PRIVILEGED AND CONFIDENTIAL
DRAFT 8-10-01 shell
-------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
-------------
|X| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended June 30, 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 June 30, 2001: 37,120,474 shares of Common Stock, $.00001 par value.
================================================================================
INDEX
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - June 30, 2001.
Condensed Consolidated Statements of Deficit for the six fiscal
months ended June 30, 2001 and June 30, 2000.
Condensed Consolidated Statements of Income for the six fiscal
months ended June 30, 2001 and June 30, 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 June 30, 2001.
The consolidated financial statements for the six months ended June 30, 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 six months ended June
30, 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
June 30, 2001
(expressed in U.S. dollars)
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
June 30, 2001, and the interim consolidated statements of deficit, operations
and cash flows for the three month and six months 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 and has a deficit, to date, of
$(9,373,021). 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).
Chartered Accountants
Toronto, Ontario
August 2, 2001
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Balance Sheet
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 93,235
Accounts receivable (net of allowance for doubtful accounts of $260,137) 378,158
Due from officers and directors (note 3) 148,766
Inventory 60,959
Deposit on net asset acquisition (note 11b) 1,775,000
Prepaid expenses and deposits 88,872
- ----------------------------------------------------------------------------- ------------
2,544,990
Capital assets (at cost less accumulated amortization of $757,448) 1,295,678
- ----------------------------------------------------------------------------- ------------
$ 3,840,668
============================================================================= ============
Liabilities
Current liabilities
Bank indebtedness $ 212,483
Accounts payable and accrued liabilities 2,136,574
Income taxes payable 42,462
Current portion of capital lease obligations 6,317
Current portion of long-term debt (note 4) 8,306
- ----------------------------------------------------------------------------- ------------
2,406,142
Long-term debt (note 4) 19,118
- ----------------------------------------------------------------------------- ------------
2,425,260
- ----------------------------------------------------------------------------- ------------
Commitments and contingencies (note 9) --
- ----------------------------------------------------------------------------- ------------
Shareholders' equity
Share capital (note 5)
Authorized: 100,000,000 Common shares, $0.00001 par value
10,000,000 Preferred shares $0.00001 par value
Issued and outstanding: 37,120,474 Common shares 370
Additional paid in capital (net of share issuance costs of $341,237) 10,821,441
Accumulated other comprehensive (loss) (33,382)
Deficit (9,373,021)
- ----------------------------------------------------------------------------- ------------
1,415,408
- ----------------------------------------------------------------------------- ------------
$ 3,840,668
============================================================================= ============
The accompanying notes are an integral part of these consolidated financial
statements.
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Deficit
for the six month periods ended June 30, 2001 and June 30, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------ -----------
Deficit, beginning of periods $(4,661,716) $ (466,263)
Net loss for the periods (4,711,305) (754,299)
- ------------------------------------------------------------ -----------
Deficit, end of periods $(9,373,021) $(1,220,562)
============================================================ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Operations
for the six month periods ended June 30, 2001 and June 30, 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------- ------------
Revenue $ 936,040 $ 2,601,359
Cost of sales 1,248,958 1,509,927
- ---------------------------------------------------------------------- ------------
Gross profit (312,918) 1,091,432
- ---------------------------------------------------------------------- ------------
Expenses
Selling, general and administration 2,353,866 1,287,035
Stock based compensation (note 5) 1,755,215 462,761
Interest and financing costs 110,553 200,418
Interest expense - related parties (note 3) -- 10,679
Depreciation and amortization 115,292 35,076
- ---------------------------------------------------------------------- ------------
4,334,926 1,995,969
- ---------------------------------------------------------------------- ------------
Loss from operations (4,647,844) (904,537)
Share of loss of significantly influenced investment (63,461) --
- ---------------------------------------------------------------------- ------------
Loss before provision for income taxes (4,711,305) (904,537)
Provision for income taxes -- (150,238)
- ---------------------------------------------------------------------- ------------
Net loss for the periods $ (4,711,305) $ (754,299)
====================================================================== ============
Net loss per share - basic (note 7) $ (0.13) $ (0.02)
====================================================================== ============
Weighted average shares outstanding 36,967,831 35,402,204
====================================================================== ============
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 June 30, 2001 and June 30, 2000 (expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------- ------------
Revenue $ 297,224 $ 1,090,840
Cost of sales 480,549 626,600
- ---------------------------------------------------------------------- ------------
Gross profit (183,325) 464,240
- ---------------------------------------------------------------------- ------------
Expenses
Selling, general and administration 956,525 708,016
Stock based compensation (note 5) 862,255 458,091
Interest and financing costs 72,068 187,196
Interest expense - related parties (note 3) -- 4,577
Depreciation and amortization 58,602 18,038
- ---------------------------------------------------------------------- ------------
1,949,450 1,375,918
- ---------------------------------------------------------------------- ------------
Loss from operations (2,132,775) (911,678)
Share of loss of significantly influenced investment (49,301) --
- ---------------------------------------------------------------------- ------------
Loss before provision for income taxes (2,182,076) (911,678)
Provision for income taxes -- (167,798)
- ---------------------------------------------------------------------- ------------
Net loss for the periods $ (2,182,076) $ (743,880)
====================================================================== ============
Net loss per share - basic (note 7) $ (0.06) $ (0.02)
====================================================================== ============
Weighted average shares outstanding 37,134,440 35,204,000
====================================================================== ============
The accompanying notes are an integral part of these consolidated financial
statements.
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Statement of Cash Flows for the six month periods
ended June 30, 2001 and June 30, 2000 (expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------- -----------
Cash flow from operating activities
Net loss for the periods $(4,711,305) $ (754,299)
Items not affecting cash
Depreciation and amortization 144,571 77,033
Stock option compensation (note 5) 1,755,215 462,761
Imputed interest -- 10,679
Equity loss of significantly influenced investment 63,461 --
Future income taxes -- (220,972)
- ------------------------------------------------------------------------------------- -----------
(2,748,058) (424,798)
Other sources (uses) of cash from operations
Decrease (increase) in accounts receivable 1,108,361 (608,662)
Decrease in inventory 119,474 39,493
Decrease in prepaid expenses and deposits 42,500 8,376
Increase in accounts payable and accrued liabilities 563,511 932,550
Increase in income taxes payable -- 117,023
- ------------------------------------------------------------------------------------- -----------
(914,212) 63,982
- ------------------------------------------------------------------------------------- -----------
Cash flow from investing activities
Purchase of capital assets (29,364) (1,030,702)
- ------------------------------------------------------------------------------------- -----------
Cash flow from financing activities
Repayments on long-term debt (11,503) (2,255)
Proceeds from issue of share capital 961,187 1,281,758
Proceeds from debenture -- --
Increase (decrease) in bank indebtedness 12,433 (57,092)
Decrease (increase) in related party advances 75,663 (119,046)
- ------------------------------------------------------------------------------------- -----------
1,037,780 1,103,365
- ------------------------------------------------------------------------------------- -----------
Effect of exchange rate changes on cash (22,185) 21,866
- ------------------------------------------------------------------------------------- -----------
Increase in cash 72,019 158,511
Cash and cash equivalents, beginning of periods 21,216 --
- ------------------------------------------------------------------------------------- -----------
Cash and cash equivalents, end of periods $ 93,235 $ 158,511
===================================================================================== ===========
Supplemental cash flow information Cash paid during the periods for:
Income taxes $ -- $ 26,794
Interest $ 110,553 $ 20,538
===================================================================================== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 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 June 30, 2001, the Company has incurred losses and has a deficit, to
date, of $(9,373,021).
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 six months ended June 30,
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 June 30, 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.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 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 June 30, 2001, the following balances were due from related parties:
Officers and directors $ 148,766
The amounts due to 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 - $10,679) 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. Amounts due from officers and
directors are non-interest bearing, due on demand and have no fixed
repayment terms.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 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 $1,435 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; $ -- $144,739
Promissory note bearing interest at prime plus 2.5% per annum
with monthly principal repayments of $2,848 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; -- 129,452
Term loan bearing interest at 8.9% per annum, with monthly
principal and interest payments of $330, maturing in December
2004, secured by the vehicle; 15,745 14,531
Term loan bearing interest at 1.9% per annum, with monthly
principal and interest payments of $546, maturing in March
2002, secured by the vehicle; 11,679 14,872
- --------------------------------------------------------------------------------- --------
27,424 303,594
Less: Current portion 8,306 282,321
- --------------------------------------------------------------------------------- --------
$ 19,118 $ 21,273
================================================================================= ========
The month end prime rate as at June 30, 2001 was approximately 6.25% (2000
- 7.5%).
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 $ 4,056
2002 8,705
2003 9,561
2004 5,102
- ---------------------------------------------------------------------------------
Total $ 27,424
=================================================================================
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 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 was approved and ratified by a majority of the Company's
shareholders at the annual meeting of shareholders held on May 24, 2001.
The maximum aggregate number of Company shares which may be issued
pursuant to all grants and awards under the plan (including incentive
stock options) is 1,500,000 shares, plus an annual increase that may be
added each fiscal year of up to ten percent (10%) of the number of shares
outstanding or a lesser number as determined by the Board of Directors. As
of June 30, 2001, 1,027,048 options were granted under the Plan.
As of June 30, 2001, an aggregate of 2,296,250 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
June 30, 2001, options to purchase 980,000 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 $1,755,215
for the period (2000 - $462,761). 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% 75%
Risk free interest rate 4.9% 5.2
Expected option term 5.0 5.0
Fair value per share of options granted $ 2.69 4.99
- ----------------------------------------------------------- ----
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
Compensation expense recorded under FAS No. 123 would have been
approximately $2,455,233 in 2001 (2000 - $462,975), increasing the loss
per share by $0.02 in 2001 (2000 - a nominal amount). As at June 30, 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 $ 1.59 280,000 $ 1.45
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 $ 0.95 280,000 $ 1.45
Granted - first quarter 10,000 $ 4.81 -- $ --
Granted - second quarter 1,872,048 $ 2.92 -- $ --
Expired - second quarter (219,750) $ 4.88 -- $ --
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2001 3,323,298 $ 1.81 280,000 $ 1.45
- ---------------------------------------------------------------------------------------------------------------------
As at June 30, 2001, stock options expire as follows:
- ---------------------------------------------------------------------------------------------------------------------
number exercise number
outstanding price exercisable
- ---------------------------------------------------------------------------------------------------------------------
2004 600,000 $ 0.01 --
2005 741,250 $ 0.01 200,000
2005 100,000 $ 5.00 80,000
2006 100,000 $ 3.25 --
2006 10,000 $ 4.81 --
2006 597,048 $ 5.00 --
2007 145,000 $ 0.01 --
2007 430,000 $ 5.00 --
2008 300,000 $ 0.01 --
2009 300,000 $ 0.01
- ---------------------------------------------------------------------------------------------------------------------
3,323,298 280,000
- ---------------------------------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
As at June 30, 2001, details of share purchase warrants outstanding were
as follows:
- --------------------------------------------------------------------------------
number exercise expiry
outstanding price date
- --------------------------------------------------------------------------------
621,500 $ 5.00 2002
200,000 $ 2.50 2002
35,591 $ 2.75 2003
558,333 $ 3.00 2003
83,333 $ 4.00 2003
- --------------------------------------------------------------------------------
1,498,757
- --------------------------------------------------------------------------------
Subsequent to the end of the quarter, 300,000 warrants exercisable at
$3.00 were cancelled.
- --------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Share Capital - continued
- --------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------
Net loss for the period -- -- -- -- (4,711,305) (4,711,305)
Exchange differences -- -- -- 41,756 -- 41,756
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) -- -- -- 41,756 (4,711,305) (4,669,549)
Private placement 343,452 3 915,248 -- -- 915,251
Conversion of liability 18,522 -- 45,936 -- -- 45,936
Deposit on net asset
Acquisition (note 11b) 500,000 -- 1,775,000 -- -- 1,775,000
Stock option
compensation -- -- 1,755,215 -- -- 1,755,215
- ------------------------------------------------------------------------------------------------------------------------------
June 30, 2001 37,620,474 $370 $10,821,441 $(33,382) $(9,373,021) $ 1,415,408
- ------------------------------------------------------------------------------------------------------------------------------
The 219,725 common shares issued in a private placement during the first
quarter were priced on March 1, 2001 and are subject to anti-dilution
price protection until March 13, 2002.
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. The investor has voluntarily extended the redemption period
beyond what was specified in the original contract provided that
redemption fees continue to be paid.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 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 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.
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 six month period ended June 30,
2001 and the six month period ended June 30, 2000.
Information by operating segment as at and for the six month period ended
June 30, 2001:
- -------------------------------------------------------------------------------------------------------------
FC&MS FN&SE S&M NS Total
- -------------------------------------------------------------------------------------------------------------
Revenue $ 294,746 231,520 306,984 102,790 $ 936,040
Interest expense $ 17,463 (2,702) (10,220) 11,060 $ 15,601
Amortization of
capital assets $ 59,857 12,465 7,867 56,864 $ 137,053
Loss before
income taxes $(1,583,050) (292,079) (382,064) (518,572) $(2,775,765)
Total assets $ 872,948 191,014 126,000 781,189 $ 1,971,151
Capital assets $ 427,763 112,433 50,979 662,968 $ 1,254,143
Capital asset additions $ 4,245 -- -- 6,598 $ 10,843
- -------------------------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
6. Information on Operating Segments - continued
- --------------------------------------------------------------------------------
Reconciliations to consolidated results as at and for the six month period
ended June 30, 2001:
- --------------------------------------------------------------------------------
Segmented Corporate Total
- --------------------------------------------------------------------------------
Revenue $ 936,040 -- $ 936,040
Loss before income taxes $(2,775,765) (1,935,540) $(4,711,305)
Total assets $ 1,971,151 1,869,517 $ 3,840,668
Capital assets $ 1,254,143 41,535 $ 1,295,678
Capital asset additions $ 10,843 18,521 $ 29,364
- --------------------------------------------------------------------------------
Information by operating segment as at and for the six month period ended
June 30, 2000:
- -------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
- -------------------------------------------------------------------------------------------------------------
Revenue $ 1,561,460 382,911 611,700 45,048 $ 2,601,119
Interest expense $ 20,296 6,765 10,385 133 $ 37,579
Amortization of
capital assets $ 43,596 14,422 4,767 14,248 $ 77,033
Income (loss) before
income taxes $ (277,278) 188,885 (24,889) (12,614) $ (125,896)
Total assets $ 1,349,483 142,256 336,129 1,125,391 $ 2,953,259
Capital assets $ 433,651 126,779 40,679 797,854 $ 1,398,963
Capital asset additions $ 75,435 -- 9,550 945,717 $ 1,030,702
- -------------------------------------------------------------------------------------------------------------
Reconciliations to consolidated results as at and for the six month period
ended June 30, 2000:
- ------------------------------------------------------------------------------------------
Segmented Corporate Total
- ------------------------------------------------------------------------------------------
Revenue $ 2,601,119 240 $ 2,601,359
Income (loss) before income taxes $ (125,896) (778,641) $ (904,537)
Total assets $ 2,953,259 239,487 $ 3,192,746
Capital assets $ 1,398,963 -- $ 1,398,963
Capital asset additions $ 1,030,702 -- $ 1,030,702
- ------------------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
6. Information on Operating Segments - continued
- --------------------------------------------------------------------------------
Geographic information
Information by geographic region as at and for the six month period ended
June 30, 2001:
- -----------------------------------------------------------------------------------------
Canada United States Total
- ------------------------------------------------------------------------ ------------
Revenue $ 889,585 46,455 $ 936,040
Interest expense $ 66,380 44,173 $ 110,553
Amortization of capital assets $ 140,763 3,808 $ 144,571
Loss before income taxes $(2,640,776) (2,070,529) $(4,711,305)
Total assets $ 2,030,036 1,810,632 $ 3,840,668
Capital assets $ 1,267,482 28,196 $ 1,295,678
Capital asset additions $ 24,379 4,985 $ 29,364
- ------------------------------------------------------------------------ ------------
Information by geographic region as at and for the six month period ended
June 30, 2000:
- -----------------------------------------------------------------------------------------
Canada United States Total
- ------------------------------------------------------------------------ ------------
Revenue $ 2,556,385 44,734 $ 2,601,119
Interest expense $ 37,415 164 $ 37,579
Amortization of capital assets $ 75,913 1,120 $ 77,033
Income (loss) before income taxes $ (815,281) (89,256) $ (904,537)
Total assets $ 3,110,950 81,796 $ 3,192,746
Capital assets $ 1,392,223 6,740 $ 1,398,963
Capital asset additions $ 1,022,540 8,162 $ 1,030,702
- ------------------------------------------------------------------------ ------------
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.
Six months ended June 30
2001 2000
- --------------------------------------------------------------------------------
Basic EPS Computation:
Net loss for the periods $ (4,711,305) $ (754,299)
Weighted average outstanding shares 36,967,831 35,402,204
Basic EPS $ (0.13) $ (0.02)
- --------------------------------------------------------------------------------
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
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 June 30, 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 $ 255,549
2002 439,074
2003 314,169
2004 190,666
2005 46,782
- -------------------------------------------------------------------------------
Total $ 1,246,240
===============================================================================
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 June
30, 2001, the minimum annual commitment under these agreements was
approximately $719,000.
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.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(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.
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.
11. Subsequent Events
- --------------------------------------------------------------------------------
Subsequent to the period end, the following transactions occurred:
(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 our common
stock up to an aggregate of $12.0 million. The $12.0 million of
common stock is to be purchased over a 40-month period, subject to a
six month extension or earlier termination 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 fair value of the
375,000 commitment shares and 375,000 shares underlying the
commitment warrants of $1,162,500 will be charged to operations over
the 40 month period.
(b) On June 12, 2001, the Company signed a letter of intent to acquire
Digital Global Internet Inc. ("DGI"). The transaction is expected to
close on August 31, 2001 and be structured such that the Company
will be acquiring operating assets of DGI and assuming specified
liabilities of DGI. The purchase price for the net assets will be
1,500,000 common shares of the Company. A deposit of 500,000 common
shares of the Company was made in accordance with the letter of
intent.
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
(c) On July 27, 2001, the Company entered into a line of credit with
Palm Trading Limited ("Palm") that may be drawn upon by the Company
in one or more tranches in an aggregate principal amount up to
$500,000 (the "Credit Line"). Each Draw Down may be for a minimum
$10,000 up to a maximum of $50,000. Amounts drawn down on the line
of credit shall accrue interest at a rate of 8% per annum,
compounded monthly. The Company may draw upon the Credit Line
approximately once per month. Any and all outstanding amounts due
under the Credit Line shall be repaid in full on the earlier of (i)
such date as the Company has adequate cash reserves as determined by
the Audit Committee of the Company's Board of Directors in
consultation with the Company's independent auditors; or (ii) July
27, 2003. The Company shall also issue warrants to Palm under the
Credit Line in amount corresponding to the fair market value of the
Company's common stock as of the date of each draw down under the
Credit Line. Each of such warrants shall be exercisable at fair
market value for 1.15 shares of restricted Company common stock.
(d) In August 2001 the Company's common stock commenced listing for
trading on the Third Segment of the Frankfurt Stock Exchange
underWKN 938 851 and symbol UVS.
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 second quarter ended June 30, 2001.
GENERAL
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 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. In connection with the acquisition, the management of our
Company changed and our Company's name became Universe2U.
BUSINESS STRATEGY
We have built our business model on a simple and growth oriented philosophy:
o universal access;
o open networks; and
o access creation.
We are currently pursuing a two-pronged business strategy:
o to be an "infostructure" pioneer in developing high bandwidth
networks in partnership with local governments, institutions,
businesses and rights-of-way owners; and
o to design and build fiber optic networks and market
telecommunication services for major telephone and cable television
companies.
Our "infostructure" concept involves 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.
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.
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 will
be from the individual operations, the long term revenue stream and
profitability will 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.
OPERATING SEGMENTS
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.
REVENUES AND EXPENSES
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.
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 acquire the needed financing for infostructure
projects; . our ability to grow our engineering, design,
construction and direct sales business to drive the organic growth;
o our ability to obtain customers before our competitors do; . our
ability to achieve adequate margins on materials; . the demand for
our network services;
o the level of competition we face from other telecommunications
services providers, including price and margins for communications
services over time;
o the ability of the "new" entrants into the telecommunications
industry to pay for our services on a timely basis; 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 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.
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. 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 two
quarters. 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
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 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 $1.7 million, or 64% to $936 thousand for the six
months ended June 30, 2001 from $2.6 million for the six months ended June 30,
2000. For the six months ended June 30, 2001, the total revenue for the FC&MS
operating segment was $295 thousand, the total revenue for the FN&SE operating
segment was $232 thousand, the total revenue for the S&M operating segment was
$307 thousand and the total revenue for the NS operating segment was $103
thousand. Cost of sales decreased $261 thousand or 17% to $1.2 million for the
six months ended June 30, 2001 from $1.5 million for the six months ended June
30, 2000. Total revenues decreased $794 thousand, or 73% to $297 thousand for
the quarter ended June 30, 2001 from $1.1 million for the quarter ended June 30,
2000. Cost of sales
decreased $146 thousand or 23% to $481 thousand for the quarter ended June 30,
2001 from $627 thousand for the quarter ended June 30, 2000.
Gross profit for the six months ended June 30, 2001 was a negative $313 thousand
(negative 33% of revenues) versus $1.1 million (42% of revenues) in 2000.
Selling, general and administration expenses increased $1.1 million, to $2.4
million (251% of revenues) for the six months ended June 30, 2001 from $1.3
million (49% of revenues) for the six months ended June 30, 2000. Gross profit
for the quarter ended June 30, 2001 was a negative $183 thousand (negative 20%
of revenues) versus $464 thousand (43% of revenues) in 2000. Selling, general
and administration expenses increased $249 thousand, to $957 thousand (322% of
revenues) for the quarter ended June 30, 2001 from $708 thousand (65% of
revenues) for the quarter ended June 30, 2000.
Stock based compensation expense for the six months ended June 30, 2001 was $1.8
million versus $463 thousand for the six months ended June 30, 2000. Stock based
compensation expense for the quarter ended June 30, 2001 was $862 thousand
versus $458 thousand for the quarter ended June 30, 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 $2.2 million of stock compensation expense over the next 6 quarters
relating to stock options existing as at December 31, 2000. As at June 30, 2001
there were 3,323,298 stock options outstanding with a weighted average exercise
price of $1.81.
Interest and financing costs were $111 thousand (12% of revenues) for the six
months ended June 30, 2001, a decrease of $90 thousand from $200 thousand (8% of
revenues) for the six months ended June 30, 2000. Interest and financing costs
were $72 thousand (24% of revenues) for the quarter ended June 30, 2001, a
decrease of $115 thousand from $187 thousand (17% of revenues) for the quarter
ended June 30, 2000.
Depreciation and amortization costs were $145 thousand (15% of revenues) for the
six months ended June 30, 2001, compared to 77 thousand (3% of revenues) for the
six months ended June 30, 2000. The increase of $68 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 $63 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.
Depreciation and amortization costs were $73 thousand (25% of revenues) for the
quarter ended June 30, 2001, compared to 47 thousand (4% of revenues) for the
quarter ended June 30, 2000.
The Company incurred losses before income taxes for the six months ended June
30, 2001 of $4.7 million compared to a loss before income taxes of $905 thousand
for the six months ended June 30, 2000. Non-cash stock based compensation
accounted for $1.8 million of the loss in the six months ended June 30, 2001,
compared to $463 thousand for the six months ended June 30, 2000. The Company
incurred losses before income taxes for the quarter ended June 30, 2001 of $2.2
million compared to a loss before income taxes of $912 thousand for the quarter
ended June 30,
2000. Non-cash stock based compensation accounted for $862 thousand of the loss
in the quarter ended June 30, 2001, compared to $459 thousand for the quarter
ended June 30, 2000.
For the six months ended June 30, 2001, the loss before income taxes for the
FC&MS operating segment was $1.6 million, the loss before income taxes for the
FN&SE operating segment was $292 thousand, the loss before income taxes for the
S&M operating segment was $382 thousand and the loss before income taxes for the
NS operating segment was $519 thousand.
During the first two quarters of 2001, we adjusted our workforce from a peak of
168 people to our current level of 42.
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform to the presentation adopted in
the current period's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
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 the
construction of advanced fiber optic networks, upgrade our underground
construction equipment, service our debt and acquire strategic companies.
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 will be in fiber construction and maintenance
services where equipment requirements will mirror revenue growth and where
equipment purchases are large ticket items.
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. We
expect the significant cash flow requirements will be 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 January 1,
2001 to December 31, 2001 at approximately $2 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 SmartBuildings, SmartCommunities and
SmartLinks 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 continue to be available to
us or, if available, 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 six months ended June 30, 2001, the Company's net cash used in operating
activities was $914 thousand ($64 thousand cash flow in 2000). This amount
includes adjustments for non-cash items comprised of depreciation and
amortization of $145 thousand ($77 thousand in 2000), stock option compensation
of $1.8 million ($463 thousand in 2000), and a deduction for the equity loss of
$63 thousand (nil in 2000). For the six months ended June 30, 2001 net cash used
in investing activities was $29 thousand, which consisted of additions to
property, plant and equipment. For the six months ended June 30, 2000, net cash
flow used in investing activities was $1 million. For the six months ended June
30, 2001 net cash provided by financing activities of $1.03 million included net
proceeds from the issue of share capital of $961 thousand, offset by net
repayments on debt of $12 thousand, and the net decrease in due to related
parties of $76 thousand. For the six months ended June 30, 2000 net cash
provided by financing activities of $1.1 million included a net decrease in debt
of $59 thousand, net proceeds of share capital of $1.3 million and a net
increase in amounts due to related parties of $119 thousand.
GOING CONCERN CONSIDERATIONS
The Company has incurred losses to date and has a deficit, to date, of
$(9,373,021). 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 in 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 on, the Unaudited Interim Consolidated
Financial Statements for the quarter ended June 30, 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.
SUBSEQUENT EVENTS
Credit Line
On July 27, 2001, the Company entered into a line of credit with Palm Trading
Limited ("Palm") that may be drawn upon by the Company in one or more tranches
in an aggregate principal amount up to $500,000 (the "Credit Line"). Each Draw
Down may be for a minimum $10,000 up to a maximum of $50,000. Amounts drawn down
on the line of credit shall accrue interest at a rate of 8% per annum,
compounded monthly. The Company may draw upon the Credit Line approximately once
per month. Any and all outstanding amounts due under the Credit Line shall be
repaid in full on the earlier of (i) such date as the Company has adequate cash
reserves as determined by the Audit Committee of the Company's Board of
Directors in consultation with the Company's independent auditors; or (ii) July
27, 2003. The Company shall also issue warrants to Palm under the Credit Line in
amount corresponding to the fair market value of the Company's common stock as
of the date of each draw down under the Credit Line. Each of such warrants shall
be
exercisable at fair market value for 1.15 shares of restricted Company common
stock.
Frankfurt Listing
In August 2001 the Company's common stock commenced listing for trading on the
Third Segment of the Frankfurt Stock Exchange under WKN 938 851 and symbol UVS.
The Fusion Transaction
On August 1, 2001, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion agreed to purchase on each trading
Day during the term of the agreement, $15,000 of our common stock up to an
aggregate of $12.0 million. The $12.0 million of common stock is to be purchased
over a 40 month period, subject to a six month extension or earlier termination
at our discretion. The purchase price of the shares of common stock will be
equal to a price based upon the future market price of the common stock without
any fixed discount to the market price. We have the right to set a minimum
purchase price at any time as described below. Under the terms of the agreement,
the Company is obligated to register for resale all of the shares and shares
underlying the warrants that are issued to Fusion. On August 6, 2001, the
Company filed a registration statement with the U.S. Securities and Exchange
Commission registering such shares.
Purchase of Shares under the Common Stock Purchase Agreement
Under the common stock purchase agreement, on each trading day Fusion is
obligated to purchase a specified dollar amount of our common stock. Subject to
our right to suspend such purchases at any time, and our right to terminate the
agreement with Fusion at any time, each as described below, Fusion shall
purchase on each trading day during the term of the agreement $15,000 of our
common stock. This daily purchase amount may be decreased by us at any time. We
also have the right to increase the daily purchase amount at any time, provided
however; we may not increase the daily purchase amount above $15,000 unless our
stock price is above $7.00 per share for five consecutive trading days. The
purchase price per share is equal to the lesser of:
o the lowest sale price of our common stock on the purchase date; or
o 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.
The purchase price will be adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, or other similar transaction occurring during
the trading days in which the closing bid price is used to compute the purchase
price. 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.
The following table sets forth the number of shares of our common stock that
would be sold to Fusion under the common stock purchase agreement at varying
purchase prices:
Percentage
Outstanding After
Number of Shares to be Giving Effect to the
Assumed Purchase Price Issued if Full Purchase Issuance to Fusion(1)
$ 1.00 12,000,000(2) 28%
$ 2.00 6,000,000(2) 14%
$ 2.50 4,800,000(2) 11%
$ 5.00 2,400,000(2) 6%
$ 7.00 1,714,286 4%
$ 10.00 1,200,000 3%
(1) Based on 43,376,747 shares outstanding as of August 1, 2001. Includes the
issuance of 375,000 shares of common stock issued to Fusion as a commitment fee
and the number of shares issuable at the corresponding assumed purchase price
set forth in the adjacent column.
(2) We estimate that we will issue no more than 6,000,000 shares to Fusion under
the common stock purchase agreement. We have the right to terminate the
agreement at any time without any payment or liability to Fusion other than
payment of the commitment shares.
Minimum Purchase Price
We have the right to set a minimum purchase price ("floor price") at any time.
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 shall not be
permitted or obligated to purchase any shares of our common stock in the event
that the purchase price is less than the then applicable floor price as
established by us.
Our Right To Suspend Purchases
We have the unconditional right to suspend purchases at any time for any reason
effective upon one trading day's notice. Any suspension would remain in effect
until our revocation of the suspension. To the extent we need to use the cash
proceeds of the sales of common stock under the common stock purchase agreement
for working capital or other business purposes, we do not intend to restrict
purchases under the common stock purchase agreement.
Our Right To Increase and Decrease the Daily Purchase Amount
We have the unconditional right to decrease the daily amount to be purchased by
Fusion at any time for any reason effective upon one trading day's notice. We
also have the right to increase the daily purchase amount at any time for any
reason; provided however, we may not increase the daily purchase amount above
$15,000 unless our stock price has been above $7.00 per share for five
consecutive trading days. For any trading day that the sale price of our common
stock is below $7.00, the daily purchase amount shall not be greater than
$15,000.
Our Termination Rights
We have the unconditional right at any time for any reason to give notice to
Fusion terminating the common stock purchase agreement. Such notice shall be
effective one trading day after Fusion receives such notice.
Effect of Performance of the Common Stock Purchase Agreement on our Shareholders
It is anticipated that shares purchased by Fusion will be sold over a period of
up to 40 months. The sale of a significant amount of shares by Fusion at any
given time could cause the trading price of our common stock to decline and to
be highly volatile. Fusion may ultimately purchase all of the shares of common
stock issuable under the common stock purchase agreement, and it may sell some,
none or all of the shares of common stock it acquires upon purchase. Therefore,
the purchases under the common stock purchase agreement may result in
substantial dilution to the Interests of other holders of our common stock.
However, we have the right at any time for any reason to: (1) reduce the daily
purchase amount, (2) suspend purchases of the common stock by Fusion and (3)
terminate the common stock purchase agreement.
No Short-Selling or Hedging by 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.
Events of Default
Generally, Fusion may terminate the common stock purchase agreement without any
liability or payment to the Company upon the occurrence of any of the following
events of default:
o if for any reason the shares offered by cannot be sold for a period of ten
consecutive trading days or for more than an aggregate of 30 trading days
in any 365-day period;
o suspension by our principal market of our common stock from trading for a
period of ten consecutive trading days or for more than an aggregate of 30
trading days in any 365-day period;
o our failure to satisfy any listing criteria of our principal market for a
period of ten consecutive trading days or for more than an aggregate of 30
trading days in any 365-day period;
o the transfer agent's failure for five trading days to issue to Fusion
shares of our common stock which Fusion is entitled to under the common
stock purchase agreement;
o any material breach of the representations or warranties or covenants
contained in the common stock purchase agreement or any related agreements
which has or which could have a material adverse affect on us subject to a
cure period of ten trading days;
o a default by us of any payment obligation in excess of $1.0 million; or
o any participation or threatened participation in insolvency or bankruptcy
proceedings by or against us.
Commitment Shares Issued to Fusion
Under the terms of the common stock purchase agreement Fusion has received
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, as a commitment fee.
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.
No Variable Priced Financings
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.
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
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements", as amended by SAB 101A and SAB
101B, was effective in the fourth fiscal quarter of 2000. In general, SAB 101
points out that revenue should be recognized over the period of performance or
the on-going activity that was contracted for by the customer. Any changes
required by adopting SAB 101 are accounted for as a change in accounting
principles. The Company began using SAB 101 in the fiscal quarter beginning
October 1, 2000.
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",
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 certain 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 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 the legal proceedings previously
reported in the Company's filings with the Commission.
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, and
the Company's quarterly report on Form 10-QSB for the quarter ended March 31,
2001, each of which have been 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
In May and June of 2001, the Company executed stock purchase agreements for the
purchase of an aggregate of 123,727 shares of Company common stock, par value
$.00001 per share, in a non-public offering transaction exempt from registration
under Regulation S promulgated under the Securities Act of 1933, for a total
purchase price of $365,250.
On June 19, 2001, the Company issued 500,000 Shares of Common Stock to DGI
Holdings LLC pursuant to a letter of intent executed between the Company and
Digital Global Internet, Inc. ("DGI") with respect to the Company's contemplated
purchase of all of the assets of DGI. Such issuance of the Company's common
stock occurred in a non-public transaction exempt from registration under
Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 24, 2001, the Company held its Annual Meeting of Shareholders.
The Company's shareholders elected Kim Allen, Paul Pathak, Connie Colangelo,
Barry Herman, Anthony Palumbo and Frederick Kasravi as members of the Board of
Directors of the Company.
The following votes were cast in connection with the election of directors:
For Against Abstain
--- ------- -------
Angelo Boujos 23,796,540 - 0 - - 0 -
Kim Allen 23,796,540 - 0 - - 0 -
Paul Pathak 23,796,540 - 0 - - 0 -
Connie Colangelo 23,796,540 - 0 - - 0 -
Barry Herman 23,796,540 - 0 - - 0 -
Anthony Palumbo 23,796,540 - 0 - - 0 -
Frederick Kasravi 23,796,540 - 0 - - 0 -
The Company's shareholders approved the amendment to the Company's Articles of
Incorporation to provide for the increase in authorized capital stock to
110,000,000 shares, of which 100,000,000 shares will continue to be designated
as
common stock, par value $.00001 per share and 10,000,000 shares will be
designated as preferred stock, par value $.00001 per share. The following votes
were cast in connection with such approval:
For Against Abstain
--- ------- -------
23,796,470 1,070 - 0 -
The Company's shareholders ratified and approved the Company's 2000 Equity
Incentive Plan. The following votes were cast in connection with such approval:
For Against Abstain
--- ------- -------
23,795,620 920 - 0 -
The Company's shareholders ratified the appointment of Moore Stephens Cooper
Molyneux LLP as the Company's independent auditors for the fiscal year ending
December 31, 2001. The following votes were cast in connection with such
ratification:
For Against Abstain
--- ------- -------
23,796,540 - 0 - - 0 -
Item 5. Other Information.
On June 12, 2001, the Company announced that it had signed a letter of intent to
acquire Digital Global Internet Inc. (DGI), a Baltimore, Maryland-based company.
DGI offers RoomHost(TM), an in-room interactive terminal that provides travelers
with high-speed Internet connectivity. The Company expects to close the
acquisition of DGI in August 2001, however there can be no assurance in this
regard.
On July 27, 2001, the Company entered into a line of credit with Palm Trading
Limited ("Palm") that may be drawn upon by the Company in one or more tranches
in an aggregate principal amount up to $500,000 (the "Credit Line"). Each Draw
Down may be for a minimum $10,000 up to a maximum of $50,000. Amounts drawn down
on the line of credit shall accrue interest at a rate of 8% per annum,
compounded monthly. The Company may draw upon the Credit Line approximately once
per month. Any and all outstanding amounts due under the Credit Line shall be
repaid in full on the earlier of (i) such date as the Company has adequate cash
reserves as determined by the Audit Committee of the Company's Board of
Directors in consultation with the Company's independent auditors; or (ii) July
27, 2003. The Company shall also issue warrants to Palm under the Credit Line in
amount corresponding to the fair market value of the Company's common stock as
of the date of each draw down under the Credit Line. Each of such warrants shall
be exercisable at fair market value for 1.15 shares of restricted Company common
stock.
In August 2001 the Company's common stock commenced listing for trading on the
Third Segment of the Frankfurt Stock Exchange under WKN 938 851 and symbol UVS.
Item 6. Exhibits and Reports
Form 8-K filed June 13, 2001 (press release regarding Letter of Intent to
acquire Digital Global Internet Inc.).
Exhibits
3.1 Certified Copy of Amendment to the Articles of Incorporation, as filed
with the Commission as Exhibit 4.1 to the Company's Registration Statement
on Form S-3 filed on August 6, 2001, is incorporated herein by reference
thereto.
3.2 Amended and Restated By-laws, as filed with the Commission as Exhibit 4.2
to the Company's Registration Statement on Form S-3 filed on August 6,
2001, is incorporated herein by reference thereto.
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: August 14, 2001
Kim Allen, Chief Executive Officer and
Principal Financial Officer