UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 14,191,339 shares outstanding
$.001 Par Value as of May 13, 2002
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
COMMUNICATE.COM INC.
REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
The purpose of this amendement to Communicate.com Inc.'s Quarterly Report on
Form 10-QSB is to show the effects of adoption of SFAS 142 that resulted in a
reduction in value of the Registrant's intangible assets in the amount of
$1,426,736 as at January 1, 2002. The resulting reduction in cost base of a
domain name sold during the period ended March 31, 2002 from $141,200 to $82,315
has caused an increase in domain name revenue of $58,885. These restatements
have resulted in a reduction of total assets and net equity in the amount of
$1,367,566. Net income (loss) for the period has been restated from $43,437 to
($1,324,129). Loss per share has increased from $0.00 to ($0.09).
This amendment does not reflect events occurring after the filing of the
Quarterly Report on May 14, 2002, the original filing date of the Quarterly
Report, or modify or update those disclosures as presented in the original Form
10-QSB, except to reflect the restatement as described above.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Balance sheets as of March 31, 2002 and December 31,
2001 Statements of Operations as of March 31, 2002 and
March 31, 2001 Statements of Cash Flows as of March 31,
2002 Notes to the Financial Statements 3
Item 2. Management's discussion and analysis of financial
condition and results of operations 3
PART II. OTHER INFORMATION 7
Item 1. Legal Proceedings. 7
Item 2. Changes in Securities. 8
Item 3. Defaults Upon Senior Securities. 8
Item 4. Submission of Matters to a Vote of Security Holders. 8
Item 5. Other Information. 8
Item 6. Exhibits and Reports on Form 8-K. 8
Signatures 10
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 is involved in internet-related businesses. Pursuant to an
acquisition in November 2000, Registrant acquired an 83% interest in Domain
Holdings Inc. (formerly Communicate.com Inc.) (the "Subsidiary") that markets
and licenses a portfolio of approximately 80 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 has
been generating revenue from leasing domain names, from sales commissions from
the selling of third-party products and services, from pay-per-click revenue and
from the sale of non-core domain name assets.
Registrant presently has one administrative employee and two consultants
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 March 31, 2002 March 31, 2001
------------------------------------------------------------------------------------------------------
Statements of Operations Data
-----------------------------
Domain Name Revenue, Net $ 187,207 $ 50,816
Other 25,887 12,520
General and Administrative $ (27,575) $ (51,553)
Professional Fees (59,085) (102,033)
Depreciation (1,430) (23,135)
Operating Income (Loss) $ 125,004 $ (113,385)
3
OPERATING INCOME (LOSS) 125,004 (113,385)
INTEREST EXPENSE (22,397) (13,246)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE THE FOLLOWING 102,607 (126,631)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,426,736) --
- --------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ (1,324,129) $ (126,631)
================================================================================
BASIC EARNINGS (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.01 $ (0.01)
EFFECT OF ACCOUNTING CHANGE (0.10) --
- --------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ (0.09) $ (0.01)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,191,339 12,537,428
================================================================================
Balance Sheet Data As at March 31, 2002 As at December 31, 2001
------------------
Current Assets $ 96,482 $ 125,931
Fixed Assets 16,002 17,432
Intangible Assets 1,832,526 3,341,577
Total Assets $ 1,945,010 $ 3,484,940
Accounts Payable & Accrued Liabilities $ 658,192 $ 733,751
Loan Payable 468,930 605,000
Deferred Revenue -- 9,886
Total Liabilities $ 1,127,122 $ 1,348,637
Common Stock $ 5,201 $ 5,201
Additional Paid in Capital 2,772,016 2,772,016
Accumulated Deficit $ (1,959,329) $ (640,914)
(b) RESULTS OF OPERATION
REVENUES. In the first quarter of 2002, Registrant recorded income from the
utilization of its domain names of $187,207, an increase of approximately 368%
from the first quarter of 2001. Registrant's increased sales were derived from
the net sale of a sports domain name for approximately $118,000, as well as
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 $22,000 during the
first quarter of 2002 compared to $25,800 in the first quarter of 2001. These
agreements are done on a month-to-month basis. In addition, Registrant
recognized approximately $38,000 from arrangements entered into with an internet
pay-per-click service provider, which will pay the Registrant a fee for
successful click-through traffic. Registrant did not record any income from
pay-per-click agreements in the first quarter of 2001. In 2002, the Registrant
amended its revenue recognition policy on the foregoing web advertising revenue
from recording the revenue on a cash basis to recording the revenue when the
amount can be determined in advance and collectibility can be reasonably
assured. The effect on revenue of this change in revenue recognition policy had
the policy been in place in the quarter ended March 31, 2001 would be nil.
Registrant also amortized deferred revenue to generate $9,800 from the leasing
of a sports domain name in the first quarter of 2002.
Management will continue to market its portfolio of domain names in fiscal 2002
and identify potential purchasers who have substantial liquid assets to complete
any contemplated purchase 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.
4
Registrant has negotiated with many of its trade creditors and capital lessors
to settle on a reduced amount owing by the Subsidiary. In the first quarter of
2002, gain resulting from debt settlement amounted to $23,000 and has been
classified as other revenue. Any cashflow generated, net of monthly cash
operating expenses, has been applied to reduce debt. This debt management
program shall continue 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. 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 auditing fees which were related to costs of regulatory filings and
financial statement preparation. Registrant continues to seek ways to reduce
these costs. During the first quarter of 2002, professional fees totaled
$59,000, compared to$102,000 for the same quarter of last year, a reduction of
approximately 42%. While the Company continues to pursue litigation, management
is unaware of factors which are likely to increase professional fees for the
remaining quarters in 2002.
CHANGE IN ACCOUNTING POLICY. As at January 1, 2002, the Registrant recorded an
impairment of its intangible assets held for resale as required upon adoption of
SFAS 142 which resulted from a decline in the market value of the Registrant's
stock in the amount of $1,426,736. The charge is a non-cash item and does not
affect the cash position of the Registrant.
(c) LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002 Registrant had current liabilities in excess of current assets
resulting in a working capital deficit of $1,030,640. During the three-month
ended March 31, 2002 Registrant had a net loss of $1,324,130 and a decrease in
cash of $17,000, compared to a net loss of $126,600 and a decrease in cash of
$23,900 for the same quarter of last year. Operating activities generated
cashflows of $137,600 primarily from the sale of a domain name, from net income
generated during the quarter and after payments to trade creditors. The
cashflows were used to repay a $150,000 loan and to pay lease obligations.
Registrant has accumulated a deficit of $1,992,120 since inception and has a
stockholders' equity of $817,888 at March 31, 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.
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-throughs generated by the
domain name assets; and (iv) 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 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
5
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 and actual results
could differ materially from those set forth in or underlying the
forward-looking statements.
6
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 October 10, 2001, Communicate and the Subsidiary entered into a loan
agreement with Siden Investments, Inc. ("Siden"), pursuant to which Siden
advanced to Communicate and the Subsidiary an aggregate of $150,000, including
funds previously advanced to Communicate and the Subsidiary (the "Loan"). As
additional security for the Loan, Communicate entered into an Option Agreement
with Siden pursuant to which Siden was given the right to acquire up to
15,000,000 shares of Communicate's common stock at an exercise price of $0.01
per share (the "Option"). The Loan was repaid in full on about March 22, 2002.
Since the date of repayment, a dispute has arisen between Siden and Communicate
regarding the exercisability of the Option. It is the Company's belief that
inasmuch as the Option was granted as additional security for the Loan, and
inasmuch as the Loan has been repaid in full, the Option has terminated and is
of no further force or effect. While Siden has not attempted to exercise the
option, Siden has advised Communicate that it believes it is entitled to do so.
Based on the advice of counsel, Communicate believes that while there can be no
certainty in this matter absent a settlement or judicial proceeding, neither of
which has been commenced, Communicate is able raise additional defences to
Siden's claim, should a claim be made or an action brought against Communicate
or the Subsidiary. No formal demand has been made with respect to this matter
and, therefore, Communicate cannot evaluate whether it would prevail in an
action.
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 the
contract was cancelled properly and intends to defend against the claim
vigorously.
7
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 return of an investment of $97,000 made in
February 2000. Registrant believes the services were provided for and on behalf
of Siden and that the investment was for share subscription in the Subsidiary
that had been completed. Registrant does not believe the claims have merit and
intends to defend against any legal action vigorously.
Registrant is not aware of any other pending or threatened material legal
proceedings.
Item 2. Changes in Securities.
- ------------------------------
None.
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.
- --------------------------
Change of Principal Office - the Company and its Subsidiary has relocated to 600
- - 1100 Melville Street, Vancouver, BC, V6E 4A6. The new office space,
approximately 300 square feet, is sub-leased on a month-to-month basis.
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(A) Index to and Description of Exhibits.
- ----------------------------------------------
EXHIBIT DESCRIPTION
F-1 Financial Statements.
27 Financial Data Schedule.
(B) Reports on Form 8-K.
- -----------------------------
8
On February 8, 2002, Communicate filed a Form 8-K disclosing under Item #2 an
arms-length agreement to sell substantially all of the domain name assets of its
Subsidiary for $1.5 million as at December 31, 2001 and that approval from the
majority of the Subsidiary's shareholders had been received on February 8, 2002.
On March 5, 2002, Communicate filed a Form 8-K disclosing under Item #2 that the
previous agreement to sell substantially all of the domain name assets of its
Subsidiary had been mutually terminated and that Cameron Pan resigned as
President and director and that Leigh Jeffs was appointed the President and
director of Communicate and its Subsidiary on February 22, 2002.
There were no other reports on Form 8-K filed by Registrant during the first
quarter ending March 31, 2002.
9
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: January 31, 2003 By: /s/ David M. Jeffs
10
Exhibits
Financial Statements......................................................F-1
11
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
(RESTATED)
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
March 31, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------
(unaudited)
(Restated - See Note 3)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 35,620 $ 52,672
Accounts receivable 15,725 11,325
Advances receivable 40,745 53,125
Prepaid expenses 4,392 8,809
- ------------------------------------------------------------------------------------------------------
96,482 125,931
FIXED ASSETS (Note 5) 16,002 17,432
INTANGIBLE ASSETS HELD FOR RESALE (Note 4) 1,832,526 3,341,577
- ------------------------------------------------------------------------------------------------------
$ 1,945,010 $ 3,484,940
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 648,394 $ 713,514
Loans Payable (Note 6) 468,930 605,000
Deferred revenue -- 9,886
Lease obligation (Note 5) 9,798 20,237
- ------------------------------------------------------------------------------------------------------
1,127,122 1,348,637
- ------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 12)
STOCKHOLDERS' EQUITY
Capital stock (note 7)
Authorized
50,000,000 Common shares, $.001 par value
Issued and outstanding
14,191,339 (2001 - 14,191,339) Common shares 5,201 5,201
Additional paid in capital 2,772,016 2,772,016
Accumulated deficit (1,992,120) (667,991)
Accumulated other comprehensive income 32,791 27,077
- ------------------------------------------------------------------------------------------------------
817,888 2,136,303
- ------------------------------------------------------------------------------------------------------
$ 1,945,010 $ 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
ended March 31, ended March 31,
2002 2001
- --------------------------------------------------------------------------------
(Restated - See Note 3)
REVENUES
Domain name revenue, net $ 187,207 $ 50,816
Other 25,887 12,520
- -------------------------------------------------------------------------------
213,094 63,336
- -------------------------------------------------------------------------------
EXPENSES
General and administrative 27,575 49,937
Professional fees 59,085 102,033
Sales and marketing -- 1,616
Depreciation and amortization 1,430 23,135
- -------------------------------------------------------------------------------
88,090 176,721
- -------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 125,004 (113,385)
INTEREST EXPENSE (22,397) (13,246)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE THE FOLLOWING 102,607 (126,631)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(NOTE 2) (1,426,736) --
- --------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ (1,324,129) $ (126,631)
================================================================================
BASIC EARNINGS (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.01 $ (0.01)
EFFECT OF ACCOUNTING CHANGE (0.10) --
- --------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ (0.09) $ (0.01)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,191,339 12,537,428
===============================================================================
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)
Three months Three months
ended March 31, ended March 31,
2002 2001
- -----------------------------------------------------------------------------------------------
(Restated - See
Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $(1,324,129) $ (126,631)
Adjustments to reconcile net loss to net cash
used in operating activities
- cumulative effect of accounting change 1,426,736 --
- non-cash expenses and costs of revenue 82,315 --
- depreciation and amortization 1,430 23,135
- accrued interest 13,930 9,024
- accounts receivable (4,400) 58,306
- advances receivable 12,380 --
- other assets -- 7,322
- prepaid expenses 4,417 (529)
- accounts payable (65,120) (12,598)
- deferred revenue (9,886) --
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 137,673 (41,971)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES -- --
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- loan repayments (150,000) --
- lease obligation repayments (10,439) (14,553)
- ---------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (160,439) (14,553)
- ---------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES 5,714 32,607
- ---------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (17,052) (23,917)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,672 47,823
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,620 $ 23,906
=============================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
During the period ended March 31, 2001 the Company issued 16,000 common
shares in settlement of certain trade accounts payable of $20,000.
The accompanying notes are an integral part of these
interim consolidated financial statements
F-4
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
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.
As a result, CMNN owns 83% 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 March 31, 2002 the Company has
a working capital deficiency of $1,030,640 (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 March 31, 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 83%
interest in its subsidiary. 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
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
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
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
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 as well as a comparison of the fair value to
book value of the Company.
Effective January 1, 2002, the Company adopted the provisions of SFAS 142 which,
upon adoption, requires the Company to make an initial determination as to
whether an impairment of its intangible assets held for resale has occurred as a
result of adopting this new accounting policy. In accordance with the provisions
of SFAS 142, the Company is required to compare its net book value to the
overall market capitalization of the Company and if the market capitalization is
less than the Company's net book value, to record an impairment of its
intangible assets accordingly. As a result of applying this impairment test in
the first quarter of 2002, the Company has recorded a charge in the period of
$1,426,736 as a cumulative effect of an accounting change.
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.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
These financial statements have been restated to reflect a reduction in value of
the Company's intangible assets in the amount of $1,426,736 as a result of its
adoption of SFAS 142. The resulting reduction in cost base of a domain name sold
during the period ended March 31, 2002 from $141,200 to $82,315 has caused an
increase in domain name revenue of $58,885. These restatements have resulted in
a reduction of total assets and net equity in the amount of $1,367,566. Net
income for the period has been restated from $43,437 to ($1,324,129). Loss per
share has increased from $0.00 to ($0.09).
F-7
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 4 - ACQUISITION
- --------------------------------------------------------------------------------
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 owns 83% of the outstanding
shares of common stock of the 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
-----------
4,291,501
Liabilities assumed at fair value:
Accounts payable and accrued liabilities (1,301,421)
Lease obligations (109,863)
-----------
Purchase price $ 2,880,217
===========
NOTE 5 - FIXED ASSETS
- --------------------------------------------------------------------------------
March 31, December 31,
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 (58,524) (57,094)
Less: impairment provision (144,423) (144,423)
--------- ---------
$ 16,002 $ 17,432
========= =========
As at March 31, 2002, computer equipment includes $56,295 of equipment held
under capital lease. In connection with this leased equipment the Company has
lease obligations of $9,798, which 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
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 6 - LOANS 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 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. As at March 31, 2002, $400,000 has been loaned by
PCMI to the Company and $68,930 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 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 bears
interest, calculated monthly, at the Royal Bank Prime Rate plus four percent
(4%) commencing November 1, 2001. To December 31, 2001 $3,342 of interest had
been paid in connection with this loan. During the period the principal and
accrued interest was repaid in full. The Company provided security for this loan
by way of a General Security Agreement, a Promissory Note, an Option Agreement
and the transfer of one of the Company's domain names into Escrow until the loan
is fully repaid. The Option Agreement provided the lender the option to acquire
15,000,000 restricted shares of the Company's common stock at a price of $0.01
per share for a period of three years. Refer to Note 11.
NOTE 7 - CAPITAL STOCK
- --------------------------------------------------------------------------------
On January 23, 2001, 16,000 shares of common stock were issued in settlement of
debts totalling $20,000.
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 March 31, 2002. Options were
outstanding to purchase shares of common stock of AlbertaCo as at the date of
the acquisition of AlbertaCo. Effective January 1, 2001, the options to purchase
shares of common stock of AlbertaCo were cancelled. At as March 31, 2002, the
Company had recorded no compensation expense for any period relating to the
granting of stock options.
Refer to Note 11.
NOTE 8 - DOMAIN SALES AND LEASING
- --------------------------------------------------------------------------------
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.
F-9
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 8 - DOMAIN SALES AND LEASING (CONT'D)
- --------------------------------------------------------------------------------
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 which was received in April 2002. 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 $9,886
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 $117,685 has been recognized in Domain Name
Revenue, net of the carrying value of hockey.com of $82,315.
NOTE 9 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
During the period ended March 31, 2002 management fees and salaries of totalling
$2,000 were paid to the sole director of the Company. During the period ended
March 31, 2001 management fees and salaries of totalling $24,829 were paid to
two directors of the Company.
NOTE 10 - FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
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.
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.
F-10
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 11 - INCOME TAXES
- --------------------------------------------------------------------------------
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 which 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 12 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
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.
During the period ended March 31, 2002 Company repaid the balance of the
principal and interest outstanding in connection with the amounts borrowed from
Siden (refer to Note 5). Since the date of repayment, a dispute has arisen
between Siden and the Company regarding the exercisability of the Option
Agreement (the "Option"). It is the Company's belief that inasmuch as the Option
was granted as additional security for the Loan, and inasmuch as the Loan has
been repaid in full, the Option has terminated and is of no further force or
effect. While Siden has not attempted to exercise the option, Siden has advised
the Company that it believes it is entitled to do so. Based on the advice of
counsel, the Company believes that while there can be no certainty in this
matter absent a settlement or judicial proceeding, neither of which has been
commenced, the Company is able to raise additional defences to Siden's claim,
should a claim be made or an action brought against the Company or the
Subsidiary. No formal demand has been made with respect to this matter and,
therefore, the Company cannot evaluate whether it would prevail in an action.
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.
On April 23, 2002 DNG Capital Corp. ("DNG") issued a demand letter to AlbertaCo
demanding payment of CDN$15,105 for alleged services rendered from November 2001
to January 2002. DNG has also demanded repayment of $97,000 from AlbertaCo for
its investment in February 2000. The Company does not believe these claims have
any merit and will defend itself against any legal actions taken by DNG.
F-11