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 September 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 November 6, 2002
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
The purpose of this amendment 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 a result of its adoption of SFAS 142. The resulting reduction in
cost base of domain names sold during the period ended September 30, 2002 from
$282,400 to $121,577 has caused an increase in domain name net revenue of
$160,823. A previously recorded gain on settlement of debt of $159,500 has been
reclassified to additional paid in capital.
The restatements described have resulted in changes to the following:
As previously reported at As restated
September 30, 2002 at September 30, 2002
---------------------------------------------------
Total assets $ 3,160,464 $ 1,895,339
Additional paid in capital 2,906,616 3,066,516
Total equity 2,405,378 1,140,253
Net income (loss) for the period 145,833 (1,279,192)
Earnings (loss) per share $ 0.01 $ (0.09)
This amendment does not reflect events occurring after the filing of the
Quarterly Report on November 6, 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.
<page>
COMMUNICATE.COM INC.
REPORT ON FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Balance sheets as of September 30, 2002 and December 31, 2001
Statements of Operations as of September 30, 2002 and September 30,
2001
Statements of Cash Flows as of September 30, 2002
Notes to the Financial Statements
Item 2. Management's discussion and analysis of financial condition and results 3
of operations
PART II. OTHER INFORMATION 8
Item 1. Legal Proceedings. 8
Item 2. Changes in Securities. 8
Item 3. Defaults Upon Senior Securities. 8
Item 4. Submission of Matters to a Vote of Security Holders. 9
Item 5. Other Information. 9
Item 6. Exhibits and Reports on Form 8-K. 9
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, 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
amounts 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.
<table>
<caption>
For the Quarters Ended For the Nine-Month Ended
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations Data
- -----------------------------
Domain Name Revenue, Net $ 92,931 $ 37,520 $ 413,377 $ 159,248
Other 6,177 -- 43,991 13,551
General and Administrative $ (10,401) $ (22,999) $ (122,852) $ (130,114)
Professional Fees (57,702) (42,553) (174,911) (197,459)
Depreciation (1,100) (20,056) (3,778) (64,369)
Operating Income (Loss) $ 29,905 $ (48,088) $ 155,827 $ (219,143)
Interest (12,643) (8,662) (47,215) (31,328)
Gain (Loss) on Write-off & Settlement of Debts 54,403 68,688 54,403 80,881
Loss on Acquisition of Minority Interest -- -- (15,471) --
Loss on Disposal of Fixed Assets -- -- -- (1,857)
Net Income (Loss) Before Accounting Change $ 71,665 $ 11,938 $ 147,544 $ (171,447)
Cumulative Effect of Accounting Change -- -- $ (1,426,736) --
Net Loss for the Period $ 71,665 $ 11,938 $ (1,279,192) $ (171,447)
Basic Earnings (Loss) per Share Before Accounting Change $ 0.005 $ 0.00 $ 0.01 $ (0.01)
Effect of Accounting Change -- -- $ (0.10) --
Basic Earnings (Loss) per Share $ 0.005 $ 0.00 $ (0.09) $ (0.01)
Weighted Average Shares Outstanding 14,691,339 14,191,339 14,363,500 13,156,475
3
<table>
<caption>
Balance Sheet Data As at September 30, As at December 31,
------------------ 2002 2001
Current Assets $ 88,421 $ 125,931
Fixed Assets 13,654 17,432
Intangible Assets 1,793,264 3,341,577
Total Assets $ 1,895,339 $ 3,484,940
Accounts Payable & Accrued Liabilities $ 370,654 $ 733,751
Loan Payable 378,545 605,000
Deferred Revenue 5,887 9,886
Total Liabilities $ 755,086 $ 1,348,637
Common Stock $ 5,701 $ 5,201
Additional Paid in Capital 3,066,516 2,772,016
Accumulated Deficit $(1,931,964) $ (640,914)
</table>
(B) RESULTS OF OPERATIONS
REVENUES. In the third 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 of
Internet users who visit sites identified with Registrant's domain names and
gain or loss from domain name sales) of $92,900, an increase of approximately
247% from the third quarter of 2001. The increase primarily resulted from a
pay-per-click revenue arrangement that did not generate significant results
until the fourth quarter of 2001. Registrant recognized approximately $43,000
from this and other Internet pay-per-click arrangement, based on Registrant
receiving a fee for successful click-through traffic, in which users navigating
to a site associated with a domain name owned by Registrant are redirected to a
site which sells goods and services associated with the domain name. Registrant
recorded approximately $15,400 in income from pay-per-click agreements from
various different service providers in the third quarter of 2001. Registrant's
sales also include 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 $19,700 during the third quarter of 2002 compared to $15,100 in the
third 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 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 September
30, 2001 would be nil.
4
Additionally, Registrant earned lease revenue of $15,000 from a geographic
domain name used for travel and also recognized from deferred revenue $12,000
related to the lease of a sports domain name in the third quarter of 2002. As
noted in the prior quarter, the lessee of the sports domain has decided not to
exercise its option to purchase the property, and the Registrant has resumed
full ownership and administrative control of the sports domain and arranged to
redirect the sports domain traffic to a new lessee for the fourth quarter. In
the third quarter of 2001, Registrant earned leasing revenue of $7,000 from
sports and geographic domain properties.
Management will continue to market selectively individual domain names in its
portfolio of domain names for the foreseeable future 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 believes 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 third quarter of 2002, Registrant generated other revenue from the sale
of surplus equipment and earned $6,200. No such revenue was generated in the
third quarter of 2001. Since 2001, 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 costs for general and corporate functions, including
contract work fees and all facilities and Internet-hosting fees. In the third
quarter of 2002, Registrant incurred $10,400 of expenses as compared to $23,000
in the third quarter of 2001. Approximately $12,000 of expenses related to
management salaries have been reclassified as consulting fee in this quarter
which, when taken into consideration, would have made current quarter
administrative expense consistent with the same quarter in the prior year. The
expenses in this and the previous year's quarter have been reduced substantially
from the comparable quarter in 2000 as a result of management's cost savings
program implemented in the last quarter of 2000 and continued to date.
Management expects this expense to increase by approximately $10,000 per quarter
in the coming quarters as efforts are made by the Company to develop certain
domain names to enhance their resale values. There is no certainty that this
effort will lead to a corresponding increase in revenue even though it will
likely increase the value of the underlying domain assets selected for
development.
PROFESSIONAL AND CONSULTING FEES. Professional fees relate to legal and audit
fees associated with regulatory filings and financial statement preparation and
with ongoing litigations, and consulting fees relate to management salaries and
benefits. Registrant continues to seek ways to reduce these costs. During the
third quarter of 2002, professional and consulting fees totaled $58,000,
compared to $43,000 for the same quarter of last year. Taking into consideration
$12,000 of management salary previously classified as general and administrative
expenses in 2001, professional and consulting fees increased by $5,000 or 11.6%
in this quarter as compared to the same quarter in 2001. The increase is
5
directly attributable to ongoing litigation actions against the Registrant's
subsidiary. While the Company continues to defend against the litigations,
management is unaware of factors that are likely to increase professional fees
in the last quarter 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
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 September 30, 2002 Registrant had current liabilities in excess of current
assets resulting in a working capital deficit of $666,700. During the nine-month
ended September 30, 2002 Registrant had a net loss of $1,279,200 and an increase
in cash of $17,000, compared to a net loss of $171,000 and a decrease in cash of
$33,000 for the same nine-month period of last year. Operating activities
generated cashflows of $303,000 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, which in aggregate totaled $274,000. Registrant has
accumulated a deficit of $1,947,183 since inception and has a stockholders'
equity of $1,140,253 at September 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.
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
6
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.
7
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 18.39% 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. On May 16, 2002, the
Subsidiary filed a statement of defence. Registrant believes the contract was
cancelled properly and intends to defend against the claim vigorously.
Registrant is not aware of any other pending or threatened material legal
proceedings.
Item 2. Changes in Securities.
- ------------------------------
On July 24, 2002, the Board of Directors granted to J Cameron Pan, an officer of
the Company, an option to acquire 580,000 common shares of the Company at a
price of $0.10 per share until July 23, 2004 in consideration of debt owing by
the Subsidiary to Mr. Pan. The stock option is issued in reliance on Section
4(2) of the Securities Act of 1933, and the common shares, when issued, shall be
restricted securities subject to Rule 144.
Item 3. Defaults Upon Senior Securities.
- ----------------------------------------
None.
8
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
99.1 Certification of Chief Executive Officer and Chief Financial
Officer
(B) Reports on Form 8-K.
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.
There were no other reports on Form 8-K filed by Registrant during the third
quarter ending September 30, 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 Jeffs
10
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(unaudited)
(RESTATED)
BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-1
<page>
COMMUNICATE.COM INC.
CONSOLIDATED BALANCE SHEETS
<table>
<caption>
September 30, December 31,
2002 2001
- --------------------------------------------------------------------------------------------------------------
(unaudited)
(Restated - See Note 3)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 69,547 $ 52,672
Accounts receivable 16,893 64,450
Prepaid expenses 1,981 8,809
- --------------------------------------------------------------------------------------------------------------
88,421 125,931
FIXED ASSETS (Note 5) 13,654 17,432
INTANGIBLE ASSETS HELD FOR RESALE (Note 4) 1,793,264 3,341,577
- --------------------------------------------------------------------------------------------------------------
$ 1,895,339 $ 3,484,940
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 360,823 $ 713,514
Loans payable (Note 6) 378,545 605,000
Deferred revenue 5,887 9,886
Lease obligation (Note 5) 9,831 20,237
- --------------------------------------------------------------------------------------------------------------
755,086 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
14,691,339 (2001 - 14,191,339) Common shares 5,701 5,201
Additional paid in capital 3,066,516 2,772,016
Accumulated deficit (1,947,183) (667,991)
Accumulated other comprehensive income 15,219 27,077
- --------------------------------------------------------------------------------------------------------------
1,140,253 2,136,303
- --------------------------------------------------------------------------------------------------------------
$ 1,895,339 $ 3,484,940
==============================================================================================================
</table>
The accompanying notes are an integral part of these interim
consolidated financial statements
F-2
<page>
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<table>
<caption>
Three months Three months Nine months Nine months
ended Sept 30, ended Sept 30, ended Sept 30, ended Sept 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Restated - (Restated -
See Note 3) See Note 3)
REVENUES
Domain name revenue, net $ 92,931 $ 37,520 $ 413,377 $ 159,248
Other 6,177 -- 43,991 13,551
- ------------------------------------------------------------------------------------------------------------------------------------
99,108 37,520 457,368 172,799
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
General and administrative 10,401 22,999 122,852 130,114
Professional and consulting fees 57,702 42,553 174,911 197,459
Depreciation 1,100 20,056 3,778 64,369
- ------------------------------------------------------------------------------------------------------------------------------------
69,203 85,608 301,541 391,942
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 29,905 (48,088) 155,827 (219,143)
INTEREST EXPENSE (12,643) (8,662) (47,215) (31,328)
GAIN ON WRITE-OFF AND
SETTLEMENT OF DEBTS (NOTE 5) 54,403 68,688 54,403 80,881
LOSS ON ACQUISITION OF MINORITY INTEREST -- -- (15,471) --
LOSS ON DISPOSAL OF FIXED ASSETS -- -- -- (1,857)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE THE FOLLOWING 71,665 11,938 147,544 (171,447)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NOTE 2) -- -- (1,426,736)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ 71,665 $ 11,938 $ (1,279,192) $ (171,447)
====================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.00 $ 0.00 $ 0.01 $ (0.01)
EFFECT OF ACCOUNTING CHANGE -- -- (0.10) --
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ 0.00 $ (0.09) $ (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,691,339 14,191,339 14,363,500 13,156,475
====================================================================================================================================
</table>
The accompanying notes are an integral part of these interim
consolidated financial statements
F-3
<page>
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<table>
<caption>
Nine months
Nine months ended ended Sept 30,
Sept 30, 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(Restated -
See Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $(1,279,192) $ (171,447)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
- cumulative effect of accounting change 1,426,736 --
- gain on write-off and settlement of debts (54,403) (80,881)
- loss on disposal of assets -- 1,857
- non-cash cost of fixed revenue 121,577 42,360
- depreciation 3,778 64,369
- accrued interest 37,162 26,163
- deferred revenue (3,999) 21,936
- other receivables -- 96,111
- accounts receivable 47,557 --
- prepaid expenses 6,828 11,496
- accounts payable and accrued liabilities (3,288) (78,758)
- -----------------------------------------------------------------------------------------------------------------------
CASH FROM (USED IN) OPERATING ACTIVITIES 302,756 (66,794)
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 (10,406) (64,453)
- loan proceeds (repayments) (263,617) 63,391
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES (274,023) (1,062)
- -----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (11,858) 30,081
- -----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,875 (33,055)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,672 47,823
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 69,547 $ 14,768
=======================================================================================================================
</table>
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
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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.
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. ("DHI").
DHI owns a portfolio of simple, intuitive domain names. DHI's current business
strategy is to seek partners to develop its domain names to include content,
commerce and community applications. DHI 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 September 30, 2002 the Company
has a working capital deficiency of $666,665 (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 may 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 September 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, DHI. 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
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
potential dilution of securities 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 DHI.
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 domain names sold
during the period ended September 30, 2002 from $282,400 to $121,577 has caused
an increase in domain name net revenue of $160,823. A previously recorded gain
on settlement of debt of $159,500 (as described in Note 6) has been reclassified
to additional paid in capital.
F-7
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS (CONT'D)
- --------------------------------------------------------------------------------
The restatements described have resulted in changes to the following:
As previously reported As restated at
at September 30, 2002 September 30, 2002
---------------------------------------------
Total assets $ 3,160,464 $ 1,895,339
Additional paid in capital 2,906,616 3,066,516
Total equity 2,405,378 1,140,253
Net income (loss) for the period 145,833 (1,279,192)
Earnings (loss) per share $ 0.01 $ (0.09)
NOTE 4 - ACQUISITION
- --------------------------------------------------------------------------------
By agreement dated November 10, 2000 the Company acquired 52% of the outstanding
shares of DHI, 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 DHI.
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
===========
On May 24, 2002 the Company acquired an additional 10% of DHI for $15,471. The
Company now owns 93% of the outstanding shares of common stock of DHI.
F-8
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 5 - FIXED ASSETS
- --------------------------------------------------------------------------------
September 30, 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 (60,872) (57,094)
Less: accumulated impairment provision (144,423) (144,423)
----------------------------
$ 13,654 $ 17,432
============================
As at September 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 $9,831 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.
NOTE 6 - LOANS PAYABLE
- --------------------------------------------------------------------------------
In connection with the acquisition of DHI, 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 DHI 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 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 September 30, 2002, $400,000 has been loaned by PCMI to
the Company and a total of $92,162 of interest has been accrued. During the
period $113,617 was repaid to PCMI leaving $378,545 owing as at September 30,
2002. PCMI and certain of its officers and directors were also shareholders of
DHI and sold their shareholdings in DHI 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
DHI in connection with a DHI financing completed prior to the Company's
acquisition of DHI. The warrants have a fair value of $85,100 and resulted in a
contribution to additional paid in capital on settlement of $37,400. (Refer to
Note 6)
In 2001, the Company and DHI 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 DHI. 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 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 contribution to
additional paid in capital on settlement of debts of $122,500 resulting from the
settlement of previously accrued finders' fees owing to Siden from DHI.
During the period, the Company settled its debt to an investor of $25,000 for
$1,000 and wrote off certain previously accrued liabilities resulting in a gain
of $54,403.
F-9
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 7 - CAPITAL STOCK
- --------------------------------------------------------------------------------
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 DHI in the amount of
$50,000 owing to an individual who became a director of the Company in July
2002.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123. In accordance with SFAS No. 123 the Company applies
the fair value method using the Black-Scholes option-pricing model in accounting
for options granted to consultants. In addition, the Company has adopted the
provisions of FIN 44.
SHARE PURCHASE WARRANTS
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 contribution to paid in capital on settlement
of $37,400.
STOCK OPTIONS
The Company does not have a formal Stock Option Plan, however, options may be
granted with terms and conditions at the discretion of the Company's board of
directors.
On July 24, 2002 the Company granted an officer 580,000 stock options at an
exercise price of $0.10 per share. The options vest evenly over two years
commencing July 24, 2002. No compensation expense will be recorded upon vesting
of these options in accordance with the provisions of APB No. 25 as the exercise
price of the options awarded approximated the market price of the Company's
common shares as at the date of the award.
In accordance with the provisions of SFAS No. 123, for stock options granted to
officers, directors and employees, the Company provides Pro-forma information
regarding net income (loss) and net income (loss) per share as if the Company
had accounted for these stock options using the fair value method. The fair
value of the options granted in the period was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 4%; dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of 205% and a
weighted average expected life of the option of 2 years.
For purposes of pro-forma disclosures, the estimated fair value of the options
of $49,823 is amortized to expense over the vesting period. The Company's
pro-forma information relating to the granting and vesting of stock options is
as follows:
<table>
<caption>
September 30, September 30,
2002 2001
--------------------------------
Net loss for the period As reported $ (1,279,192) $ (171,447)
SFAS 123 compensation expense Pro-forma (4,641) --
--------------------------------
Net loss for the period Pro-forma $ (1,283,833) $ (171,447)
--------------------------------
Pro-forma basic net loss per share Pro-forma $ (0.09) $ (0.01)
================================
</table>
F-10
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
NOTE 8 - DOMAIN SALES AND LEASING
- --------------------------------------------------------------------------------
LEASE OF VANCOUVER.COM
By agreement dated March 21, 2001, DHI 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 DHI 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 DHI 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 first nine months of 2002. The agreement was terminated in August
2002 subsequent to the Company receiving the $30,000 due in 2002. During the
period, $40,000 of income related to the September 14, 2001 agreement was
recognized as revenue.
During September 2002, the Company received $5,887 US from an alternate party
for an agreement to lease the use of its URL domain name (boxing.com) for the
period 1 October 2002 to 31 December 2002.
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.
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 gain on the sale of $20,738 has been recognized in Domain Name
Revenue, net of the carrying value of vegetarian.com of $39,262.
NOTE 9 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
During the period ended September 30, 2002 management fees and salaries
totalling $36,000 were paid to one officer and one director of the Company.
During the period ended September 30, 2001 management fees and salaries of
totalling $19,658 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.
F-11
<page>
COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(RESTATED)
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, and lease obligation. The fair values of these financial instruments
approximate their carrying values.
NOTE 11 - INCOME TAXES
- --------------------------------------------------------------------------------
The Company's subsidiary, DHI 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 and its subsidiary have net operating loss
carryforwards of approximately $3,800,000 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 DHI
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 DHI commenced a legal action against DHI
on March 9, 2000 for wrongful dismissal and breach of contract. He is seeking,
at minimum, 18.39% of the outstanding shares of DHI, 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.
On April 4, 2002 Gartner Inc. filed a claim against DHI for an alleged breach of
contract and debt owing for marketing services rendered during 2000 and 2001 in
the amount of $85,600. On May 16, 2002 the Company filed its Statement of
Defence. 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-12