option expense relates to employee option grants provided before, or soon
after, the corporation was acquired on May 17, 2000. The Company anticipates
expensing an additional $1.7 million of stock compensation expense over the next
6 quarters relating to stock options existing as at December 31, 2000. As at
March 31, 2001 there were 1,871,000 stock options outstanding with a weighted
average exercise price of $0.87.
Interest and financing costs were $38 thousand (6% of revenues) for the quarter
ended March 31, 2001, an increase of $25 thousand from $13 thousand (1% of
revenues) for the quarter ended March 31, 2000. This was a direct result of
increased financing necessary for capital expenditures and to fund the operating
losses. During the first quarter of the current year, the Company experienced
cash flow shortages on a number of occasions and has 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.
Depreciation and amortization costs were $71 thousand (11% of revenues) for the
quarter ended March 31, 2001, compared to 30 thousand (2% of revenues) for the
quarter ended March 31, 2000. The increase of $41 thousand was the result of a
substantial addition in capital assets primarily in Fiber Optics Corporation of
Canada, as well as, the acquisition of CableTec. The share of loss of
significantly influenced investment of $14 thousand represents start up costs
associated with a 49% owned investment, T-E Realty and Rights of Ways Agency
LLC., which began operations in the third quarter of the prior year.
For the quarter ended March 31, 2001, the loss before income taxes for the FC&MS
operating segment was $939 thousand. For the quarter ended March 31, 2001, the
loss before income taxes for the FN&SE operating segment was $127 thousand. For
the quarter ended March 31, 2001, the loss before income taxes for the S&M
operating segment was $217 thousand. For the quarter ended March 31, 2001, the
loss before income taxes for the NS operating segment was $277 thousand.
The Company incurred losses before income taxes for the quarter ended March 31,
2001 of $2.5 million compared to a profit before income taxes of $7 thousand for
the quarter ended March 31, 2000. Non-cash stock based compensation accounted
for $893 thousand of the loss in the quarter ended March 31, 2001, compared to
$5 thousand for the quarter ended March 31, 2000.
During the first quarter 2001 we adjusted our workforce from a peak of 168
people to our current level of 78, which includes 15 additional people in
Network and Technology Solutions divisions.
24
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.
LIQUIDITY AND CAPITAL RESOURCES
Our current growth plan is twofold:
To design, build, and market SmartNetworks:
. SmartBuildings;
. SmartCommunities; and
. SmartLinks;
To provide SmartServices:
. Infrastructure Services, including the designing and building of
networks;
. Customer Value Creation Services, including marketing services,
selling rights-of-way, business transformation, technology
solutions; and
. SmartOffices, including DSL services, complete network services to
all types of businesses ranging from small offices to multi-campus
enterprises
The SmartServices are provided to telecommunication companies and support our
SmartNetworks.
We believe that all of these market segments provide high-growth potential.
Based on our current growth plan, we expect to require a substantial amount of
capital to expand the development of operations and networks into new geographic
areas of target markets in North America. We need capital to fund operations and
strategically acquire related companies. Materials, supplies and equipment are
all readily available for all of our operations; therefore, we anticipate being
able to schedule capital expenditures simultaneously with anticipated funding.
Most of the capital expenditures will be in SmartNetworks. We anticipate raising
capital on a project-by-project basis. By comparison, in the fiber design,
engineering, sales and marketing operations, revenue growth is expected to be
supported primarily by an increase in labor force and only marginally with
increased capital expenditures. 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. Nonetheless, we expect continuing
significant cash flow requirements, particularly for strategic acquisitions and
internal growth.
Our current plan includes strategic acquisitions or internal growth to expand
the scope of operations and networks into new geographic areas of target markets
in North America. 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 April 1,
2001 to December 31, 2001 at approximately $3 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 SmartNetworks do not occur as expected.
Sources of funding for our current and future financing requirements may include
vendor financing, public offerings or private placements of equity and/or debt
securities, commercial credit facilities and bank loans. There can be no
assurance that sufficient additional financing will be available to us or, if
available,
25
that it can be obtained on a timely basis and on acceptable terms. Failure to
obtain financing could result in the delay or curtailment of our development and
expansion plans and expenditures. Any of these events could have a material
adverse effect on our business.
For the quarter ended March 31, 2001, the Company's net cash used in operating
activities was $468 thousand ($241 thousand cash flow in 2000). This amount
includes adjustments for non-cash items comprised of depreciation and
amortization of $71 thousand ($30 thousand in 2000), stock option compensation
of $893 thousand ($5 thousand in 2000), and a deduction for the equity loss of
$14 thousand (nil in 2000). For the quarter ended March 31, 2001 net cash used
in investing activities was $23 thousand, which consisted of additions to
property, plant and equipment. For the quarter ended March 31, 2000, net cash
used in investing activities was $79 thousand. For the quarter ended March 31,
2001 net cash provided by financing activities of $506 thousand included net
proceeds from the issue of share capital of $550 thousand, offset by net
repayments on debt of $28 thousand, and the net decrease in due to related
parties of $16 thousand. For the quarter ended March 31, 2000 net cash provided
by financing activities of $121 thousand included a net decrease in debt of $85
thousand, proceeds on debenture of $344 thousand and a net decrease in amounts
due to related parties of $138 thousand.
Management has decided not to proceed with a previously announced $35 million
Private Equity Line due to prohibitively burdensome cost and expense of
complying with Canadian securities regulatory requirements. Management has taken
an alternative approach under which it expects to raise funds for continued
operations through private placements and project financing, however there can
be no assurance of the results in this regard.
The Company has incurred losses to date and has a deficit, to date, of
$(7,190,945). This raises 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. The Company continues to seek
financing both in the form of debt and equity and its ability to continue, as a
going concern is dependent on the success of these efforts. Please refer to Note
1 of, and the Review Engagement Report on, the Unaudited Interim Consolidated
Financial Statements for the quarter ended March 31, 2001. Management believes
that the availability of expected private placement equity funding may alleviate
some of the Company's cash flow needs, however, there can be no assurance in
this regard. Additional risks relating to investment in the Company may be found
in the Company's filings with the U.S. Securities and Exchange Commission,
including the Company's Annual Report on Form 10-KSB for the year ended December
31, 2000.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently has no items that relate to "trading portfolios". The
Company 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.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Universe2U Inc., and/or its affiliated companies, are from time to time parties
to lawsuits in the normal course of business. Litigation in general can be
expensive and disruptive to normal business operations. Moreover, the results of
complex legal proceedings are difficult to predict. We believe that we have
defenses in each of the cases set forth below and the cases previously disclosed
and will vigorously contest each of these matters. An unfavorable resolution of
one or more of the following lawsuits could adversely affect our business,
results of operations, or financial condition.
A. On March 16, 2001, a lawsuit was commenced in the Ontario Superior Court of
Justice by Destiny Network Solutions Inc.(Destiny) against Universe2U Canada
Inc. and two of its employees (Destiny Network Solutions Inc. v. Akhilesh Shan,
Joseph Khunaysir and Universe2U Canada Inc., Toronto court file number
01-CV-207508). The two employees were formerly employees of Destiny. The lawsuit
alleges, among other things, that the employees breached fiduciary and
contractual obligations owed to Destiny by leaving the employ of Destiny and
commencing employment with Universe2U Canada Inc., that the employees solicited
customers of Destiny for Universe2U Canada Inc.'s benefit, and that they
disclosed confidential information to Universe2U Canada Inc. The lawsuit seeks,
as against Universe2U Canada Inc., damages in the amount of $7 million
(Canadian), as well as an injunction restraining Universe2U Canada Inc. from
soliciting customers of the plaintiff and/or using confidential information of
the plaintiff. Universe2U Canada Inc. has filed a notice of intent to defend
with the court. Universe2U Canada Inc. disputes the allegations, and intends to
vigorously defend these proceedings.
B. On April 12, 2001, Universe2U Canada Inc. received a letter from a lawyer
representing an employee who alleges that Universe2U Canada Inc. wrongfully
terminated his employment. The employee asserts that his losses as a result are
between $400,000 and $600,000 (Canadian). To date, no statement of claim has
been served on the company.
We are not currently involved in any pending legal proceedings that are expected
to have a material adverse effect on our business, however there can be no
assurance in this regard. 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, 2000 filed with the U.S. Securities and Exchange
Commission. We may from time to time become involved in legal proceedings in the
ordinary course of our business.
Item 2. Changes in Securities and Use of Proceeds
On March 13, 2001, the Company consummated the sale of 219,725 shares of our
common stock to Dominion Fixed Income Plus Investments Ltd. ("Dominion") in a
private placement, which resulted in net proceeds to the Company of $550,000.
The foregoing securities were issued pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933, as
amended. The securities sold to Dominion are restricted and may not be offered
or re-sold in the United States absent registration or an exemption from
registration. The shares of common stock issued pursuant to such placement are
subject to anti-dilution price protection until March 13, 2002, exercisable with
respect to each share of the purchased shares (the "Reset Right"), whereby upon
notice from Dominion, each of such purchased shares shall have its respective
original
27
purchase price of $2.50 per share reset in accordance with the formula below
(the "Reset Price"). In the event of a Reset Price, an additional number of
shares shall be issued to Dominion based upon the difference between the
original purchase price and the average of the publicly quoted high and low
trading price of our Common Stock during the five (5) days prior to notice to us
of exercise of the Reset Right (the "High-Low Average Price"). We shall issue
such additional number of shares to Dominion calculated by (a) subtracting the
High-Low Average Price from the original purchase price, (b) multiplying the
difference thereof by the number of shares that are the subject of the Reset
Right notice from Dominion; and (c) dividing the product thereof by the original
purchase price. The Reset Right is exercisable with respect to any or all of the
purchased shares in whole or in part at any time until March 13, 2002. We, at
our sole discretion, may redeem the purchased shares for a period of up to
twenty-five (25) days from the March 13, 2001 closing date (the "Redemption
Period") upon repayment, in whole or in part, of the aggregate original purchase
price plus a redemption fee in cash equivalent to two percent (2%) of the
original purchase price per share of the shares redeemed, or a pro rata amount
of the aggregate original purchase price if all shares are not redeemed in full.
We, at our sole discretion, may, prior to the expiration of the Redemption
Period, extend such Redemption Period for an additional twenty-five (25) days
upon payment to Dominion of a fee in cash equivalent to two percent (2%) of the
aggregate original purchase price. We may renew and extend the Redemption Period
for two additional consecutive periods upon payment of the foregoing fees.
In March of 2001, the Company executed stock purchase agreements with a service
provider and a Company vendor for the purchase of an aggregate of 23,522 shares
of Company common stock, par value $.00001 per share, in a non-public offering
transaction exempt from registration under Section 4(2) of the Securities Act of
1933, for a total purchase price equivalent to $58,593, in partial payment for
services rendered and goods delivered to the Company.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information.
On March 14, 2001 the Company entered into an agreement to sell, under a private
equity line structure, up to $35 million of Universe2U common stock to an
institutional private equity fund. The equity line was intended to provide a
financing facility for the Company to privately sell common stock to the equity
line investor on a regular basis over a two year period. The Company has
subsequently assessed that the equity line would be prohibitively burdensome
with respect to the cost and expense of complying with Canadian securities
regulatory requirements. The Company has therefore terminated its obligations
with respect to the equity line and Management intends to pursue alternative
financing programs.
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Item 6. Exhibits and Reports
Form 8-K filed March 14, 2001 (disclosure of private placement sale of common
stock).
Form 8-K filed March 15, 2001 (disclosure of private equity line).
Form 8-K filed March 20, 2001 (press release regarding private equity line).
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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: May 14, 2001
--------------------------------
Kim Allen, Chief Executive Officer and
Principal Financial Officer
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