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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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|X| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended March 31, 2002.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _______ to _______
Commission file number 333-86331
UNIVERSE2U INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0433489
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 West Beaver Creek Road,
Suite 109, Richmond Hill, ON, Canada L4B 3K1
(Address of Principal (Zip Code)
Executive Offices)
(905) 881-3284
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
State the number of shares outstanding of each of the issuer's common equity as
of March 31, 2002: 37,274,984 shares of Common Stock, $.00001 par value.
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INDEX
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2002.
Condensed Consolidated Statements of Deficit for the three fiscal
months ended March 31, 2002 and March 31, 2001.
Condensed Consolidated Statement of Operations for the three fiscal
months ended March 31, 2002 and March 31, 2001.
Condensed Consolidated Statements of Cash Flows for the three fiscal
months ended March 31, 2002 and March 31, 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION.
Unaudited Consolidated Financial Statements
Quarter ended March 31, 2002.
The consolidated financial statements for the three months ended September 30,
2001 include, in the opinion of management, all adjustments (which consist only
of normal recurring adjustments) necessary to present fairly the results of
operations for such periods. Results of operations for the three months ended
March 31, 2002, are not necessarily indicative of results of operations that
will be realized for the year ending December 31, 2002.
Universe2U Inc.
Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
F-1
[LETTERHEAD OF MOORE STEPHENS COOPER MOLYNEUX LLP CHARTERED ACCOUNTANTS]
Review Engagement Report
To the Shareholders of
Universe2U Inc.
We have reviewed the interim consolidated balance sheet of Universe2U Inc. as at
March 31, 2002, and the interim consolidated statements of deficit, operations
and cash flows for the three month period then ended. Our review was made in
accordance with generally accepted standards for review engagements and
accordingly consisted primarily of enquiry, analytical procedures and discussion
related to information supplied to us by the Company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles in the United States.
The Company has incurred losses to date, has a deficit, to March 31, 2002 of
$(15,796,752), has a working capital deficiency of $3,607,070 and used $466,132
of cash for operating activities during the period. In addition, the Company has
been unable to meet its payroll obligations, trade obligations, and long-term
debt commitments as they become due. These factors raise substantial doubt on
the Company's ability to continue as a going concern. The accompanying
consolidated interim financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence as a result of the Company's inability to locate
sufficient financing (see notes 1 and 9).
Signed: "Moore Stephens Cooper Molyneux LLP"
Chartered Accountants
Toronto, Ontario
May 15, 2002
F-2
Universe2U Inc.
- --------------------------------------------------------------------------------
Unaudited Interim Consolidated Balance Sheet
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 4) $ 627,274
Accounts receivable (net of allowance for doubtful accounts of $250,037) 29,387
Due from officers and directors (note 3) 72,479
Prepaid expenses and deposits 79,051
------------
808,191
Deferred charges (note 11a) 930,000
Capital assets (at cost less accumulated amortization of $544,370) 532,782
------------
$ 2,270,973
============
Liabilities
Current liabilities
Bank indebtedness (note 4) $ 634,266
Accounts payable and accrued liabilities 3,166,896
Income taxes payable 49,654
Current portion of loans payable (note 5) 551,770
Current portion of long-term debt (note 6) 12,675
------------
4,415,261
Loan payable (note 5) 217,497
Long-term debt (note 6) 12,203
------------
4,644,961
------------
Commitments and contingencies (note 10) --
------------
Shareholders' equity
Share capital (note 7)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 39,832,473 Common shares 400
Additional paid in capital (net of share issuance costs of $341,237) 15,020,851
Accumulated other comprehensive income 176,513
Deposit on net asset acquisition (note 11c) (1,775,000)
Deficit (15,796,752)
------------
(2,373,588)
------------
$ 2,270,973
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Universe2U Inc.
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Unaudited Interim Consolidated Statement of Deficit
for the three month periods ended March 31, 2002 and March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001
------------ -----------
Deficit, beginning of periods $(13,964,156) $(4,661,716)
Net loss for the periods (1,832,596) (2,529,229)
------------ -----------
Deficit, end of periods $(15,796,752) $(7,190,945)
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Universe2U Inc.
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Unaudited Interim Consolidated Statement of Operations
for the three month periods ended March 31, 2002 and March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001
------------ ------------
Revenue $ 37,226 $ 638,816
Cost of sales 259,915 768,409
------------ ------------
Gross profit (222,689) (129,593)
------------ ------------
Expenses
Selling, general and administration 764,700 1,397,341
Stock based compensation (note 7) 411,922 892,960
Interest and financing costs 412,386 38,485
Depreciation and amortization 20,829 56,690
------------ ------------
1,609,907 2,385,476
------------ ------------
Loss from operations (1,832,596) (2,515,069)
Share of loss of significantly influenced investment -- (14,160)
------------ ------------
Loss before provision for income taxes (1,832,596) (2,529,229)
Provision for income taxes -- --
------------ ------------
Net loss for the periods $ (1,832,596) $ (2,529,229)
============ ============
Net loss per share - basic (note 9) $ (0.05) $ (0.07)
============ ============
Weighted average shares outstanding 38,785,289 36,802,445
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Universe2U Inc.
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Unaudited Interim Consolidated Statement of Cash Flows
for the three month periods ended March 31, 2002 and March 31, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001
----------- -----------
Cash flow from operating activities
Net loss for the periods $(1,832,596) $(2,529,229)
Items not affecting cash
Amortization of capital assets 30,565 71,393
Amortization of deferred charges 87,188 --
Stock option compensation (note 7) 411,922 892,960
Issuance of warrants 3,274 --
Equity loss of significantly influenced investment -- 14,160
Loss on disposal of capital assets 14,286 --
----------- -----------
(1,285,361) (1,550,716)
Other sources (uses) of cash from operations
Decrease in accounts receivable 109,191 730,945
Decrease in inventory 33,645 87,011
(Increase) decrease in prepaid expenses and deposits 59,244 27,529
Increase in accounts payable and accrued liabilities 617,149 237,576
----------- -----------
(466,132) (467,655)
----------- -----------
Cash flow from investing activities
Purchase of capital assets -- (22,866)
Proceeds on disposal of capital assets 6,702 --
----------- -----------
6,702 (22,866)
----------- -----------
Cash flow from financing activities
Repayments on long-term debt -- (7,450)
Proceeds from issue of share capital -- 550,000
Increase in bank indebtedness 613,094 (20,527)
Increase in related party advances (27,435) (15,611)
Proceeds from loans payable 547,705 --
Repayments on loans payable (75,636) --
----------- -----------
1,057,728 506,412
----------- -----------
Effect of exchange rate changes on cash 28,976 32,463
----------- -----------
Increase in cash 627,274 48,354
Cash and cash equivalents, beginning of periods -- 21,216
----------- -----------
Cash and cash equivalents, end of periods $ 627,274 $ 69,570
=========== ===========
Supplemental cash flow information
Cash paid during the periods for:
Income taxes $ -- $ --
Interest $ 53,370 $ --
Non-cash investing and financing activities during the periods for:
Trade obligations settled with 55,277 Common shares $ 21,841 $ --
Financing fees settled with 783,453 Common shares $ 244,700 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Consolidation
Going concern basis of presentation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States. This
assumes that Universe2U Inc. (the "Company") will be able to realize its
assets and discharge its liabilities in the normal course of business.
Should the Company be unable to continue as a going concern as a result of
the inability to locate sufficient financing, it may be unable to realize
the carrying value of its assets and to meet its liabilities as they
become due.
As at March 31, 2002, the Company has incurred significant losses and has
a deficit to date of $(15,796,752), has a working capital deficiency of
$3,607,070 and used $466,132 of cash for operating activities during the
period. In addition, the Company has been unable to meet its payroll
obligations, trade obligations, and long-term debt commitments as they
become due as a result of their cash flow deficiency.
Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the financial statements not
misleading have been included. Results for the three months ended March
31, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB filed on April 15, 2002 for
the year ended December 31, 2001.
Basis of consolidation
These financial statements have been prepared on a consolidated basis and
include 100% owned subsidiaries' assets and liabilities as well as the
revenues and expenses arising from their respective incorporation or
acquisition dates. Investments in entities over which the Company has
significant influence but not control are accounted for under the equity
method of accounting.
2. Foreign Exchange
The Company's Canadian operations are self-sustaining and therefore their
assets and liabilities are translated into U.S. dollars, the basis of
presentation of these financial statements, using the period end rate of
exchange. Revenue and expenses of such operations are translated using the
average rate of exchange for the period. The related foreign exchange
gains and losses arising on translation of the Company's Canadian
operations are included in shareholders' equity until realized.
F-7
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
3. Transactions with Related Parties
As of March 31, 2002, the following balances were due from related
parties:
Officers and directors $ 72,479
The amounts due to and from officers and directors are non-interest
bearing, due on demand and have no fixed repayment terms.
4. Bank Indebtedness
The Company's credit facility provides for an operating line to a maximum
of $2.5 million CDN that must be fully secured by cash deposits, a $1
million CDN contract forward facility, and credit cards with a spending
limit of $50,000. As at March 31, 2002, $990,000 CDN of the operating line
was being utilized of the $1,000,000 CDN available. In addition to the
cash deposits, the Company has provided the following additional security
for the credit facilities: (i) a general security agreement over accounts
receivable, inventory, intangible assets, and capital assets; (ii) a
general postponement of all claims; (iii) an assignment of All Risk
Business Insurance; and (iv) corporate cross guarantees from all
subsidiaries. The operating line bears interest at the bank's prime
lending rate plus 0.5% if the facility is fully utilized and supported by
cash deposits and at prime plus 1.5% if the cash deposits are maintained
at less than $2.5 million CDN. The month end prime rate as at March 31,
2002 was approximately 3.75% (2001 - 6.75%).
5. Loan Payable
2002 2001
--------- ---------
Loan payable, bearing interest of 45,000 Common
shares of the Company, balance due at maturity of
February 18, 2002. Loan provides for a 60-day
extension upon payment of a fee of $10,000 CDN.
Penalty provisions require a payment of 500,000
Common shares if loan is not repaid by the end of
the first 60-day period and an additional 250,000
Common shares if the loan is not repaid by the end
of the second 60-day period. $ 49,951 $ --
Loan payable, bearing monthly interest payments of
$8,834 CDN, balance due at maturity of August 15,
2002. In addition, the Company must provide the
lender with 5,500 Common shares of the Company for
each day the loan is outstanding to a maximum of
1,000,000 Common shares. The loan also provides
for a 10% monthly payment penalty in the event of
default at maturity and a payment of 3 months
interest for early termination of the loan. 501,819 --
--------- ---------
Subtotal 551,770 --
--------- ---------
F-8
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
5. Loan Payable - continued
2002 2001
--------- ---------
Subtotal $ 551,770 $ --
Loan payable bearing interest at 8% per annum
compounded monthly. The loan may be drawn down in
increments of between $10,000 and $50,000 to a
maximum of $500,000. Any and all outstanding
amounts shall be repaid in full on the earlier of
(i) such date as the Company has adequate reserves
as determined by the Audit Committee; or (ii) July
27, 2003. The Company shall also issue warrants to
the lender under the loan agreement in the amount
corresponding to the fair market value of the
Company's Common stock as of the date of each draw
down under the loan agreement. Each of such
warrants shall be exercisable at fair market value
for 1.15 shares of restricted Company Common
stock. 217,497 --
--------- ---------
769,267 --
Less: Current portion 551,770 --
--------- ---------
$ 217,497 $ --
========= =========
6. Long-Term Debt
2002 2001
--------- ---------
Term loan bearing interest at 8.9% per annum, with
monthly principal and interest payments of $317,
maturing in December 2004, secured by the vehicle; $ 9,925 $ 11,904
Term loan bearing interest at 1.9% per annum, with
monthly principal and interest payments of $525,
maturing in March 2002, secured by the vehicle; 14,953 16,316
--------- ---------
24,878 28,220
Less: Current portion 12,675 7,793
========= =========
$ 12,203 $ 20,427
========= =========
The month end prime rate as at March 31, 2002 was approximately 3.75%
(2001 - 6.75%).
Principal repayments on long-term debt are as follows:
2002 $ 10,952
2003 9,080
2004 4,846
---------
Total $ 24,878
=========
F-9
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
7. Share Capital
Stock options
On June 9, 2000, the Board of Directors adopted the Company's 2000 Equity
Incentive Plan ("the Plan"). The Plan provides for the potential grant of
options and other securities to employees, directors and consultants of
the Company and its subsidiaries. The purpose of the Plan is to provide an
incentive to such persons with respect to Company activities. The terms of
the awards under the Plan are determined by a Board appointed committee.
The Plan was approved and ratified by the shareholders within twelve
months of the adoption date. Under the terms of the Plan as approved by
the shareholders, 1,500,000 shares of common stock may be issued, with
replenishment available under the Plan each year at the discretion of the
Board (or the committee of the Board) up to an amount equal to 10% of the
Company's outstanding stock. As of March 31, 2002, 1,829,375 (2001 - nil)
options were granted or outstanding under the Plan. Such options have been
granted at exercise prices ranging from $0.01 to $5.00 per share and as of
March 31, 2002, options to purchase 734,375 (2001 - nil) shares of common
stock of the Company were vested.
As of March 31, 2002, an aggregate of 1,213,750 (2001 - 1,871,000)
non-Plan stock options were outstanding that had been granted to
employees, directors and consultants of the Company and its subsidiaries.
Such options had been granted at exercise prices ranging from $0.01 per
share to $5.00 per share and as of March 31, 2002, options to purchase
1,207,750 (2001 - 600,000) shares of common stock of the Company were
vested.
The Company accounts for stock-based compensation under the provisions of
APB No. 25 "Accounting for Stock Issued to Employees" for issuances to
employees and directors, for services as a director, and, accordingly,
recognizes compensation expense for stock option grants to the extent that
the estimated fair value of the stock exceeds the exercise price of the
option at the measurement date. Issuances to consultants are accounted for
under the fair value method of SFAS 123. This non-cash compensation
expense is charged against operations ratably over the vesting period of
the options or service period, whichever is shorter, and was $411,922 for
the period (2001 - $892,960). In accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation", the fair value of each fixed option granted
is estimated on the date of grant using the Black-Scholes option pricing
model, using the following weighted average assumptions:
Option assumptions 2002 2001
------ ------
Dividend yield -- --
Expected volatility 75% 75%
Risk free interest rate 5.7% 5.8%
Expected option term 5.0 5.0
Fair value per share of options granted $ 3.42 $ 3.41
------ ------
Compensation expense recorded under FAS No. 123 would have been
approximately $731,228 for 2002 (2001 - $1,139,062), increasing the loss
per share by $0.01 in 2002 (2001 - $0.01).
F-10
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
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7. Share Capital - continued
Option assumptions - continued
As at March 31, 2002, details of options outstanding were as follows:
Outstanding Exercisable
----------- -----------
weighted average weighted average
number exercise price number exercise price
------ -------------- ------ --------------
December 31, 2000 1,661,000 $ 0.95 1,207,750 $ 0.34
Granted 2,253,762 $ 2.72 734,375 $ 5.00
Exercised (263,547) $ 0.44 -- $ --
Expired (546,214) $ 3.08 -- $ --
--------- ---------- --------- ----------
December 31, 2001 3,105,001 $ 1.90 1,942,125 $ 2.26
Granted 81,252 $ 0.70 -- $ --
Exercised (81,252) $ 1.90 -- $ --
Expired (61,876) $ 2.23 -- $ --
--------- ---------- --------- ----------
March 31, 2002 3,043,125 $ 2.01 1,942,125 $ 2.26
--------- ---------- --------- ----------
As at March 31, 2002, stock options expire as follows:
number exercise number
outstanding price exercisable
----------- -------- -----------
2004 400,000 $ 0.01 400,000
2005 813,750 $ 0.50 807,750
2006 609,375 $ 4.71 509,375
2007 620,000 $ 3.76 225,000
2008 300,000 $ 0.01 --
2009 300,000 $ 0.01 --
--------- --------- ---------
3,043,125 $ 2.01 1,942,125
--------- --------- ---------
As at March 31, 2002, details of share purchase warrants outstanding were
as follows:
number weighted average
outstanding exercise price expiry date
----------- ---------------- -----------
821,500 $ 4.39 2002
377,257 $ 3.64 2003
126,663 $ 1.46 2004
6,792 $ 0.64 2005
375,000 $ 4.00 2006
------- --------- ----
1,707,212 $ 3.91
------- --------- ----
F-11
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
7. Share Capital - continued
Continuity of stockholders' equity
accumulated
additional comprehen- other comp-
common par paid in sive income rehensive
shares value capital (loss) income (loss) deficit total
---------- ----- ---------- ----------- ------------- ------------ -----------
December 31, 2000 36,758,500 $367 $ 6,330,042 $ (75,138) $ (4,661,716) $ 1,593,555
---------- ---- ----------- ----------- --------- ------------ -----------
Net loss for the period -- -- -- (9,302,440) -- (9,302,440) (9,302,440)
Exchange differences -- -- -- 216,461 216,461 -- 216,461
-----------
Total comprehensive
(loss) (9,085,979)
-----------
Private placements 343,452 3 915,252 -- -- 915,255
Conversion of liability 671,992 7 624,650 -- -- 624,657
Exercise of options 263,547 3 263,698 -- -- 263,701
Financing commitment
fee (note 11a) 375,000 4 1,162,496 -- -- 1,162,500
Deposit on net asset
acquisition (note 11c) 500,000 5 1,774,995 -- -- 1,775,000
Stock option
compensation -- -- 2,425,519 -- -- 2,425,519
Issuance of warrants -- -- 785,428 -- -- 785,428
---------- ---- ----------- ----------- --------- ------------ -----------
December 31, 2001 38,912,491 $389 $14,282,080 $ 141,323 $(13,964,156) $ 459,636
---------- ---- ----------- ----------- --------- ------------ -----------
Net loss for the period -- -- -- (1,832,596) -- (1,832,596) (1,832,596)
Exchange differences -- -- -- 35,910 35,190 -- 35,190
-----------
Total comprehensive
(loss) (1,796,686)
-----------
Conversion of liability 55,277 -- 21,841 -- -- 21,841
Exercise of options 81,252 1 57,044 -- -- 57,045
Financing fees 783,453 10 244,690 -- -- 244,700
Stock option
compensation -- -- 411,922 -- -- 411,922
Issuance of warrants -- -- 3,274 -- -- 3,274
------------------------------------------------------------------------------------------
March 31, 2002 39,832,473 $400 $15,020,851 $ 176,513 $(15,796,752) $ (598,988)
---------- ---- ----------- ----------- --------- ------------ -----------
F-12
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
8. Information on Operating Segments
General description
The Company's subsidiaries were organized into operating segments based on
the nature of products and services provided and into geographical
segments based on the location of customers. The Company's operations were
classified into four reportable operating segments; Fiber Construction and
Maintenance Services ("FC&MS"), Fiber Network and System Engineering and
Design ("FN&SED"), Sales and Marketing ("S&M"), and Network Services
("NS") and also into two reportable geographic regions; Canada and the
United States. In the current year, the Company is no longer organized
into operating segments.
The FC&MS segment was responsible for building and maintaining the telecom
infrastructure including long-haul network builds, regional networks,
community networks, and in-building networks. The focus was on physical
infrastructure to support telecommunications encompassing fiber, wireless
and copper based telecommunications.
The FN&SED segment was responsible for all engineering and design
activities including permits, designs, mapping, GIS, structural design,
engineered drawings, network design, equipment specifications, research
and development and the securing and perfecting of rights of ways.
The S&M segment was responsible for all direct sales, which involve the
sale of telecom infrastructure products to telecommunication companies,
telecommunication services on behalf of telecommunications companies and
services on behalf of the right of way owners. The segment also acted as
broker for sales of rights of ways.
The NS segment was a support service for the other operating segments.
The accounting policies of the segments are the same as those described in
the Company's annual financial statements. The Company evaluated financial
performance based on measures of gross revenue and profit or loss from
operations before income taxes. The following tables set forth information
by operating segment as at, and for the three month period ended March 31,
2001.
Information by operating segment as at and for the three month period
ended March 31, 2001:
FC&MS FN&SE S&M NS Total
----------- ------ ------- ------ -----------
Revenue $ 262,619 94,797 209,635 71,765 $ 638,816
Interest expense $ 9,380 860 3,665 948 $ 14,853
Amortization of
capital assets $ 30,119 6,260 3,951 27,810 $ 68,140
Loss before
income taxes $ (939,068) (126,719) (216,862) (277,200) $(1,559,849)
Total assets $ 1,125,001 198,701 270,713 841,373 $ 2,435,788
Capital assets $ 441,087 114,057 52,793 679,911 $ 1,287,848
Capital asset additions $ 4,264 -- -- -- $ 4,264
----------- ------ ------- ------ -----------
F-13
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
8. Information on Operating Segments - continued
Reconciliations to consolidated results as at and for the three month
period ended March 31, 2001:
Segmented Corporate Total
----------- --------- -----------
Revenue $ 638,816 -- $ 638,816
Loss before income taxes $(1,559,849) (969,380) $(2,529,229)
Total assets $ 2,435,788 157,931 $ 2,593,719
Capital assets $ 1,287,848 43,423 $ 1,331,271
Capital asset additions $ 4,264 18,602 $ 22,866
----------- -------- -----------
Geographic information
Information by geographic region as at and for the three month period
ended March 31, 2002:
Canada United States Total
----------- ------------- -----------
Revenue $ 37,226 -- $ 37,226
Interest expense $ 43,044 10,326 $ 53,370
Amortization of capital assets $ 28,754 1,811 $ 30,565
Income (loss) before income taxes $(1,138,655) (693,941) $(1,832,596)
Total assets $ 1,261,765 1,009,208 $ 2,270,973
Capital assets $ 510,435 22,347 $ 532,782
Capital asset additions $ -- -- $ --
----------- ------ -----------
Information by geographic region as at and for the three month period
ended March 31, 2001:
Canada United States Total
----------- ------------- -----------
Revenue $ 627,661 11,155 $ 638,816
Interest expense $ 15,394 11,100 $ 26,494
Amortization of capital assets $ 69,406 1,987 $ 71,393
Loss before income taxes $(1,496,509) (1,032,720) $(2,529,229)
Total assets $ 2,478,534 115,185 $ 2,593,719
Capital assets $ 1,301,255 30,016 $ 1,331,271
Capital asset additions $ 22,866 -- $ 22,866
----------- ---------- -----------
Revenues are attributed to countries based on location of customers.
F-14
Universe2U Inc.
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Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
9. Earnings per Share
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Shares" which requires companies to report basic and fully diluted
earnings per share ("EPS") computations effective with the Company's
quarter ending December 31, 1997. Basic EPS excludes dilution and is based
on the weighted-average common shares outstanding and diluted EPS gives
effect to potential dilution of securities that could share in the
earnings of the Company. Diluted EPS has not been presented as it is
anti-dilutive as a result of having incurred losses in each period.
Options that may potentially dilute EPS in the future are listed in note
7.
Three months ended March 31
2002 2001
------------ ------------
Basic EPS Computation:
Net loss for the periods $ (1,832,596) $ (2,529,229)
Weighted average outstanding shares 38,785,289 36,802,445
Basic EPS $ (0.05) $ (0.07)
------------ ------------
10. Commitments and Contingencies
Lease commitments
At March 31, 2002, the Company's total obligations, under various
operating leases for equipment and occupied premises, exclusive of realty
taxes and other occupancy charges, are as follows:
2002 $ 431,215
2003 184,029
2004 103,499
2005 39,848
------------
Total $ 758,591
============
The Company was in arrears with respect to several of their operating
lease commitments at year end. Arrears payments plus accrued interest are
included in current liabilities as at March 31, 2002.
Employment contracts
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The majority of agreements
continue until terminated by the executive or the Company and do not
provide for severance payments of any kind upon termination. The
agreements include a covenant against competition with the Company, which
extends for a period of time after termination for any reason. As of March
31, 2002, the minimum annual commitment under these agreements was
approximately $300,682
F-15
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
10. Commitments and Contingencies - continued
Legal proceedings
At March 31, 2002, the Company and its wholly owned subsidiaries are
involved in various suits, claims, proceedings, and investigations that
arise from time to time in the normal course of business.
Certain of the proceedings relate to wrongful dismissal actions brought
against the Company by former employees, claims of misappropriation of
confidential information by competitors, and claims of breach of contract
by service providers. The Company is unable to ascertain the ultimate
aggregate amount of monetary liability or operational impact of these
identified legal proceedings that seek damages of material or
indeterminate amounts due to the current status of the claims. The Company
therefore cannot determine whether these actions will, individually or in
aggregate, have a material adverse effect on the business, results of
operations, and financial condition of the Company. No amount has been
accrued in the accounts in respect of these matters. The defendants in
these legal proceedings include the Company and certain named directors
and officers of the Company who intend to vigorously defend these claims.
Other proceedings related to default judgments, orders to pay, statements
of claim, and small claims court actions served against the Company by
secured and unsecured suppliers and other service providers for unpaid
accounts. The full amount of all identified claims plus an estimate of
interest and costs that may be awarded has been accrued in the accounts in
respect of these matters as at March 31, 2002. The Company is working with
the creditors to establish suitable payment arrangements. Subsequent to
the period end, several of the secured creditors exercised their rights to
repossess equipment and vehicles provided to the Company.
11. Subsequent Events
Subsequent to the period end, the following transactions occurred:
(a) On August 1, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion") pursuant to
which Fusion agreed to purchase directly from the Company on each
trading day during the term of the agreement, $15,000 of common
stock up to an aggregate of $12.0 million. The $12.0 million of
common stock is to be purchased over a 40-month period, subject to a
six-month extension or earlier termination at the Company's
discretion. The purchase price of shares of common stock will be
equal to a price based upon future market price of the common stock
without any fixed discount to the market price. The Company has the
right to set a minimum purchase price at any time. Fusion may not
purchase shares under the agreement if Fusion or its affiliates
would beneficially own more than 4.9% of the aggregate outstanding
common stock immediately after the purchase. The Company has the
right to increase this limitation to 9.9%. Under the terms of the
agreement Fusion received 375,000 shares of common stock and
warrants to purchase 375,000 shares of common stock at an exercise
price of $4.00 per share, as a commitment fee. The combined fair
value of the 375,000 shares and the 375,000 warrants to purchase
375,000 shares of $1,162,500 will be charged to operations over the
40-month period.
The Company intends to utilize the Fusion facility upon registration
of the shares with the Securities and Exchange Commission that is
expected to be finalized subsequent to the period end.
F-16
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
11. Subsequent Events - continued
(b) On March 13, 2001, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") for the purchase of 219,729 shares
of common stock for $550,000 with an investor. The Purchase
Agreement contains gross-up provisions so that in the event the
Company's common stock trades at a lower price than the original
purchase price, additional shares of common stock will be issued to
the investor. All such shares are entitled to registration rights.
The Purchase Agreement also provided redemption rights to the
Company to redeem such shares. In order for the Company to maintain
its rights to continue the redemption provisions under the Purchase
Agreement, the Company is obligated to pay a monthly fee to the
investor. The Company and the investor agreed to continue the
Company's redemption rights on the shares beyond the originally
contemplated period of two months; however, the Company was unable
to make requisite payments after August 2001. The investor agreed to
continue the Company's redemption rights. In April 2002, the Company
and the investor amended the Purchase Agreement so that in
consideration of the investor not exercising its gross up or
registration rights, the Company would make all payments in respect
of the past-due fees, of approximately $95,000, to maintain the
Company's rights to redeem the shares and in addition pay the
investor a fee equal to 13.25% on the original purchase price of the
shares for a period of up to 6 months. Upon such payments and
payment of the original purchase price for the shares, the Company
may exercise its redemption rights at any time at its sole
discretion.
(c) On December 14, 2001, the Company announced that it has executed a
new Term Sheet for the acquisition of substantially all of the
operating assets of Digital Global Internet Inc. ("DGI"), a
Baltimore, Maryland based company. The acquisition was originally
expected to be completed within 75 days however it has not yet
closed. The Company had previously announced on June 12, 2001 the
signing of a Term Sheet with DGI, however, the Company and DGI were
not able to come to mutually acceptable definitive terms on the
basis of that June 2001 Term Sheet. The Company believes that the
contemplated revised structure for the acquisition of DGI will
facilitate the closing of the transaction, however there can be no
assurance in this regard
(d) On April 11, 2002, the Board of Directors approved the Company's
proposed Refinancing Plan to raise additional capital through
private financing. The key component of the Refinancing Plan is to
temporarily reduce the number of publicly tradable Company shares by
requesting the Company's stockholders submit their shares of common
stock to a voluntary lockup for a period of one year. The Company
will seek to obtain a minimum of 29 million shares for inclusion in
the lockup representing approximately 80% of all outstanding Company
shares. Any decision whether to enter into financing arrangements
during the effective period of the lockup agreement will be at the
sole discretion of the Board of Directors. Stockholders electing to
participate in the lockup will have up to May 31, 2002 to tender
their shares to the Company's escrow agent, Equity Transfer Services
Inc. of Toronto, Ontario. The lockup agreement will only be
effective if more than 29 million shares are submitted to the Escrow
Agent. During the effective period of the lockup, stockholders
participating in the lockup may not engage in any of the following:
F-17
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
11. Subsequent Events - continued
a. offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any derivative
securities,
b. enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic
consequences of ownership of the common stock or any
derivative securities, or
c. make any open market transactions relating to shares of
common stock or any derivative securities and will not
make any demand for or exercise any right with respect
to, the registration of any shares of common stock or
any derivative securities.
The Agreement shall not be binding nor take effect unless and
until the Company has obtained executed consent in the form of
this Agreement with the owners of record, or beneficial
owners, of an aggregate minimum of 29,000,000 shares of Common
Stock and the securities of the Derivative Securities granted
to and held by affiliates, officers and directors of the
Company.
(e) On May 14, 2002, the Company completed the transaction with Wisper
Inc. The Company acquired broadband connectivity customers, supply
contracts, agent agreements, and the equipment serving those
customers which include: (i) a wireless network with towers in
Brampton, Mississauga, and Georgetown, Ontario; (ii) know how on
deploying fixed wireless ISM networks; (iii) customer care and
trouble ticket application; (iv) sales agent agreements; and (v)
strategic agreements with key suppliers such as Bell Nexxia and
Futureway Communications. The customer base provides the Company
with over $400,000 CDN in recurring annual revenue. The physical
assets have a current net book value of approximately $150,000 CDN.
In exchange for the Wisper Network assets, Wisper Inc. (CDNX: WIP)
will receive up to a maximum total of $404,311 CDN worth of
Universe2U Inc. shares and cash, subject to shareholder and
regulatory approval. The terms of the deal do not require the
Company to pay the cash or shares upfront, however, the Company will
be assuming a net of $87,825 CDN of liabilities associated with the
assets and wholesale expenses of the acquired business. The Company
will pay $180,000 CDN in cash or shares over the next 12 months and
the balance of a maximum of $136,825 in shares with a one-year trade
restriction. The Agreement has provisions for additional purchase
price adjustments. In addition, some of Wisper's key staff,
associated with broadband deployment will join the Company.
F-18
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
11. Subsequent Events - continued
(f) On April 8, 2002, the Company executed a Marketing Agreement with
EBI Communications, Inc. ("EBI") where it became a reseller for the
EBI's Voice over IP service and their Least Cost Routing Gateway.
The Company has the right to market and sell the products to the
worldwide markets directly or through other agents. The product will
be sold under a private label and brand the products as Universe2U -
Least Cost Router, Voice2U, or other such name. It is contemplated
that the two parties will work collaboratively on product
development; with the Company providing product feature
input/packaging and EBI doing the technical research and
development. There are two conditions precedent for this Agreement
to become binding on the parties: (i) EBI and Universe2U must work
together to secure financing for $750,000, at terms acceptable to
both parties and (ii) to set up the necessary back office to support
the generation of LCRR, marketing cost and fund the inventory. There
is to be final acceptance testing of the product by the Company.
Active marketing of the product is expected to commence in June
2002.
F-19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with our Condensed Consolidated
Financial Statements for the first quarter ended March 31, 2002.
General
We have refocused our business to be successful in this very tough telecom
marketplace. We have significantly reduced our costs while adding additional
industry experts to our team. The acquisition of Wiper Network's broadband
business will bring us a network footprint in the Greater Toronto Area. As a
network partner, we work with communities to make their network's ventures
successful. Through our industry expertise, we expect our customers to achieve a
high return on investment by developing, designing, building and operating a
sustainable business, providing "right" solution and speed to market.
Universe2U's focus is the development and successful deployment and operation of
community broadband networks. All markets in the communications and technology
sectors go through a process of industry standard creation and they become
volume markets. We believe that broadband networks should be viewed as utilities
the same as existing electricity, water, wastewater, and gas. Every citizen and
business in a community should have the right to high-speed not just be the
lucky few. We concentrate on smaller cities, generally less than 200,000 in
population, because they have historically been overlooked and underserved by
the dominant players in the industry. We will continue to review opportunities
that come to us from the larger cities. We define community broadly as a group
of people living in the same locality or having common interests this includes:
municipalities, community groups, industry sectors, industrial parks,
multi-tenant commercial office buildings, hotels, and multi-tenant residential
building.
Our objectives are:
(a) To develop SmartCommunities in partnership with local governments,
utilities, and building owners.
(b) To provide broadband connectivity, by being a reseller of broadband
connectivity services which include: Private Line, Optical Wave,
ATM, Dedicated Internet, Frame Relay, Network Timing, Switched
Voice, Carrier Voice, International Backhaul, International Private
Line, Collocation, and DSL; installing wireless services; providing
means to expanding the network coverage through load aggregation
model, incremental builds, consulting; and providing a Project
Management Office; and
(c) To provide broadband content and products, through a comprehensive
portfolio of innovative products and services, including advertising
distribution, business media, digital media management, enhanced
data, integrated transmission, Internet, managed hosting, managed
services, streaming communications, transport, and voice.
Our Company is the product of an acquisition, completed on May 17, 2000, in
which Paxton Mining Corporation, a Nevada corporation, acquired all of the
outstanding shares of Universe2U Inc. In connection with the acquisition, the
management of our Company changed and our Company's name became Universe2U.
4
Before the acquisition, under the name Paxton Mining Corporation, we were an
early stage development company organized to acquire, explore, and develop
mining properties. Following the acquisition, we ceased any mining-related
activities.
BUSINESS STRATEGY
Our business model is targeted to work in the white space where there is less
competition. We co-brand our product with the community to give it credibility.
Many in the telecom sector are returning to the old reliable, as the cost
savings don't justify the disruption of service.
In our SmartCommunities model, the public sector is our partner. We bring to
them a method of achieving high capacity telecommunications access built on a
cost recovery basis. We also position ourselves as an organization that is
funded by the public sector, for the public sector. Within building, the
property owner/manager is our partner. We bring to them a method of achieving
high capacity telecommunications access built on a cost recovery basis. Building
owners are extremely well positioned to enter the telecommunications business.
We are deploying a community pull strategy as opposed to the typical telco push
strategy, based on our strong understanding of how the public sector operates
and the patience to make it happen with them. We offer a solution sale rather
than just a product.
We offer a package of broadband connectivity and content. Most in the field
offer one or the other. We offer universal access and we will deliver anyone's
content. We have a community portal offering that will be the main delivery
vehicle of customized services. We offer wireless as a quick start . . . fill in
the gap solution.
Our belief is that competition in general may increase over the next three or
four years as companies start maturing and realize the full potential of
delivering what the market is demanding. We anticipate that our mission and
strategic go-forward plans will position us very well to become a preferred
supplier for the expected explosion of demand for high-speed universal access.
We intend to pursue additional strategic alliances with communications providers
that have high-bandwidth needs and who offer us long-term, high capacity
commitments for traffic on our network. Such strategic alliances could also
allow us to combine our capabilities with those of our strategic alliance
partners and thereby offer our customers additional products and services.
We have experienced operating losses and expect to continue to generate losses
into the foreseeable future while we continue to expand our customer base and
internal information systems.
OPERATING SEGMENTS
Operations are evaluated based on two reportable geographic segments: Canada and
the United States. Prior to the Company's refocus of their business, operations
were organized into segments based on the nature of products and services
provided. The Company's operations were classified into four reportable
operating segments:
5
o Fiber Construction and Maintenance Services ("FCMS")is responsible
for building and maintaining the telecom infrastructure including
long-haul network builds, regional networks, community networks, and
in-building networks. The focus is on physical infrastructure to
support telecommunications encompassing fiber, wireless and copper
based telecommunications.
o Fiber Network and System Engineering and Design ("FN&SED") is
responsible for all engineering and design activities including
permits, designs, mapping, GIS, structural design, engineered
drawings, network design, equipment specifications, research and
development and the securing and perfecting of rights-of-ways.
o Sales and Marketing ("S&M") is responsible for all direct sales,
which involve the sale of telecom infrastructure products to
telecommunication companies, telecommunication services on behalf of
telecommunications companies and services on behalf of the
right-of-way owners. The segment also acts as broker for sales of
rights-of-ways.
o Network Services ("NS") is a support service for the other operating
segments.
Following the refocus, the Company is no longer organized into reportable
operating segments.
REVENUES AND EXPENSES
We generate revenues from reselling voice, data, and other telecommunications
services; and the direct deliver of services. We are transitioning for the
position where the majority of our revenues are derived for one-time services to
where we expect to be generating the majority of our revenues on a monthly
recurring basis, however there can be no assurance in this regard.
We believe that our ability to generate revenues in the future will be affected
primarily by the following factors, some of which we cannot control:
o Our ability to acquire the needed financing for network projects;
o Our ability to grow our direct sales business to drive the organic
growth;
o Our ability to obtain customers before our competitors do;
o Our ability to achieve adequate margins on materials and wholesale
services;
o The demand for our services;
o The level of competition we face from other telecommunications
services providers, including price and margins for communications
services over time; and
o Possible regulatory changes, including regulations requiring
building owners to give access to competitive providers of
communications services
Our cost of sales consists primarily of the wholesales cost, the associated
costs of as labor, equipment leases, and capital asset amortization expense. We
expect these costs to increase in aggregate dollar amount as we continue to grow
our business but to decline as a percentage of revenues with respect to
materials costs due to economies of scale, expected improvements in technology
and price competition from an increased number of vendors, however, there can be
no assurance in this regard.
6
Selling expenses include sales salaries and commission payments and marketing,
advertising and promotional expenses. We expect to incur significant sales and
marketing expenses as we continue to grow our business and build our brand.
General and administrative expenses include costs associated with the recruiting
and compensation of corporate administration, customer care and technical
services personnel as well as costs of travel, entertainment, back office
systems, legal, accounting and other professional services. We expect these
costs to increase significantly as we expand our operations, but decline as a
percentage of revenues due to economies of scale, however there can be no
assurance in this regard.
We intend to pursue business partnering, acquisitions, and other strategic
relationships to expand our customer base, our ability to offer turnkey
solutions and geographic presence. We expect these activities to significantly
affect our results of operations and require us to raise additional capital.
However there can be no assurance as to the level of such activities, if any, in
the future.
AMALGAMATION
As at December 31, 2000, the Company amalgamated the wholly owned subsidiaries
formerly operating as Fiber Optics Corporation of Canada Inc., Canadian Cable
Consultants Inc., and Photonics Engineering & Design Inc., into Universe2U
Canada Inc.
We expect to amalgamate Coastal Networks Inc., MultiLink Networks Inc., and
Universe2U Rights-of-Way Agency Inc. into a single entity during the current
fiscal year.
RESULTS OF OPERATIONS
Total revenues decreased $602 thousand, or 94% to $37 thousand for the three
months ended March 31, 2002 from $639 thousand for the three months ended March
31, 2001. Cost of sales decreased $508 thousand or 66% to $260 thousand for the
three months ended March 31, 2002 from $768 thousand for the three months ended
March 31, 2001.
Gross profit for the three months ended March 31, 2002 was a negative $223
thousand (-598% of revenues) versus a negative $130 thousand (-20% of revenues)
in 2001. Selling, general and administration expenses decreased $632 thousand;
to $765 thousand (2054% of revenues) for the three months ended March 31, 2002
from $1,397 thousand (219% of revenues) for the three months ended March 31,
2001.
Stock based compensation expense for the three months ended March 31, 2002 was
$412 thousand versus $893 thousand for the three months ended March 31, 2001.
The Company accounts for stock-based compensation under the provisions of APB
No. 25 "Accounting for Stock Issued to Employees" and accordingly, recognizes
compensation expense for stock options to the extent the estimated fair value of
the stock exceeds the exercise price of the option at the measurement date. The
compensation expense is charged against operations ratably over the vesting
period of the options or the service period, whichever is shorter. Much of the
stock option expense relates to employee option grants provided before, or soon
after, the corporation was acquired on May 17, 2000. The Company anticipates
expensing an additional $1.5 million of stock compensation expense over the next
6 quarters relating to stock options existing as at March 31, 2002. As at March
7
31, 2002 there were 3,043,125 stock options outstanding with a weighted average
exercise price of $2.01.
Interest and financing costs were $412 thousand (1108% of revenues) for the
three months ended March 31, 2002, an increase of $394 thousand from $38
thousand (6% of revenues) for the three months ended March 31, 2001. This was a
direct result of increased financing necessary for capital expenditures and to
fund the operating losses. During the first quarter of the current year, the
Company experienced cash flow shortages on a number of occasions and had been
unable to meet all of its payable obligations on a timely basis. The company is
late in remitting payroll withholding and sales taxes to the tax authorities.
Depreciation and amortization costs were $31 thousand (82% of revenues) for the
three months ended March 31, 2002, compared to $71 thousand (11% of revenues)
for the three months ended March 31, 2001. The decrease of $40 thousand was the
result of a substantial reduction in capital assets primarily in the
construction divisions.
The Company incurred losses before income taxes for the three months ended March
31, 2002 of $1.8 million compared to a loss before income taxes of $2.5 million
for the three months ended March 31, 2001. Non-cash stock based compensation
accounted for $412 thousand of the loss in the three months ended March 31,
2002, compared to $893 thousand for the three months ended March 31, 2001.
During the first quarter of 2002, we adjusted our workforce from a peak of 19
people to our current level of 8.
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform to the presentation adopted in
the current period's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Based on our current growth plan, we expect to require new capital to expand our
business into new geographic areas of target markets in North America. We need
capital to fund the development of our agent sales force, service our debt, and
acquire strategic companies. In order to help us finance our new strategy, on
August 1, 2001, the Company entered into a $12 million equity financing
commitment from Fusion Capital Fund II, LLC, and a Chicago based institutional
investor ("Fusion"). We expect the Fusion financing commitment to provide us
with necessary working capital on an ongoing basis; however, certain conditions
must be met before we can draw upon this facility, which have not yet been
satisfied. Other sources of funding for our current and future financing
requirements during the near future may include vendor financing, registered
public offerings or private placements of equity and/or debt securities,
commercial credit facilities, and/or bank loans. There can be no assurance that
sufficient additional financing will be available to us or, if available, that
it can be obtained on a timely basis and on acceptable terms. We expect some
contracts currently under negotiation to close soon, which would provide
significant revenue to the Company, however there can be no assurance in this
regard.
A further description of the terms and conditions of the Fusion financing
commitment may be found under the caption "SUBSEQUENT EVENTS" in the Company's
quarterly report on Form 10-QSB for the period ended June 30, 2001 filed with
the Securities and Exchange Commission on August 14, 2001, which is incorporated
8
herein by reference thereto. On August 6, 2001 we filed a registration statement
with the Securities and Exchange Commission relating to the offer and re-sale by
Fusion Capital Fund II, LLC of up to an aggregate of 6,750,000 shares of our
common stock, however, the registration statement has not yet been declared
effective by the Commission. The Company is not yet able to draw upon the Fusion
financing facility. We intend to complete all formalities required in order to
draw upon the Fusion financing facility but there is no certainty that we will
be able to do so.
During 2001, the Company established a line of credit with Palm Trading Limited
("Palm"). The line of credit may be drawn upon by the Company in one or more
tranches in an aggregate principal amount up to $500,000 (the "Credit Line").
Each draw down may be for a minimum of $10,000 up to a maximum of $50,000.
Amounts drawn down on the line of credit shall accrue interest at a rate of 8%
per annum, compounded monthly. The Company may draw upon the Credit Line
approximately once per month. Any and all outstanding amounts due under the
Credit Line shall be repaid in full on the earlier of (i) such date as the
Company has adequate cash reserves as determined by the Audit Committee of the
Company's Board of Directors in consultation with the Company's independent
auditors; or (ii) July 27, 2003. The Company shall also issue warrants to Palm
under the Credit Line in amount corresponding to the fair market value of the
Company's common stock as of the date of each draw down under the Credit Line.
Each of such warrants shall be exercisable at fair market value for 1.15 shares
of restricted Company common stock. Under the terms of the loan agreement, the
lender is granted warrants calculated as follows:
# of Warrants = Funds Advanced / 20-day Average Trading Price * 15%
Each warrant is exercisable at a price that is 15% greater than the 20-day
average trading price at the date of issuance. For financial statement purposes,
the fair value of the warrants is estimated on the date of grant using the
Black-Scholes pricing model. To March 31, 2002, 133,455 warrants were issued in
connection with this loan.
On February 22, 2002, we established Credit facilities between Laurentian Bank
of Canada as lender, and 1418276 Ontario Inc., our non-operating holding company
holding all the shares of Universe2U Canada Inc. The Credit facility provides
for an operating line of up to $2.5 million CDN, secured by cash deposits, a $1
million CDN contract forward facility, and a $50K credit card line. In
connection with the establishment of the Laurentian Credit facility, on February
15, 2002, 1418276 Ontario Inc., our non-operating holding company, established
an $800,000 CDN loan with 1463549 Ontario Inc. to be used as the cash security
for the Laurentian Credit facility. The loan has the following terms: 6 month
term, monthly interest payments of $8,834.34 CDN, 10% monthly payment penalty in
the event of default at maturity, payment of 3 months interest for early
termination of loan, the Company pays all associated expenses to establish the
loan and at maturity or repayment date the Company will issue 5,500 shares of
restricted common stock for each day the loan is outstanding up to a maximum of
1,000,000 shares. Such shares will be issued without registration rights.
Our current plan includes strategic acquisitions or internal growth to expand
the scope of our business into new geographic areas of target markets in North
America. For all of our operations, materials, supplies, and equipment are
readily available; therefore, we anticipate being able to schedule capital
expenditures simultaneously with anticipated funding. Most of the capital
expenditures are expected to sales and marketing areas where requirements are
expected to mirror revenue growth. We intend to reduce the requirement for cash
9
flow to fund operating equipment as much as possible by leasing a substantial
portion of our operating equipment. We expect the significant cash flow
requirements will be for strategic acquisitions and internal growth.
By comparison, our approach is to outsource most construction and installation
activities only marginally with increased capital expenditures.
Not including cash flow requirements for strategic acquisitions and major
projects where we may take an equity position, we currently estimate that our
capital requirements for the period from January 1, 2002 to December 31, 2002 at
approximately $2.4 million.
Our plan includes estimates which are forward-looking statements that may change
if circumstances related to third party materials and labor costs, revenue
growth expectations, construction, change of regulatory regime requirements and
opportunities to deploy the Company's SmartCommunities and SmartBuildings do not
occur as expected.
Sources of funding for our current and future financing requirements may include
vendor financing, public offerings, or private placements of equity and/or debt
securities, commercial credit facilities and bank loans. There can be no
assurance that sufficient additional financing will continue to be available to
us or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain financing could result in the delay or curtailment of
our development and expansion plans and expenditures. Any of these events could
have a material adverse effect on our business.
For the three months ended March 31, 2002, the Company's net cash used in
operating activities was $466 thousand ($468 thousand in 2001). This amount
includes adjustments for non-cash items comprised of depreciation and
amortization of $31 thousand ($71 thousand in 2001), stock option compensation
of $412 thousand ($893 thousand in 2001), amortization of deferred charges of
$87 thousand (nil in 2001), the issuance of warrants of $3 thousand (nil in
2001), and a losses from significantly influenced investments and disposals of
capital assets totaling $14 thousand ($14 thousand in 2001).
For the three months ended March 31, 2002 net cash generated by investing
activities was $7 thousand principally attributable to the sale of capital
assets. For the three months ended March 31, 2001, net cash used in investing
activities was $23 thousand, which consisted of additions to property, plant,
and equipment.
For the three months ended March 31, 2002, net cash provided by financing
activities of $1.1 million, included net proceeds from the increase in bank
indebtedness of $613 thousand and net proceeds on term debt of $472 thousand
offset by an increase in due from related parties of $27 thousand. For the three
months ended March 31, 2001 net cash provided by financing activities of $0.5
million included net proceeds from the issue of share capital of $550 thousand
offset by net repayments on long-term debt of $7 thousand, the decrease in bank
indebtedness of $21 thousand and the net increase in due from related parties of
$16 thousand.
GOING CONCERN CONSIDERATIONS
The Company has incurred losses to date and has a deficit, to date, of
$(15,796,752) and a working capital deficiency of $(3,607,070). In addition, we
have been unable to consistently meet our payroll obligations, trade
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obligations, and long-term debt commitments as they become due. These factors
raise substantial doubt on the Company's ability to continue as a going concern.
The liquidity of the Company has been adversely affected by continuing losses
and shortage of cash resources. The Company continues to seek financing both in
the form of debt and equity and its ability to continue as a going concern is
dependant on the success of these efforts. Please refer to Note 1 of, and the
Review Engagement Report on, the Combined Financial Statements for the three
months ended March 31, 2002. The Management believes that the availability of
the Laurentian Bank Credit Facility, the Palm Trading Credit Facility, and
Fusion financing facility may alleviate some of the Company's cash flow needs,
however, there can be no assurance in this regard.
SUBSEQUENT EVENTS
On April 8, 2002, we executed a Marketing Agreement with EBI Communications,
Inc. ("EBI") were we became a reseller for the EBI's Voice over IP service and
their Least Cost Routing Gateway. We have right to market and sell the products
to the worldwide markets directly or through other agents. The product will be
sold under a private label and brand the Products as Universe2U - Least Cost
Router, Voice2U, or other such name. We contemplate working collaboratively on
product development; with Universe2U providing product feature input/packaging
and EBI doing the technical research and development. There are 2 Conditions
Precedent for this Agreement to become binding on the parties: EBI and U2U
working together to secure financing for $750,000, at terms acceptable to both
parties, to set up the necessary back office to support the generation of LCRR,
marketing cost and fund the inventory. Final Acceptance Testing of the Product
by U2U. We expect to be actively marketing the product in June 2002.
On April 11, 2002, the Board of Directors approved the Company's proposed
Refinancing Plan to raise additional capital through private financing. Some of
the Company's shareholders, representing approximately 80%, or approximately 32
million shares, of all outstanding Company securities, have committed to
voluntarily lock-up these securities for a period of one year, ending April 30,
2003. The Company expects that the lockup will facilitate the Company's ability
to raise additional capital through private financing. Due to initial logistical
difficulties in delivery of physical share certificates to the Lockup Escrow
Agent, the Board has extended the final date for delivery of the physical
securities to the Lockup Escrow Agent until May 31, 2002.
On December 14, 2001, the Company announced that it has executed a new Term
Sheet for the acquisition of substantially all of the operating assets of
Digital Global Internet Inc. ("DGI"), a Baltimore, Maryland based company. The
acquisition was originally expected to be completed within 75 days however it
has not yet closed. The Company had previously announced on June 12, 2001 the
signing of a Term Sheet with DGI for acquisition of substantially all of the
outstanding stock of DGI, however, the Company and DGI were not able to come to
mutually acceptable definitive terms on the basis of that June 2001 Term Sheet.
The Company has not yet been successful in raising the capital to finance DGI's
business plan, a step needed to facilitate the closing of the transaction. There
can be no assurance in this transaction will be completed.
On May 14, 2002- we completed the transaction announced on April 8, 2002 with
Wisper Inc. We acquired broadband connectivity customers, supply contracts,
agent agreements, and the equipment serving those customers, which include:
Wireless network with towers in Brampton, Mississauga, and Georgetown; know-how
on deploying fixed wireless ISM network; customer care and trouble ticket
application; sales agent agreements; and strategic agreements with key suppliers
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such as Bell Nexxia, and Futureway Communications. The customer base is expected
to provide the Company with approximately $400,000 CDN in recurring annual
revenue. The physical assets of Wisper Inc. have a current net book value of
approximately $150,000 CDN. In exchange for Wisper Network assets, Wisper Inc.
(CDNX: WIP) will receive up to a maximum of approximately $400,000 CDN worth of
Company shares and cash, subject to shareholder and regulatory approval. The
terms of the deal do not require Uninverse2U to pay and cash or shares upfront,
however, the Company will be assuming a net of approximately $88,000 CDN of
liabilities associated with the assets and wholesale expenses of the acquired
business. The Company will pay approximately $180,000 CDN in shares or cash over
the next 12 months and the balance of a maximum of approximately $136,500 in
restricted shares. The Agreement has provisions for additional purchase price
adjustments. In addition, some of Wisper's key staff, associated with broadband
deployment, will join the Company.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no items that relate to "trading portfolios." We did not
include trade accounts payable and trade accounts receivable in the "other than
trading portfolio" because their carrying amounts approximate fair value. We may
from time to time enter into interest rate protection agreements.
We are subject to market risks due to fluctuation in foreign currency exchange
rates as the Company reports in US dollars yet the bulk of the corporation's
assets are located in Canada. We have not made significant use of financial
instruments to minimize the exposure to foreign currency fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations", that supersedes APB Opinion 16 and various related
pronouncements, was effective for all business combinations initiated after June
30, 2001. In general, SFAS 141 states that all business combinations be
accounted for as purchase transactions with the pooling-of-interests method
being no longer acceptable. In addition, SFAS 141 establishes new rules
concerning recognition of intangible assets arising in a purchase business
combination and requires enhanced disclosure of information in the period in
which a business combination is completed. The Company will adopt this standard
on all future acquisitions.
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets" supersedes APB Opinion 17 and related interpretations and is
effective for the Company on January 1, 2002. In general SFAS 142 establishes
new rules on accounting for goodwill and other intangible assets acquired in a
business combination. In addition, SFAS 142 reaffirms that intangibles acquired
in other than a business combination be initially recognized at fair value and
that the costs of internally developed intangible assets be charged to expense
as incurred. The adoption of this standard is not expected to have a material
impact on the Company.
Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" replaces SFAS 121 and provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, SFAS 144 also expands the scope of
a discontinued operation to include a component of an entity, and it eliminates
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the current exemption to consolidation when control over a subsidiary is likely
to be temporary. The standard is effective for the Company on January 1, 2002.
The adoption of this standard is not expected to have a material impact on the
Company.
FORWARD LOOKING STATEMENTS
Statements included in this quarterly report on Form 10-QSB which are not
historical in nature, are intended to be, and are hereby identified as
"forward-looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by words including "anticipate", "await",
"envision", "foresee", "aim at", "believe", "intends", "estimates", "expect",
"anticipate" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, are subject to significant risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Readers are directed to the
Company's other filings with the U.S. Securities and Exchange Commission for
additional information and a presentation of the risks and uncertainties that
may affect the Company's business and results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings previously
reported in the Company's periodic reports filed with the Commission. The
Company and/or its affiliated companies are parties to lawsuits, which arose, in
the normal course of business. Litigation in general can be expensive and
disruptive to normal business operations and the results of complex legal
proceedings are difficult to predict. The Company believes they have defenses in
each of the suits they are currently involved in and will vigorously contest
each of the matters. An unfavorable resolution of one or more of the currently
ongoing lawsuits could adversely affect the business, results of operations, or
financial condition.
Further information regarding status of pending proceedings may be found in the
Company's annual report on Form 10-KSB for the year ended December 31, 2001,
which have been filed with the U.S. Securities and Exchange Commission.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information.
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We have signed of an Agreement with USAsia Telecom, LLC (USAT), a subsidiary of
Mitsubishi Corporation (London:8058q.L), in which Universe2U intends to utilize
USAT's capability to provide high-speed Internet access to remote communities
and to customers seeking a back up to their land-based Internet providers.
We have signed a Memorandum of Understanding (MOU) to build an innovative
relationship whereby Universe2U will become a sales channel for Enersource
Telecom's broadband network connections and network services to business
customers within Mississauga, Ontario.
We have signed a 5-year Master Services Agreement with Williams Communications,
whereby we can resell the services. These services consist of: Private Line
Service, Optical Wave Service, ATM Service, Dedicated Internet Service, Frame
Relay Service, Network Timing Services, Switched Voice Service, Carrier Voice
Services, International Backhaul Services, International Private Line Service,
Collocation Service, and CNMS Service.
On April 11, 2002, Jeff Rosenthal was appointed to the Company's Board of
Directors. Mr. Rosenthal has served as President of the Company since November
2000. He was President of Fiber Options Corporation of Canada Inc., a subsidiary
of the Company, from May 2000 until November 2000. Mr. Rosenthal served as the
Managing Principal for Utility Solutions Corporation from April 1998 until May
2000, a Canadian firm that specializes in delivering business solutions to
energy providers. Prior to Utility Solutions, Mr. Rosenthal held senior
management positions during his 16-year career at Toronto Hydro from 1982 until
1998. Mr. Rosenthal holds a BASc (Electrical Engineering) from the University of
Toronto (1982) and a MBA from York University (1990).
On April 15, 2002 Mr. Barry Herman resigned from the Company's Board of
Directors for personal reasons. On May 16, 2002 Mr. Fred Kasravi also resigned
from the Board of Directors for personal reasons.
Item 6. Exhibits and Reports
Reports on Form 8-K:
None.
Exhibits:
10.24 Form of Lockup Agreement between Universe2U, Inc. and shareholders
regarding one year voluntary lockup of common stock, as filed with the
Commission as Exhibit 10.24 to the Company's Form 10-KSB for the
year-ended December 31, 2001.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSE2U INC.
By: /s/ Kim Allen Date: May 15, 2002
--------------------
Kim Allen, Chief Executive Officer, and Principal Financial Officer
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