UNITED STATES
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 quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-29929
COMMUNICATE.COM INC.
(Exact name of small business as specified in its charter)
Nevada 33-0786959
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
#1300 - 1090 West Georgia Street, Vancouver, B.C. V6E 3V7
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(Address of principal executive offices)
(604) 697-0136
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(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock 14,191,339 shares outstanding
$.001 Par Value as of November 1, 2001
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Communicate.com Inc.
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COMMUNICATE.COM INC.
REPORT ON FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Balance sheets as of September 30, 2001 and December 31,
2000
Statements of Operations as of September 30, 2001 and
September 30, 2000
Statements of Cash Flows as of September 30, 2001
Notes to the Financial Statements
Item 2. Management's discussion and analysis of financial condition and
results of operations 2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 6
Item 2. Changes in Securities. 6
Item 3. Defaults Upon Senior Securities. 6
Item 4. Submission of Matters to a Vote of Security Holders. 6
Item 5. Other Information. 6
Item 6. Exhibits and Reports on Form 8-K. 7
Signatures 8
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Communicate.com Inc.
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PART I
ITEM 1: FINANCIAL STATEMENTS.
- -----------------------------
The response to Item 1 has been submitted as a separate section of this Report
beginning on page F-1.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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General
- -------
Registrant, directly and through its subsidiary and through contractual
arrangements, invests in and operates internet-related businesses. Pursuant to
an acquisition in November 2000, Registrant acquired an 83% interest in
Communicate.com Inc. (the "Subsidiary"), an Alberta corporation that markets and
licenses a portfolio of domain names, 30 of which generate high amount of
internet traffic because of their generic description of a specific product or
services category.
Registrant has in the past twelve months focused on developing revenue streams
from its domain names and reducing the debt of the Subsidiary. Registrant
generates revenues from a variety of sources, including the lease of domain
names on a flat fee or variable basis, sales commissions from third-party
products and services, "pay-per-click" revenue and the sale of domain name
assets which Registrant have determined not to be part of Registrant's core
assets.
Registrant has negotiated with certain of Subsidiary's trade creditors and
capital lessors to settle existing obligations for less than the principal
amount owed. Registrant has applied cashflow generated, net of monthly operating
expenses, to reduce debt and other obligations. Registrant anticipates that this
debt management program shall continue for the foreseeable future.
Registrant presently has 3 administrative employees employed by the Subsidiary.
Registrant has relied on hourly-contractors to meet its technical needs and
expects to continue the practice for the foreseeable future.
(A) SELECTED FINANCIAL DATA
The following selected financial data was derived from Communicate's unaudited
financial statements. The information set forth below should be read in
conjunction with the Company's financial statements and related notes included
elsewhere in this report.
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Communicate.com Inc.
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For the Quarters Ended September 30, 2001 September 30, 2000
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Statements of Operations Data
-----------------------------
Domain and Advertising Sales $ 37,520 --
General and Administrative $ (22,999) --
Professional Fees (42,553) $ (5,412)
Depreciation (20,056) (25)
Operating Loss $ (48,088) $ (5,437)
Gain on Settlement of Debt 68,688 --
Interest (8,662) (450)
Income Tax -- --
Net Income (Loss) $ 11,938 $ (5,887)
Basic Earnings (Loss) per Share $ 0.0008 $ (0.0006)
Weighted Average Shares Outstanding 14,191,339 9,300,000
Balance Sheet Data
------------------ As of September 30, 2001 As of December 31, 2000
Current Assets $ 110,697 $ 251,359
Fixed Assets 143,381 233,620
Intangible Assets 3,341,809 3,364,875
Total Assets $ 3,595,887 $ 3,849,854
Accounts Payable & Accrued Liabilities $ 666,339 $ 838,484
Loan Payable 494,953 405,399
Note Payable -- 825,000
Deferred Income 21,936 --
Lease Obligations 20,411 92,357
Total Liabilities $ 1,203,639 $ 2,161,240
Common Stock $ 5,201 $ 3,535
Additional Paid in Capital 2,772,016 1,928,682
Accumulated Deficit $ (408,186) $ (236,739)
Accumulated Other Comprehensive Income (Loss) $ 23,217 $ (6,864)
(B) RESULTS OF OPERATION
Registrant has not generated any significant revenues or expenses until the
acquisition of the Subsidiary on November 10, 2000. Prior to that date,
Registrant was a developing stage company in search of business acquisition. The
results of operation discussed hereon describe the business activities of the
Registrant since November 10, 2000.
REVENUES. In the last quarter of 2000 Registrant entered into an agreement to
7sell a geographical category domain name from which Registrant had expected to
generate revenues in the first and the second quarter of 2001. However, the
purchaser of the geographical category domain name did not make the contracted
payment. Management of Registrant exercised its remedy under the terms of the
purchase agreement in July of 2001 and assumed control of the domain name.
Management intends to seek other bids for the domain name in the coming months.
During the second quarter of 2001, the Registrant entered into an agreement to
lease one of its domain names for a ten-year period and received an advance of
$33,000 against future revenue to be calculated at the end of each annual
anniversary based on a percentage of gross revenue. The lessee also has the
options to purchase the domain name prior to the fifth anniversary date and
eighth anniversary date for specified amounts.
3
Communicate.com Inc.
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During the second quarter of 2001, the Registrant entered into an agreement to
sell one of its sports category domain name for GBP$100,000 payable in three
equal annual installments and received additionally a 10% interest in the
purchaser and a share of revenues generated from the site over the two-year
period. Proceeds of the first annual installment net of costs amounted to
$37,000.
During the third quarter of 2001, the Registrant entered into an agreement to
lease one of its sports category domain name for $25,000 for six months and to
further lease for another six months at the option of the lessor. The revenue
will be amortized over the lease period.
Management will continue to market its portfolio of domain names in fiscal 2001
and identify potential purchasers who have adequate liquid assets to complete a
transaction. Management believe that its portfolio of generic product or
services category domain names will continue to generate interest from potential
partners or purchasers despite a softened and depressed domain names aftersales
market because of the intuitive and traffic-generating characteristics of
Registrant's domain names.
Registrant generated advertising and click-through revenues of $30,000 from the
leasing of internet traffic from idle domain names redirected to potential
partners and purchasers who would be interested in making an offer to acquire a
domain name in Registrant's portfolio or would want to utilize a domain name to
enhance internet traffic that were product or service category specific and
would benefit any online business in or near the same product or service
category. Management cannot reasonably forecast revenue generated by these
agreements but expect revenue to remain consistent on a quarter over quarter
basis.
During the third quarter of 2001, Registrant has negotiated and settled with a
number of creditors and lessors on debts and leases and has recorded a gain of
$68,688.
GENERAL AND ADMINISTRATIVE. Registrant's general and administrative expenses
consist primarily of salaries and related costs for general and corporate
functions, including all facilities fees. These expenses have been reduced
substantially from the preceding quarters as a result of management's cost
savings program implemented in the last quarter of 2000 and the change in
business focus in the Subsidiary's business.
PROFESSIONAL FEES. A substantial amount of the professional fees were for legal
and auditing fees which were related to costs of regulatory filings and
financial statement preparation. Registrant continues to seek ways to reduce
these costs.
(C) LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001 Registrant had current liabilities in excess of current
assets resulting in a working capital deficit of $1,092,942. During the
nine-months ended September 30, 2001 Registrant had a net loss of $171,447 and a
decrease in working capital of $64,201, excluding the conversion of a note
payable into stockholders' equity. The decrease in working capital was primarily
due to the operating loss and to extinguishing certain capital leases and to
settle debts, offset by the collection of certain receivables and add-back of
non-cash related expenses. Registrant has accumulated a deficit of $408,186
since inception and has a stockholders' equity of $2,392,248 at September 30,
2001. Based on these factors, there is substantial doubt about Registrant's
ability to continue as a going concern.
4
Communicate.com Inc.
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Registrant will only be able to continue operations if it raises additional
funds, either through operations or outside funding. Registrant cannot predict
whether it will be able to do so.
Registrant's revenue generating program comprises of (i) the leasing of domain
names for a monthly flat-rate to third parties to conduct on-line businesses;
(ii) the selling of products and services of third parties for commission fee;
(iii) the earning of fees resulting from traffic click-throughs generated by the
domain name assets; and (iv) the selling of non-core domain name assets.
Registrant and the Subsidiary cannot satisfy its cash requirements for the next
12 months without having to raise additional funds. The Subsidiary's expected
cash requirement for the next 12 months has been reduced from the original
estimate of one million dollars to four hundred thousand dollars. Registrant
expects to raise any additional funds by way of equity and/or debt financing,
and through the sale of non-strategic domain name assets. However, Registrant
may not be able to raise the required funds from such financings, particularly
in light of existing market conditions and the perception by investors of those
companies that, like the Registrant, engage in e-commerce and related
businesses. In that case Registrant will proceed by approaching current
shareholders for loans or equity capital to cover operating costs.
Although the foregoing actions are expected to cover Registrant's anticipated
cash needs for working capital and capital expenditures for at least the next
twelve months, no assurance can be given that Registrant will be able to raise
sufficient cash to meet these cash requirements.
To that end, subsequent to the quarter ended September 30, 2001 Registrant has
entered into a Promissory Note agreement with an existing shareholder to borrow
$150,000 to pay off debts and leases and for working capital.
Registrant has no current plans to purchase any plant or significant equipment.
(D) UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of Registrant's financial condition and the
results of its operations and other sections of this report, contain forward
looking statements, that are based upon the current beliefs and expectations of
Registrant's management, as well as assumptions made by, and information
currently available to, Registrant's management. Because these statements
involve risks and uncertainties, actual actions and strategies and the timing
and expected results may differ materially from those expressed or implied by
the forward-looking statements. As well, Registrant's future results,
performance or achievements could differ materially from those expressed in, or
implied by, any forward-looking statements. Future events and actual results
could differ materially from those set forth in or underlying the
forward-looking statements.
5
Communicate.com Inc.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
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During the quarter ended September 30, 2001, Registrant was not a party to any
additional material pending legal proceedings and, to the best of its knowledge,
no such action by or against Registrant has been threatened.
Item 2. Changes in Securities.
- ------------------------------
On October 10, 2001 pursuant to a promissory note with Siden Investments Ltd.
("Siden"), Registrant granted warrants to Siden to purchase up to 10,000,000
shares of its common stock at an exercise price of $0.02 per share. The exercise
price of the share purchase warrants was determined by discounting the weighted
average closing price of the Registrant's common shares for the month of
October. Siden Capital Corp., an affiliate of Siden, holds 75,766 shares of
common stock of the Registrant.
The warrants may be exercised by Siden at any time prior to October 10, 2004
upon notice to Registrant and payment of the exercise price therefore. The
number of shares subject to the warrants and the exercise price for the warrants
are subject to adjustment in connection with certain issuances of equity
securities by Registrant as stated in the warrant agreement.
Registrant relied on an exemption from registration under Section 4(2) of the
Securities Act of 1933 in issuing the warrants. No underwriter was involved in
the issuance of these warrants.
Item 3. Defaults Upon Senior Securities.
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the first nine months of the fiscal year covered
by this report.
Item 5. Other Information.
- --------------------------
As noted in Item 2 above, on October 10, 2001, Registrant and its subsidiary
entered into a loan transaction with Siden Investments Ltd pursuant to which
Registrant and its subsidiary borrowed an aggregate of US$150,000. The borrowed
funds will be used to pay outstanding debt and lease obligations and for general
working capital.
6
Communicate.com Inc.
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Item 6. Exhibits and Reports on Form 8-K.
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(A) Index to and Description of Exhibits.
- ----------------------------------------------
EXHIBIT DESCRIPTION
F-1 Financial Statements
10.1 Promissory Note Between Siden and Registrant and its Subsidiary
10.2 General Security Agreement in Favor of Siden
10.3 Escrow Agreement Between Siden and Registrant and its Subsidiary
10.4 Warrant Agreement Between Siden and Registrant
27 Financial Data Schedule.
(B) Reports on Form 8-K.
- -----------------------------
There were no report on Form 8-K filed by Registrant during the quarter ending
September 30, 2001.
On November 6, 2001 Registrant filed a Form 8-K disclosing under Item 5 the loan
agreement with Siden Investments Ltd. described in Item 2 and Item 5 above.
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Communicate.com Inc.
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PART II - SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMUNICATE.COM INC.
Date: November 14, 2001 By: /s/ Graham B. Heal
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Date: November 14, 2001 By: /s/ J Cameron Pan
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Communicate.com Inc.
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Exhibits
Financial Statements...................................................................................F-1
Promissory Note Between Siden and Registrant and its Subsidiary........................................A-1
General Security Agreement in Favor of Siden...........................................................B-1
Escrow Agreement Between Siden and Registrant and its Subsidiary.......................................C-1
Warrant Agreement Between Siden and Registrant.........................................................D-1
Financial Data Schedule................................................................................E-1
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Communicate.com Inc.
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COMMUNICATE.COM INC.
(FORMERLY TROYDEN CORPORATION)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(unaudited)
Communicate.com Inc.
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BALANCE SHEETS......................................................... F-2
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS.......................... F-3
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... F-4
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS..................... F-5
F-1
COMMUNICATE.COM INC.
(FORMERLY TROYDEN CORPORATION)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,768 $ 47,823
Prepaid expenses 28,547 40,043
Other receivables 67,382 163,493
- ---------------------------------------------------------------------------------------------------------------------
110,697 251,359
FIXED ASSETS (NOTE 4) 143,381 233,620
INTANGIBLE ASSETS HELD FOR RESALE (NOTE 3) 3,341,809 3,364,875
- ---------------------------------------------------------------------------------------------------------------------
$ 3,595,887 $ 3,849,854
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 666,339 $ 838,484
Loans payable (Note 5) 494,953 405,399
Note payable (Note 3) -- 825,000
Deferred revenue 21,936 --
Current portion of capital lease obligations 20,411 36,217
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1,203,639 2,105,100
CAPITAL LEASE OBLIGATIONS -- 56,140
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1,203,639 2,161,240
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COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)
STOCKHOLDERS' EQUITY
Capital stock (note 6)
Authorized
50,000,000 Common shares, $.001 par value
Issued and outstanding
14,191,339 (2000 - 12,525,339) Common shares 5,201 3,535
Additional paid in capital 2,772,016 1,928,682
Accumulated deficit (408,186) (236,739)
Accumulated other comprehensive income (loss) 23,217 (6,864)
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2,392,248 1,688,614
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$ 3,595,887 $ 3,849,854
=====================================================================================================================
The accompanying notes are an integral part of these interim
consolidated financial statements
F-2
COMMUNICATE.COM INC.
(FORMERLY TROYDEN CORPORATION)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended September 30 Nine months ended September 30
2001 2000 2001 2000
=========================================================================================================================
REVENUES
Domain name revenue (net of cost) $ 37,520 $ -- $ 159,248 $ --
Other -- -- 13,551 --
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37,520 -- 172,799 --
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EXPENSES
General and administrative 22,999 -- 130,114 --
Professional fees 42,553 5,412 197,459 12,387
Depreciation and amortization 20,056 25 64,369 75
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85,608 5,437 391,942 12,462
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OPERATING LOSS (48,088) (5,437) (219,143) (12,462)
INTEREST EXPENSE (8,662) (450) (31,328) (1,189)
GAIN ON SETTLEMENT OF DEBTS (NOTE 10) 68,688 -- 80,881 --
LOSS ON DISPOSAL OF ASSETS -- -- (1,857) --
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GAIN (LOSS) BEFORE INCOME TAX 11,938 (5,887) (171,447) (13,651)
INCOME TAX -- -- -- (800)
- -------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) FOR THE PERIOD $ 11,938 $ (5,887) $ (171,447) $ (14,451)
=========================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ 0.001 $ (0.001) $ (0.013) $ (0.002)
=========================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,191,339 9,300,000 13,156,475 9,300,000
=========================================================================================================================
The accompanying notes are an integral part of these interim
consolidated financial statements
F-3
COMMUNICATE.COM INC.
(FORMERLY TROYDEN CORPORATION)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September 30
2001 2000
=====================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(171,447) $ (14,451)
Adjustments to reconcile net loss to net cash
used in operating activities
- gain on settlement of debt (80,881) --
- loss on disposal of assets 1,857 --
- non-cash cost of revenue 42,360 --
- depreciation and amortization 64,369 75
- accrued interest 26,163 1,999
- other receivables 96,111 --
- prepaid expenses 11,496 --
- accounts payable (78,758) 6,902
- deferred revenue 21,936 --
- -----------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (66,794) (5,475)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- proceeds on disposal of assets 4,720 --
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CASH FLOWS FROM INVESTING ACTIVITIES 4,720 --
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- lease obligation repayments (64,453) --
- loan advances 63,391 --
- advances from shareholders -- 5.475
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CASH FLOWS FROM FINANCING ACTIVITIES (1,062) 5,475
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 30,081 --
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,055) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,823 --
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,768 $ --
=====================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
During the period the Company issued 16,000 common shares in settlement of
certain trade accounts payable of $20,000.
During the period the Company issued 1,650,000 common shares in settlement
of notes payable of $825,000.
During the period the Company settled certain of its lease and accounts
payable obligations resulting in a gain of $80,881.
The accompanying notes are an integral part of these interim
consolidated financial statements
F-4
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Company was incorporated October 10, 1995 under the laws of the State of
Nevada and effective August 24, 2000 changed its name from Troyden Corporation
to Communicate.com Inc. ("CMNN" or "the Company"). CMNN has previously been a
development stage company seeking business acquisition opportunities. Effective
November 10, 2000 the Company acquired a 52% controlling interest in
Communicate.com Inc., an Alberta private company ("AlbertaCo") and during
December 2000 acquired from minority shareholders an additional 31% of the
outstanding shares of AlbertaCo. As a result, CMNN owns 83% of the outstanding
shares of AlbertaCo.
AlbertaCo owns a large portfolio of simple, intuitive domain names. AlbertaCo's
current business strategy is to seek partners to develop its domain names to
include content, commerce and community applications. AlbertaCo is generating
revenues from the sale of interests in certain of its domain names and
accordingly the Company is no longer considered to be in the development stage.
The interim consolidated financial statements have been prepared on the basis of
a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. At September 30, 2001 the
Company has a working capital deficiency of $1,092,942 and has incurred ongoing
losses since inception raising substantial doubt as to the Company's ability to
continue as a going concern. The Company's continued operations are dependent on
its ability to obtain additional financing, settling its outstanding debts and
ultimately to attain profitable operations.
Unaudited Interim Financial Statements
--------------------------------------
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. They do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there have been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2000 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission. The interim unaudited
consolidated financial statements should be read in conjunction with those
financial statements included in the Form 10-KSB. In the opinion of Management,
all adjustments considered necessary for a fair presentation, consisting solely
of normal recurring adjustments, have been made. Operating results for the nine
months ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION
The accompanying financial statements are presented in United States dollars and
are prepared in accordance with accounting principles generally accepted in the
United States.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and the 83%
interest in its subsidiary AlbertaCo. All significant intercompany balances and
transactions are eliminated on consolidation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, bank indebtedness, accounts payable and accrued liabilities, loan
payable and capital lease obligations. The fair values of these financial
instruments approximate their carrying values. The fair value of the Company's
capital leases are estimated based on market value of financial instruments with
similar terms. Management believes that the fair value of the debt approximates
its carrying value.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is computed at the following
rates over the estimated useful lives of the assets:
Computer equipment 30% declining balance
Furniture and fixtures 20% declining balance
Office equipment 20% declining balance
Other intangibles 5 years straight-line
One-half year depreciation is taken in the year of acquisition on certain
capital assets.
F-5
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company generates revenues from the licensing, leasing and sale of the
rights to its domain names and advertising revenue that consists primarily of
commissions earned from the referral of visitors to the Company's sites to other
parties. Collectibility of the proceeds in connection with these transactions is
subject to a high level of uncertainty; accordingly revenues are recognized only
as received in cash and are shown net of direct selling costs. The carrying
amount of the domain names held for resale is charged against revenue on a
proportionate basis concurrent with the recognition of the revenue.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
compensation expense is recognized based on the difference, if any, on the date
of grant between the estimated fair value of the Company's stock and the amount
an employee must pay to acquire the stock. Compensation expense is recognized
immediately for past services and pro-rata for future services over the
option-vesting period.
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force in Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under
this method, future tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Future tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment. A valuation allowance is provided for deferred tax assets
if it is more likely than not that the Company will not realize the future
benefit, or if the future deductibility is uncertain.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses for the periods that
the financial statements are prepared. Actual amounts could differ from these
estimates.
FOREIGN CURRENCY TRANSACTIONS
The financial statements are presented in United States dollars. In accordance
with Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation", foreign denominated monetary assets and liabilities are translated
to their United States dollar equivalents using foreign exchange rates that
prevailed at the balance sheet date. Revenue and expenses are translated at
average rates of exchange during the year. Related translation adjustments are
reported as a separate component of stockholders' equity, whereas gains or
losses resulting from foreign currency transactions are included in results of
operations.
F-6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS
Financial instruments are initially recorded at historical cost. If subsequent
circumstances indicate that a decline in fair value of a financial asset is
other than temporary, the financial asset is written down to its fair value.
LOSS PER SHARE
Basic loss per share is computed by dividing loss for the period by the weighted
average number of common shares outstanding for the period. Fully diluted loss
per share reflects the potential dilution of securities by including other
potential common stock, including convertible preferred shares, in the weighted
average number of common shares outstanding for a period and is not presented
where the effect is anti-dilutive. Because the Company does not have any
potentially dilutive securities, the accompanying presentation is only of basic
loss per share.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity from transactions,
events and circumstances, other than those resulting from investments by owners
and distributions to owners. Comprehensive income to date consists only of the
net loss resulting from translation of the foreign currency financial statements
of AlbertaCo.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying amount of capital assets and intangible assets
held for resale for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The determination of
any impairment would include a comparison of estimated future operating cash
flows anticipated during the remaining life with the net carrying value of the
assets held.
NOTE 3 - ACQUISITION OF ALBERTACO
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By agreement dated November 10, 2000 the Company acquired 11,714,080 Class A
common shares of AlbertaCo, representing 52% of the outstanding shares of
AlbertaCo, in consideration for 1,000,000 shares of the Company's common stock,
a cash payment of $400,000 and an additional $1,100,000 payable in four equal
amounts of $275,000 due 30, 60, 90 and 120 days following the acquisition or as
otherwise agreed to by the parties. The Company may, at its option, satisfy the
additional $1,100,000 payable by the issuance of 2,200,000 shares of the
Company's common stock.
In connection with this acquisition, the Company borrowed $400,000 from Pacific
Capital Markets Inc. (refer to Note 5)
On December 14, 2000, 550,000 shares of common stock were issued at an agreed
value of $0.50 per share as settlement of $275,000 of the $1,100,000. On June
20, 2001, 1,650,000 shares of common stock were issued at an agreed value of
$0.50 per share as settlement of the $825,000 balance of this agreement.
In addition, effective November 30, 2000, the Company made an offer to purchase
all of the remaining minority shareholdings of AlbertaCo on the basis of one
share of the Company for each 5.1470556 shares of AlbertaCo. This offer remained
in effect until December 29, 2000. In connection with this offer, the Company
acquired an additional 7,079,039 shares of AlbertaCo, representing 31% of the
outstanding shares of AlbertaCo, for consideration of 1,375,339 shares of the
Company's common stock at a fair value of $0.64 per share.
The Company owns 83% of the outstanding shares of common stock of AlbertaCo.
F-7
NOTE 4 - FIXED ASSETS
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September 30, 2001 December 31, 2000
--------------------------------------
Computer equipment $ 196,322 $ 216,252
Furniture and fixtures 6,568 6,568
Office equipment 3,993 3,993
Other intangibles 20,160 20,160
--------------------------------
227,043 246,973
Less: accumulated depreciation (83,662) (13,353)
--------------------------------
$ 143,381 $ 233,620
================================
As at September 30, 2001, computer equipment includes $57,541 of equipment held
under capital lease. Accumulated depreciation of leased equipment at September
30, 2001 is $23,304.
NOTE 5 - LOAN PAYABLE
- --------------------------------------------------------------------------------
In connection with the acquisition of AlbertaCo, the Company entered into a Loan
and Security Agreement dated November 10, 2000 with Pacific Capital Markets Inc.
("PCMI"), a British Columbia corporation. Under the terms of the agreement, PCMI
agreed to loan the Company up to $1,500,000 to satisfy its obligation pursuant
to the AlbertaCo purchase agreement dated November 10, 2000. Amounts loaned by
PCMI are secured by a promissory note payable on demand and bearing interest at
the Royal Bank of Canada prime rate plus 2%. In the event that the Company fails
to repay the amounts due under this agreement, PCMI may, at its option, convert
the balance of principal and interest due pursuant to this agreement into shares
of the Company's common stock of at a price equal to 80% of the average selling
price of the Company's common stock for the fifteen days prior to conversions.
As at September 30, 2001, $400,000 has been loaned by PCMI to the Company and
$31,562 of interest has been accrued.
PCMI and certain of its officers and directors were also shareholders of
AlbertaCo and sold their shareholdings in AlbertaCo to the Company in connection
with the minority shareholder offer as described in Note 3, and as a result
became shareholders of the Company.
In order to negotiate settlements with certain creditors of AlbertaCo, AlbertaCo
entered into a lending agreement with DMD Investments Ltd., dated September 19,
2001, for up to CAN$100,000 on a one-year term with interest calculated at the
Royal Bank Prime Rate plus four percent (4%). As at September 30, 2001 $63,391
had been advanced in connection with the loan. This loan was retired subsequent
to year end with proceeds from a loan agreement with Siden Investments Ltd..
Refer to Note 11.
NOTE 6 - CAPITAL STOCK
- --------------------------------------------------------------------------------
The authorized capital of the company consists of 50,000,000 Common Shares with
a par value of $.001.
During January 2001, the Company issued 16,000 shares of common stock in
settlement of certain trade accounts payable of AlbertaCo in the amount of
$20,000. During June 2001, the Company issued 1,650,000 shares of common stock
in settlement of a note payable in the amount of $825,000.
F-8
NOTE 6 - CAPITAL STOCK (cont'd)
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STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees". This method recognizes compensation cost as the
amount by which the fair value of the stock exceeds the exercise price at the
date of grant.
The Company has no stock options outstanding as at September 30, 2001. Refer to
Note 11.
NOTE 7 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
During the period management fees and salaries totalling $19,658 were paid to
two directors of the Company. Refer to Note 5.
NOTE 8 -CONTINGENCIES
- --------------------------------------------------------------------------------
FOREIGN EXCHANGE RISK
The Company is subject to foreign exchange risk for sales and purchases
denominated in foreign currencies. Foreign currency risk arises form the
fluctuation of foreign exchange rates and the degree of volatility of these
rates relative to the United States dollar. The Company does not actively manage
this risk.
CONTINGENCIES
The former Chief Executive Officer of AlbertaCo commenced a legal action against
AlbertaCo on March 9, 2000 for wrongful dismissal and breach of contract. He is
seeking, at minimum, 18.39% of the outstanding shares of AlbertaCo, specific
performance of his contract, special damages in an amount of CAN$37,537,
aggravated and punitive damages, interest and costs. On June 1, 2000,
Communicate.com commenced an action against this individual claiming damages and
special damages for breach of fiduciary duty and breach of his employment
contract. The amount of loss, if any, resulting from this litigation is
presently not determinable.
AlbertaCo has been threatened with legal action by Don King Productions ("DKP")
for alleged infringements on a pay-per-view telecast in March 2000 on
AlbertaCo's website, boxing.com. DKP is seeking damages of $100,000 and the
rights to the boxing.com domain name. The Company denies any wrongdoing and will
defend any legal action undertaken by DKP.
Certain minority shareholders of AlbertaCo threatened to take legal action in
the Court of Queens Bench of Alberta pursuant to the Alberta Business
Corporation Act to obtain remedies based on alleged shareholder oppression.
These shareholders have also notified certain directors and investors of their
intention to proceed with derivative claims that will be proceeded with in
combination with the shareholder oppression action. To date no statement of
claim has been filed and should a claim be started, the Company intends to
vigorously defend this action.
F-9
NOTE 9 - DOMAIN NAME REVENUE
- --------------------------------------------------------------------------------
During the period the Company entered into a number of agreements related to the
domain names included in intangible assets held for resale as follows:
SALE OF CRICKET.COM
AlbertaCo has entered into an agreement to sell one of its URL domain name
(cricket.com) for proceeds of $25,000 which has been included in domain name
revenue, 90% of the net revenues from Cricket.com Ltd. (a newly formed company
of which AlbertaCo will own 40%) to a maximum of $500,000, and 50% of the net
revenues from Cricket.com Ltd. until an additional $500,000 is paid.
SALE OF RUGBY.COM
AlbertaCo has entered into an agreement to sell its URL domain name (rugby.com)
for proceeds of (pound)100,000 payable in three equal annual instalments
starting in April 2001. Additionally the Company receives a 10% interest in
Rugbee.com Ltd. and a share of revenues generated from the site over the
two-year period.
LEASE OF VANCOUVER.COM
AlbertaCo entered into an agreement to lease its URL domain name (vancouver.com)
for a ten year period for consideration of 2% of the gross revenue (exclusive of
applicable taxes) generated by the lessee in respect of on-line revenues
originating from the domain name URL and 1% of the gross revenue (exclusive of
applicable taxes) generated by the lessee in respect of offline revenues
originating from the domain name URL. The lessee has the right to purchase the
domain name URL prior to the fifth anniversary date for CAN$400,000 less all
amounts previously paid to AlbertaCo during the lease term. The lessee also has
the right to purchase the domain name URL prior to the eighth anniversary date
for CAN$800,000 less all amounts previously paid to AlbertaCo during the lease
term. The lessee may cancel this agreement with 60 days notice of the annual
anniversary date.
LEASE OF BOXING.COM
AlbertaCo entered into an agreement to lease its URL domain name (boxing.com)
for a twelve-month period commencing September 14, 2001 for consideration of
$55,000 to be recognized over the term of the lease. The lessee has the right to
purchase the domain name URL prior to the first anniversary date for $250,000.
The lessee also has the right to purchase the domain name URL prior to the
eighteen-month anniversary for $275,000. The Company has received $25,000
relating to this agreement.
NOTE 10 - DEBT SETTLEMENTS
- --------------------------------------------------------------------------------
During the period the Company made settlement arrangements with certain
creditors whereby the creditors agreed to take cash settlements in amounts that
were less than the outstanding amount of debt, resulting in a gain on settlement
of $80,881.
F-10
NOTE 11 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
Subsequent to year-end, the Company and its subsidiary signed a promissory note
with Siden Investments Ltd. for $150,000. The proceeds of the loan were used to
repay the loan from DMD Investments Ltd. in the amount of $65,000 and to further
settle liabilities in the subsidiary. The loan will bear interest, calculated
monthly, at the Royal Bank Prime Rate plus four percent (4%) commencing November
1, 2001.
A General Security Agreement, a Promissory Note and the transfer of one of the
Company's domain names into Escrow until the loan is fully repaid provide the
security for the loan.
As consideration for entering into the agreement the Company agreed to pay the
lender a $15,000 set up fee and also granted the lender warrants to purchase
10,000,000 restricted shares of the Company's common stock at a price of $0.02
per share for a period of 3 years. The Company will account for these share
purchase warrants in accordance with SFAS No. 123 by applying the fair value
method using the Black-Scholes option pricing model assuming a dividend yield of
0%, a risk-free interest rate of 5%, an expected life of three years and an
expected volatility of 175%. The fair value of these warrants will be recorded
as a $176,000 finance fee in the fourth quarter.
F-11