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 June 30, 2002
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
-----------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
#600 - 1100 Melville Street, Vancouver, B.C. V6E 4A6
----------------------------------------------------
(Address of principal executive offices)
(604) 697-0136
--------------
(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 14,691,339 shares outstanding
$.001 Par Value as of August 12, 2002
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
COMMUNICATE.COM INC.
REPORT ON FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets as of June 30, 2002 and December 31,
2001 Statements of Operations as of June 30, 2002 and
June 30, 2001 Statements of Cash Flows as of June 30,
2002 and 2001 Notes to the Financial Statements
Item 2. Management's discussion and analysis of financial condition and
results of operations
PART II. Other Information
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
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
2
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
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Registrant, through its majority-owned subsidiary, Domain Holdings, Inc.
(formerly Communicate.com Inc.) (the "Subsidiary"), is involved in businesses
which exploit commercial uses of the Internet. The Subsidiary markets and
licenses a portfolio of approximately 40 domain names, 30 of which generate high
amount of internet traffic because of, among other things, their generic
description of a specific product or services category.
Registrant has focused since the beginning of 2001 on developing revenue streams
from its domain names and reducing the debt of the Subsidiary. Registrant
generates revenue from leasing domain names, from sales commissions from the
sale of third-party products and services utilizing the Internet, from
"pay-per-click" revenue and from the sale of domain name assets that Registrant
believes are not essential to its business.
Registrant presently has one administrative employee and two consultants, both
of whom are 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.
For the Quarters Ended June 30, 2002 June 30, 2001
------------------------------------------------------------------------------------------------------
Statements of Operations Data
-----------------------------
Domain Name Revenue, Net $31,301 $70,912
Other 11,926 13,224
General and Administrative $( 85,380) $( 55,480)
Professional Fees (58,124) (52,873)
Sales and Marketing -- (82)
Depreciation (984) (21,178)
3
Operating Income (Loss) $( 101,262) $(45,477)
Interest (12,175) (9,420)
Loss on Acquisition of Minority Interest (15,471) --
Gain on Settlement of Debt 159,900 --
Gain (Loss) on Assets Disposals -- (1,857)
Net Income (Loss) $ 30,992 $( 56,754)
Basic Earnings (Loss) per Share $ 0.01 ($ 0.01)
Weighted Average Shares Outstanding 14,202,328 12,722,658
Balance Sheet Data As at June 30, As at December
------------------ 2002 31, 2001
Current Assets $ 113,096 $ 125,931
Fixed Assets 14,754 17,432
Intangible Assets 3,058,651 3,341,577
Total Assets $ 3,186,501 $ 3,484,940
Accounts Payable & Accrued Liabilities $ 464,150 $ 733,751
Loan Payable 403,781 605,000
Deferred Revenue 12,798 9,886
Total Liabilities $ 880,728 $ 1,348,637
Common Stock $ 5,701 $ 5,201
Additional Paid in Capital 2,906,616 2,772,016
Accumulated Deficit $( 606,544) $( 640,914)
(b) RESULTS OF OPERATIONS
REVENUES. In the second quarter of 2002, Registrant recorded income from the
utilization of its domain names (consisting primarily of the lease of domain
names, commissions on the sales of products where Registrant's domain names are
utilized, and fees received from third parties calculated on the number Internet
users who visit sites identified with Registrant's domain names and gain or loss
from domain name sales) of $31,300, a decrease of approximately 56% from the
second quarter of 2001. The decrease resulted primarily from a loss recognized
by Registrant of $81,200 on the sale of a health-related domain name to a third
party. Excluding the loss on sale of the domain name, revenue for the second
quarter would be $112,500, an increase of 58% from the second quarter of 2001.
Registrant recognized approximately $44,700 from arrangements entered into with
an internet pay-per-click service provider, which will pay the Registrant a fee
for successful click-through traffic, in which users navigating to a site
associated with
4
a domain name owned by Registrant are redirected to a site which sells goods and
services associated with the domain name. Registrant recorded approximately
$16,400 in income from pay-per-click agreements from various different service
providers in the second quarter of 2001. Registrant's sales reflect commission
generating arrangements with several of its health-related domains whereby the
Registrant earns a portion of any revenue generated from customers introduced by
the Registrant's domain names which generated $17,000 during the second quarter
of 2002 compared to $18,000 in the second quarter of 2001. These agreements are
arranged on a month-to-month basis and there can be no assurance that they will
be renewed or, if renewed, that they will continue to generate income on the
same basis as in past periods. In addition, Registrant also received the second
annual installment of approximately $33,000 from the leasing of a geographic
domain name and recognized deferred revenue to generate $15,000 from the leasing
of a sports domain name in the second quarter of 2002. The operator of the
leased sports domain name has notified Registrant that he will not exercise his
option to purchase the domain name and will not continue to operate the site
beyond September 13, 2002. Management will seek other business opportunity for
this and other domain names not in use.
Management will continue to market selectively individual domain names its
portfolio of domain names in fiscal 2002 and identify potential purchasers who
have substantial liquid assets to complete any contemplated purchase
transactions. Because of the fluid nature of Internet-based businesses,
Registrant will require potential purchasers to advance funds as deposits to
better assure the consummation of these transactions. 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.
In the second quarter of 2002, Registrant generated other revenue from a bad
debt recovery of $7,300, and other miscellaneous income of $4,700. Any cashflow
generated, net of monthly cash operating expenses, has been applied to reduce
debt. Management anticipates continuing this debt management program for the
foreseeable future.
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. In the second quarter of 2002,
Registrant incurred $85,000 of expenses as compared to $55,000 in the second
quarter of 2002. Included in the second quarter are i) a compensation expense of
$50,000 for work related to debt settlement; ii) a severance accrual of $36,000;
and iii) a recovery on legal fees of $5,700. Excluding these charges and
recovery, general and administrative expense would have been $5,000. These
expenses have been reduced substantially from the same quarter in 2001 as a
result of management's cost savings program implemented in the last quarter of
2000 and continued to date and the change in business focus in the Subsidiary's
business.
PROFESSIONAL FEES. A substantial amount of the professional fees were for legal
and consulting fees which were related to costs of regulatory filings, financial
statement preparation and litigation costs. Registrant continues to seek ways to
reduce these costs. During the second quarter of 2002, professional fees totaled
$58,000, compared to $52,900 for the same quarter of last year, an increase of
approximately 10%. While the Company continues to pursue pending litigation,
management is unaware of factors which are likely to increase professional fees
for the remaining quarters in 2002.
5
(c) LIQUIDITY AND CAPITAL RESOURCES
Registrant seeks to generate revenue from (i) leasing domain names to third
parties to conduct on-line businesses; (ii) selling products and services of
third parties; (iii) fees resulting from traffic click-through agreements
generated by the domain name assets; and (iv) selling of non-core domain name
assets.
At June 30, 2002 Registrant had current liabilities in excess of current assets
resulting in a working capital deficit of $767,600. During the six-month ended
June 30, 2002 Registrant had a net income of $74,400 and an increase in cash of
$31,600, compared to a net loss of $183,300 and a decrease in cash of $9,500 for
the same six-month period of last year. Operating activities generated cashflows
of $308,700 primarily from the sale of two domain names, from net income
generated during the quarter and after payments to trade creditors. The
cashflows were used to repay a $150,000 loan, other loans and to pay lease
obligations. Registrant has accumulated a deficit of $593,500 since inception
and has a stockholders' equity of $2,305,700 at June 30, 2002. Due to the
working capital deficit, there is substantial doubt about Registrant's ability
to continue as a going concern. 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.
During the second quarter of 2002, Registrant took several steps to reduce its
debt and enhance its cash flow, while reducing potential claims.
On May 24, 2002, Registrant and the Subsidiary mutually agreed to settle a
potential legal dispute with David Sidoo, Siden Capital Corp. and Siden
Investments Ltd. (the "Siden Group"). In the previous quarter, disputes between
the Registrant and the Siden Group had arisen which were related to a loan
agreement entered into on October 10, 2001, by Registrant and the Subsidiary
with Siden Investments Ltd. Under that agreement, Siden advanced to Registrant
and the Subsidiary an aggregate of $150,000. As security for the loan,
Registrant entered into an Option Agreement pursuant to which Siden Investments
Ltd. was given the right to acquire up to 15,000,000 shares of Registrant's
common stock at an exercise price of $0.01 per share. The Loan was repaid in
full on about March 22, 2002.
Since the date of repayment, Siden and Registrant disagreed regarding the
exercisability of the option. It was Registrant's belief that, inasmuch as the
option was granted as additional security for the loan, and inasmuch as the loan
was repaid in full, the option was terminated and of no further force or effect.
No formal demand was made with respect to this matter. After extended
discussions, Registrant and the Subsidiary and the Siden Group determined it was
in their mutual best interests to resolve their outstanding disagreements and
mutually settle the disputes. As part of the settlement, Registrant and the
Siden Group came to the following arrangements:
o the members of the Siden Group transferred 2,112,608 shares of the stock
of the Subsidiary held by them to Registrant, increasing Registrant's
interest in the Subsidiary to 93% of the outstanding shares of the
Subsidiary; and
o the members of the Siden Group agreed that the option granted to Siden
Investments Ltd. by Registrant to acquire up to 15,000,000 shares of
Registrant's common stock was void.
6
Except for the purchase of stock of the Subsidiary, which resulted in a loss
upon acquisition of $15,400, the resolution of this dispute did not result in
any financial impact on the Company.
On June 28, 2002, the Registrant and the Subsidiary entered into two Assignment
of Debt Agreements pursuant to which the Registrant effectively extinguished
obligations owing to David Jeffs and Pacific Capital Markets Inc. In one such
Agreement, the Registrant acquired from David Jeffs the obligation of the
Subsidiary to pay David Jeffs the sum of $50,000 in return for the issuance by
the Registrant of 500,000 shares of the Registrant's common stock. In the second
Agreement, the Registrant acquired the obligation of the Subsidiary under a
finders' agreement dated January 12, 2000 which obligated the Subsidiary to pay
Pacific Capital Markets Inc. the sum of US$122,500, and effected the
restructuring of a promissory note, dated November 10, 2000 in the principal
amount of US$400,000. Under that Agreement, the Registrant acquired Pacific
Capital Markets Inc.'s interest in the obligation of the Subsidiary, and Pacific
Capital Markets, Inc. agreed to convert the promissory note from a demand note
to a term note, due and payable on June 28, 2002, in consideration for the
issuance to Pacific Capital Markets, Inc. of warrants to purchase 2,000,000
shares of the Registrant's common stock at an exercise price of US$0.05 per
share. The settlement of the finders' fee resulted in a gain on settlement of
debt of $159,900.
Notwithstanding these developments, 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 is
$200,000. 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.
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
7
and actual results could differ materially from those set forth in or underlying
the forward-looking statements.
8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
- --------------------------
In December 1999, the Subsidiary commenced a lawsuit in the Supreme Court of
British Columbia (No. C996417) against Paul Green, the former chief executive
officer of the Subsidiary, for breach of fiduciary duty for wrongfully
attempting to appropriate the Subsidiary's business opportunities. The
Subsidiary is seeking an undetermined amount of damages and a declaration that
it had just cause to terminate Paul Green as the CEO in or about June 1999. No
decision has been rendered in this case and the Company cannot predict whether
it will prevail, and if it does, what the terms of any judgment may be.
On March 9, 2000, Paul Green commenced a separate action in the Supreme Court of
British Columbia (No. S001317) against the Subsidiary. In that action, Paul
Green claimed wrongful dismissal and a breach of contract on the part of the
Subsidiary. Paul Green is seeking an undetermined amount of damages and, among
others, an order of specific performance for the issuance of a number of shares
in the capital of the Subsidiary equal to 18.9% or more of the outstanding
shares of the Subsidiary. On June 1, 2000, the Subsidiary filed a statement of
defence and counterclaim. Management intends to defend this action vigorously.
On April 4, 2002, Gartner, Inc. made a claim against the Subsidiary for alleged
breach of contract and debt owing for marketing services rendered during April
1, 2000 to March 31, 2001 in the amount of $85,600. Registrant believes a
defense is available on the basis of the contract being terminated during an
agreed upon trial period. However, final assessment of the relative merits of
the case will require completion of full discovery processes. In the interim,
Registrant intends to defend against the claim vigorously.
On April 23, 2002, DNG Capital Corp issued a demand letter to the Subsidiary
demanding the payment of Cdn$15,105 for alleged services rendered during
November 2001 to January 2002 and repayment of a loan of $97,000 advanced in
February 2000. Registrant believes the services were provided for and on behalf
of Siden and that the loan advanced were for share subscription in the
Subsidiary that had been completed. On May 24, 2002, Communicate and the
Subsidiary obtained a mutual release from DNG Capital Corp. for any and all
possible and outstanding claims.
Registrant is not aware of any other pending or threatened material legal
proceedings.
Item 2. Changes in Securities.
- ------------------------------
On June 28, 2002, the Board of Directors authorized the issuance of 500,000
shares of common stock to David Jeffs as full and final settlement of a $50,000
debt assumed by the Registrant from the Subsidiary. The debt was accumulated
from services provided by Mr. Jeffs. Communicate relied on an exemption from
registration under Section 4(2) of the Securities Act of 1933 in issuing the
shares. These shares are restricted securities and are subject to resale
restrictions under Rule 144.
9
On June 28, 2002, the Board of Directors authorized the issuance of 2,000,000
share purchase warrants which will grant Pacific Capital Markets Inc. the right
to acquire one common share for each warrant at an exercise price of $0.05 per
common share at any time after June 28, 2002 through June 28, 2004. The Warrants
are non-transferable. Communicate relied on an exemption from registration under
Section 4(2) of the Securities Act of 1933 in issuing the shares. These shares
are restricted securities and are subject to resale restrictions under Rule 144.
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 three months of the fiscal year
covered by this report.
Item 5. Other Information.
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(A) Index to and Description of Exhibits.
- -----------------------------------------------
EXHIBIT DESCRIPTION
F-1 Financial Statements.
10.1 Assignment of Debt Agreement among
Communicate.com Inc., David Jeffs and Domain
Holdings, Inc. dated June 28, 2002.
10.2 Assignment of Debt Agreement among
Communicate.com Inc., Pacific Capital Markets,
Inc. and Domain Holdings, Inc. dated June 28,
2002.
10.3 Share Purchase Warrant dated June 28, 2002.
27 Financial Data Schedule.
99.1 Certification of Chief Executive Officer and
Chief Financial Officer
10
(B) Reports on Form 8-K.
- -----------------------------
There were no report on Form 8-K filed by Registrant during the second quarter
ending June 30, 2002.
On July 26, 2002, Registrant filed a Form 8-K announcing that, effective July
23, 2002, Mr. R Leigh Jeffs resigned as Director and President, Secretary and
Treasurer of the Company and its subsidiary Domain Holdings Inc. Concurrently,
Mr. David Jeffs was appointed as Director and President and Secretary of the
Company and its subsidiary, and Mr. J Cameron Pan was appointed as Treasurer of
the Company and its subsidiary.
11
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: August 14, 2002 By:/s/ David Jeffs
12
Exhibits
Financial Statements..................................................F-1
Assignment of Debt Agreement among Communicate.com Inc., David Jeffs and
Domain Holdings, Inc. dated June 28, 2002.
Assignment of Debt Agreement among Communicate.com Inc., Pacific Capital
Markets, Inc. and Domain Holdings, Inc. dated June 28, 2002.
Share Purchase Warrant dated June 28, 2002.
Financial Data Schedule.
Certification of Chief Executive Officer and Chief Financial Officer
13
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(unaudited)
BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-1
COMMUNICATE.COM INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 84,324 $ 52,672
Accounts receivable 24,159 64,450
Prepaid expenses 4,613 8,809
- ----------------------------------------------------------------------------------------------------------------------
113,096 125,931
FIXED ASSETS (Note 4) 14,754 17,432
INTANGIBLE ASSETS HELD FOR RESALE (Note 3) 3,058,651 3,341,577
- ----------------------------------------------------------------------------------------------------------------------
$ 3,186,501 $ 3,484,940
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 453,859 $ 713,514
Loans payable (Note 5) 403,781 605,000
Deferred revenue 12,798 9,886
Lease obligation (Note 4) 10,290 20,237
- ----------------------------------------------------------------------------------------------------------------------
880,728 1,348,637
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY
Capital stock (note 6)
Authorized
50,000,000 Common shares, $.001 par value
Issued and outstanding
14,691,339 (2001 - 14,191,339) Common shares 5,701 5,201
Additional paid in capital 2,906,616 2,772,016
Accumulated deficit (593,561) (667,991)
Accumulated other comprehensive income (loss) (12,983) 27,077
- ----------------------------------------------------------------------------------------------------------------------
2,305,773 2,136,303
- ----------------------------------------------------------------------------------------------------------------------
$ 3,186,501 $ 3,484,940
======================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
F-2
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
REVENUES
Domain name revenue (net of cost) $ 31,301 $ 70,912 $ 159,623 $ 121,728
Other 11,926 13,224 37,814 25,744
- -----------------------------------------------------------------------------------------------------------------
43,227 84,136 197,437 147,472
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
General and administrative 85,380 55,480 112,977 105,417
Professional fees 58,124 52,873 117,209 154,906
Sales and marketing -- 82 -- 1,698
Depreciation 985 21,178 2,678 44,313
- -----------------------------------------------------------------------------------------------------------------
144,489 129,613 232,864 306,334
- -----------------------------------------------------------------------------------------------------------------
OPERATING LOSS (101,262) (45,477) (35,427) (158,862)
INTEREST EXPENSE (12,175) (9,420) (34,572) (22,666)
LOSS ON ACQUISITION OF MINORITY INTEREST (15,471) -- (15,471) --
GAIN ON SETTLEMENT OF DEBTS (Note 5) 159,900 -- 159,900 --
LOSS ON DISPOSAL OF FIXED ASSETS -- (1,857) -- (1,857)
- -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ 30,992 $ (56,754) $ 74,430 $ (183,385)
=================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ 0.002 $ (0.004) $ 0.005 $ (0.015)
=================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,202,328 12,722,658 14,196,864 12,630,466
=================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
F-3
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months Six months
ended June 30, ended June 30,
2002 2001
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ 74,430 $ (183,385)
Adjustments to reconcile net loss to net cash
used in operating activities
- gain on settlement of debt (159,900) --
- loss on disposal of assets -- 1,857
- non-cash cost of fixed revenue 282,400 42,360
- depreciation 3,204 44,313
- accrued interest 25,874 17,710
- deferred revenue 2,912 --
- accounts receivable 40,291 79,370
- prepaid expenses 4,196 8,025
- accounts payable and accrued liabilities 35,345 5,409
- ---------------------------------------------------------------------------------------------------
CASH FROM OPERATING ACTIVITIES 308,752 15,659
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- proceeds on disposal of assets -- 4,720
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES -- 4,720
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- lease obligation repayments (9,947) (33,626)
- loan repayments (227,093) --
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES (237,040) (33,626)
- ---------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (40,060) 3,693
- ---------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 31,652 (9,554)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,672 47,823
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 84,324 $ 38,269
===================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
On June 28, 2002 500,000 shares were issued in settlement of $50,000 of accounts
payable. Refer to Note 6.
On June 28, 2002 2,000,000 share purchase warrants were issued in settlement of
$122,500 of accounts payable. Refer to Note 6.
The accompanying notes are an integral part of these interim consolidated
financial statements
F-4
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
- -------------------------------------------------------------------------------
(UNAUDITED)
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"). 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.
After acquiring a further 10% of the outstanding shares of AlbertaCo from
minority shareholders in the second quarter of 2002, CMNN owns 93% of the
outstanding shares of AlbertaCo. On April 5, 2002 AlbertaCo changed its name to
Domain Holdings Inc.
AlbertaCo owns a 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 has also entered
into agreements to sell or lease certain of its domain names (refer to Note 7).
The 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 June 30, 2002 the Company has a
working capital deficiency of $767,632 (2001 - $1,222,706) and has incurred
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
to maintain 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, 2001 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 three
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
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 93%
interest in its subsidiary, Domain Holdings Inc. All significant intercompany
balances and transactions are eliminated on consolidation.
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
One-half year depreciation is taken in the year of acquisition on certain
capital assets.
F-5
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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REVENUE RECOGNITION
Revenues from the sale and lease of domain names, whose carrying values are
recorded as intangible assets held for resale, consists primarily of funds
earned for the transfer of rights to domain names that are currently in the
Company's control. Collectibility of these proceeds is subject to a high level
of uncertainty; accordingly revenues are recognized only as received in cash and
are shown net the carrying value of the intangible asset sold. Lease payments
paid in advance are recorded as deferred revenue.
Web advertising revenue consists primarily of commissions earned from the
referral of visitors to the Company's sites to other parties. The amount and
collectibility of these referral commissions is subject to uncertainty;
accordingly revenues are recognized when the amount can be determined and
collectibility can be reasonably assured.
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.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN
44"), which provides guidance as to certain applications of APB 25. FIN 44 is
generally effective July 1, 2000 with the exception of certain events occurring
after December 15, 1998.
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.
F-6
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing earnings (loss) for the
period by the weighted average number of common shares outstanding for the
period. Fully diluted earnings (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. The
presentation is only of basic earnings (loss) per share as the effect of the
potential dilution of securities is anti-dilutive to the prior period's basic
(loss) per share and has no effect on the current period's basic earnings 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.
INTANGIBLE ASSETS HELD FOR RESALE
The Company has adopted the provision of the Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be amortized
and will be tested for impairment annually. 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 asset. Management
has determined that as at June 30, 2002 no impairment of intangible assets held
for resale has occurred.
RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission Staff Accounting Bulletin No. 101 and
subsequent amendments and related releases ("SAB 101") released during the year
ended September 30, 1999 provide guidance for the recognition of revenue in
financial statements. The Company has considered the guidance presented therein
and believes that the Company's practices for the recording of revenue are
consistent with this guidance.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The adoption of SFAS 141 does not have a material impact on the
Company's financial position or results of operations.
F-7
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
- -------------------------------------------------------------------------------
(UNAUDITED)
NOTE 3 - ACQUISITION
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By agreement dated November 10, 2000 the Company acquired 52% of the outstanding
shares of AlbertaCo, for total consideration of $2,000,000 of which $400,000 was
paid in cash in 2000, $775,000 was paid in 2000 through the issuance of
1,550,000 shares of the Company's common stock at $0.50 per share and the
remaining $825,000 was paid in 2001 through the issuance of 1,650,000 shares of
the Company's common stock at $0.50 per share.
In addition, by offer made November 30, 2000 and completed December 29, 2000,
the Company acquired an additional 31% of the remaining minority shareholdings
of AlbertaCo for consideration of $880,217 paid through the issuance of
1,375,339 shares of the Company's common stock at $0.64 per share. After
completion of these two transactions, the Company owned 83% of the outstanding
shares of common stock of AlbertaCo.
This business combination has been accounted for using the purchase method of
accounting. The purchase price has been allocated as follows:
Assets acquired at fair value:
Current assets $ 350,568
Capital assets 519,798
Intangible assets held for resale - domain names 3,421,135
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4,291,501
Liabilities assumed at fair value:
Accounts payable and accrued liabilities (1,301,421)
Lease obligations (109,863)
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Purchase price $ 2,880,217
===============
On May 24, 2002 the Company acquired an additional 10% of AlbertaCo for $15,471.
As AlbertaCo had a Stockholders' deficiency at the date of this transaction,
this amount has been recorded as a loss on acquisition of minority interest. The
Company now owns 93% of the outstanding shares of common stock of AlbertaCo.
NOTE 4 - FIXED ASSETS
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December 31,
June 30, 2002 2001
---------------------------------
Computer equipment $ 208,388 $ 208,388
Furniture and fixtures 6,568 6,568
Office equipment 3,993 3,993
---------------------------------
218,949 218,949
Less: accumulated depreciation (59,772) (57,094)
Less: accumulated impairment provision (144,423) (144,423)
---------------------------------
$ 14,754 $ 17,432
=================================
As at June 30, 2002, computer equipment includes $56,295 of equipment held under
capital lease. In connection with this leased equipment the Company has lease
obligations of $10,290 that are due in 2002.
During the year ended December 31, 2001 the Company wrote down the carrying
value of its fixed assets by $144,423 to reflect the equipment's net realizable
value.
F-8
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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(UNAUDITED)
NOTE 5 - LOANS PAYABLE
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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 United States dollar 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. To June 30, 2002, $400,000 has been loaned by PCMI to
the Company and a total of $80,874 of interest has been accrued. During the
period $77,093 was repaid to PCMI leaving $403,781 owing as at June 30, 2002.
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.
During the period, the Company issued 2,000,000 share purchase warrants to PCMI
in settlement of $122,500 of previously accrued finders' fees owing to PCMI from
AlbertaCo. The warrants have a fair value of $85,100 and resulted in a gain on
settlement of $37,400. (Refer to Note 6)
In 2001, the Company and AlbertaCo signed a promissory note with Siden
Investments Ltd. ("Siden") for $150,000. As consideration for entering into the
agreement the Company agreed to pay the lender a $15,000 set up fee. The
proceeds of the loan were used to repay a loan from DMD Investments Ltd. in the
amount of $65,000 and to further settle liabilities of AlbertaCo. The loan bore
interest, calculated monthly, at the Royal Bank Prime Rate plus four percent
(4%) commencing November 1, 2001. During the period the principal and accrued
interest was repaid in full. Subsequent to the date of repayment, a dispute
arose between Siden and the Company regarding the exercisability of an Option
Agreement (the "Option"). It was the Company's belief that inasmuch as the
Option was granted as additional security for the Loan, and inasmuch as the Loan
had been repaid in full, the Option had terminated and was of no further force
or effect. While Siden had not attempted to exercise the option, Siden had
advised the Company that it believed it was entitled to do so. By settlement
agreement dated May 24, 2002, Siden, and the Company agreed that the Option is
of no further force or effect and released each other from any mutual
obligations, commitments or contractual arrangements. As a result, the Company
recorded a gain on settlement of debts of $122,500 resulting from the settlement
of previously accrued finders' fees owing to Siden from AlbertaCo.
NOTE 6 - CAPITAL STOCK
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The authorized capital of the company consists of 50,000,000 Common Shares with
a par value of $.001.
During June 2002, the Company issued 500,000 shares of common stock of the
Company in settlement of certain accounts payable of AlbertaCo in the amount of
$50,000 owing to an individual who became a director of the Company in July
2002.
STOCK-BASED COMPENSATION
On June 28, 2002, the Company issued 2,000,000 share purchase warrants entitling
the holder to purchase one share of common stock at $0.05 for a period of two
years in settlement of certain accounts payable of $122,500. The Company has
accounted 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 4%, an expected
life of two years and an expected volatility of 201%. The fair value of these
warrants is $85,100 resulting in a gain on settlement of $37,400.
The Company has no stock options outstanding as at June 30, 2002 and has
recorded no compensation expense for any period relating to the granting of
stock options.
F-9
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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(UNAUDITED)
NOTE 7 - DOMAIN SALES AND LEASING
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LEASE OF VANCOUVER.COM
By agreement dated March 21, 2001, 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
By agreement dated September 14, 2001, the Company agreed to lease the use of
its URL domain name (boxing.com) for $25,000 paid for the first six months, of
which $9,886 is shown as deferred revenue as at December 31, 2001, and $30,000
due for the second six months of which $12,748 is included in deferred revenue.
Included in the agreement is an option to purchase the domain name for $250,000
for 45 days after the one-year anniversary of this agreement and $275,000 for 45
days after the eighteen-month anniversary of this agreement. During the period
the $27,138 has been recorded as revenue in connection with this agreement.
SALE OF HOCKEY.COM
By agreement dated March 11, 2002, AlbertaCo entered into an agreement to sell
its URL domain name (hockey.com) for $200,000. The agreement closed on March 21,
2002 and the gain on the sale of $58,800 has been recognized in Domain Name
Revenue, net of the carrying value of hockey.com of $141,200
SALE OF VEGETARIAN.COM
By agreement dated May 13, 2002, AlbertaCo entered into an agreement to sell its
URL domain name (vegetarian.com) for $60,000. The agreement closed on May 14,
2002 and the loss on the sale of $81,200 has been recognized in Domain Name
Revenue, net of the carrying value of vegetarian.com of $141,200
NOTE 8 - RELATED PARTY TRANSACTIONS
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During the period ended June 30, 2002 management fees and salaries of totalling
$8,000 were paid to the sole director of the Company. During the period ended
June 30, 2001 management fees and salaries of totalling $24,934 were paid to two
directors of the Company.
NOTE 9 - FINANCIAL INSTRUMENTS
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INTEREST RATE RISK EXPOSURE
The Company has limited exposure to any fluctuation in interest rates.
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.
F-10
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
- -------------------------------------------------------------------------------
(UNAUDITED)
NOTE 9 - FINANCIAL INSTRUMENTS (cont'd)
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CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents and trade
accounts receivable. The Company limits its exposure to credit loss by placing
its cash and cash equivalents on deposit with high credit quality financial
institutions. Receivables arising from sales to customers are generally not
significant individually and are not collateralized; as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss.
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, note payable and capital lease obligation. 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.
NOTE 10 - INCOME TAXES
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The Company's subsidiary, AlbertaCo is subject to Canadian federal and British
Columbia provincial taxes in Canada and the Company is subject to United States
federal and state taxes.
As at December 31, 2001 the Company has net operating loss carryforwards of
approximately $5,800,000 that result in deferred tax assets. The carryforwards
will expire, it not utilized, commencing in 2006. Management believes that the
realization of the benefits from these deferred tax assets appears uncertain due
to the Company's limited operating history and history of operating losses.
Accordingly, a full deferred tax asset valuation allowance has been provided and
no deferred tax asset benefit has been recorded.
No tax provision has been recorded in the current period as the Company and
AlbertaCo have sufficient loss carryforwards to offset all taxable income
recorded in the period.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
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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 outcome of these legal actions is currently not determinable and
as such the amount of loss, if any, resulting from this litigation is presently
not determinable.
On April 4, 2002 Gartner Inc. filed a claim against AlbertaCo for an alleged
breach of contract and debt owing for marketing services rendered during 2000
and 2001 in the amount of $85,600. The Company believes the contract was
properly cancelled and intends to defend itself against this claim. No provision
for loss has been recorded pending outcome of this litigation.
F-11