As filed with the Securities and Exchange Commission on July 29, 2002
Registration Statement No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
UNIVERSE2U INC.
(Name of Small Business Issuer in its Charter)
Nevada 1731 88-0433489
------ ---- ----------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Class Code) Identification No.)
of incorporation)
30 West Beaver Creek Rd. - Suite 109
Richmond Hill, Ontario, Canada L4B 3K
(905) 881-3284
(Address and telephone number of principal executive offices and principal place
of business)
Kim Allen
Chief Executive Officer
Universe2U Inc.
30 West Beaver Creek Rd. - Suite 109
Richmond Hill, Ontario, Canada L4B 3K1
Tel:(905) 881-3284
Fax:(905) 709-5264
(Name, address, and telephone number of agent for service)
Copies to:
Keith Moskowitz, Esq.
Ehrenreich Eilenberg & Krause LLP
11 East 44th Street, 17th Floor
New York, NY 10017
Tel: (212) 986-9700
Fax: (212) 986-2399
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
Proposed
maximum Proposed
Amount of offering maximum Amount of
Title of each class of securities to be price per aggregate registration
securities to be registered registered (1) share offering price fee
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants 1,500,000 shares $0.30(2) $ 450,000 $41.40
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying
Convertible Debentures 17,373,016 shares $0.20(3) $3,474,603 $319.66
- -------------------------------------------------------------------------------------------------------------------
TOTAL 18,873,016 shares $3,924,603 $361.06
- -------------------------------------------------------------------------------------------------------------------
(1) Represents shares of common stock, which may be offered pursuant to this
registration statement, which shares are issuable upon conversion of
secured convertible debentures and upon exercise of related warrants held
by the selling security holders. The number of shares of common stock
registered hereunder represents a good faith estimate by the Registrant of
the number of shares of common stock issuable upon conversion of the
debentures and upon exercise of the warrants. In addition to the shares set
forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon conversion or exercise of, or otherwise in
respect of, the debentures and the warrants, as such number may be adjusted
as a result of stock splits, stock dividends and similar transactions in
accordance with Rule 416.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g). As provided in that Rule, the offering price
of the shares underlying the warrants is deemed to be the warrant exercise
price, which is higher than the fluctuating market price of the underlying
common stock.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c). Represents the average of the high and low
trading prices of the common stock on July 25, 2002.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, dated July 29, 2002
iii
PROSPECTUS
18,873,016 Shares
Universe2U Inc.
Common Stock
This prospectus covers the offer and sale by certain selling security holders of
shares of common stock of Universe2U Inc., a Nevada corporation. These shares
may be issued to the selling security holders upon conversion of convertible
debentures and exercise of warrants that such persons purchased or agreed to
purchase in June 2002.
We will not receive any of the proceeds from the sale of common stock under this
prospectus (except that we may receive proceeds from the exercise by the selling
security holders of warrants covering shares of common stock included in this
prospectus).
The selling security holders may offer their shares covered by this prospectus
in public or private transactions, at prevailing market prices or at privately
negotiated prices.
Our common stock is traded on the NASD Over-the-Counter Bulletin Board under the
symbol "UTOU."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR VARIOUS RISKS YOU
SHOULD CONSIDER BEFORE YOU PURCHASE ANY SHARES OF OUR COMMON STOCK.
We have not authorized any person, agent or entity to give any information or
make any representation other than those contained in this Prospectus. You
should not rely on any such information or representation as having been
authorized by us. This Prospectus is not an offer to sell the securities and it
is not soliciting an offer to buy the securities in any state where offers or
sales are not permitted.
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
Neither the Securities and Exchange Commission nor any state securities
commission nor any other regulatory body has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this prospectus is July __, 2002.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 2
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 21
Market For Common Equity and Related Stockholder Matters ................ 21
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 19
Business................................................................. 28
Management............................................................... 45
Principal Stockholders................................................... 51
Certain Transactions...................................................... 53
Selling Security Holders................................................. 56
Plan of Distribution..................................................... 57
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 62
Indemnification Matters . . . . . . . . . . . . . . . . . . . . . . . . . 62
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find Additional Information................................ 64
Index to Financial Statements............................................ F-1
PROSPECTUS SUMMARY
The following summary provides an overview of selected information and does not
contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus and the financial
statements. Unless the context otherwise requires, the information contained in
this prospectus gives effect to
- - a 19-for-1 stock dividend effected to holders of record of our common stock
as of May 25, 2000 and
- - an aggregate of 5,758,000 shares issuable upon exchange of a like number of
shares held by former owners of one of our subsidiaries (including our
chairman and his wife).
When we refer in this prospectus to "we", "us", "our company" or similar terms,
we mean Universe2U, Inc. and its subsidiaries, unless the context otherwise
requires.
OUR COMPANY
We provide wireless telecommunications services and resell DSL service to small
and medium-sized enterprises in communities that we believe have traditionally
been underserved by telecommunications providers. We also offer communities
comprehensive broadband consulting and management services to assist in
deploying and maximizing potential returns from their networks. Our target
communities include municipalities, schools, hospitals and commercial,
governmental, industrial, and residential complexes whose location has
historically made it more difficult or costly to deliver broadband access. We
intend to expand our business by exploiting the anticipated increased
connectivity of our customers and offering a range of enhanced services
including Internet-based telephony under the name "voice2u" and managed
e-community portals. We currently have approximately 200 customers for our
services, all of which are located in Canada. We are not a telecommunications
carrier nor do we provide regulated telecommunications services.
In early 2001, we commenced a strategic shift in our business strategy to our
present model. Prior to that time, our business primarily involved design,
construction and maintenance of broadband infrastructure as a third party
contractor for large telecommunications companies and electric utilities
building their own telecommunications network. While that business resulted in
multi-million dollar build-out contracts, it was dependent on the health of the
telecom industry and the financial health of our telecom customers. It was also
labor-intensive and limited in its ability to produce recurring revenue streams
from value-added products and services. Revenues from our network design,
construction, and maintenance business were approximately $1.22 million in 2001
and $5.65 million in 2000. The decrease reflects adverse conditions in the
telecom market as well as our change in business strategy. In connection with
our new focus, we disposed of a number of capital assets, reduced our employee
base from approximately 180 employees to our current level of 10 employees, and
implemented other cost-cutting measures.
We intend to continue to compete for current and future market opportunities by
using our existing portfolio of network solutions and services, by refining and
deploying the available technology to meet the specific service demands of our
target markets, and by acquiring or aligning with companies that have new,
attractive product offerings and technologies. Our ability to develop or
acquire technologies, products, and services to fulfill the changing needs of
our customers and address new market opportunities is critical to our future
success.
Our goal is to become a leading business strategy includes the following key
elements:
- - "Partner" With Communities - Our goal is to be viewed as a partner with
communities in the successful deployment and operation of broadband
networks. We believe that access owners, including municipalities, can play
a key role in
2
marketing broadband access and related products and services to their
constituents. We will seek mutually beneficial compensation arrangements
with these groups (e.g. co-branding/co-marketing agreements and
revenue-sharing arrangements) in order to motivate these groups to promote
broadband-based products and services to their constituents. We intend to
seek equity participation in certain projects. We also intend to offer
community portals, which would act as a vehicle through which value-added
features could be offered to community constituents. We refer to our
partnership with these groups as "SmartCommunities."
- - Offer Comprehensive Broadband Solutions - Our goal is to provide the
management for complete broadband solutions including network design,
project management for network construction, broadband connectivity through
reseller arrangements, wireless connectivity installation, Internet-based
telephony, managed e-community portals, and a comprehensive portfolio of
broadband content and value-added services. As a solutions integrator, we
believe that our independence, commitment to universal access and open
networks and turnkey solutions provide attractive and competitive
attributes to our business.
- - Target Underserved Communities - We will seek to exploit anticipated growth
in broadband access and related services, particularly among smaller
communities. A recent Nielson/NetRatings survey concluded that 44.8% of
United States Internet broadband users live in the top 10 largest
metropolitan areas. Further, the Gartner Group predicts that broadband
Internet access penetration will exceed 75% by 2005 up from 50% in 2002.
Roughly, two-thirds of the North American population is located smaller
communities. In addition, some areas in major centers are underserved.
Thus, we expect the growth rate of broadband in smaller communities to
double that of the major metropolitan areas.
- - Leverage Experience and Relationships - Our historical activities
designing, engineering, constructing, and maintaining networks for
communities have provided our management with valuable industry experience
and relationships in our target markets. It has also played an important
role in shaping our new business strategy. We intend to leverage our
industry experience and relationships to successfully implement our
business.
- - Grow Through Qualified Acquisitions and Strategic Relationships - 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 believe that the communication
services industry is highly fragmented, consisting of a large number of
smaller, regional businesses and presents significant opportunities for
consolidation. We plan to target those businesses with high quality
management and strong performance records and to integrate such acquired
operations into our organization.
We have not generated significant revenue from our new business strategy. While
we are currently involved in projects for municipalities in Canada and are in
preliminary discussions with other communities, our existing projects are
currently limited in scope and neither they nor any future projects will
necessarily result in significant revenue.
Our principal executive offices are located at 30 West Beaver Creek Road, Suite
109, Richmond Hill, Ontario, Canada L4B 3K1 and our telephone number is (905)
881-3284. Our website is www.universe2u.com. Statements appearing on our
website are expressly excluded from this prospectus.
Recent Business Developments
In April 2002, we entered into a marketing agreement with EBI Communications,
Inc. pursuant to which EBI agreed to supply us with its gateway devices designed
to enable users to communicate over EBI's Internet-based telephony least cost
routing network. Under the agreement, we acquired worldwide rights to market
and sell the devices and least cost routing service on a private label basis
under our own brand name, voice2u. Our rights are nonexclusive; subject to our
right to convert the agreement to an exclusive basis during the first year upon
payment of an agreed sum to EBI. The agreement became effective on June 25,
2002.
3
On May 14, 2002, we entered into a definitive agreement with Wisper Networks,
Inc., a wireless broadband provider, pursuant to which we agreed to acquire that
company's wireless network infrastructure, customer contracts and related supply
and other agreements in exchange for $432,000 CDN, payable in cash and, under
certain circumstances, shares of common stock. The cash portion of the purchase
price is payable in monthly installments of $15,000 CDN commencing May 16, 2002,
and the share portion must be paid by May 16, 2003. We assumed liabilities as
part of the transaction, currently estimated at $113,000 CDN, which is to be
applied against the purchase. The agreement also provides for adjustments to
the purchase price based upon annual recurring revenue during the 60 days
following the date of the agreement. Based on current estimates, we anticipate
that this should result in an additional $82,000 CDN reduction to the purchase
price. Certain employees of Wisper have joined our company. The transaction is
being treated as a purchase for financial reporting purposes, and remains
subject to approval by Wisper's shareholders. Pending closing of the
transaction, we are entitled to all revenue generated from customers and we are
obligated to reimburse Wisper Networks, Inc. for the provision of such services
on a cost plus basis. See "Business - Wireless Services."
THE OFFERING
This prospectus covers the offer and sale by certain selling security holders of
shares of our common stock. These shares may be issued to the selling
security holders upon conversion of convertible debentures and exercise of
warrants that such persons purchased or agreed to purchase in June 2002.
In June 2002, we entered into an agreement with the selling security holders
pursuant to which they agreed to purchase secured convertible debentures in the
aggregate principal amount of $1,500,000 and warrants to purchase 1,500,000
shares of our common stock for a total purchase price of $1,500,000 in three
equal tranches of $500,000. The first tranche was paid on signing the
agreement, the second tranche is to be paid within 10 days of the initial filing
of this registration statement and the third tranche is to be paid within 10
days of the effective date of this registration statement. The debentures bear
interest at 10% per annum and are convertible at any time at the option of the
holder into shares of our common stock at a substantial discount to the then
market price. The warrants are exercisable at $.30 per share and expire June
2005.
SUMMARY OF FINANCIAL INFORMATION
You should read the following summary of financial information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus.
Our historical financial information is not necessarily indicative of our
future financial performance, particularly in light of our change in business
strategy commenced in early 2001.
Three Months Ended Year Ended
------------------------------ -----------------------------
March 31, 2002 March 31, 2001 Dec. 31, 2001 Dec. 31, 2000
(unaudited) (unaudited)
OPERATING DATA:
Revenue $ 37,226 $ 638,816 $ 1,224,334 $ 5,653,709
Income (loss) from continuing operations ($1,832,596) ($ 2,515,069) ($ 9,238,979) ($ 4,054,920)
Net income (loss) for the period ($1,832,596) ($ 2,529,229) ($ 9,302,440) ($ 4,195,453)
Net income (loss) per common share ($0.05) ($0.07) ($0.25) ($0.12)
Weighted average number of common shares 38,785,289 36,802,445 37,596,066 36,006,392
Cash dividends per common share - - - -
4
BALANCE SHEET DATA:
Total assets $ 2,270,973 $ 2,593,719 $ 1,950,903 $ 3,455,206
Working capital ($ 3,607,070) ($ 2,725,127) ($ 1,129,815) $ 205,913
Long-term obligations $ 229,700 $ 20,427 $ 185,549 $ 23,595
Retained Earnings/(Deficit) ($15,796,752) $ 524,579 ($13,964,156) ($ 4,661,716)
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES IN
THIS OFFERING. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY
AFFECTED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT.
RISK FACTORS RELATING TO OUR BUSINESS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following factors and other information in this
prospectus before deciding to invest in our company. If any of the following
risks actually occur, our business, financial condition, results of operations
and prospects for growth would likely suffer. As a result, the trading price of
our common stock could decline, and you could lose all or part of your
investment.
WE HAVE A LIMITED HISTORY OF OPERATIONS
We have a limited operating history and limited historical financial information
upon which to base your evaluation of our performance, particularly in light of
our change in business strategy commenced in early 2001. We currently have a
limited number of customers and we are still in the process of implementing our
new business strategy. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies starting a new
business, particularly companies in rapidly evolving markets such as the
telecommunications services market.
WE HAVE SIGNIFICANT HISTORICAL LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES IN
THE FUTURE
We have to date incurred operating losses and negative cash flows from operating
activities. We may never be able to achieve profitability. We incurred net
losses of $9,302,440, or $0.12 per share, during 2001 and $4,199,543, or $0.25
per share, during the prior year. At March 31, 2002, we had an accumulated
deficit of $15,796,752 and our losses continue to date. We expect to make
significant expenditures in connection with the development of our business,
including marketing and expanding our service offerings within existing
communities, partnering with additional communities and for potential
acquisitions. As a result, we expect our losses to continue and increase during
the foreseeable future. Our business will fail and you will lose your
investment if we are not able to achieve profitability or generate positive cash
flow sufficient to meet our working capital requirements before we exhaust our
capital resources.
WE NEED ADDITIONAL CAPITAL, WHICH WE MAY NOT BE ABLE TO OBTAIN
At March 31, 2002, we had a working capital deficit of $3,607,070. We have been
unable to meet our payroll obligations, trade obligations, and long-term debt
obligations as they become due as a result of cash flow deficiency. Our
auditors have included a going-concern qualification in their audit report on
our financial statements for the year ended December 31, 2001 included in this
prospectus. We need a significant infusion of new capital to sustain and grow
our business. Other than a remaining $1,000,000 convertible debt commitment by
the selling stockholders, $500,000 of which is to be funded within ten days of
the filing date of this prospectus, and $500,000 of which is to be funded within
ten days of the effective date of this prospectus, we have no sources of
financing immediately available to us. All of our credit facilities are fully
drawn upon and a $12 million equity line of credit that we entered into in
August 2001 will not be effective unless and until we register the resale of the
underlying shares with the SEC. Based upon our present plan of operations, we
anticipate that our existing cash resources, together with the $1,000,000
convertible debt commitment (but excluding the $12 million equity line of
credit), and our increased revenue from our new business model will be
sufficient to fund our operations at least through December 31, 2002. If the
necessary financing is not available on satisfactory terms, we may be unable to
6
continue, develop, or expand our operations. Equity financing would result in
additional dilution to our shareholders. If we decide to raise additional funds
by incurring debt, we may become subject to additional restrictive financial
covenants and financial ratios.
OUR ASSETS ARE FULLY ENCUMBERED AND ARE SUBJECT TO FORECLOSURE IF WE FAIL TO
SATISFY OUR DEBT OBIGATIONS
At June 30, 2002, we had outstanding secured debt obligations in the principal
amount of $1,500,000, approximately $1,000,000 of which is owed to Laurentian
Bank pursuant to an ongoing credit facility and $500,000 of which is owed to the
selling security holders under their convertible notes due June 2005. The
selling security holders have agreed, subject to certain conditions, to purchase
an additional $500,000 in secured convertible debentures by 10 days after the
initial filing of this prospectus and an additional $500,000 by 10 days after
the effective date of this prospectus. We have granted security interests in
all of our assets to secure these obligations. If we default on our obligations
to these creditors, our assets may be foreclosed upon and we may be forced to
cease doing business. Our agreements with these creditors as well as certain
other investors, contain certain restrictive covenants and provisions limiting
our ability to engage in certain financings without their consent.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT SUCCEED
We may not be able to deploy our communications services as planned, achieve
significant market acceptance, achieve favorable operating results or
profitability, or generate revenues sufficient to cover our capital and
operating costs. To be successful, we must develop, market and implement
communications solutions that are widely accepted by our customers at prices
that cover both our operating expenses and development costs. We have not
validated our business model and strategy in the market. We anticipate that our
SmartCommunity business and marketing strategy will involve a lengthy sales
cycle. We believe that the combination of our unproven business model and the
highly competitive and fast-changing communications market in which we compete
makes it impossible to predict:
- the extent to which our communications services will achieve market
acceptance;
- customer penetration in the communities where we provide service; or
- our overall success.
OUR BUSINESS DEPENDS ON KEY PERSONNEL, THE LOSS OF WHOM COULD ADVERSELY AFFECT
OUR BUSINESS
Our business is managed by a small number of key management and operating
personnel. We believe that the success of our business strategy and our ability
to operate profitably depend on the continued services of key management
personnel, particularly Angelo Boujos, Chairman of the Board, Kim Allen, Chief
Executive Officer and Gilbert Chalifoux, Chief Operating Officer. We believe
that each of these key persons contributes unique and significant expertise to
our operations. If we lose the services of any of these individuals or other
key personnel, we may not be able to effectively implement our business model.
We have limited key man life insurance on the lives of Messrs. Boujos and Allen.
Such insurance may not be sufficient to cover the costs to our business from the
loss of either of these individuals.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND RELY ON OTHERS FOR OUR SALES
AND MARKETING EFFORTS
To a large extent, our current sales and marketing efforts rely on arrangements
with others to promote our services. This can result in a lack of control by us
over the marketing and sale of our products. Our compensation arrangements with
such persons is largely success oriented, which may not result in the most
effective sales efforts. We may choose to hire our own sales force in the
7
future. This will require significant expenditures of money and management
resources to attract and select qualified personnel and to train, educate and
support such personnel.
THERE MIGHT NOT BE SUFFICIENT DEMAND FOR OUR DATA AND ENHANCED SERVICES AMONG
SMALL AND MEDIUM-SIZED BUSINESSES
Demand for data services has grown rapidly, and this market is characterized by
rapidly changing technology, evolving industry standards, and frequent new
service introductions. If the commercial market for Internet access and other
broadband data services develops more slowly than expected or if the
communications services that we offer are not widely accepted among small and
medium-sized businesses, our revenues will not grow as quickly as necessary to
achieve or sustain profitability. Demand and market acceptance for recently
introduced services in this industry, including our enhanced services, are also
subject to a high level of unpredictability. Heavy use of the Internet may
impede further development to the extent that users experience delays,
transmission errors, and other difficulties. In addition, customers who have
already invested substantial resources in other technologies may be particularly
reluctant or slow to employ our services.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AGAINST OUR COMPETITORS
Many of our competitors have larger customer bases and significantly greater
financial and technological resources than we do, which could affect our ability
to attract and retain customers as well as diminish our ability to derive
sufficient revenues to remain in business. The telecommunications industry is
extremely competitive which has led to declining prices and margins, coupled
with increasing demands for better and more comprehensive service. We expect
significant competition from traditional and new communications companies,
including facilities-based communications service providers, local and long
distance telephone companies, cable television companies, electric utilities,
microwave carriers, satellite carriers, wireless telephone system operators,
Internet service providers, digital subscriber line companies and large
end-users with private networks. We may also face competition from existing or
prospective customers who employ in-house personnel to perform some of the same
types of services as we provide. Competitors might use new or alternative
technologies to offer better or less expensive services than we can offer. The
development of new technologies or the significant penetration of alternative
technologies into our target market may reduce the demand for our services and
harm our business.
FIXED WIRELESS SERVICE PROVIDERS
We may lose potential small and medium-sized business customers to other fixed
wireless service providers. Fixed wireless service providers are communications
companies that can provide high-speed communications services to customers using
microwave or other facilities or satellite earth stations on building rooftops.
Some of these providers have targeted small and medium-sized business customers
and have a business strategy that is similar to ours. These providers include
TeraGo Networks, NEXTLINK, WorldWithoutWire, and MIPPS.
INTERNET SERVICE PROVIDERS, DIGITAL SUBSCRIBER LINE (DSL) PROVIDERS, AND
CABLE-BASED SERVICE PROVIDERS
Instead of our services, our potential small and medium-sized business customers
could use services provided by digital subscriber line companies and cable-based
service providers. Internet service providers, such as EarthLink, and Telus,
provide Internet access to residential and business customers, generally using
the existing communications infrastructure. Digital subscriber line companies
and/or their Internet service provider customers, such as Bell Nexxia, and
Futureway Communications, typically provide broadband Internet access using
digital subscriber line technology, which enables data traffic to be transmitted
over standard copper telephone lines at much higher speeds than these lines
would normally allow. Cable-based service providers, such as Rogers High Speed,
RCN Telecom Services, and Road Runner, also provide broadband Internet access.
These various providers may also offer traditional or Internet-based voice
services to compete with us.
8
OUR ABILITY TO PROVIDE BROADBAND ACCESS TO OUR CUSTOMERS IS DEPENDENT UPON
PROPER FUNCTIONING OF THE COMMUNICATIONS NETWORKS OF THE SERVICE PROVIDERS UPON
WHOM WE RELY
We are dependent on the systems of our data and voice providers, and, in some
cases, on the interface between our systems and those of our providers.
Therefore, any systems failures experienced by our providers could also have
similar adverse effects on our systems and prevent or impair our service
delivery. Our voice2U Internet telephony service is particularly dependent on
EBI Communications, Inc.'s least cost routing network, our sole provider of such
service. Systems failures can result from a number of factors, many of which
are beyond our control, including:
- Physical damage
- Power loss
- Capacity limitations
- Design defects or inadequacies
- Hardware and software defects
- Security breaches
Our service providers will need to adequately maintain their networks and will
need to upgrade or improve their networks and equipment in order to assure
proper performance and prevent technological obsolescence. We have no control
over whether our service providers will properly maintain, upgrade or improve
their networks and equipment in a timely fashion or at all.
TO PROVIDE OUR DATA AND VOICE SERVICES, WE MUST PURCHASE COMMUNICATIONS CAPACITY
FROM THIRD PARTIES WHO MAY BE UNABLE OR UNWILLING TO MEET OUR REQUIREMENTS
We must purchase communications capacity from third parties in order to provide
our services and to connect our networks to the networks of other communications
providers. These third parties may be unable or unwilling to meet our
operational requirements, service our networks timely and cost effectively, and
guarantee needed capacity, quality assurance or costs. We primarily rely on:
- Bell Nexxa and Futureways to provide collocation space for our data
network access points, and
- EBI Communications to provide VoIP services
Technical difficulties arising from the networks of any of these data or VoIP
services providers, or contractual or other problems with our business
relationships with these providers, could have a material adverse effect on our
business and results of operations.
We also rely on other communications providers for data connectivity to link our
customer to our networks. Our failure to obtain adequate connections from other
communications providers on a timely basis could delay or impede our ability to
provide services and generate revenue. In addition, in some of our target
markets, there is only one established carrier available to provide the
necessary connection. This increases our costs and makes it extremely
difficult, if not impossible, to obtain redundant connections. Sufficient
capacity or redundant capacity may not be readily available from third parties
at commercially reasonable rates, if at all. Our failure to obtain sufficient
redundant connectivity could result in service interruptions or an inability to
provide service in selected locations, which could, in time, lead to a loss of
customers and damage to our reputation.
OUR ABILITY TO GENEREATE REVENUE FROM CONSULTING SERVICES FOR NETWORK
CONSTRUCTION IS DEPENDENT ON A NUMBER OF FACTORS BEYOND OUR CONTROL
Our ability to generate revenue from consulting services for network
construction is dependent upon a number of factors beyond our control including
a comprehensive cost-benefit analysis demonstrating that the perceived benefits
outweigh the anticipated costs, as well as our community partners' ability to
9
secure financing in amounts sufficient to fund the projects. These projects can
cost significant sums of money. Budgets for these projects must be large enough
to cover a variety of risks including:
- Management's ability to effectively control and manage the project
- Shortages of materials or skilled labor
- Unforeseen engineering, environmental or geological problems
- Work stoppages
- Weather interference and natural hazards
- Failure to obtain necessary licenses, permits, and authorizations
- Problems establishing or maintaining interconnections with other
network providers at various public and private points
- Other unanticipated cost increases
If these factors cannot be overcome, we will not be able to generate meaningful
revenue from our network construction consulting services.
OUR BUSINESS COULD SUFFER FROM A REDUCTION OR INTERRUPTION FROM OUR EQUIPMENT
SUPPLIERS OR OTHER THIRD PARTIES ON WHOM WE RELY FOR INSTALLATION AND PROVISION
OF FIELD SERVICE
We purchase our equipment from various vendors and outsource a portion of the
installation and field service of our networks to third parties. Any reduction
in, or interruption of, service from any of our major vendors or installation
and field service providers such as Alliance Corporation, Hutton Communications,
or Cisco Systems could impair our ability to acquire or retain customers and
harm our business generally. These vendors may also not be able to meet our
requirements in a timely and satisfactory manner, and we may not be able to
obtain additional or alternative vendors when and if needed. In addition, the
price of the equipment we purchase may substantially increase over time,
increasing the costs we pay in the future. It could take a significant period
of time to establish relationships with alternative suppliers for each of our
technologies and substitute their technologies into our network.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS
If we are successful in implementing our business plan, our operations could
expand rapidly. This rapid expansion could place a significant strain on our
management, financial and other resources. Our network infrastructure and that
of our service providers may need future expansions and adaptations to respond
to growth in the number of customers served, increased capacity demands and
changes to our service offerings.
Our ability to manage future growth, if it occurs, will depend on our ability
to:
- control expenses related to our business plan;
- maintain responsive customer service;
- maintain regulatory compliance with federal and state authorities as we
- enter into new municipalities;
- improve existing, and implement new, billing and collections, operational
- support and administrative systems; and
- expand, train, and manage our employee base.
The failure to manage our growth effectively would impair our business and
operational performance. We may not be able to expand or adapt our networks to
meet the increasing demands of customers or evolving industry standards.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND ASSIMILATE FUTURE
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH WOULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS
We recently entered into an agreement to acquire the wireless network assets of
Wisper Networks, Inc., and may in the future, acquire, make investments in, or
enter into strategic alliances with companies which have customer bases,
switching capabilities, existing networks, value-added services or other assets
in our current markets or in areas into which we intend to expand our business.
10
Any acquisitions, investments, strategic alliances, or related efforts will be
accompanied by risks such as the:
- Difficulty of identifying appropriate acquisition candidates;
- Difficulty of assimilating operations of respective entities;
- Potential disruption of our ongoing business;
- Loss of key management and operating personnel;
- Potential inability to successfully manage joint ventures especially those
in which we hold less than a majority interest;
- Inability of management to integrate businesses and capitalize on
opportunities presented by acquisitions, investments, strategic
alliances or related efforts;
- Failure to successfully incorporate licensed or acquired technology and
rights into our services;
- Inability to maintain uniform standards, controls, procedures and
policies; and
- Impairment of relationships with employees and customers as a result of
changes in management.
If we are not able to successfully overcome these risks or any other problems
encountered with such acquisitions, investments, strategic alliances or related
efforts, the benefits of such transaction may not be realized and we could incur
significant costs and suffer reductions in revenue form existing operations. We
may also become responsible for liabilities of an acquired business that we may
not have discovered prior to an acquisition.
OUR BUSINESS WILL BE HARMED IF OUR INFORMATION SYSTEMS ARE NOT REPLACED OR
FURTHER DEVELOPED
Sophisticated information systems are vital to our growth and our ability to
achieve operating efficiencies. A failure of any of these systems could
substantially impair our ability to provide services, send invoices, and monitor
our operations. Systems we have identified as being presently inadequate to
meet the increased demands of significant growth include our:
-billing and collections systems;
-operational support systems, such as order entry, order management,
-customer service databases and trouble ticketing; and
-administrative systems, such as financial, accounting and human
resources.
We estimate that modifying or replacing these systems will cost approximately
$1.5 million over the next two years, although actual costs may be higher. Our
plans for the development and implementation of these systems rely, for the most
part, on acquiring products and services offered by third-party vendors and
integrating those products and services. We may be unable to implement these
systems on a timely basis or at all, and these systems may not perform as
expected. We may also be unable to maintain and upgrade these systems as
necessary.
THE COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES, AND NEW
TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The communications industry is subject to rapid and significant technological
changes, including continuing developments in digital subscriber line technology
and alternative technologies for providing high-speed data communications.
These alternative technologies include cable modem, fixed wireless, satellite,
or other high-speed transmission technology. As a consequence:
- we expect that new products and technologies will emerge that may be
superior to, and/or render obsolete, the products and technologies we
currently use, including copper-based transmission and fixed wireless
technologies;
- our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
- we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology.
11
If we fail to adapt successfully to technological changes or fail to obtain
access to new or improved technologies, our business would suffer.
LACK OF INTEROPERABILITY MAY HAMPER OUR FUTURE GROWTH
The lack of interoperability among hardware produced by different vendors may
limit our ability to effectively link community networks with other networks on
a fully interoperable basis. Without a widely adopted interoperability standard
for VoIP applications, terminators of voice traffic over the Internet will
continue to be required to only accept voice traffic originating on gateways
compatible with their terminating gateway. Unless an interoperability standard
is widely adopted and used by manufacturers of gateways and other hardware, we
will need to carry traffic on the public switched telephone network reducing our
competitive advantage over traditional long distance service providers and our
business may be materially harmed.
WE MAY NOT BE ABLE TO ACQUIRE AND MAINTAIN THE RIGHTS-OF-WAY AND OTHER PERMITS
AFTER THEY HAVE EXPIRED OR TERMINATED
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments, transit authorities,
and building owners to install underground conduit and/or overhead structures
for the expansion of our networks. We may not be successful in obtaining and
maintaining these agreements or obtaining these agreements on acceptable terms.
Some of these agreements may be short-term or revocable at will, and we may not
be able to maintain access after they have expired or terminated. If any of
these agreements were terminated or could not be renewed for any reason, and we
were forced to remove our infrastructure or abandon our networks, the
termination could have a material adverse effect on our business.
WE MAY NOT BE ABLE TO SURVIVE THE CURRENT ECONOMIC CRISIS IN THE
TELECOMMUNICATIONS INDUSTRY
The telecommunications industry has recently experienced a dramatic slowdown in
business. The economic difficulties our industry faces have and, for so long as
they continue, will, negatively impact our ability to raise capital and grow our
business. Many companies, start-up businesses as well as more seasoned
companies, have been forced to declare bankruptcy. A glut in fiber-optic
capacity and equipment, as well as accusations of improper accounting at larger
companies, does not support a near-term recovery. The problems within the
industry are magnified with respect to our company as we have a small customer
base and very limited capital to sustain us.
OUR CHAIRMAN AND HIS WIFE MAY BE ABLE TO INFLUENCE MATTERS REQUIRING STOCKHOLDER
APPROVAL AND THEIR INTERESTS MAY CONFLICT WITH OTHER STOCKHOLDERS
Our Chairman of the Board of Directors, Angelo Boujos, and his wife, Josie
Boujos, directly and indirectly through a family trust, own approximately 13
million shares of our company's common stock, amounting to approximately 33% of
all outstanding shares of common stock. These principal stockholders are able
to exercise significant control over the election of the board of directors. In
addition, these principal stockholders hold a sufficient portion of our shares
to generally determine the outcome of most corporate matters submitted to the
shareholders for approval. This control may include, without limitation, power
to determine the outcome of decisions regarding mergers, consolidations, and the
sale of all or substantially all of our assets. In addition, these principal
stockholders would have substantial influence over any change in control of our
company. As a result, other stockholders may not have a meaningful voice in the
corporate governance and affairs of our company.
12
OUR COMPANY MAY BE SUBJECT TO A FOREIGN EXCHANGE RISK
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 our assets are
located in, and our operations are conducted in, Canada. We have not made
significant use of financial instruments to minimize the exposure to foreign
currency fluctuations. As a result, our reported financial condition and
results of operations may be negatively impacted by fluctuations in the exchange
rate between the United States and Canadian dollar.
OUR COMPANY MAY BE SUBJECT TO LIABILITY UNDER PENDING LAWSUITS
We are a party to several lawsuits. These lawsuits generally relate to claims
of wrongful dismissal by former employees, claims for misappropriation of
confidential information by competitors and claims of breach of contract by
service providers. Other claims relate to unpaid accounts by service providers
and suppliers, some of which have resulted in default judgments. If we do not
prevail in these lawsuits, we could be subject to liability of an unknown
magnitude. A significant determination made against us could require that we
pay monetary damages that could deplete our financial resources.
ASPECTS OF OUR BUSINESS MAY BE SUBJECT TO GOVERNMENTAL REGULATION WHICH CAN HURT
OUR ABILITY TO IMPLEMENT OUR BUSINESS QUICKLY AND EFFICIENTLY
We may be subject to varying degrees of regulation in each of the jurisdictions
in which we operate. In the United States, the FCC and various state regulatory
bodies regulate some aspects of our services, such as broadband delivery and
VoIP. In some local jurisdictions, approval must be obtained to operate or
construct our community partners' networks. In Canada, the CRTC regulates some
aspects of our services. When we establish joint venture the corporate
structure requires a large percentage to be Canadian owned, thus some
joint-venture structures may involve multiple organizations.
Regulations governing communications services change from time to time in ways
that are difficult to predict and our services could become subject to federal,
state, and/or local regulation. As we continue to expand our operations
geographically, we may become subject to the regulation of additional
jurisdictions. If we fail to comply with all applicable regulations or
experience delays in obtaining required approvals, our business could be harmed.
Some of the jurisdictions where we provide services have little, if any, written
regulations regarding our operations. In addition, the written regulations and
guidelines that do exist in a jurisdiction may not specifically address our
operations. If our interpretations of these regulations and guidelines are
incorrect, our business may be harmed. Compliance with all regulatory
requirements may be costly.
Many regulations and legal issues related to co-location, VoIP, and the Internet
are unsettled and have yet to be interpreted or enforced. Some of these issues
within our industry include property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy.
Our business may be adversely affected by the adoption and interpretation of any
future or currently existing laws and regulations. In addition, despite the
design and implementation of a variety of network security measures,
unauthorized access, computer viruses, unsolicited e-mail "spamming",
accidental, or intentional action, and other disruptions could occur. It is
possible that claims could be made against us for which we could possibly be
held liable. We may need to implement measures to reduce our exposure to the
potential liability that may require the expenditure of substantial resources.
The increased attention focused upon liability issues as a result of lawsuits,
new laws and legislative proposals could impede the growth of our business.
In addition, certain of our activities may be subject to regulation in each
state to the extent that these services are offered for intrastate use. These
regulations, as well as future regulatory, judicial, or legislative action could
require material expenditures that could be prohibitively expensive and
therefore adversely affect our ability to continue in business. In such event,
we would not be able to implement our business model, as a result, our business
could fail, and you could lose all of your investment in our Company.
13
WE MAY NOT BE ABLE TO COMPLY WITH CANADIAN RESTRICTIONS ON FOREIGN OWNERSHIP
Under the Canadian ownership provisions of the Telecommunications Act, a
"telecommunications common carrier" is not eligible to operate in Canada unless
it is owned and controlled by Canadians. We are not a carrier nor do we provide
regulated telecommunications services. However, future Canadian
Radio-television and Telecommunications Commission determinations or events
beyond our control may require us to comply with the ownership provisions of the
Telecommunications Act. We currently derive substantially all of our revenue
from Canadian sources. If we are impaired from operating in Canada as a result
of becoming subject to the Telecommunications Act, we may not be able to
continue in business in Canada and there would be a substantial likelihood that
our business would fail.
RISKS RELATING TO THE OFFERING
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT OUR STOCK PRICE
The sale or availability for sale of substantial amounts of our common stock,
including shares covered by this prospectus and shares issuable upon exercise of
outstanding stock options or warrants, in the public market could adversely
affect the market price of our common stock and materially impair our ability to
raise capital through future offerings of our common stock. As of June 30,
2002, we had 34,799,608 shares of common stock issued and outstanding and the
following shares of common stock were reserved for issuance:
- - 6,644,507 shares of common stock upon exercise of our outstanding warrants
and options (other than warrants held by the selling security holders);
- - 18,873,016 shares of common stock upon conversion of the debentures and
exercise of the warrants issued to the selling security holders or to be
issued to such persons upon satisfaction of their full $1,500,000 funding
commitment under the June 2002 Private Placement;
- - 5,758,000 shares to be issued upon the exchange of a like number of shares
held by former owners of one of our subsidiaries (including our chairman
and his wife);
- - up to 1,000,000 shares in connection with an $800,000 CDN principal amount
loan;
- - an indeterminate number of warrants in connection with a $500,000 credit
facility based on the amounts advanced and our stock price at the time of
the draw down; and
- - an indeterminate number of shares of common stock which may become issuable
under the $12 million equity line of credit with Fusion Capital Fund II,
LLC.
Substantially all of the currently outstanding shares of common stock and an
aggregate of 1,500,000 shares underlying options that were privately registered
are freely tradeable without restriction unless held by our affiliates, as that
term is defined under the Securities Act. The up to 18,873,016 shares covered by
this prospectus will be freely tradeable after the effective date of this
prospectus so long as the prospectus remains current and effective. The Fusion
equity line will not be activated unless and until a resale registration
statement relating to the underlying shares is declared effective. Accordingly,
any shares that we issue under that arrangement will also be freely tradeable
only so long as the prospectus remains current and effective.
The remaining shares described above plus an indeterminable number of additional
shares, will be deemed "restrictive securities" and may not be sold in the
absence of registration or in accordance with Rule 144 under the Securities Act
or another exemption from registration. In addition, shares that are held by
affiliates that are not covered by a resale registration may also not be sold
except pursuant to registration or in accordance with Rule 144 or another
exemption from registration under the Securities Act.
14
June 2002 Private Placement
As of July 25, 2002, $500,000 principal amount of secured convertible debentures
were issued to the selling security holders in connection with the June 2002
Private Placement. The debentures are convertible into such number of shares of
common stock as is determined by dividing the principal amount thereof by the
then current conversion price. If the appropriate conversion price on July 24,
2002 was $0.11 (the lesser of 55% of the average of the lowest three trading
prices during the twenty days immediately preceding the conversion date or
$0.50), the debentures would have been convertible into approximately 4,545,455
shares of common stock. However, this number could be significantly greater in
the event of a decrease in the trading price of the common stock. Moreover,
upon funding of the balance of the investors' total commitment, an aggregate of
$1,500,000 principal amount of debentures will be outstanding. Purchasers of
common stock could therefore experience substantial dilution of their investment
upon conversion of the debentures. The debentures are not registered and may be
sold only if registered under the Securities Act of 1933, as amended, or sold in
accordance with an applicable exemption from registration, such as Rule 144.
The shares of common stock into which the debentures may be converted are being
registered pursuant to this registration statement.
As of July 25, 2002, warrants to purchase 500,000 shares of common stock issued
to the purchasers of the debentures were outstanding. Moreover, upon funding of
the balance of the investors' commitment, warrants to purchase an aggregate of
1,500,000 shares of common stock will be outstanding. These warrants are
exercisable for three years at $0.30 per share, subject to antidilution
adjustment. The shares of common stock issuable upon exercise of these warrants
are being registered pursuant to this registration statement.
The selling security holders may engage in short sales of our stock, which could
have the effect of driving down our stock price. Short sales are sales of a
security not owned by the seller and is a technique used to take advantage of an
anticipated decline in the price of a security. Because the selling security
holders can convert their debentures into common stock at a price that is less
than the then current market price, they will be able to sell our stock short
and then convert their debentures and cover their short sales with stock
purchased at a price that is lower than their sales price with little or no
risk. Repeated short sales could place downward pressure on our stock price and
result in a loss to persons who purchase shares from the selling security
holders pursuant to this prospectus. In addition, our current stockholders may
also engage in short sales of our stock, which could put additional downward
pressure on our stock price.
Lock-up arrangement
Effective June 6, 2002, certain of our existing stockholders holding an
aggregate of 32,829,765 shares of stock, including shares underlying then
outstanding options, agreed to lock-up their shares and options. The Lock-up
Agreement generally prohibits sales of such shares until April 30, 2003, subject
to certain exceptions. Market sales of shares held by principal stockholders or
any other stockholder or the availability of shares for future sale may have an
adverse effect on the market price of our common stock.
OUR STOCK MAY BE ILLIQUID AND INVESTORS MAY HAVE DIFFICULTY SELLING THEIR SHARES
The Company's common shares are traded on the OTC Bulletin Board. As a result,
the holders of the Company's common shares may find it more difficult to obtain
accurate quotations concerning the market value of the shares. Shareholders
also may experience greater difficulties in attempting to sell the shares than
if they were listed on a stock exchange or quoted on the NASDAQ National Market
or the NASDAQ Small-Cap Market. Because the Company's common shares are not
traded on a stock exchange or on the NASDAQ National Market or the NASDAQ
Small-Cap Market, and the market price of the common shares is less than $5.00
per share, the common shares are classified as a "penny stock." SEC Rules
impose additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as
an "established customer" or an "accredited investor." This includes the
15
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customer concerning the risks of penny stocks. Application of the penny
stock rules to the Company's common shares could adversely affect the market
liquidity of the shares, which in turn may affect the ability of holders of the
Company's common shares to resell the shares. As a result of the difficulty in
selling our shares, investors may not be able to liquidate their shareholdings
in our company as quickly as they might otherwise be able to do in more
conventionally traded securities and therefore you may lose all or a significant
portion of your investment in our company.
OUR STOCK PRICE IS HIGHLY VOLATILE WHICH CAN RESULT IN SIGNIFICANT AND RAPID
FLUCTUATIONS IN THE VALUE OF YOUR STOCK POSITION
The market price of our common stock has been and we expect it to continue to be
highly unstable. Since January 2001, our stock price has ranged from a high of
$5.13 per share to a low of approximately $0.10 per share. As a result, the
value of your shares may fluctuate considerably and rapidly irrespective of the
intrinsic value of our company. Factors that may have a significant impact on
the market price of our shares may include announcements of technological
improvements or announcements by other companies, regulatory matters, research
and development activities, new or existing products or procedures, signing or
termination of partnership and strategic alliance agreements, concerns about our
financial position, operating results, litigation, government regulation,
developments or disputes relating to agreements, patents or proprietary rights,
and industry and market volatility.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus under the sections entitled
"Prospectus," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" are forward- looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. They include statements
about our expectations, beliefs, plans, objectives, assumptions or future events
or performance. These statements are often, but not always, made through the
use of words or phrases such as "will likely result," "expect," "will continue,"
"anticipate," "estimate," "intends," "plan," "projection," "would," and
"outlook." These forward-looking statements are based on our expectations and
are subject to a number of risks and uncertainties. Our actual results may
differ materially from those suggested by these forward- looking statements for
various reasons, including those discussed under the sections entitled "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business - General risks of the telecommunications
industries; Development risks."
You should not place undue reliance on any such forward- looking statements.
Further, any forward-looking statement speaks only as of the date on which it is
made and we undertake no obligation to update any forward- looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
16
USE OF PROCEEDS
The shares covered by this prospectus are being offered by certain selling
security holders and not by us. Consequently, we will not receive any proceeds
from the sale of these shares. However, we may receive the proceeds from the
exercise of warrants as described below.
Of the shares covered by this prospectus, 1,500,000 shares are issuable upon
exercise of warrants granted to the selling security holders in connection with
the June 2002 Private Placement. Assuming all such warrants are exercised, we
would receive proceeds of $450,000. We expect to use any such proceeds for our
working capital and general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades under the symbol "UTOU" on the NASD Over-The-Counter
Bulletin Board ("OTCBB"). The common stock commenced trading on the OTCBB on
May 17, 2000. The high and low trading prices of the common stock since
inception of trading have been as follows:
Quarterly Period Ended High Low
June 30, 2000 $12.00 $4.90
September 30, 2000 $9.50 $5.00
December 31, 2000 $7.50 $4.75
March 31, 2001 $5.13 $1.69
June 30, 2001 $5.05 $2.08
September 30, 2001 $3.30 $0.95
December 31, 2001 $1.60 $0.41
March 31, 2002 $1.12 $0.15
June 30, 2002 $0.90 $0.27
The quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission and may not represent actual transactions.
Our common stock is listed for trading on the Third Segment of the Frankfurt
Stock Exchange under WKN 938 851 and the symbol "UVS." Trading has not been
initiated on that exchange.
There are approximately 39 holders of record of our common stock as of July 16,
2002. We believe that there are in excess of 650 beneficial owners of our
common stock.
We have never declared or paid any cash dividends on shares of our common stock.
We currently intend to retain our earnings for future growth and development of
our business and, therefore, do not anticipate paying cash dividends in the
foreseeable future.
17
SELECTED FINANCIAL DATA
You should read the following selected financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this Registration Statement.
Financial information does not purport to be indicative of results, which may be
obtained in the future.
Three Months Ended Year Ended
------------------------------ -------------------------------
March 31, 2002 March 31,2001 Dec. 31, 2001 Dec. 31, 2000
(unaudited) (unaudited)
OPERATING DATA:
Revenue $ 37,226 $ 638,816 $ 1,224,334 $ 5,653,709
Income (loss) from continuing operations ($1,832,596) ($ 2,515,069) ($ 9,238,979) ($ 4,054,920)
Net income (loss) for the period ($1,832,596) ($ 2,529,229) ($ 9,302,440) ($ 4,195,453)
Net income (loss) per common share ($0.05) ($0.07) ($0.25) ($0.12)
Weighted average number of common shares 38,785,289 36,802,445 37,596,066 36,006,392
Cash dividends per common share - - - -
BALANCE SHEET DATA:
Total assets $ 2,270,973 $ 2,593,719 $ 1,950,903 $ 3,455,206
Working capital ($ 3,607,070) ($ 786,267) ($ 2,725,127) $ 205,913
Long-term obligations $ 229,700 $ 20,427 $ 185,549 $ 23,595
Retained Earnings/(Deficit) ($ 15,796,752) $ 524,579 ($13,964,156) ($ 4,661,716)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following information together with our consolidated
financial statements and the related notes included in this prospectus beginning
on page F-1. Certain statements in this section are "forward-looking
statements." You should read the information under "Forward-looking Statements"
for special information about our presentation of forward-looking information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We provide broadband connectivity and content delivery solutions to communities
that have traditionally been underserved by telecommunications companies. These
communities include municipalities, schools, hospitals and commercial,
governmental, industrial, and residential complexes whose location makes it more
difficult or costly to provide broadband access. We provide these communities
with consulting and management services for design, development, operation,
marketing, and sales. We provide broadband through our wireless infrastructure
and as a reseller. We deliver content through our Internet portal and our
Internet-based telephony product we callvoice2u. Our activities are presently
limited to Canada and the United States. We are not a telecommunications
carrier nor do we provide regulated telecommunications services.
In early 2001, we commenced a strategic shift in our business strategy to our
present model. Prior to that time, we expected to build our relationships with
communities through our infrastructure expertise as our business primarily
involved design, construction and maintenance of broadband infrastructure as a
third party contractor for large telecommunications companies and electric
utilities building their own telecommunications network. While that business
resulted in multi-million dollar build-out contracts, it was dependent on the
health of the telecom industry and the financial health of our telecom
customers. It was also labor-intensive and limited in its ability to produce
recurring revenue streams from value-added products and services. Revenues from
design, construction, and maintenance services (and sales of related products)
were approximately $1.22 million in 2001 and $5.65 million in 2000. The
decrease reflects adverse conditions in the telecom market as well as our change
in business strategy. In connection with our new focus, we disposed of a number
of capital assets, reduced our employee base from approximately 180 employees to
our current level of 10 employees, and implemented other cost-cutting measures.
Operations are evaluated based on two reportable geographic segments: Canada and
the United States. Before our refocusing of our business, operations were
organized into segments based on the nature of products and services provided:
- - Fiber Construction and Maintenance Services, responsible for building and
maintaining the telecom infrastructure including long-haul network builds,
regional networks, community networks, and in-building networks.
- - Fiber Network and System Engineering and Design, 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.
- - Sales and Marketing, 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.
- - Network Services, a support service for the other operating segments.
In May 2002, we entered into a definitive agreement with Wisper Networks, Inc.,
a wireless broadband provider, pursuant to which we agreed to acquire that
company's wireless network infrastructure, customer contracts and related supply
and other agreements in exchange for $432,000 CDN, payable in cash and, under
19
certain circumstances, shares of common stock. The cash portion of the purchase
price is payable in monthly installments of $15,000 CDN commencing May 16, 2002,
and the share portion must be paid by May 16, 2003. We assumed liabilities as
part of the transaction, currently estimated at $113,000, which is to be applied
against the purchase. The agreement also provides for adjustments to the
purchase price based upon annual recurring revenue during the 60 days following
the date of the agreement. Based on current estimates, we anticipate that this
should result in an additional $82,000 CDN reduction to the purchase price.
Certain employees of Wisper have joined our company. The transaction is being
treated as a purchase for financial reporting purposes, and remains subject to
approval by Wisper's shareholders. Pending closing of the transaction, we are
entitled to all revenue generated from customers and we are obligated to
reimburse Wisper Networks, Inc. for the provision of such services on a cost
plus basis.
GOING CONCERN
We have incurred losses to date. We have a deficiency as of December 31, 2001 of
$(13,964,156), a working capital deficiency of $2,725,127 and used $1,673,295 of
cash for operating activities during the year. In addition, we have been unable
to meet our payroll obligations, trade obligations, operating lease commitments,
and long-term debt commitments as they become due.
These factors raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated financial statements assume that the
company will continue as a going concern. Accounting principles require us to
adjust our financial statements to reflect the recoverability and classification
of recorded asset amounts and classification of liabilities upon the occurrence
of events that would result in our inability to continue as a going concern.
These events might include, but not limited to, our inability to meet short-term
liabilities as they come due, secured creditors foreclosing on material assets
or other material adverse events.
If we are unable to meet the going concern estimation, we would be required to
write down the value of all assets to their liquidation value and all long-term
debt will be converted into short-term liabilities. If this were to happen, at
March 31, 2002 the potential write down of assets would be in excess of $1.6
million, increasing the net loss for that quarter from $1,832,596 to over $3.4
million on a pro forma basis. Further, the current liabilities would increase
by roughly $230,000, and our working capital deficiency would increase by
roughly $1,700,000 from $2,725,127 to $4,400,000 on a pro forma basis.
RESULTS OF OPERATIONS
Year ended December 31, 2001 and three months ended March 31, 2002, compared to
the fiscal period ended December 31, 2000, and three months ended March 31,
2001, respectively.
Certain accounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation adopted in the current
period financial statements.
REVENUES
Total revenues decreased $4.4 million, or 78%, to $1.2 million for the year
ended December 31, 2001 from $5.6 million for the year ended December 31, 2000.
The decrease is largely attributable to a reduction in the volume of network
design, engineering, construction, and maintenance work from our third party
contracting activities. The construction in the telecommunications industry was
significantly less in 2001 than 2000 in our target markets. The majority of our
2001 revenue was from our legacy business. In addition, we changed our business
strategy to focus on further developing our SmartCommunity model. Less than 15%
of the revenue was attributable to new business model.
Total revenues decreased $602, 000, or 94%, to $37,000 for the three months
ended March 31, 2002 from $639,000 for the three months ended March 31, 2001.
The decrease is attributable to the same reasons described above for the
decrease in revenues for the year.
COST OF SALES
20
Cost of sales decreased $1.4 million, or 41%, to $1.9 million for the year ended
December 31, 2001 from $3.3 million for the year ended December 31, 2000. The
decrease lagged the reduction in revenue as much of the construction resources
were idle for large portions of the year as we went through a restructuring.
Cost of sales decreased $508,000, or 66%, to $260,000 for the three months ended
March 31, 2002 from $768,000 for the three months ended March 31, 2001. This
decrease reflects the decrease in revenue and that some of our cost of sales are
fixed. These fixed costs include equipment rental, lease commitments for
equipment, amortization costs, salaries to engineers, and trade staff. In the
short term, we are unable to reduce these costs proportionally with the
reduction of the revenue.
GROSS PROFIT
Gross profit for the year ended December 31, 2001 was negative $736,000 (-60% of
revenues) versus $2.3 million (41% of revenues) in 2000. The decrease in gross
profit reflects the inactivity in the construction area while continuing to pay
the lease costs of the equipment.
Gross profit for the three months ended March 31, 2002 was $223,000 (-598% of
revenues) versus a negative $130,000 (-20% of revenues) in 2001. The decrease
in gross profit reflects the continued fixed costs as the Company continued to
refocus its business strategy.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administration expenses increased $1.4 million to $4.9
million (402% of revenues) for the year ended December 31, 2001 from $3.5
million (63% of revenues) for the year ended December 31, 2000, as a resulting
of the change in our business strategy. We accounted for the restructuring
costs, such as employee statutory severance pay as an administrative expense.
Selling, general and administration expenses decreased $632,000 to $765,000
(2,054% of revenues) for the three months ended March 31, 2002 from $1,397,000
(219% of revenues) for the three months ended March 31, 2001. This reflects the
cost cutting measures implemented as we refocused our business strategy. This
includes reduction in administrative, executive, management and other support
salaries, and their associated overhead expenses and a reduction in printing and
other office costs.
STOCK BASED COMPENSATION EXPENSE
Stock based compensation expense for the year ended December 31, 2001 was $2.4
million versus $2.4 million for the year ended December 31, 2000. We account
for stock-based compensation under the provisions of APB No. 25 "Accounting for
Stock Issued to Employees" and accordingly, we recognize 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, our
acquisition on May 17, 2000.
Stock based compensation expense for the three months ended March 31, 2002 was
$412,000 versus $893,000 for the three months ended March 31, 2001. We
anticipate 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 31, 2002 there were 3,043,125 stock options outstanding with
a weighted average exercise price of $2.01.
At the meeting of our Board of Directors on April 11, 2002, the price of
2,095,875 outstanding options that had been granted to employees, officers, and
directors was reset to $0.75 per share. The closing price of the stock on April
10, 2002 was $0.65. The repricing will trigger variable plan accounting for
these options under FIN 44 on a go forward basis and was reflected in our 10Q-SB
for the quarter ended March 31, 2002. Our disclosure in the MD&A in the Form
10-QSB for said period stated that we anticipate expensing $1.5 million in stock
21
compensation expense over the next 6 quarters. Although this reflected our
anticipated usage of stock option compensation on a go forward basis, it does
not attempt to estimate the effect of the variable plan accounting that has been
adopted.
INTEREST AND FINANCING COSTS
Interest and financing costs were $1.1 million (86% of revenues) for the year
ended December 31, 2001, an increase of $798,000 from $258,000 (5% of revenues)
for the year ended December 31, 2000. This was a direct result of increased
financing necessary for capital expenditures and to fund the operating losses.
The interest and financing costs also include the fair value of warrants issued
in connection with financing. As of March 31, 2002, there is included in income
a deferred charge of $930,000, which is being amortized over the 40-month of the
financing.
Interest and financing costs were $412,000 (1108% of revenues) for the three
months ended March 31, 2002, an increase of $374,000 from $38,000 (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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs were $218,000 (18% of revenues) for the year
ended December 31, 2001, compared to $273,000 (5% of revenues) for the year
ended December 31, 2000. The decrease of $56,000 was the result of a disposal
of capital assets in connection with the refocus of our business strategy.
Depreciation and amortization costs were $31,000 (82% of revenues) for the three
months ended March 31, 2002, compared to $71,000 (11% of revenues) for the three
months ended March 31, 2001. The decrease of $40,000 was the result of a
substantial reduction in capital assets primarily in connection with our network
construction business in connection with the refocus of our business strategy.
NET LOSS
We incurred losses before income taxes for the year ended December 31, 2001, and
December 31, 2000, of $9.3 million and $4.1 million, respectively. Non-cash
stock based compensation accounted for $2.4 million of the loss in the year
ended December 31, 2001, and $2.4 million of the loss in the year ended December
31, 2000.
We 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 $412,000 of the loss in the three months ended March 31, 2002, compared to
$893,000 for the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
We incurred losses since inception and, at March 31, 2002, have a deficit as of
$(15,796,752) and a working capital deficiency of $(3,607,070). We have been
unable to consistently meet our payroll obligations, trade obligations, and
long-term debt commitments as they become due. These factors raise substantial
doubt as to our ability to continue as a going concern. See the Auditor's
Report on the audited Consolidated Financial Statements and the Review
Engagement Report on the interim Consolidated Financial Statements included
herein as well as the Notes referred to in such reports.
22
During the year, we experienced cash flow shortages on a number of occasions and
had been unable to meet all of our payable obligations on a timely basis. Three
of the operating operations were late in remitting payroll withholding and sales
taxes to the tax authorities.
Our operations have been funded to date through a combination of cash flow from
operations and equity and debt financings. Based on our current plan of
operation, we anticipate that our existing cash resources, including available
credit lines and existing credit commitments amounting to $1,250,000(including
the remaining $1 million convertible debt commitment by the selling security
holders), will not be sufficient to satisfy our operations beyond the next 12
months.
In an effort to improve our ability to obtain equity-based financing, effective
June 6, 2002, certain of our existing stockholders holding an aggregate of
32,829,765 shares of common stock, including shares underlying then outstanding
options, agreed to lock-up their shares and options pursuant to an agreement
each of them entered into with us). These agreements generally prohibit sales
of such shares until April 30, 2003, subject to certain exceptions.
For the three months ended March 31, 2002, the Company's net cash used in
operating activities was $466,000 ($468,000 in 2001). This amount includes
adjustments for non-cash items comprised of depreciation and amortization of
$31,000 ($71,000 in 2001), stock option compensation of $412,000 ($893,000 in
2001), amortization of deferred charges of $87,000 (0 in 2001), the issuance of
warrants of $3,000,000 (0 in 2001), and a losses from significantly influenced
investments and disposals of capital assets totaling $14,000 ($14,000 in 2001).
For the three months ended March 31, 2002 net cash generated by investing
activities was $7,000 principally attributable to the sale of capital assets.
For the three months ended March 31, 2001, net cash used in investing activities
was $23,000, 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 $613,000 and net proceeds on term debt of $472,000 offset by an
increase in due from related parties of $27,000. For the three months ended
March 31, 2001 net cash provided by financing activities of $500,000 included
net proceeds from the issue of share capital of $550,000 offset by net
repayments on long-term debt of $7,000, the decrease in bank indebtedness of
$21,000 and the net increase in due from related parties of $16,000.
Upon approval by Wisper Networks' shareholders of our planned acquisition of its
wireless network business, we will be committed to pay the purchase price as
follows: $432,000 CDN, payable $15,000 CDN monthly and, under certain
circumstances, shares of common stock. We assumed liabilities as part of the
transaction, currently estimated at $113,000 CDN. The agreement also provides
for adjustments to the purchase price based upon annual recurring revenue during
the 60 days following the date of the agreement, which is currently estimated to
be $350,000 CDN. The resulting balance will be paid in shares price at $0.69 on
May 15, 2003, subject to registration with the Ontario Securities Commission.
The purchase price is payable over 12 months from closing. Under certain
circumstances, the cash portion may be paid in stock as well.
FUSION EQUITY LINE
On August 1, 2001, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion agreed to purchase shares of our
common stock on each trading day during the term of the agreement in an amount
not to exceed $15,000 per day (unless our stock price exceeds $7.00 per share),
up to an aggregate of $12.0 million during the term of the agreement. The
agreement was to have an initial term of 40 months, but was recently extended to
52 months, with an optional six-month extension at our discretion. The purchase
price of the shares of common stock will be equal to the lowest sale price of
our common stock on the purchase date or the average of the three (3) lowest
closing sale prices of our common stock during the fifteen (15) consecutive
trading days prior to the date of a purchase by Fusion.
23
We have the right to suspend or limit purchases and to terminate the agreement
at any time. Notwithstanding the foregoing, Fusion may not purchase shares of
common stock under the common stock purchase agreement if Fusion or its
affiliates would beneficially own more than 4.9% of our then aggregate
outstanding common stock immediately after the proposed purchase. If the 4.9%
limitation is ever reached, we have the option to increase this limitation to
9.9%. If the 9.9% limitation is ever reached, this limitation will not limit
Fusion's obligation to fund the daily purchase amount. Fusion must liquidate
holdings to remain below the 9.9% threshold, however it does not limit their
funding obligation.
We have the right to set a minimum purchase price at any time. If our stock
price trades at a level that results in a purchase price below the floor price,
Fusion will not be permitted or obligated to purchase our stock under the
agreement. Currently, the floor price is $2.50. We can increase or decrease
the floor price at any time upon one trading day prior notice to Fusion.
Fusion has agreed that neither it nor any of its affiliates shall engage in any
direct or indirect short-selling or hedging of our common stock during any time
prior to the termination of the common stock purchase agreement.
Fusion may terminate the common stock purchase agreement without any liability
or payment to the Company upon the occurrence of certain events including our
failure to maintain an effective registration covering resale of the purchased
shares, our failure to maintain trading in our common stock, in each case for
certain periods of time, our default of payment obligations in excess of $1
million, actual or threatened bankruptcy by us and our material breach of the
representations and warranties contained in the agreement.
In consideration for its commitment under the agreement, we issued to Fusion,
for no additional consideration, 375,000 shares of our common stock, and
warrants to purchase 375,000 shares of our common stock at an exercise price of
$4.00 per share. Unless an event of default occurs, Fusion must maintain
ownership of 375,000 shares of our common stock (i) for a period of 40 months
from the date of the common stock purchase agreement, or (ii) until such date as
the common stock purchase agreement is terminated.
Until the termination of the common stock purchase agreement, we have agreed not
to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless we have
obtained Fusion's prior written consent.
To gain Fusion's consent to proceed with the June 2002 Private Placement and in
consideration for Fusion's extension of the agreement term to 52 months, we
reduced the exercise price of the warrants to $1.00.
PALM TRADING CREDIT FACILITY
In July 2001, we established a line of credit with Palm Trading Limited. We may
draw upon the line of credit in one or more tranches in an aggregate principal
amount not to exceed $500,000. Each draw down may be for a minimum of $10,000
up to a maximum of $50,000. Outstanding balances accrue interest at a rate of
8% per annum, compounded monthly. We may draw upon the credit line
approximately once per month. The line of credit shall be repaid on the earlier
of such date as we have adequate cash reserves, as determined by our Audit
Committee, or July 27, 2003. Upon each draw down under the line of credit, we
are obligated to issue warrants to Palm based on the following formula:
# 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 prior to 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. As of March 31, 2002, 133,455 warrants had
been issued in connection with this loan.
LAURENTIAN BANK CREDIT FACILITY
24
On February 22, 2002, we established a credit facility with Laurentian Bank of
Canada. The facility provides for an operating line of credit up to $2.5
million CDN, a $1 million CDN contract forward facility, and credit cards with a
$50,000 spending limit. The line of credit is to be fully secured by cash
deposits. The line of credit 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 collateral is less than $2.5 million CDN. In
addition, we have provided Laurentian Bank a general security interest covering
substantially all of our assets, as well as corporate cross guarantees from our
subsidiaries. At June 30, 2002, $800,000 CDN was being utilized under the line
of credit. To fund the cash collateral, on February 15, 2002 we borrowed
$800,000 CDN from 1463549 Ontario Inc., an unrelated third party investor. The
loan requires monthly interest only payments of $8,834.34 CDN and matures on
August 15, 2002. The loan bears a 10% monthly payment penalty in the event of
default at maturity and a penalty for early termination equal to three months of
interest. We agreed to pay all costs associated with establishing the loan. We
also agreed to issue to the lender, upon maturity or earlier repayment and for
no additional consideration, 5,500 shares of our common stock for each day the
loan is outstanding up to a maximum of 1,000,000 shares. These shares do not
bear registration rights.
As part of the credit facility with Laurentian, we obtained a $1,000,000 CDN
contract forward facility. The facility permits us to borrow up to 70% of the
value of the contracts the bank deems is qualified.
JUNE 2002 CONVERTIBLE DEBT FINANCING
On June 25, 2002, we entered into an agreement with AJW Partners, LLC, New
Millennium Capital Partners II, LLC, Pegasus Capital Partners, LLC, and AJW/New
Millennium Offshore, Ltd. for the private placement of $1,500,000 principal
amount of secured convertible debentures. The debentures are convertible into
shares of our common stock in accordance with an agreed upon formula. Under the
agreement, the investors purchased an aggregate of $500,000 principal amount of
debentures at the time of the agreement and committed to purchase the balance in
equal $500,000 installments: $500,000 within 10 days of our filing this resale
registration statement and the remaining $500,000 within 10 days following the
effective date of such registration statement. For each $1.00 principal amount
of debentures purchased, the investors will also receive a warrant to purchase
one share of our common stock, resulting in warrants to purchase an aggregate of
1,500,000 shares of our common stock being issued upon completion of the
investors' full funding commitment. The warrants are exercisable in full on the
date of grant at an exercise price $0.30 per share (subject to antidilution
adjustment) and expire June 25, 2005.
We intend to utilize the proceeds of the financing for launching voice2u, our
Internet-based telephony product, expanding our wireless network, marketing and
sales promotion, internal corporate infrastructure development and general
working capital requirements.
The primary terms of the debentures are as follows:
Entire principal amount will mature on June 25, 2005.
- - The debentures bear interest at 12% per annum with interest payments due
quarterly, payable in cash or shares of common stock at our option.
- - The debenture holders have the option to convert any unpaid principal (plus
accrued and unpaid interest and other amounts owing under the debentures)
into shares of our common stock at any time after the original issue date
at the then applicable conversion price (subject to certain limitations).
- - The conversion price per share in effect on any conversion date shall be
the lesser of (i) $0.50 per share and (ii) 55% of the average of the lowest
three intra-day trading prices during the twenty trading days immediately
preceding the applicable conversion date.
25
- - The debentures bear a mandatory prepayment penalty of 130% of the principal
and all accrued interest being prepaid (plus any other amounts owing under
the debentures). Our right to prepay the debentures expires 30 days after
issuance of the debentures.
- - The debentures are secured by all of our assets as well as the assets of
our subsidiaries. Until we enter into of a subordination agreement with our
existing primary lender, Laurentian Bank of Canada, the debentures are also
secured by 3,000,000 shares of common stock owned by Mr. Angelo Boujos, our
Chairman and principal stockholder.
- - The debentures include significant penalties if we fail to pay amounts
owing under the Debentures in a timely manner and if we otherwise breach
our obligations under the Debentures.
The shares of common stock issuable upon conversion of the Debentures and
exercise of the Warrants are being registered for resale by the selling security
holders pursuant to a registration rights agreement between us and the selling
security holders.
OTHER
As of March 31, 2002, we were owed, on a net basis, an aggregate of
approximately $70,000 from officers and directors. Amounts due to and from
officers and directors are non-interest bearing, due on demand and have no fixed
repayment term.
At March 31, 2002, we owed approximately $50,000 under a loan from the FSC Group
that was originally scheduled to mature on February 18, 2002. The loan bore
interest of 45,000 shares of common stock. Due to cash constraints, we continue
to extend the maturity of the loan to and thereby became obligated pursuant to
the terms of the loan to issue an aggregate of 750,000 additional shares of
common stock to the lender.
On April 1, 2002, we entered into a loan agreement with Invicta Financial
pursuant to which we agreed to reimburse that entity for $20,000 it paid in July
2001 to list our common stock on the Third Tier of the Frankfurt Stock Exchange.
Under the agreement, we agreed to repay the full $20,000 plus interest at 13.25%
per annum and origination fees of $22,000. We may repay the loan at any time
and the loan does not have a maturity date.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no items that relate to "trading portfolios." 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 are
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. We 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
26
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
the current exemption to consolidation when control over a subsidiary is likely
to be temporary. The standard is effective for us as of January 1, 2002. The
adoption of this standard is not expected to have a material impact on our
company.
27
BUSINESS
OVERVIEW
We provide wireless telecommunications services and resell DSL service to small
and medium-sized enterprises in communities that we believe have traditionally
been underserved by telecommunications providers. We also offer communities
comprehensive broadband consulting and management services to assist in
deploying and maximizing potential returns from their networks. Our target
communities include municipalities, schools, hospitals and commercial,
governmental, industrial, and residential complexes whose location has
historically made it more difficult or costly to deliver broadband access. We
intend to expand our business by exploiting the anticipated increased
connectivity of our customers and offering a range of enhanced services
including Internet-based telephony under the name "voice2u" and managed
e-community portals. We currently have approximately 200 customers for our
services, all of whom are located in Canada. We are not a telecommunications
carrier nor do we provide regulated telecommunications services.
In early 2001, we commenced a strategic shift in our business strategy to our
present model. Prior to that time, our business primarily involved design,
construction and maintenance of broadband infrastructure as a third party
contractor for large telecommunications companies and electric utilities
building their own telecommunications network. While that business resulted in
multi-million dollar build-out contracts, it was dependent on the health of the
telecom industry and the financial health of our telecom customers. It was also
labor-intensive and limited in its ability to produce recurring revenue streams
from value-added products and services. Revenues from our network design,
construction, and maintenance business were approximately $1.22 million in 2001
and $5.65 million in 2000. The decrease reflects adverse conditions in the
telecom market as well as our change in business strategy. In connection with
our new focus, we disposed of a number of capital assets, reduced our employee
base from approximately 180 employees to our current level of 10 employees, and
implemented other cost-cutting measures.
We have not generated significant revenue from our new business strategy. While
we are currently involved in projects for municipalities in Canada and are in
preliminary discussions with other communities, our existing projects are
currently limited in scope and neither they nor any future projects will
necessarily result in significant revenue.
We intend to continue to compete for current and future market opportunities by
using our existing portfolio of network solutions and services, by refining and
deploying the available technology to meet the specific service demands of our
target markets, and by acquiring or aligning with companies that have new,
attractive product offerings and technologies. Our ability to access
technologies, products, and services to fulfill the changing needs of our
customers and address new market opportunities is critical to our future
success.
CORPORATE HISTORY
We are a Nevada corporation, originally incorporated in June 1999 under the name
Paxton Mining Corporation. Effective May 17, 2000, Paxton, through a newly
formed wholly-owned Ontario corporation, 1418726, Inc., acquired all of the
outstanding shares of Universe2U Canada Inc. (U2U Canada, formerly Universe2U
Inc.), an Ontario corporation. Upon completion of the acquisition, our company
changed its name to Universe2U Inc. As part of the transaction, 73% of our
company's then outstanding common stock was tendered for cancellation by certain
stockholders and we effected a 19:1 common stock dividend. For accounting
purposes, the acquisition was treated as a recapitalization and as a reverse
acquisition of our company by Universe2U Canada Inc. The acquisition was
treated as a reverse business combination for financial reporting purposes.
Paxton had no meaningful operations prior to the acquisition. Accordingly, the
transaction is not treated as a business combination for financial reporting
purposes and the historical financial statements included in this prospectus
reflect the consolidated operations of Universe2U Inc. and Universe2U Canada
Inc. from and after the date of the transaction. Financial information included
in this prospectus prior to that date is included on a combined basis and
reflects only the operations of Universe2U Canada Inc. and its subsidiaries.
28
On May 31, 2000, U2U Canada acquired all of the outstanding shares of CableTec
Communications Inc. (formerly Bernie Tan Investments Inc.), a company involved
in underground excavation and cable installation activities, for cash
consideration of $1,500,000 Canadian and options to purchase 200,000 shares of
Universe2U Inc. at a price of $7.50 Canadian per share. CableTec had recorded
net assets of $1,500,000 CDN at the time of the acquisition. The acquisition
has been treated for financial reporting purposes as a purchase and the results
of operations CableTec are included in the consolidated financial statements
included in this prospectus since the date of acquisition. The former owners of
CableTec did not exercise their option.
Our company currently has eight wholly owned subsidiaries in the United States
and Canada. We also have a 49% ownership in a Michigan corporation, T-E Realty
& Right-of-Way Agency, LLC. On January 1, 2002, three of our Canadian
subsidiaries were merged into U2U Canada and ceased operating as independent
entities. In an effort to further streamline our corporate structure, we are
currently in the process of amalgamating four of our United States subsidiaries
that have limited operations.
OUR MARKET OPPORTUNITY
Internet communications worldwide can be divided into the "backbone" network and
the "access" network. The backbone networks are typically comprised of optical
fiber cables between cities, countries and continents that provide essentially
unlimited capacity for sending relatively large amounts of data over long
distances. However, the optical fiber technology used for the backbone network
is too expensive to extend to each individual user. Accordingly, distributing
data from the backbone network to homes and business is done via an "access"
network, also referred to as the "last mile" network.
To date, broadband access networks have included higher speed digital subscriber
telephone lines (DSL), cable TV with data modems and, more recently, wireless
networks. Wireless technology differs from wired technology in that it does not
rely on a physical medium for transporting signals. Instead, wireless networks
transmit radio-frequency signals to equipment that is tuned to receive those
signals.
Due to the large capital expenditures involved, telecommunications providers
have been reluctant to rollout broadband, or high bandwidth, Internet access to
communities outside of urban areas. In recent years, there have been advances
in broadband delivery technologies, particularly in wireless technologies that
have made it more economical to successfully deliver such services. Our
discussions with community leaders in the underserved markets indicate that they
expect increases in broadband users that match or even exceed the penetration
rates experienced or expected to be experienced in urban centers.
In spite of the cost barrier, in January 2002 Forrester Research estimated
broadband and wireless revenues in the United States to be in excess of $50
billion in 2001 and projected such revenue to increase to over $100 billion by
2006. Wireless revenue is expected to constitute the majority of such revenue.
These numbers include revenue from cable broadband as well, a service we do not
provide. Broadband delivered via cable modem has significantly greater market
penetration than broadband delivery through Digital Line Subscriber service DSL
service, particularly among US households, DSL expenditures by small businesses
were estimated by In-Stat/MDR to be nearly triple that of cable expenditures by
such businesses. In 2002, In-Stat/MDR estimates small business expenditures to
approximate $800 million for cable broadband and more than $1.5 billion for DSL.
DSL penetration in the US market grew by approximately 78% in 2001, compared to
an increase in Canadian DSL penetration of approximately 263% during the same
period according to In-Stat/MDR estimates.
Set forth below is a chart showing annual telecom revenue in the United States,
as estimated by Forrester Research in January 2002.
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Annual Revenue By Telecom Type (billions)
2001 2002 2003 2004 2005 2006
Broadband $ 6.0 $ 10.3 $ 15.3 $ 19.7 $ 22.4 $ 23.3
Wireless $ 46.5 $ 53.7 $ 66.6 $ 74.6 $ 81.6 $ 85.1
Dial-up $ 8.6 $ 10.7 $ 10.9 $ 8.6 $ 6.8 $ 5.4
Long-distance $ 18.9 $ 17.6 $ 17.5 $ 16.9 $ 16.2 $ 15.6
Local $ 40.8 $ 40.8 $ 40.6 $ 40.1 $ 37.6 $ 34.5
Total $120.8 $133.1 $150.9 $159.9 $164.6 $163.9
The estimates for broadband access services do not include enhanced service
features like voice conferencing, e-community portals, and VoIP. As an example,
Frost & Sullivan projects that the retail VoIP market will grow to $78 billion
by 2007.
OUR STRATEGY
Although the telecommunications industry has been burdened by over-capacity in
many markets, we believe that we are well positioned for growth within the scope
of our business strategy. We believe that there is an opportunity for growth in
partnering with communities to provide for high-bandwidth data, voice, and video
connectivity. We believe this opportunity is growing as a result of new
applications and services and as a result of improvements in "last mile"
technology, including digital subscriber lines, cable modems, and wireless
solutions. Despite the current difficulties within the telecommunications
industry and generally unfavorable market conditions, we believe that our
strategy provides a favorable competitive business model relative to other
service providers.
Our business strategy includes the following key elements:
- "Partner" With Communities
- Offer Comprehensive Broadband Solutions
- Target Underserved Communities
- Leverage Experience and Relationships
- Grow Through Qualified Acquisitions and Strategic Relationships
"PARTNER" WITH COMMUNITIES
Our goal is to be viewed as a partner with communities in the successful
deployment and operation of broadband networks. We believe that access owners,
including municipalities, can play a key role in marketing broadband access and
related products and services to their constituents. We also envision
partnering with electric utilities, which we believe are particularly
well-suited to participate in the telecommunications business given their access
rights, physical infrastructure and sophisticated billing systems. We will seek
mutually beneficial compensation arrangements with these groups (e.g.
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co-branding/co-marketing agreements and revenue-sharing) in order to motivate
them to promote broadband-based products and services to their constituents. We
intend to seek equity participation in certain projects. We will also offer an
e-community portal, which would act as a vehicle through which value-added
enhanced features could be offered to community constituents. We refer to our
partnership with these groups as "SmartCommunities."
OFFER COMPREHENSIVE BROADBAND SOLUTIONS
Our goal is to offer comprehensive broadband solutions to communities and small
and medium sized businesses. We currently offer the following services:
- Project management for network design and construction
- Wireless and DSL connectivity
- Voice2U VoIP
- Broadband consulting
- e-community portal management
As our broadband customer base expands, we offer a variety of other value-added
enhanced services such as text messaging, web hosting and email service. As a
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solutions integrator, we believe that our independence, commitment to universal
access and open networks and turnkey solutions provide attractive and
competitive attributes to our business.
TARGET UNDERSERVED COMMUNITIES
We will seek to exploit anticipated growth in broadband access and related
services, particularly among small and medium-sized enterprises in non-urban
communities. Based on anticipated growth in broadband penetration among these
communities, we believe that these communities are ripe for our broadband
solutions.
LEVERAGE INDUSTRY EXPERIENCE AND RELATIONSHIPS
We will leverage our historical activities designing, constructing, and
maintaining broadband networks for large telecommunications companies and
electric utilities, as well as management's industry experience and
relationships with industry players and communities.
GROW THROUGH STRATEGIC RELATIONSHIPS AND ACQUISITIONS
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 believe that the communication services
industry is highly fragmented, consisting of a large number of smaller, regional
businesses and presents significant opportunities for consolidation. We plan to
target those businesses with high quality management and strong performance
records and to integrate such acquired operations into our organization.
We believe that our strategy has enabled us to provide a number of advantages to
our existing customer base of small and medium-sized enterprises, as well as to
potential community partners desiring to deploy broadband networks.
OUR SOLUTION
Our solution offers a number of advantages to our small and medium-sized
enterprise customers and to our community partners. Advantages to small and
medium-sized enterprises include:
Comprehensive Broadband Services. We offer scalable solutions designed to meet
the complete communications needs of small and medium-sized enterprises. Our
bundled services are billed in a single invoice for increased customer
convenience. Our services to these customers presently include:
- data services such as high-speed Internet access and data networking;
- voice2u -a VoIP service we introduced in July 2002; and
- enhanced services such as e-mail, web hosting, virtual private networks,
and network security.
Competitively Priced Services. Efficiencies created by our broadband network
and reseller agreements allow us to offer services on a cost-effective basis
though the aggregating the cost of IP on our network. We offer high-speed
Internet access at competitive rates and, through our recently introduced
voice2u service, offer long-distance telephone service via the Internet at
significantly lower rates than other providers that rely on public switched
networks. We provide additional discounts to customers who purchase bundled
services.
Rapid and Efficient Provisioning. We are typically able to provision services
to a new customer on an average of ten business days. We connect each
customer's network directly to our broadband network so that our customers
usually do not need to purchase or install any new equipment. Our broadband
network also allows our existing customers to increase the speed of their data
services or obtain new services without dispatch of technical personnel.
Responsive to Customer Needs. We have developed an organizational structure
dedicated to being responsive to customer needs and concerns. We maintain a
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network operations center, which permits us to identify and resolve our network
problems efficiently, either alone or in conjunction with our carriers. We also
maintain a customer service hotline and employ field support technicians who are
on call 24 hours a day, 365 days a year.
Enhanced Services. We currently provide our customers with enhanced services
including voice2u, web-based e-mail, web hosting, virtual private networking and
network security products and services. Through selective strategic alliances
with commerce, content, and technology providers, we anticipate offering
additional enhanced services in the future. The networks on which our services
are delivered are designed to be capable of providing high availability,
bandwidth-enabled data services such as Internet protocol-based video streaming,
information technology outsourcing, and business applications hosting.
Advantages to community partners include:
Comprehensive Broadband Management and Consulting Services. Our broadband
management and consulting services are designed to assist municipalities and
other communities with all aspects of network design, construction, deployment,
and finance, as well as marketing of broadband-enabled services to their
constituents.
Profit Maximization. As a network partner, our goal is to assist communities in
deploying broadband networks efficiently and economically and to help
communities maximize revenue potential from deployment of broadband networks.
We have developed a disciplined and efficient approach to planning,
constructing, and deploying broadband networks given the unique needs and
resources of each community. We also offer creative marketing techniques,
including our e-community portal, designed to maximize use of broadband-enabled
services among community constituents.
Financing. Recognizing the costs of deploying broadband networks, we assist our
community partners in their efforts to obtain necessary funding. For example,
through Bucknall Financial Services Inc. we were successful in arranging funding
aggregating $100 million for three of our SmartCommunity network developments.
The funding is subject to the business criteria and our model and must be
guaranteed by the municipality. We have also developed an income trust funding
model for the incremental buildout of community owned telecommunication system.
Complete "one-stop shopping" expert resource. As a solutions integrator, we
offer turnkey solutions incorporating a variety of technologies designed to meet
the particular needs of our customers. In combination with our broadband
management and consulting services, this enables us to serve as a "one-stop
shopping" source for our community partners.
OUR SERVICES
Our service offerings are designed to improve the communications capabilities of
small and medium-sized enterprises and to assist communities in deploying and
generating maximum revenue from broadband networks. We offer the following
services:
- Broadband Connectivity
- Wireless Connectivity
- DSL Reseller
- Enhanced Services
- e-Community Portal
- voice2u
- Managed Internet Services
- Broadband Management and Consulting Services
BROADBAND DELIVERY
We currently provide our broadband wireless and DSL services on a reseller
basis.
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Our data services currently include high-speed Internet access, frame relay data
networking, and other high-speed data transmission services. We currently
provide dedicated high-speed Internet access in a variety of bandwidth
connections with symmetrical speeds of up to 1.5 to 10 million bits per second.
Our dedicated service is 'always on,' providing instantaneous connection to the
Internet and the ability to send and receive data continuously. We install
switching equipment to customer's bandwidth needs.
WIRELESS SERVICES
Our wireless service is delivered through a fixed wireless network consisting of
towers and other wireless equipment located in Brampton, Mississauga and
Georgetown, Ontario and owned by Wisper Networks, Inc. The network serves a
population of approximately 600,000 people located in the Greater Toronto Area.
The network is connected to the Internet backbone at various access points
through fiber optic and other high-speed connections. Customers are connected
to the network via wireless transceivers located on their premises.
On May 14, 2002, we entered into a definitive agreement with Wisper Networks,
Inc., a wireless broadband provider, pursuant to which we agreed to acquire that
company's wireless network infrastructure, customer contracts and related supply
and other agreements in exchange for $432,000 CDN, payable in cash and shares.
The cash portion is payable in $15,000 CDN monthly installments over the 12
months following the date of the agreement. We assumed certain liabilities as
part of the transaction (estimated at approximately $113,000 CDN), which will be
applied against the total purchase price. The total purchase price will also be
adjusted based on annual recurring revenue during the 60 days following the date
of the agreement. Based on current estimates, this should result in a further
reduction in the purchase price of approximately $82,000 CDN. The remaining
balance is payable by May 16, 2003 in shares of common stock valued at $.69 per
share, the market price at the time the agreement was entered into, subject to
registration of these shares with the Ontario Securities Commission and the
Securities and Exchange Commission. Certain employees of Wisper have joined our
company. This transaction is being treated as a purchase for financial
reporting purposes, and remains subject to approval by Wisper's shareholders.
Pending closing of the transaction, we are entitled to all revenue generated
from customers and we are obligated to reimburse Wisper Networks, Inc. for the
provision of such services on a cost plus basis. If the transaction does not
close, we would be entitled to retain the customers, but would not be entitled
to the physical network assets. In such event, we would seek a longer-term
arrangement with Wisper for the provision of necessary wireless services. If we
were unable to reach a mutually satisfactory arrangement, we would need to seek
other means of supplying our customers with appropriate service.
DSL SERVICES
Our DSL services are provided through reseller agreements with a number of
carriers.
ENHANCED SERVICES
We offer enhanced services designed to provide data and Internet solutions for
small and medium-sized enterprises. These services include:
- web-based e-mail, a hosted service based on a web mail interface that
requires no software downloads or configurations;
- web-hosting, a managed data service that provides customers with a web
presence;
- virtual private networking, a data networking solution for secure,
cost-effective transmission of private Internet protocol traffic
through the Internet; and
- network and data security products and services, which include
corporate firewall, user authentication and data encryption services.
We intend to increase our service offerings in the future to include value-added
business applications including:
- unified messaging services, which allow users to send and receive
e-mail, voicemail and faxes through a single interface;
- Internet protocol-based video conferencing;
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- e-commerce services, which provide users the ability to sell products
and services on the Internet;
- remote file storage and back-up; and
- systems management software.
We intend to offer these services through strategic arrangements with commerce,
content, and technology providers.
e-Community Portal
We offer to our community partners a customized e-Community Portal. The portal
would provide customized and accessible information about the programs, events,
available services and other information relevant to the community and its
residents. The e-Community Portal is designed to serve as a vehicle through
which other value-added products and services can be offered to small and
medium-sized businesses and others interested in the community, thereby
generating revenue for our community partners and us. We believe that the
e-Community Portal will give municipalities a simple and effective way to
communicate with its constituents and other interested parties. For our
community partners, the e-community portal could help to generate direct and
indirect revenue through municipal transaction fees, local advertising,
marketing and promotions, licensing, economic development attraction and
retention and tourism.
voice2u - Internet Telephony Delivery
In July 2001, we introduced a new service called voice2u. Voice2u is a
Internet-based telephony service that allows users to send telephone calls
anywhere in the world using the Internet backbone in combination with
traditional telephone networks, at a cost that can be as much as 50% less for
domestic and international long distance calls. An IP Gateway product is
installed at the user's premises that connect the user's Internet service to the
user's phone system. When a telephone call (or fax or digital signal) is made,
it is automatically routed through the Gateway where it is converted to an IP
packet and transported through our provider's switch over the Internet to the
recipient. The voice2u gateways are pre-configured to prioritize voice traffic
with quality of service, and engineered to use the public switched
telecommunications network as automatic backup.
In April 2002, we entered into a marketing agreement with EBI Communications,
Inc. pursuant to which EBI agreed to supply us with its gateway devices designed
to enable users to communicate over EBI's Internet-based Telephony least cost
routing network. Under the agreement, which became effective June 25, 2002 we
acquired worldwide rights to market and sell the devices and least cost routing
service on a private label basis under our own brand name, voice2u. Our rights
are nonexclusive; subject to our right to convert the agreement to an exclusive
basis during the first year upon payment of an agreed sum to EBI. Under the
agreement, we will purchase the EBI's VoIP gateway products at agreed upon
prices and we will pay additional amounts to EBI based on minutes used. EBI
will provide us with the gateway, the requisite software, and with back office
applications. The agreement has a three-year term, subject to automatic renewal
for successive one-year periods, subject to either party's right to terminate
prior to the expiration of the initial or renewal term. If certain agreed upon
sales levels are generated, EBI shall not have the right to terminate.
BROADBAND MANAGEMENT AND CONSULTING
We offer management and consulting services to communities. These services are
designed to assist in the deployment and optimization of networks and maximize
network usage for optimal value. These services include:
-Management of network design, engineering and construction
-Assisting with creative financing strategies
-Establishing servicing costs and creating business plans
-Assisting with project budgeting and planning
-Designing and implementing marketing strategy
-Assessing specific market segments and opportunities
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-Conducting pre-sales initiatives
-Designing creative compensation/revenue sharing arrangements
-Assessing new value-added products and services
OUR SALES AND MARKETING
We do not maintain a direct sales force. We rely on agents and our
relationships in the industry to market and sell our services. A key element of
our marketing strategy is our "SmartCommunity" model, whereby we partner with
municipalities, schools, hospitals and commercial, governmental, industrial and
residential complexes to market our services directly to their constituents and
tenants. We also seek to partner with electric utilities. We believe that this
approach should result in faster and more efficient market penetration. By
targeting underserved communities with a high concentration of potential
customers and leveraging a community partner strategy, our agents should be able
to increase the effectiveness of their sales and marketing efforts.
In addition to our "SmartCommunity" model, we also market our services directly
to end-users. We develop databases of prospective customers within a targeted
community and our agents profile their businesses and potential communications
needs. The agents then conduct direct consultative sales efforts supported by
on-going promotions, which may include installation fee waivers or discounts.
We recruit our Agents from the communications industry and provide them with
ongoing, in-house training on our broad range of service offerings. Agents are
compensated based on a commission plan structured to encourage increased
penetration and customer retention within their assigned territory. Our agents
are paid a one-time sales commission shortly after a sale. We are examining a
structure where the up-front sales commission would be reduced in favor of
larger commissions paid over the life of the customer relationship. We
anticipate that this commission structure will not only forge stronger customer
relationships but will also limit agent turnover.
We support our agents with sales, engineering and account administrative
support. Our sales technicians can provide additional technical sales support
for data and enhanced services as needed by our customers. In addition, our
marketing team is responsible for developing, promoting, and branding our
services. The marketing team is also responsible for ensuring that our services
remain competitive with the marketplace by continually monitoring the
competitive landscape on a market-by-market basis. The marketing team monitors
changes in service offerings, competition, and price variations. We supplement
our sales and marketing operations through our website located at
www.universe2u.com.
OUR CUSTOMER CARE
We are dedicated to being highly responsive to customer needs and concerns. We
maintain a network operations center, which permits us to identify and resolve
network problems efficiently, either alone or in conjunction with our carriers.
We operate a customer service hotline to address customer needs and concerns.
We retain field technicians to address network problems. Our field technicians
are on call 24 hours a day, 365 days a year. These technicians provide
on-premises field installation, troubleshooting, equipment repair, and other
customer support functions.
In July 2002, we implemented a new billing system that will enable us to
continue to provide a single integrated bill for all services used by a
customer. Our old system used our accounting system and could not provide many
of the features identified below. The new system will provides the following
new features: automated online payments, print bar code information on the bills
for automated bill processing, stores the information on all our equipment
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installed at the customer's premises, provide for rate bundled discounts,
permits us to display usage information in a text and/or graphical format on the
bill and/or online, and it permits direct access by our Account Representative
to customer information. Through our billing and back-office support, we issue
customers' bills on a monthly basis with a single bill for all services. Our
customer service center handles billing inquiries.
voice2u is being introduced on a debt service paid in advance basis only. We
are attempting to transition other recurring services through our debt service,
as appropriate. We also plan to offer a web-based billing interface for
customer convenience and to place funds into their account. In addition, we are
selecting and implementing a new operations support system which we expect will
be fully operational by the end of the third quarter of 2002, which should
increase the speed and efficiency of our order provisioning and customer care.
We do not anticipate material disruptions to our operations in connection with
the implementation of the new system.
OUR SERVICE PROVIDERS AND SIGNIFICANT RELATIONSHIPS
Our business strategy leverages key relationships to diversify our services,
expand our reach, and penetrate markets and access important talent.
Our delivery of DSL broadband service relies on reseller agreements with a
number of carriers. As of July 12, 2002, we had reseller agreements with eight
carriers. One of these carriers provides satellite services; another also
provides dial-up service for us. Under the agreements, the carriers provide us
with bandwidth in exchange for a monthly fee. We are responsible for customer
billing and customer care. We market the DSL service to our customers under our
own name. The agreements are generally terminable by either party on 30 days'
notice.
In addition, we have entered into a Master Services Agreement with Williams
Communications pursuant to which we can provide a variety of services offered by
Williams or its third party providers in the United States including: 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. We do not currently offer any
services under this agreement, but may do so in the future.
To provide us with the ability to service to remote locations and provide
customers with redundant technology backup when required. We have also entered
into a reseller agreement with USASIA TELECOM, LLC (USAT) that enables us to
provide service to more remote locations in northern Canada and redundant
technology back up when needed. USAT's network utilizes high-speed fiber optic
connections between the State of Hawaii and the US Internet backbone, combined
with Asian satellite coverage provided by Japan Satellite System, Inc., to link
the Asian market with the United States and Canadian markets.
Pending closing of the Wisper Networks, Inc. acquisition, our wireless services
are provided by Wisper. Following the closing of the transaction, we will
provide these services directly through the purchased network assets.
Our voice2u service is provided by EBI Communications, Inc.
We also have working relationships with a number of other industry participants
who can contribute to various aspects of our business and to the
telecommunications needs of our customers. These include, among others,
financing and leasing groups, network construction groups, and equipment
suppliers.
Bucknall Financial Services Inc. has arranged funding for our SmartCommunity
network developments. Bucknall has obtained commitments for funding anticipated
to exceed approximately $100 million to work with universe2u and their various
municipal partners throughout on-going development and implementation of these
networks. The funding is subject to the business criteria and our model and
must be guaranteed by the municipality. We expect this funding to enable
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development and implementation of these projects in the near future and break
through the fiscal roadblocks communities must overcome in order to reach their
goals. Facilitating project financing on behalf of our municipality partners is
one of the customer-driven elements of our turnkey approach.
From time to time, we engage consultants to provide specialized expertise in
connection with strategic or other aspects of our business including
identification of strategic relationships and financing of network construction
and deployment projects.
COMPETITION
The market for data and voice services for small and medium-sized enterprises
and other customers in out target market is extremely competitive. Intense
competition has led to declining prices and margins for many communications
services. We face competition on price and quality of service from traditional
and new communications companies with longer operating histories, more
established customer relationships, greater financial, technical and marketing
resources, larger customer bases and greater brand or name recognition than we
have. These competitors include:
- Wireless competitors;
- Incumbent local telephone companies;
- Long distance companies; and
- Internet, digital subscriber line, and cable modem service providers.
Furthermore, the numerous companies that may seek to enter our niche may expose
us to severe price competition for our services or for securing local access
rights. Our competitors may also be able to respond more quickly to
technological developments and changes in customers' needs. Any of these
factors may limit our ability to compete effectively and could harm our
business, results of operations and ability to grow.
GOVERNMENT REGULATION
As a provider of communications facilities, we are subject to varying degrees of
regulation in each of the jurisdictions in which we operate. Telecommunications
services, including local and long distance telephone services, are subject to
regulation at both the federal and state levels. The Federal Communications
Commission ('FCC') regulates interstate services, and state public utilities
commissions regulate intrastate communications services, including local
service. In the United States, the FCC and various state regulatory bodies
regulate some aspects of our services. The FCC has preempted state regulation
of, but does not directly regulate, enhanced services involving more than pure
transmission of customer-provided information, including Internet access
services. In some local jurisdictions, we must obtain approval to operate or
construct our networks.
Regulation of the communications industry is evolving rapidly. The regulations
that apply to us are subject to ongoing administrative proceedings, litigation,
and legislation. We cannot predict the outcome of these various proceedings, or
the adoption of any other regulatory initiatives. Application of existing
regulations in a new way or future regulatory changes may have a material
adverse affect on our business and operations. The full extent to which other
companies in the industry will compete with us with respect to regulatory regime
requirements may not be known for several years. Existing or as yet unproposed
regulations may become adverse competitive factors in the future and render our
SmartCommunity model less profitable.
We also do not expect to face Regulatory restrictions that would have a material
adverse effect on our business regarding pricing or terms of any regulated
communications service offerings we might choose to offer. Changes in the
regulatory environment, however, could lead to more intrusive regulation of our
service offerings and prices that could have a material adverse effect on our
business.
Federal telecommunications law in the United States directly shapes the market
in which we expect compete through their ability to set the standards and
pricing for some telecommunication services. The provisioning of
telecommunications transmission services to provide wholesale Internet service
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and video services that we expect to offer is subject to varying degrees of
regulation by the FCC pursuant to the provisions of the Communications Act of
1934 (the "Communications Act"), as amended, by the 1996 Telecom Act, and by FCC
regulations implementing and interpreting the Communications Act.
UNITED STATES
Federal - Telecommunications Act of 1996
The Telecommunications Act eliminates many of the pre-existing legal barriers to
competition in communications businesses. The Telecommunications Act also
preempts many of the state barriers to local telephone service competition that
previously existed in state and local laws and regulations and sets basic
standards for relationships between communications providers.
The Telecommunications Act removes barriers to entry in the local exchange
telephone market by preempting state and local laws that restrict competition
and by requiring incumbent local telephone companies, including the Bell
operating companies divested by AT&T in 1984, to provide nondiscriminatory
access and interconnection to potential competitors, such as cable operators,
wireless communications providers and long distance companies. In addition, the
Telecommunications Act provides relief from the earnings restrictions and price
controls that had governed the local telephone business for many years. The
Telecommunications Act will also, once certain thresholds are met, allow the
Bell operating companies to enter the long distance market within their own
local service regions.
Regulations promulgated by the FCC under the Telecommunications Act require
incumbent telephone companies to open their telephone networks to competition by
providing competitors interconnection, access to unbundled network elements and
collocation facilities within central offices. Although we currently do not
contract directly with such companies for these services, we purchase network
services from vendors who have exercised these rights and thereby can offer us
competitive prices. Numerous parties appealed various aspects of the FCC's
regulations under the Telecommunications Act, and implementation of several
provisions of the rules was delayed while the courts considered these appeals.
The FCC has the authority to issue regulations implementing the pricing and
other provisions of the Telecommunications Act and reinstating rules extending
the obligation of incumbent local telephone companies to offer elements of their
networks to competitors at cost-based rates. The FCC ordered incumbent local
telephone companies to offer line sharing arrangements that will permit
competing carriers to offer digital subscriber line services over the same
copper loop facilities used by the incumbent local telephone company to provide
voice telephone service. State utility commissions will determine the prices
for these arrangements. If these prices are set at low levels, it could allow
our competitors to offer low-cost alternatives to our services and put downward
pressure on our prices for Internet access and other data services.
Future regulatory proceedings and court appeals may create delay and uncertainty
in effectuating the interconnection and local competition provisions of the
Telecommunications Act, and could affect the availability and pricing of the
network services we purchase.
The Telecommunications Act establishes conditions that must be satisfied before
Bell operating companies are allowed to offer long distance service to customers
within their local service regions. These conditions include 14 checklist
requirements designed to open the Bell operating company networks to
competitors. Bell Atlantic currently has an application pending before the FCC
for authority to offer long distance service in New York State, one of its most
important markets. Although, no Bell operating company has yet received FCC
authorization to provide in-region long distance service, it is possible that
the FCC may approve Bell Atlantic's pending application and/or future
applications by other companies. When this happens, we anticipate that the Bell
operating companies will intensify their efforts to compete against our service
offerings.
The FCC has the authority to regulate utility company rates for cable rental of
pole and conduit space. States can establish preemptive regulations in this
area. The 1996 Telecom Act modified the pole attachment provisions of the
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Communications Act by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit,
or rights-of-way controlled by the utility. The FCC has adopted regulations to
govern the charges for pole attachments used by companies providing
telecommunications services. These regulations are likely to increase
significantly the rates charged to cable companies providing voice and data, in
addition to video services. These new pole attachment regulations became
effective in 2001 and subsequent increases in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
subsequent period of five years, until 2006. There can be no assurance that FCC
existing, or as yet, to be proposed, access requirements and infrastructure rate
control will not have a material adverse affect on our business.
The 1996 Telecom Act imposes legal requirements on "common carriers" who engage
in "interstate or foreign communication by wire or radio" and on
"telecommunications carriers". Telecommunications carriers, or common carriers,
are providers of telecommunications services, which are defined by the
Communications Act as the offering of telecommunications for a fee "directly to
the public" or to all potential users of an indiscriminate basis subject to
standardized rates, terms, and conditions. The 1996 Telecom Act largely removed
barriers to entry in the local telephone market that was monopolized by the Bell
Operating Companies and other incumbent local exchange carriers by preempting
state and local laws that restrict competition and by requiring incumbent local
exchange telephone companies to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators and long
distance companies. The 1996 Telecom Act also facilitates the entry of utility
companies into the telecommunications market. The 1996 Telecom Act also largely
eliminated the prohibition against telco-cable cross-ownership, however, it
still prohibits a telephone company or a cable system operator in the same
market from acquiring each other, except in limited circumstances, such as in
areas of smaller population. These changes in regulatory environment will
likely result in intensified industry consolidation and may further result in
increased market competitiveness of such merged companies. Any such mergers
could increase the strength of current or potential competitors against whom we
compete now or must compete against in the future.
STATE
The 1996 Telecom Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits, or has the effect of prohibiting,
any person from providing any interstate or intrastate telecommunications
service. Nonetheless, this provision of the 1996 Telecom Act should enable us
and our customers to provide telecommunications services in states that
previously prohibited competitive entry.
However, states retain jurisdiction, on a competitively neutral basis, under the
1996 Telecom Act, to adopt regulations necessary to preserve universal service,
protect public safety and welfare, manage public rights of way, ensure the
continued quality of communications services and safeguard the rights of
consumers.
States continue to determine the rates that ILECs can charge for most of their
intrastate services. They are also responsible for mediating and arbitrating
ILEC interconnection arrangements with other carriers if voluntary agreements
are not reached. Accordingly, state involvement in local telecommunications
services is substantial.
Each state (and the District of Columbia, which is treated as a state for the
purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of telecommunications services if they are
"common carriers" or "public utilities." As with the federal regulatory scheme,
we believe that the offering of dark fiber facilities does not make us a common
carrier or public utility so we would not be subject to this type of regulation
in most jurisdictions in which we currently have or plan to construct
facilities.
State regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. At present, we
do not anticipate that the regulatory requirements to which we will be subject
39
in the states in which we currently intend to operate will have any material
adverse effect on our operations. These regulations may require, among other
things, that we obtain certification to operate, and that we provide
notification of, or obtain authorization for, certain corporate transactions.
In any event, we will incur certain costs to comply with these and other
regulatory requirements such as the filing of tariffs, submission of periodic
financial and operational reports to regulators, and payment of regulatory fees
and assessments, including contributions to state universal service programs.
In some jurisdictions, our pricing flexibility for intra-state services may be
limited because of regulation, although our direct competitors will be subject
to similar restrictions. However, we make no assurances that future regulatory,
judicial, or legislative action could potentially hurt our business.
LOCAL
Regulatory responsibility for essentially local aspects of our business such as
system design and construction, safety, and consumer services remains largely
with either state or local officials and, in some jurisdictions, with both. For
example, local governments, such as the City of New York, typically retain the
ability to manage public rights-of-way; subject to the limitation, that local
governments may not prohibit persons from providing telecommunications services
and local governments may not treat telecommunication service providers in a
discriminatory manner. Because of the need to obtain approvals, local
authorities affect the timing and costs associated with our use of public
rights-of-way. In addition, some local authorities must approve or be notified
of certain corporate transactions. These regulations may have an adverse effect
on our business.
BUILDING ACCESS
Under current FCC regulations, commercial real estate owners have the right to
control wiring within their premises, beyond the demarcation point at which
telecommunications carriers terminate their facilities. The demarcation point
is typically at a minimum point of entry to the building, such as the basement.
In some older buildings, demarcation points may be located in each tenant's
office, but the real estate owner may demand that the carrier establish a new
demarcation point at the minimum point of entry. These rules allow the real
estate owner to install and maintain its own inside wire, or to contract with
others to maintain wiring on its behalf. Currently, there is no national legal
requirement that owners or managers of commercial office buildings give access
to competitive providers of communications services, but such laws and
regulations have been adopted in several states. For example, state laws in
Connecticut and Texas generally require commercial real estate owners to provide
nondiscriminatory access to communications carriers who have customers within a
building, and limit what the real estate owner may charge for such access.
These laws require that such carriers be permitted to install their own inside
wiring, and there is no requirement that real estate owners allow these carriers
to use existing inside wiring. Nationwide laws and regulations concerning
building access have been proposed in the past and may be adopted in the future.
The FCC announced it was considering adopting rules on a number of issues
related to riser access in multiple tenant environments, and requested comments
on the issues, including the following: the FCC's tentative conclusion that
utilities must allow communications and cable service providers access to
rooftop and other rights-of-way and riser conduit in multiple tenant
environments on just, reasonable and nondiscriminatory rates, terms and
conditions; whether incumbent phone companies should make available unbundled
access to riser cable and wiring within multiple tenant environments; and
whether real estate owners offering access to any communications provider should
be required to make comparable access available to all such providers on a
nondiscriminatory basis, and whether the FCC has the authority to impose such a
requirement. We cannot predict the outcome of the FCC's proceeding or of any
legislation that may be enacted into law. If these initiatives are adopted,
they could potentially reduce our ability to offer SmartBuilding in our service
offering, harm our business, and expose us to increased competition. The actual
effects, however, would depend on the terms of any new regulations or
legislation.
CANADA
In Canada, the Canadian Radio Television Commission ('CRTC') regulates some
aspects of our services. When we establish joint venture the corporate
structure requires a large percentage to be Canadian owned, thus some
joint-venture structures may involve multiple organizations. We will accomplish
40
this by establishing a special purpose Directors Co to own the required portion
of Universe2U Canada Inc. to meet the Canadian ownership requirement, which for
voice services is currently 80%. The foreign ownership issue is under active
review by the CRTC
Generally, management believes that regulation in Canada is following the
deregulation that has occurred in the United States. The CRTC wishes to promote
competition, however, it still has the mandate to protect Canadian content in
broadcasting.
Municipal access agreements have been a major issue. Municipalities are trying
to gain "access taxes" for the use of the rights-of-way. In January 2001, the
CRTC issued its decision in a dispute between several telecommunications
carriers and the City of Vancouver with respect to right of the carriers to
access the municipal roads and rights-of-way of the City (the "Ledcor
Decision"). In the proceeding leading to the Ledcor Decision, the carriers
argued that they have a statutory right to access municipal rights-of-way for
the purpose of constructing and operating their transmission facilities without
the requirement to provide to the City of Vancouver compensation in the form of
rent or other consideration. The City of Vancouver argued that it had the right
to charge rent for the use of its roads and rights-of-way. In the Ledcor
Decision, the CRTC granted the carriers permission to construct and operate
their facilities for a minimal fee equal to certain allowable causal costs
without any mark-up. It stated that the decision was limited to the facts of
the Vancouver dispute, but acknowledged that the determination may inform future
disputes between carriers and other municipalities. The Federation of Canadian
Municipalities and several large municipalities have applied to the Federal
Court of Appeal for leave to appeal the Ledcor Decision.
In May 2001, AT&T Canada Corp. filed an application requesting relief pursuant
to the Telecommunications Act for a contract with the City of Toronto. AT&T
Canada asked the CRTC to substitute terms and conditions of its current access
agreement with the City of Toronto that were inconsistent with the principles
set out in Ledcor Decision
In June 2001, the City of Toronto filed its response to AT&T Canada's
application in which the City of Toronto argued that the principles developed in
the Ledcor Decision were not applicable in the unique factual circumstances of
their contractual situation. Further, the City of Toronto argued that the
Commission lacked jurisdiction under the Act to interfere with an existing
agreement for access to municipal property such as the agreement in dispute.
On August 31, 2001, the CRTC gave public notice (PN 2001-99) of a proceeding in
which the CRTC would consider, given the framework set out in the Act and the
principles laid out in the Ledcor Decision, what circumstances, if any, would
justify an intervention by the CRTC to alter the terms of an existing contract
between a carrier and a municipality for access to municipal rights-of-way. The
proceeding would not be deciding whether the terms of the AT&T - City of Toronto
agreement or any other particular agreement should be modified. The CRTC stated
intent was to provide interested parties with an opportunity to comment
generally on the circumstances, if any, that would justify CRTC intervention
with respect to an existing agreement. The CRTC set deadlines in early 2002 for
comments and replies. After review, the CRTC is expected to announce its
findings.
The practical implementation of the ruling continues to cause problems for both
the carriers and municipalities. Carriers continue to have difficulty getting
access and municipalities continue to not receive the monies they want for the
use of their rights-of-way. We believe that municipalities and carriers would
be better served if the municipalities provided a managed infrastructure
solution, where the carriers and the municipalities costs and benefits of a
common infrastructure. We promote this type of cooperation through our
SmartCommunity model.
OTHER REGULATORY ISSUES
The data services business, including Internet access and VoIP, is largely
unregulated at this time apart from federal, state, and local laws and
regulations applicable to businesses in general. However, this business may
become subject to regulatory restraints in the future. Some federal, state and
local governments are considering a number of legislative and regulatory
proposals with respect to Internet user privacy, infringement, pricing, quality
of products and services and intellectual property ownership. We are also
unsure how existing laws will be applied to the Internet in areas such as
41
property ownership, copyright, trademark, trade secret, obscenity, and
defamation. Additionally, some jurisdictions have sought to impose taxes and
other burdens on providers of data services, and to regulate content provided
via the Internet and other information services. We expect that proposals of
this nature will continue to be debated in Congress and state legislatures in
the future. The adoption of new laws or the adaptation of existing laws to the
Internet may decrease the use of the Internet, which could in turn have a
material adverse effect on our Internet business. The wiring and other
facilities we install in buildings are subject to numerous local regulations
such as building and electrical codes, licensing requirements and construction
requirements. These regulations vary on a city-by-city and county-by-county
basis. At present, we have no plans to own any transmission facilities outside
of the buildings we serve, such as fiber-optic cables or radio links to other
buildings, but if we decide to do so in the future then we will have to comply
with a variety of additional laws, rules and regulations governing access to
public rights-of-way, in the case of cable facilities, and FCC licensing of the
radio spectrum, in the case of radio facilities.
INTELLECTUAL PROPERTY
We regard certain aspects of our products, services, and technology as
proprietary and attempt to protect them with copyrights, trademarks, trade
secret laws, restrictions on disclosure, and other methods. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products, services or technology without authorization, or to
develop similar technology independently. We do not currently have any
technologies that are patented or under application for patent. We offer
certain products and services under licensing arrangements with other parties.
The intellectual property rights of our licensors cover aspects of these
products and services. For example, we license our voice2u products and service
and underlying intellectual property rights from EBI Communications, Inc. So
long as the intellectual property rights remain valid, our ability to continue
using these products and services will be subject to continued effectiveness of
the licensing arrangements.
EMPLOYEES
As of July 16, 2002, the Company had 10 employees. We are not party to any
collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption, and are unaware of any current
efforts or plans to organize our employees. We consider our relationships with
our employees to be good.
FACILITIES
We lease approximately 20,000 square feet of office and warehouse space in
Richmond Hill, Ontario. The lease, which is scheduled to expire in January
2003, currently provides an annual base rental of $100,000. We believe that our
current facilities will be too large for our planned operations for the
foreseeable future; however, as we expand into new markets we may add small
office space. We have an option to renew, however, we are in negotiations with
the landlord for more suitable and smaller space. We anticipate that the cost
will be appreciably less than the current rent. Certain of our subsidiaries
remain obligated under leases for an aggregate of 20,000 square feet of office
space in other cities that we utilized in connection with our discontinued
network engineering and construction activities. The leases have remaining
terms ending at various times over the next 3 years and provide for aggregate
annual rent of approximately $70,000. In connection with the winding up of
those operations, we are in the process of subleasing such space.
LEGAL PROCEEDINGS
We are a party to several lawsuits as described in greater detail below.
ACTIONS BY US AGAINST OTHERS
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On September 18, 2000, an action was commenced by our former subsidiary,
Canadian Cable Consultants, Inc. (which was merged into Universe2U Inc. in
January 2002), and our subsidiary CableTec Communications, Inc in Ontario
Superior Court of Justice against Dan McAleer, Gerry Roy, and 1353042 Ontario
Limited, c.o.b. Northern Call Solutions Inc. Canadian Cable out-sourced
telemarketing work to Northern Call Solutions. Canadian Cable alleges that
Northern Call Solutions breached its contract by wrongfully soliciting certain
of Canadian Cable's key employees to leave Canadian Cable and work for Northern
Call Solutions and by wrongfully soliciting the customers and work of Canadian
Cable. Canadian Cable alleges that Dan McAleer and Gerry Roy, both former
employees of Canadian Cable, wrongfully solicited the employees and customers of
Canadian Cable. As against Northern Call Solutions, the relief sought includes
- an interim and permanent injunction restraining the defendants from
soliciting the employees and customers of Canadian Cable and returning
confidential information,
- $1,000,000 in cash damages,
- $100,000 in punitive cash damages, and
- an interim interlocutory and permanent injunction requiring Northern
to provide Canadian Cable with certain information and books and
records relating to the telemarketing services performed on behalf of
Canadian Cable and restraining Northern from divulging certain
information related to such activities.
Canadian Cable seeks similar cash and punitive damages from Daniel McAleer, as
well as an interim interlocutory and permanent injunction restraining Mr.
McAleer from
- disclosing certain trade secrets of Canadian Cable,
- soliciting Canadian Cable's customers, clients or suppliers,
- transferring business from Canadian Cable to any other person, and
- seeking to persuade or entice any executive employee of Canadian
Cable to leave that employment and restraining McAleer from engaging
in certain competitive activity for a period of one year following the
date of termination of his employment.
CableTec seeks similar relief against the defendant Gerry Roy, except that cash
damages are $500,000 punitive damages are $25,000, and in lieu of limiting Mr.
Roy's competitive activities, the injunction would restrain Mr. Roy from
impairing or diminishing the goodwill of CableTec with respect to those of
CableTec's customers, clients and suppliers with whom Roy, except by virtue of
his employment with CableTec, would not have developed a close and direct
relationship. The litigation is in the pleadings stage.
On June 4, 2001, our subsidiary, Universe2U Canada Inc., brought an action in
Ontario Superior Court of Justice against Bernard Kris Tanunagara, Barbara J.
Tanunagara and Edward Tanunagara, the former owners of CableTec Communications,
Inc. (formerly known as Bernie Tan Investments). Universe2U Canada, Inc.
acquired CableTec Communications, Inc. from the defendants in May 2000. At that
time, CableTec Communications, Inc. also entered into a three-year employment
contract with Bernard Kris Tanunagara pursuant to which he agreed to serve as
the President of CableTec Communications, Inc. We are of the opinion that early
in 2001, Mr. Tanunagara breached his contract, breached fiduciary duty, engaged
in tortious interference with business relations, and tortious interference with
economic expectancy. We are seeking damages of $6,500,000 CDN. Our claim
against all defendants seeks damages in the amount of $1,500,000 CDN,
constituting a refund of monies paid pursuant to the agreement between us and
the defendants; pre-judgment and post-judgment interest pursuant to the Courts
of Justice Act; costs of this action on a solicitor and client scale, including
applicable GST thereon; damages in the amount of $5,000,000 for lost profits
caused by Bernard Tanunagara's breaches of fiduciary duty, intentional
interference with contractual relations, and defamation; an order compelling
Bernard Tanunagara to return to the Plaintiff all personal property belonging to
the Plaintiff, including a video unit which he removed from the vehicle provided
to him by the Plaintiff, and two automobiles which are in the possession of him
or his family members. The case is pending.
On June 11, 2001, our subsidiary, CableTec Communications Inc., brought an
action in Ontario Superior Court of Justice against Vic Shaw and Hitech Global
Telecom Inc. Mr. Shaw was employed pursuant to an employment contract as the
General Manager of CableTec Communications Inc. He terminated his employment at
43
the same time as its then president, Mr. Tanunagara, taking, we allege, most of
CableTec Communications Inc.'s employees with him. Hitech Global Telecom Inc.
immediately hired Mr. Shaw and several of CableTec's former employees. We are
seeking damages of $2,500,000 CDN for misappropriation of confidential
information and interference with economic expectancy.
ACTIONS AGAINST US
On September 29, 2000, an action was commenced against Canadian Cable and our
employees William McGill and others by Northern Call Solutions in Ontario
Superior Court of Justice. The action is essentially a counterclaim to the
action brought by us and described above. Northern Call Solutions alleges that
Canadian Cable failed to pay for certain accounts allegedly generated by
Northern Telecom and to have made misrepresentations and to otherwise have
breached the contract between the parties. Northern Call Solutions has also
sued certain of Canadian Cable's employees personally for having allegedly
wrongfully solicited certain Northern Call Solution employees. Canadian Cable
denies all of the allegations. Northern Call Solutions seeks relief from
Canadian Cable in the amount of $1,085,275 in cash (including $85,275 for
alleged unpaid accounts). Cash damages and an injunction are also sought
against the other defendants. The litigation is in the pleadings stage. We
believe the counterclaims are without merit and intend to defend vigorously this
action.
Our subsidiary, Universe2U Canada is one of the defendants in an action entitled
Destiny Network Solutions Inc. v. Akhilesh Shan, Joseph Khunaysir, Universe2U
Canada Inc for alleged misappropriation of confidential information. Messrs.
Shan and Khunaysir were former employees of Destiny Network Solutions and became
employees of Universe2U Canada. When we employed Messrs. Shan and Khunaysir,
they signed documents representing that Universe2U did not recruit them and they
had no restriction regarding their employability. The plaintiff is claiming
$6,000,000 CDN, plus interest and costs and ancillary injunctive relief.
Universe2U and Destiny Network Solutions were both resellers of Rhythms Canada'
DSL service. Rhythms of Canada ceased operation in June 2001. In addition,
both companies operated as network integrators. Universe2U abandoned this
strategy in summer of 2001. Destiny Network Solutions sold their business to
Wisper Networks (CDNX:WIP)for approximately $16,000 CDN in shares of Wisper
Networks. Pleadings are not yet closed. We, and the other defendants, believe
Destiny Network Solutions' allegations are without merit and intend to defend
vigorously Destiny Network Solutions' action.
On September 15, 2000, Mr. Robert Hollands commenced an action against us in the
Ontario Superior Court of Justice. The defendants also include our officers,
Kim Allen, and Angelo Boujos and former officer Andrew Eyres, who is no longer
with our company. Robert Hollands is a former employee of ours. He claims that
he was wrongfully dismissed and not paid certain cash commissions and equity
compensation to which he alleges he was entitled. We terminated Mr. Holland for
cause, largely as a result of his failure, based on our records, to achieve any
of the sales milestones that governed his employment arrangement during the
relevant period. Mr. Holland seeks damages from us:
- $4,000,000 in cash for wrongful dismissal and loss of opportunity,
- a declaration that he is the owner of 2,000,000 shares of our common
stock and a mandatory order requiring us to issue the stock to Mr.
Hollands,
- equitable damages to compensate Mr. Hollands for any reduction in value
to the shares,
- an accounting of our sales and projected sales, and
- a declaration that Mr. Hollands is not bound by any non-competition
covenant.
From all of the defendants, Mr. Hollands seeks an order requiring them to
purchase for him 2,000,000 shares of our common stock and $5,000,000 in cash
damages for conspiracy to interfere with economic relations.
Mediation was attempted, but did not lead to settlement. Examinations for
discovery began in May 2002 and the parties agreed to suspend them for 6 months,
until we improve our financial position. We believe Mr. Hollands' allegations
are without merit and we intend to defend vigorously Mr. Hollands' action.
44
On February 4, 2002, Piedmont Commerce Center Limited Partnership obtained
default judgment relating to a lease arrangement for a property in Troy,
Michigan. The default judgment is against our subsidiaries Coastal Network
Services and F.O.C.C. Fiber Optics Corporation of Canada for $107,496.52. We
have negotiated a settlement for $40,000 in a series of deferred payments,
however, the settlement is not finalized.
We are subject to several judgments and pending claims relating to unpaid
accounts which individually are in amounts less than $60,000 but which in the
aggregate do not exceed $330,000, excluding interest. We are attempting to
negotiate settlements with all such parties.
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES, AND DIRECTORS
Our directors, executive officers and key employees position and ages as of July
25, 2002, are as follows:
Name Age Position
- ---- --- --------
Angelo Boujos 39 Chairman of the Board
Kim Allen 46 Director and Chief Executive Officer
Paul Pathak 33 Director and Secretary
Anthony Palumbo 46 Director
Jeff Rosenthal 42 Director
Gilbert Chalifoux 54 Chief Operating Officer Broadband
Angelo Boujos, Chairman of the Board
Mr. Boujos is the founder of our company and has served as Chairman of the Board
since inception and Chief Executive Officer until December 1999. In April 1998,
he entered the telecommunications business by establishing Canadian Cable
Consultants Inc., which was later merged into our company. Mr. Boujos worked
for 7 years with Toronto Dominion Bank and 2 years with American Express in a
management capacity. From 1995 until 1998, he served as senior advisor to the
President/CEO for Algonqua Springs Inc. and Culligan Inc. in the bottled water
business. Between 1987 and 1995, Mr. Boujos served as President of Winter
Valley Springs Inc. also in the bottled water business.
Kim Allen, Director and CEO
Mr. Allen has served as our Chief Executive Officer since he joined our company
in December 1999 and as a director of our company since May 2000. From June
1998 until he joined us, Mr. Allen served as the founding President of
DTE/Probyn Energy Solutions, a joint venture between DTE Energy Solutions
(Detroit Edison) and Probyn & Company. From 1992 until 1998, Mr. Allen also
served as CEO of Scarborough Public Utilities Commission, a $400 million water
and electric utility, and as its Director of Engineering & Operation from 1990
to 1992. Prior to that, Mr. Allen held a number of management positions during
a 12-year career with Ontario Hydro including positions in retail, engineering,
operations, and information systems.
Jeff Rosenthal, Director
Mr. Rosenthal has served as a director of our company since April 11, 2002. He
served as our President from November 2000 until his appointment in June 2002 as
CEO of Oshawa Power & Utilities Corporation, a $100 million electricity
provider. Mr. Rosenthal is a member of our Technical Advisory Team. From May
2000 until November 2000, he served as the President of one of our former
45
subsidiaries, Fiber Optics Corporation of Canada Inc., and Photonics Engineering
& Design which was recently merged into our company January 1, 2001. From April
1998 through May 2000, Mr. Rosenthal served as Managing Principal for Utility
Solutions Corporation, a Canadian firm that specializes in delivering business
solutions to energy providers. During a 16-year career with Toronto Hydro from
1982 to 1998, Mr. Rosenthal held senior management positions with Toronto Hydro
during a 16-year career with that company from 1982 to 1988.
Paul Pathak, Director, and Secretary
Mr. Pathak has served as a director of our company since May 2000. Since 1994,
Mr. Pathak has practiced corporate and securities law in Toronto, Ontario. He
is currently a partner at the firm of Chitiz Pathak LLP. Mr. Pathak has also
served as a director of several public companies and is currently a director of
Fareport Capital Inc., a Toronto based publicly traded company. Mr. Pathak's
law firm provides legal services to our company with respect to Canadian
matters.
Anthony Palumbo, Director
Mr. Palumbo has served as a director of our company since May 2000. Mr. Palumbo
is the Chief Executive Officer and a director of PsiGate (CDNX:PMC), a secure
online transaction processing services. From 1999 until 2001, Mr. Palumbo
served as Vice President, Chief Financial Officer, and a director of PsiGate.
From 1995 to 1999, Mr. Palumbo performed strategic planning, financial tax, and
capital-related services through Chartered Accountancy, a company that he
founded. Prior to that time, Mr. Palumbo rendered financial and consulting
services to a number of companies including Clarkson Gordon (1978-1983),
Lehndorff Group (1983-1987), and Royal LePage (1987-1995). Mr. Palumbo obtained
his chartered accountant designation in 1981 while at a predecessor of Ernst &
Young.
Gilbert Chalifoux, Chief Operating Officer
Mr. Chalifoux joined our company in May 2002. For the previous year, Mr.
Chalifoux provided consulting services for Wisper Networks. From 1999-2001, he
was the founding President of WiBand Communications, a successful national
Alternate Access provider with On-Net infrastructure in 5 Canadian cities.
Between 1998 and 1999, he was the President and CEO of IBM Learning Services
wholly owned PBSC Computer Training Centers with revenues of $50 Million and a
Canadian presence of 21 branches. From 1992-1995, Mr. Chalifoux served as the
vice President of PBSC Computer. From 1996-1997, Mr. Chalifoux served as the
Vice President of Western Markets for ACC Tel-Enterprises, which is currently an
AT&T company, managing a full range of services in the competitive Long Distance
Market leveraging his previous experience at Western based TELUS Corporation.
In addition, Mr. Chalifoux has accumulated extensive experience as a member of
the IBM Learning Services strategic management team in their Advanced PC and
Server Markets; and, as the founder of both Financial Presentations Incorporated
and The Computer Edge where he served as President and CEO.
We have a total of eight seats on our Board of Directors, three of which are
currently vacant. We intend to add one or more additional outside directors in
the near term, though we have not yet finalized a selection. Directors are
elected to serve until the next annual meeting of stockholders following their
election.
COMMITTEES OF THE BOARD OF DIRECTORS
Our bylaws provide that our board of directors may designate one or more board
committees. We currently have an audit committee and a compensation committee.
The board of directors may establish, from time to time, other committees to
facilitate the management of our business.
AUDIT COMMITTEE
The audit committee is responsible for recommending to the board of directors
the engagement of our outside auditors and reviewing our accounting controls and
the results and scope of audits and other services provided by our auditors.
The members of the audit committee are Messrs. Palumbo and Rosenthal.
46
COMPENSATION COMMITTEE
The compensation committee is responsible for reviewing and approving the amount
and type of consideration to be paid to senior management. The members of the
compensation committee are Messrs. Pathak and Allen.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Allen, CEO of our company, serves on the compensation committee of the Board
of Directors.
Mr. Pathak, a member of the company's Board of Directors is also Secretary of
the corporation and a member of the company's compensation committee. Mr.
Pathak is a partner in the law firm of Chitiz Pathak LLP, an Ontario law firm
that provides counsel to us with respect to Canadian legal matters. In respect
of such legal services, Mr. Pathak was granted an option for the purchase of
50,000 shares of common stock that vests and becomes exercisable on June 9, 2000
at a purchase price of $.01 per share. In addition, Mr. Pathak's law firm
continues to provide legal services to the company based on hourly rates and may
receive aggregate annual fees in excess of $60,000 per year.
DIRECTOR COMPENSATION AND DIRECTOR OPTION GRANTS
Directors who are employees receive no cash compensation for their services as
directors. Effective as of November 2000, non-employee directors receive cash
compensation of $500 for attendance at each meeting of the Board and meeting of
Board committees. Non-employee directors are eligible to participate in our
Equity Incentive Plan at the discretion of the full board of directors. On May
16, 2000, non-employee directors each received options exercisable for 20,000
shares of common stock at a purchase price of $5.00 per share, these options
were repriced to $0.75 on April 11, 2002. On May 30, 2002, Mr. Palumbo received
options exerciseable for an additional 50,000 shares of common stock at a
purchase price of $0.01 per share. Each of these options has a term of 5 years
and vests on May 30, 2002.
EXECUTIVE COMPENSATION
The following table sets forth in summary form, for each of the last three
fiscal years, the compensation that was paid to our Chief Executive Officer and
the other most highly compensated executive officers whose aggregate
compensation exceeded $100,000 in the year ended December 31, 2001. We
sometimes refer to these individuals in this prospectus as our named executive
officers.
Summary Compensation Table
Annual Compensation Long-term Compensation
Name and Securities
Principal Position Year Salary Bonus Underlying Options
Angelo Boujos, 2001 $112,000 -- 360,000 (2)
Chairman (1) 2000 $112,000 -- 360,000 (3)
1999 $ 0 -- 0
Kim Allen, Chief
Executive Officer 2001 $90,000 -- 300,000 (4)
2000 $90,000 -- 800,000 (5)
1999 $ 7,000 -- 400,000 (6)
Hugh Grenfal 1999 $ 0 -- 2,500,000 (7)
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(1) Boujos served as acting Chief Executive Officer of the Company until the
appointment of Mr. Allen in December 1999. In such capacity, Mr. Boujos neither
received nor was entitled to receive salary or other compensation. As of
January 3, 2000, Mr. Boujos receives a salary in his capacity as Chairman of the
Board of Directors.
(2) Includes options granted on July 1, 2001, exercisable for an aggregate
of 360,000 shares of common stock at a purchase price of $.75 per share, that
vest in 90,000 share installments on each of September 30, 2002, December 31,
2002, March 31, 2003 and June 30, 2003. At the April 11, 2002 meeting of our
Board of Directors, the purchase price of these options was reset from $3.25 to
$.75 per share.
(3) Represents fully vested options exercisable for an aggregate of 360,000
shares of common stock at a purchase price of $.75 per share. Mr. Boujos has
executed a lock-up agreement with us that provides that he may not sell any of
his shares purchased pursuant to any exercise of these options until April 25,
2003. At the April 11, 2002 meeting of our Board of Directors, the purchase
price of these options was reset from $5.00 to $.75 per share.
(4) Includes options granted on July 1, 2001, exercisable for an aggregate
of 300,000 shares of common stock at a purchase price of $.75 per share, that
vest as follows: 75,000 on each of September 30, 2002, December 31, 2002, March
31, 2003 and June 30, 2003. Mr. Allen has executed a lock-up agreement with us
that provides that he may not sell any of his shares purchased pursuant to any
exercise of the foregoing options until April 25, 2003. at the April 11, 2002
meeting of our Board of Directors, we reset the purchase price of these options
from $3.25 to $.75 per share.
(5) Includes fully vested options granted on July 1, 2000, exercisable for
an aggregate of 300,000 shares of common stock at a purchase price of $.75 per
share. Includes fully vested options granted on May 5, 2000, exercisable for an
aggregate of 500,000 shares of common stock at a purchase price of $.01 per
share, all of which vest June 9, 2001. Mr. Allen has executed a lock-up
agreement with us that provides that he may not sell any of his shares purchased
pursuant to any exercise of the foregoing options until April 25, 2003. At the
April 11, 2002 meeting of our Board of Directors, the purchase price of 300,000
of these options was reset from $5.00 to $.75 per share.
(6) Includes options granted on November 26, 1999, exercisable for an
aggregate of 400,000 shares of common stock at a purchase price of $.01 per
share. Mr. Allen has executed a lock-up agreement with us that provides that he
may not sell any of his shares purchased pursuant to any exercise of the
foregoing options until April 25, 2003.
(7) In June 1999, the Company's predecessor, Paxton Mining Corporation,
issued to Hugh Grenfal, then serving as CEO of the Company, a total of 2,500,000
shares of restricted common stock. Mr. Grenfal served as the acting CEO of
Paxton Mining Corporation from inception on June 9, 1999 until Mr. Grenfal sold
all of such 2,500,000 shares of common stock of the Company in a third party
private transaction on May 11, 2000. Mr. Grenfal resigned from the Board and
from Company management effective May 11, 2000. To the knowledge of current
management, Mr. Grenfal did not receive any salary or other compensation from
Paxton Mining Corporation during such period.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information related to stock options granted to
our named executive officers during the year ended December 31, 2001.
48
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- ----------------------------------------------------------------------------------------------------
Number of Percent Of Total
Securities Options/SAR's
Underlying Granted To Exercise or
Options/SARs Employees Base Price Expiration
Name Granted (#) In Fiscal Year Per Share Date
------------ ------------ ------------- ------------------
Angelo Boujos(1) 90,000 4% $0.75 September 30, 2007
90,000 4% $0.75 December 31, 2007
90,000 4% $0.75 March 31, 2008
90,000 4% $0.75 June 30, 2008
Kim Allen(2) 75,000 3% $0.75 September 30, 2007
75,000 3% $0.75 December 31, 2007
75,000 3% $0.75 March 31, 2008
75,000 3% $0.75 June 30, 2008
(1) The market price of the underlying shares granted to Mr. Boujos on July
1, 2001, the date of grant, was $3.30 per share. At the April 11, 2002 meeting
of our Board of Directors, the purchase price of these 360,000 options was reset
from $3.25 to $.75 per share. The shares underlying these options are subject
to the Lock-up Agreement.
(2) The market price of the underlying shares granted to Mr. Allen on July
1, 2001, the date of grant, was $3.25 per share. At the April 11, 2002 meeting
of our Board of Directors, the Company reset the purchase price of these 300,000
options was reset from $3.25 to $.75 per share. The shares underlying these
options are subject to the Lock-up Agreement.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth the number of shares covered by both exercisable
and unexercisable options as of December 31, 2001 and the year-end value of
exercisable and unexercisable options as of December 31, 2001 for the named
executive officers. The Company did not grant any SARs during the fiscal year
ended December 31, 2001 and has no intention to do so during the foreseeable
future. For purposes of calculating the value of the following options, the
Company has applied a value of $.68 per share, which was the closing price of
the Company's common stock at December 31, 2001.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEARS OPTION/SAR VALUES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEARS OPTION/SAR VALUES
Number Of Value Of
Unexercised Unexercised
Securities In-The-Money
No. Shares Underlying Options/SARs
Acquired Value Options/SARs At FY-End
Name On Exercise Realized At FY End Exercisable/
Unexercisable
- ------ ----------- -------- ------------- -------------- -------------
Angelo Boujos 0 0 180,000 Exercisable ($ 12,600)
Chairman 0 0 540,000 Unexercisable ($ 37,800)
Kim Allen, CEO 0 0 1,050,000 Exercisable $ 222,500
0 0 450,000 Unexercisable ($ 31,500)
STOCK PLANS
Our Board of Directors adopted a stock option plan (the "Equity Incentive Plan")
on June 9, 2000, and our shareholders approved and ratified the Equity Incentive
Plan at the Annual Meeting of Shareholders held on May 24, 2001. The purpose of
our Equity Incentive Plan is to provide an incentive to our employees, directors
and consultants and our subsidiaries, and to offer additional inducement in
obtaining the services of such persons.
The Equity Incentive Plan provides for the grant of both incentive stock options
and non-qualified stock options. The Equity Incentive Plan limits the number of
shares of common stock subject to options granted under the Equity Incentive
Plan to any one employee during any one calendar year to 350,000. Mr. Allen
received 900,000 shares outside of the option plan.
49
With respect to the Equity Incentive Plan, 4,551,548 shares have been authorized
and reserved for issuance pursuant to exercise of options granted under the
plan. Under the Equity Incentive Plan, the Board of Directors may replenish the
Equity Incentive Plan each calendar year with an amount of common shares equal
to up to 10% of our then-outstanding common shares. As of June 30, 2002,
options to purchase 5,551,548 shares of our common stock were issued and
outstanding under the plan.
The Equity Incentive Plan is administered by a Board committee thereof subject
to the provisions of such plan. The plan administrator has the authority to
determine which eligible persons shall receive grants, the time of grant, the
type of grant and the number of shares underlying the options, the term of the
options, the vesting schedule and other option terms.
The exercise price for options granted under the Equity Incentive Plan is to be
determined by the plan administrator. However, the exercise price of all
incentive stock options must be at least equal to the fair market value of the
underlying shares on the date of grant. With respect to any optionee who owns
capital shares possessing more than 10% of the voting power of all classes of
shares, the exercise price of any incentive stock option must be not less than
110% of the fair market value of the underlying shares on the date of grant.
The plan administrator establishes the term of each option granted pursuant to
the Equity Incentive Plan. The maximum term, however, for incentive stock
options is five years. Options are subject to earlier termination as provided
in the Equity Incentive Plan.
Options are exercisable at such times and in such installments as the plan
administrator provides in the terms of the individual option agreement. Subject
to the terms of the Equity Incentive Plan, an optionee shall not have the rights
of a shareholder until the date of issuance of a share certificate to the
optionee for the shares underlying the exercised option. Except as provided in
the individual option agreement, any optionee whose relationship with us has
terminated for any reason other than death or disability may exercise his or her
options (if otherwise exercisable) not later than thirty (30) days after the
termination date.
The Equity Incentive Plan also provides that in the event of the death or
disability of an optionee, such optionee (or the optionee's representative) is
entitled, under the appropriate circumstances, to exercise their options (if
otherwise exercisable) for up to one year from the date of death or termination
due to disability.
In the event of a stock dividend, recapitalization, certain mergers, split-up,
combination or exchange of shares or similar corporate event which results in a
change in the number or kind of our common shares, the aggregate number and kind
of shares subject to options under the Equity Incentive Plan and the related
exercise price shall be adjusted accordingly. In the event of "corporate
transactions" or a "change in control" (as defined in the Equity Incentive
Plan), or upon our dissolution, an optionee's vesting rights under the plans are
accelerated.
The Equity Incentive Plan may be terminated or amended by the Board of Directors
generally without shareholder approval. However, shareholder approval is
required for certain types of amendments as provided in the Equity Incentive
Plan. No termination or amendment of the Equity Incentive Plan may be made that
adversely affects the rights of an existing option holder, without such per
son's consent. Options granted under the Equity Incentive Plan may not be
transferred other than by will or pursuant to the laws of descent and
distribution.
As of June 30, 2002 an aggregate of 1,000,000 stock options outside of the
Equity Incentive Plan were outstanding, all of which were granted to employees,
directors, and consultants of our company and its subsidiaries. The exercise
prices of these options range from $0.01 per share to $5.00 per share. On April
11, 2002, our Board of directors approved the repricing of options to purchase
an aggregate of 2,095,875 shares with strike prices of $5.00 and $3.25 to $0.75.
The closing price of the stock on April 10, 2002 was $0.65.
The following table sets out the information relating to outstanding options to
purchase Common Shares issued by the Company under the Stock Option Plan and
previously issued non-Plan options as at the December 31, 2001.
50
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEARS OPTION/SAR VALUES
No. Number Of Unexercised Value Of
Shares Securities Underlying In-The-Money
Acquired Options/SAR's No. Shares
On Value At FY End Options/SAR's
Name/Title Exercise Realized Exercisable/Unexercisable At FY-End
Angelo Boujos
Chairman 0 0 180,000 Exercisable ($12,600)
0 0 540,000 Unexercisable ($37,800)
Kim Allen, CEO 0 0 1,050,000 Exercisable $ 222,500
0 0 450,000 Unexercisable ($31,500)
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of July 15, 2002. The percentage of beneficial ownership is
based on 39,823,993 shares of our common stock issued and outstanding as of such
date, giving effect to the exchange of all outstanding securities issued by our
Ontario, Canada subsidiary that are exchangeable for shares of the Company's
common stock. The table sets forth such information with respect to:
- each shareholder who is known by us to beneficially owns 5% or more of the
common stock;
- each of our directors;
- each of the executive officers named in the "Summary Compensation Table";
and
- all of our executive officers and directors as a group.
Unless otherwise indicated, each of the shareholders has sole voting and power
of disposition with respect to the shares of common stock beneficially owned by
such shareholder. Except as otherwise noted in the footnotes below, the address
of record for each of the principal shareholders is c/o Universe2U Inc., 30 West
Beaver Creek Road, Suite 109, Richmond Hill, Ontario L4B 3K1 Canada.
The number of shares beneficially owned by each shareholder is determined under
rules issued by the Securities and Exchange Commission. The information is not
necessarily indicative of beneficial ownership for any other purpose.
Shares Percent
Beneficially Beneficially
Name of Beneficial Owner Owned Owned\
- ------------------------ ---------------- -------------
Angelo Boujos (1) 12,882,466 32.87%
Josie Boujos (2) 12,792,400 32.87%
Josie Boujos in Trust (3) 812,400 2.08%
Kim Allen (4) 1,935,521 3.08%
Jeff Rosenthal (5) 429,025 1.00%
Paul Pathak (6) 90,000 *
Anthony Palumbo (7) 45,000 *
All Directors and Officers
as a Group (8) 28,291,351 72.10%
* Represents less than 1% of the outstanding shares of common stock.
(1) Mr. Boujos is our Chairman. Includes 4,600,000 shares of common stock
held of record by Mr. Boujos and 2,500,000 shares of common stock issuable upon
exercise of securities exchangeable for shares of common stock of the Company
which were issued by an Ontario subsidiary of our (the "Chairman's Shares").
Includes 3,950,000 shares of common stock held by the spouse of Mr. Boujos and
750,000 shares of common stock issuable upon exchange of securities exchangeable
51
for shares of our common stock which were issued by an Ontario subsidiary of the
Company (collectively the "Spouse Shares"). Includes 312,400 shares of common
stock held in a trust over which Mr. Boujos has voting control, and 500,000
shares of common stock issuable upon exchange of securities exchangeable for
shares of common stock of the Company which were issued by an Ontario subsidiary
of the Company (collectively, the "Trust Shares"). Mr. Boujos disclaims
beneficial ownership of the Spouse Shares and the Trust Shares. Includes
options granted on July 1, 2001, exercisable for an aggregate of 360,000 shares
of common stock at a purchase price of $.75 per share, that vest as follows:
90,000 on each of September 30, 2002, December 31, 2002, March 31, 2003 and June
30, 2003. Mr. Boujos has executed a lock-up agreement with us that provides
that he may not sell any of his shares purchased pursuant to any exercise of the
foregoing options until April 25, 2003. In connection with the execution of
such agreement, we reset the purchase price of all such options from $3.25 to
$.75 per share. Includes fully vested options and options vesting within 60
days of the date of this proxy statement, which are all exercisable for an
aggregate of 360,000 shares of common stock at a purchase price of $.75 per
share. Mr. Boujos has executed a lock-up agreement with the Company that
provides that he may not sell any of his shares purchased pursuant to any
exercise of the foregoing options until April 25, 2003. At the April 11, 2002
meeting of our Board of Directors, we reset the purchase price of all such
options from $3.25 to $.75 per share. Includes 97,563 options exercised into
shares in connection with deferred compensation. Includes 3,000,000 shares which
have been pledged to the selling security holders until we obtain a
subordination agreement between Laurentian Bank and the selling security
holders.
(2) Ms. Boujos is the spouse of Mr. Boujos. Includes the Spouse Shares.
Includes the Chairman's Shares. Includes the Trust Shares, as to which Ms.
Boujos is the beneficiary. Ms. Boujos disclaims beneficial ownership of the
Chairman's Shares.
(3) Includes the Trust Shares, over which Mr. Boujos exercises voting
control and power of disposition, but as to which Mr. Boujos disclaims
beneficial ownership. Ms. Boujos is the beneficiary of such trust.
(4) Mr. Allen is our CEO and a director. Includes options granted on July
1, 2001, exercisable for an aggregate of 300,000 shares of common stock at a
purchase price of $.75 per share, that vest as follows: 75,000 on each of
September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003. Mr.
Allen has executed a lock- up agreement that provides that he may not sell any
of his shares purchased pursuant to any exercise of the foregoing options until
April 25, 2003. In connection with the execution of such agreement, the Company
reset the purchase price of all such options from $3.25 to $.75 per share.
Includes fully vested options granted on July 1, 2000, exercisable for an
aggregate of 300,000 shares of common stock at a purchase price of $.75 per
share, that vest as follows: 75,000 on each of September 30, 2001, December 31,
2001, March 31, 2002 and June 30, 2002. Includes fully vested options granted
on May 5, 2000, exercisable for an aggregate of 500,000 shares of common stock
at a purchase price of $.01 per share, all of which vest June 9, 2001. Includes
options granted on November 26, 1999, exercisable for an aggregate of 400,000
shares of common stock at a purchase price of $.01 per share. Mr. Allen has
executed a lock-up agreement that provides that he may not sell any of his
shares purchased pursuant to any exercise of the foregoing options until April
25, 2003. At the April 11, 2002 meeting of our Board of Directors we reset the
purchase price of all such options from $3.25 to $.75 per share. Includes
97,563 options exercised into shares in connection with deferred compensation.
(5) Mr. Rosenthal, a director, was our President from November 2000 until
June 2002. Includes options granted on May 1, 2001, exercisable for an
aggregate of 600,000 shares of common stock at a purchase price of $.01 per
share, that vest as follows: 300,000 on each of May 1, 2003 and May 1, 2004.
Also includes unvested options granted on July 1, 2001 exercisable for an
aggregate of 200,000 shares of common stock at a purchase price of $.75 per
share, that vest as follows: 60,000 on each of September 30, 2002, December 31,
2002, March 31, 2003 and June 30, 2003. Mr. Rosenthal has executed a lock-up
agreement that provides that he may not sell any of his shares purchased
pursuant to any exercise of the foregoing options until April 25, 2003. At the
52
April 11, 2002 meeting of our Board of Directors we reset the purchase price of
all such options from $3.25 to $.75 per share. Includes fully vested options
and options vesting within 60 days of the date of this proxy statement, which
are all exercisable for the purchase of 150,000 shares of common stock at a
purchase price of $.01 per share, and 240,000 shares of common stock at a
purchase price of $.75 per share. Mr. Rosenthal has executed a lock-up
agreement that provides that he may not sell any of his shares purchased
pursuant to any exercise of the foregoing options until April 25, 2003. At the
April 11, 2002 meeting of our Board of Directors the Company reset the purchase
price of all such options from $3.25 to $.75 per share. Includes 39,025 options
exercised into shares in connection with deferred compensation
(6) Paul Pathak is our Secretary and a director. Includes fully vested
options, exercisable for an aggregate of 70,000 shares of common stock at a
purchase price of $.01 per share. Mr. Pathak has executed a lock-up agreement
that provides that he may not sell any of his shares purchased pursuant to any
exercise of the foregoing options until April 25, 2003.
(7) Anthony Palumbo is a director. Includes fully vested options,
exercisable for an aggregate of 45,000 shares of common stock at a purchase
price of $.75 per share. Mr. Palumbo has executed a lock-up agreement that
provides that he may not sell any of his shares purchased pursuant to any
exercise of the foregoing options until April 25, 2003. At the April 11, 2002
meeting of our Board of Directors we reset the purchase price of all such
options from $3.25 to $.75 per share.
(8) All directors and executive officers as a group including beneficial
ownership of common stock through the exercise of options or otherwise.
Includes the Spouse Shares and the Trust Shares as to which shares Mr. Boujos
disclaims beneficial ownership.
CERTAIN TRANSACTIONS
On May 11, 2000, a change of control occurred with respect to our stock
ownership. The change occurred in connection with a third party purchase of
stock involving the transfer of an aggregate of 5,000,000 shares of our
outstanding common stock to a group of investors led by First Union Asset
Management LtdThe controlling interest acquired by First Union was purchased in
a private transaction for aggregate consideration of $500,000 that was paid in
cash to two of the former controlling shareholders of the Company, Messrs. Hugh
Grenfal and Robert Jarva, in exchange for all of their respective shares of our
common stock. The change of control was made in connection with our acquisition
of Universe2U Inc., an Ontario corporation. Following the purchase of our
common stock and as a condition of our acquisition of the Ontario company, an
aggregate of 4,000,000 shares of common stock were tendered to us by First Union
and cancelled by us without payment. An additional 250,000 shares of
exchangeable securities of a wholly owned Ontario subsidiary of ours were issued
to the shareholders of the Ontario company in exchange for all of the
outstanding stock of the Ontario company.
After giving effect to the foregoing transactions, Angelo Boujos, Josie Boujos,
Andrew Eyres and William McGill as a group held control of an aggregate of
695,622 shares of our common stock, at that date constituting approximately 41%
of all outstanding shares. Prior to the change in control, Messrs. Grenfal and
Jarva controlled approximately 91% of our stock and served as our sole directors
and officers. In connection with the change of control, Messrs. Grenfal and
Jarva appointed new directors and thereafter resigned as directors and officers.
To the best of our knowledge, Messrs. Grenfal and Jarva in their respective
capacities as directors and officers did not have any disagreements with us on
any matter relating to our operations, policies, or practices.
On May 15, 2000, our Board of Directors authorized a dividend in the form of
shares of common stock, to be distributed to shareholders of record as of the
close of business on May 25, 2000. After giving effect to the dividend, such
shareholders of record received 19 additional shares for each one share held at
the record date (equivalent to a ratio of 20 shares of common stock for each one
share of common stock held at the close of business on the record date).
On May 17, 2000, we consummated the acquisition of Universe2U, the Ontario
company, and we changed our name from Paxton Mining Corporation to Universe2U
53
Inc. We issued 250,000 shares (5,000,000 shares after giving effect to the 19-
for-1 stock dividend on May 25, 2000) of exchangeable securities of a wholly
owned Ontario acquisition subsidiary of ours to Angelo Boujos, Josie Boujos,
Andrew Eyres and William McGill in their separate capacity as shareholders of
the Ontario company in exchange for all of their respective outstanding stock of
such company . Messrs. Boujos, Eyres, and McGill were key employees of the
Ontario company at such time. Angelo and Josie Boujos are spouses. In
conjunction with the change of control and said acquisition, Barry Herman,
Anthony Palumbo, Kim Allen, Paul Pathak, and Connie Colangelo were elected
directors of ours and Mr. Angelo Boujos was elected Chairman of the Board. For
accounting purposes, the acquisition of the Ontario company by us has been
treated as a recapitalization, with the Ontario company as the acquirer (a
reverse acquisition). The exchangeable securities issued in connection with the
acquisition are exchangeable at any time on a one- for-one basis for shares of
our common stock.
Mr. Barry Herman, a director of ours during 2000 and 2001, is President of First
Union, a Bahamian corporation. First Union represented the investors who
purchased the controlling interests in us from Messrs. Grenfal and Jarva on May
11, 2000. Following the change in control, Mr. Herman was elected to the Board
of Directors. The Company and First Union entered into a Financial Consulting
Agreement dated as of May 17, 2000, and amended as of July 25, 2000 that
provided for First Union to act as an agent on our behalf with respect to a
financing program undertaken pursuant to Regulation S of the Securities Act. In
connection with services rendered in connection with the First Union Agreement,
we paid First Union aggregate fees of $420,000. The First Union Agreement
concluded in October 2000 and the Company has no further plans to engage the
services of First Union.
Mr. Angelo Boujos, Chairman of the Company, converted indebtedness we owed him
to our common stock. Prior to the acquisition of the Ontario company, Mr.
Boujos had advanced it approximately $429,000. Mr. Boujos entered into an
agreement dated as of June 9, 2000 to convert all of such indebtedness to
100,000 shares of our common stock at a purchase price of $4.29 per share.
After giving effect to (i) the reduction in outstanding shares due to the tender
and cancellation of share ownership by First Union, (ii) the stock issued in
connection with the acquision, (iii) the stock dividend we declared, and (iv)
the conversion of the loans by Mr. Boujos to the Ontario company, the common
stock beneficially owned by Mr. Boujos constituted at such date a controlling
interest of our outstanding common stock.
Effective as of May 31, 2000, we, through a wholly owned subsidiary incorporated
pursuant to the laws of the Province of Ontario, completed the acquisition of
the shares of CableTec (formerly Bernie Tan Investments Inc.). Pursuant to the
terms of the purchase agreement, our wholly-owned subsidiary agreed to acquire
all of the outstanding shares of CableTec in consideration for the payment of
$1.5 million CDN. The transaction was originally intended to close in February
2000. The terms of the agreement were amended in March and in May 2000 to,
among other things, extend the closing date to May 31, 2000. In addition, the
agreement was amended to grant Bernard Tanunagara, the former President of the
Company's CableTec subsidiary, an option to acquire up to 200,000 of our common
shares at an exercise price of $5.00 per share, exercisable until July 31, 2001.
Effective as of May 31, 2000, the transaction was completed and the cash
consideration of $1.5 million CDN was paid, and the option was granted to
Bernard Tanunagara. Mr. Tanunagara is no longer affiliated with us.
In an effort to improve our ability to obtain equity-based financing, effective
June 6, 2002, certain of our existing stockholders holding an aggregate of
32,829,765 shares of common stock, including shares underlying then outstanding
options, representing approximately 80% of our outstanding shares, agreed to
lock-up their shares and options pursuant to an agreement each of them entered
into with us. The agreement generally prohibits sales, hedging and other
transfers of the consequences of economic ownership in such shares until April
30, 2003, subject to certain exceptions. During the term of the lock-up, we are
prohibited from engaging issuing common stock or derivative securities other
than in connection with a private equity financing. The lock-up is terminable
54
by us in the sole discretion of our Board of Directors. In consideration for
the lock-up, we reset the price of all outstanding "out-of-the-money" options
held by parties to the lock-up to $0.75 per share and extended the expiration
date for all such options by 18 months. We also amended the terms of such
options to allow exercise even if the holder is no longer employed by us,
provided the exercise occurs within 6 months of the end of the lock-up. We also
agreed to permit cashless exercises of all such options.
Effective as of June 25, 2002, Mr. Angelo Boujos agreed, subject to certain
conditions, to unconditionally guarantee all of our obligations to AJW Partners,
LLC, New Millennium Capital Partners II, LLC, AJW/New Millennium Offshore, Ltd.
and Pegasus Capital Partners, LLC. In addition, Mr. Boujos granted such parties
a security interest in 3,000,000 shares of his common stock. When we grant such
parties a security interest in all of our assets subordinate to the rights of no
other parties except the rights of Laurentian Bank of Canada and in certain
contract receivables as may exist from time to time, this agreement will
terminate.
55
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to each selling
security holder for whom we are registering securities for resale to the public.
We will not receive any of the proceeds from the sale of such securities. To
our knowledge, none of the registered security holders listed in the table below
are broker-dealers or affiliates of broker-dealers, except as indicated in the
footnotes to the table. The information below is current as of July 15, 2002.
Percentage of Shares
shares beneficially
Securities Amount of Shares beneficially owned after
Selling Security Owned Prior to offered pursuant owned after offering
Holder (1) Offering (2) to this prospectus offering (2)(3) (2)(3)
---------- ------------ ------------------ --------------- ------
AJW Partners LLC 3,208,413 3,208,413 * 0
New Millennium Capital Partners II LLC 1,698,571 1,698,571 * 0
Pegasus Capital Partners LLC 6,983,016 6,983,016 * 0
AJW/New Millennium Offshore LTD 6,983,016 6,983,016 * 0
----------------
TOTAL SHARES OFFERED 18,873,016
* Less than 1%.
(1) No selling security holders have held any position, office or had any
other material relationship with us or our officers, directors or affiliates
during the past three years.
(2) Percentage of our common stock beneficially owned is based upon
51,832,473 shares of common stock outstanding as of July 25, 2002. With respect
to the stock ownership of each selling security holder, such percentage
ownership gives effect to respective shares beneficially owned upon conversion
of convertible debentures and exercise of outstanding warrants issued or to be
issued upon satisfaction of the investors' full $1,500,000 investment
commitment. All outstanding warrants are exercisable for one share of common
stock. The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the Securities and Exchange Commission
governing the determination of beneficial ownership of securities. Under the
rules of the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Under these
rules, more than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner of securities as
to which such person has no economic interest.
(3) Assumes all of the securities offered hereby will be sold.
CERTAIN INFORMATION ABOUT THE SELLING SECURITY HOLDERS
The number of shares set forth in the table for the selling stockholders
represents an estimate of the number of shares of common stock to be offered by
the selling stockholders. The actual number of shares of common stock issuable
upon conversion of the debentures and exercise of the related warrants is
indeterminate, is subject to adjustment and could be materially less or more
than such estimated number depending on factors which cannot be predicted by us
at this time including, among other factors, the future market price of the
common stock. The actual number of shares of common stock offered in this
prospectus, and included in the registration statement of which this prospectus
is a part, includes such additional number of shares of common stock as may be
issued or issuable upon conversion of the debentures and exercise of the related
warrants by reason of any stock split, stock dividend or similar transaction
involving the common stock, in accordance with Rule 416 under the Securities Act
56
of 1933. Under the terms of the debentures, if $500,00 of the debentures had
actually been converted on July 25, 2002 and assuming that the average of the
lowest three intra-day trading prices during the twenty days immediately
preceding such date was $0.20, the conversion price would have been $0.11.
Under the terms of the debentures and the related warrants, the debentures are
convertible and the warrants are exercisable by any holder only to the extent
that the number of shares of common stock issuable pursuant to such securities,
together with the number of shares of common stock owned by such holder and its
affiliates (but not including shares of common stock underlying unconverted
shares of debentures or unexercised portions of the warrants) would not exceed
4.9% of the then outstanding common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholder exceeds the number of
shares of common stock that the selling stockholder could own beneficially at
any given time through their ownership of the debentures and the warrants. In
that regard, the beneficial ownership of the common stock by the selling
stockholder set forth in the table is not determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended.
PLAN OF DISTRIBUTION
The shares being offered by the selling stockholders or their respective
pledgees, donees, transferees or other successors in interest, will be sold from
time to time in one or more transactions, which may involve block transactions:
- on the Over-the-Counter Bulletin Board or on such other market on
which the common stock may from time to time be trading;
- in privately-negotiated transactions;
- through the writing of options on the shares;
- short sales; or
- any combination thereof.
The sale price to the public may be:
- the market price prevailing at the time of sale;
- a price related to such prevailing market price;
- at negotiated prices; or
- such other price as the selling stockholders determine from time to
time.
The shares may also be sold pursuant to Rule 144 or Regulation S. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
57
of the shares offered in this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, or the rules and regulations under such acts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a selling
stockholder enters into such an agreement or agreements, the relevant details
will be set forth in a supplement or revisions to this prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited form simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
58
DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock. To
fully understand the actual terms of the capital stock you should refer to our
certificate of incorporation, as amended, and our bylaws, as amended. The
summary does not give effect to the exercise of outstanding warrants or options
to purchase common stock or the conversion of outstanding securities convertible
into common stock, except where noted.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The number of shares of authorized capital stock is 110,000,000 shares, of which
100,000,000 shares are designated as common stock, $.00001 par value per share
and 10,000,000 shares are designated as preferred stock, $.00001 par value per
share. As of July 24, 2002, we had 34,799,608 shares of common stock outstanding
and no shares of preferred stock outstanding. As of such date, the following
shares of common stock were issuable pursuant to existing securities or
commitments:
- 6,644,507 shares of common stock upon exercise of our outstanding
warrants and options (other than warrants held by selling security
holders);
- 18,873,016 shares of common stock upon conversion of the debentures
and exercise of the warrants issued to the selling security holders or
to be issued to such persons upon satisfaction of their full
$1,500,000 funding commitment under the June 2002 Private Placement;
- up to 1,000,000 shares in connection with an $800,000 CDN principal
amount loan;
- an indeterminate number of warrants in connection with a $500,000
credit facility based on the amounts advanced and our stock price at
the time of the draw down; and
- an indeterminate number of shares of common stock which may become
issuable under the $12 million equity line of credit with Fusion
Capital Fund II, LLC.
We believe that there are in excess of approximately 39 holders of record and in
excess of 650 beneficial owners of our common stock as of June 30, 2002
including several stockholders that hold their respective stock in client
accounts of broker-dealers and/or banks.
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or, in the case of the election of directors, by
a plurality, of the votes cast at a meeting at which a quorum is present, voting
together as a single class.
Dividends. Holders of common stock will share ratably in any dividends declared
by our board of directors. Dividends consisting of shares of common stock may
be paid to holders of shares of common stock.
Other Rights. Upon our liquidation, dissolution or winding up, all holders of
common stock are entitled to share ratably in any assets available for
distribution to holders of shares of common stock. No shares of common stock
are subject to redemption or have preemptive rights to purchase additional
shares of common stock.
WARRANTS
In connection with a private placement of securities in November 2000, we issued
warrants to acquire up to 621,500 shares of common stock. The warrants have an
exercise price of $5.00 per share and are exercisable for a period of five
years.
59
In connection with the June 2002 Private Placement, we issued warrants to
purchase an aggregate of up to 500,000 shares of our common stock. We may need
to issue warrants to purchase an additional 1,000,000 shares of common stock in
two equal tranches upon satisfaction of the investors commitments for up to an
additional 1,500,000 reserved for issue warrants to acquire up to 3,000,000
shares of common stock. The warrants have an exercise price of $0.30 per share
of common stock, and are exerciseable for a period of three years.
OPTIONS
As of June 30, 2002, options to purchase a total of 5,551,548 shares of common
stock had been granted at exercise prices ranging from $.01 per share to $5.00
per share. Of such options, as of June 30, 2002 options to purchase 2,651,049
shares of our common stock are vested.
On June 9, 2000, our Board of Directors adopted the Equity Incentive Plan that
provides for up to 1,500,000 shares of common stock to be granted in the future.
4,551,548 equity securities have been issued under the Equity Incentive Plan as
of the date of this prospectus.
CONVERTIBLE DEBENTURES
In connection with the June 2002 Private Placement, we issued and sold secured
convertible debentures in the principal amount of $500,000 and agreed to issue
and sell an additional $1,000,000 principal amount of such obligations upon full
satisfaction of the investors' funding commitment. The debentures are
convertible at any time at the holders' option into shares of common stock at a
45% discount to the market price, calculated based on the lowest closing price
during a trading period to conversion.
REGISTRATION RIGHTS
We have granted registration rights to certain holders of exchangeable
securities purchased in our private placement to register for public sale up to
an aggregate of 18,873,016 shares of common stock. All of such shares of common
stock are registered by this prospectus. The registration rights available to
such stockholders will generally terminate when all shares owned by such parties
may be sold under Rule 144 without restriction. We are obligated to cover
substantially all of the costs and expenses of such registration.
We have entered agreements granting demand and/or piggyback registration rights
covering the following additional shares of common stock:
- - 5,000,000 shares issuable upon exchange of the shares held by Angelo
Boujos, Josie Boujos, Andrew Eyres and William McGill; and
- - 219,729 shares issued to Dominion in the March 2001 financing.
OUR RIGHT TO REDEEM CERTAIN STOCK
On March 13, 2001, we entered into an agreement with Dominion Fixed Income Plus
Investments Limited pursuant to which we sold to Dominion 219,729 shares of our
common stock for a total purchase price of $550,000, or approximately $2.50 per
share. Under the agreement, we were obligated to issue additional shares of our
common stock to the investor for no additional consideration if our common stock
traded below the original purchase price for a certain period of time (the
"Gross-up Rights") for a period of one year. We were entitled to redeem the
shares at a price equal to $2.50 at any time until May 13, 2001. Our redemption
right was subject to our payment to Dominion of a monthly fee equal to $11,000.
The expiration date of our redemption right was extended, but beginning in
August of that year, we failed to pay the requisite monthly fee. In April 2002,
the agreement was amended to provide that Dominion would not exercise the
Gross-up Rights or its registration rights with respect to the shares it
purchased and we would have the right to redeem the shares at any time, in
consideration for payment by us to Dominion of:
- Past-due monthly redemption right monthly payments (approximately $95,000)
- A fee equal to 13.25% annual rate of interest, based on the total purchase
price of $550,000. We can extend the repayment period until October 31,
2002.
60
The redemption right is now in effect and Dominion cannot exercise registration
and gross-up rights during this period.
Our ability to redeem the shares of common stock held by Dominion, or any other
shares of our capital stock, is subject to the requirements of Nevada law.
NO PREEMPTIVE RIGHTS
No holder of any class of our stock has any preemptive right to subscribe for or
purchase any kind or class of our securities. However, the selling security
holders have a right of first refusal on certain financings by us for specified
time periods. We are also prohibited from engaging in certain equity financings
without their consent. In addition, unless and until we terminate the Fusion
equity line, we must obtain Fusion's consent in order to engage in variable
priced equity financing.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company.
61
SHARES ELIGIBLE FOR FUTURE SALE
To date, there has been a limited public market for our common stock. No
prediction can be made as to the effect, if any, that sales of common stock or
the availability of common stock for sale will have on the market price of our
common stock. The market price of our common stock could drop due to sale of a
large number of shares of our common stock or the perception that such sales
could occur. These factors could also make it more difficult to raise funds
through future offerings of common stock.
After giving effect to the exercise of outstanding warrants and conversion of
convertible debenture for shares of common stock of the company, the company
will have 67,586,373 shares of common stock issued and outstanding. Of such
issued and outstanding shares, 18,873,016 shares registered for resale under
this prospectus will be freely tradable common stock. The remaining shares of
common stock are "restricted securities" within the meaning of Rule 144 under
the Securities Act. The restricted securities generally may not be sold unless
they are registered under the Securities Act or sold pursuant to an exemption
from registration, such as the exemption provided by Rule 144 under the
Securities Act.
In general, under Rule 144 as currently in effect, any person or persons whose
shares are required to be aggregated, including any affiliate of ours, who has
beneficially owned shares for a period of at least one year is entitled to sell,
within any three-month period, commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock, which is expected
to be approximately shares upon the completion of this offering, or
- the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to certain provisions relating to notice
and manner of sale and the availability of current public information about us
during the 90 days immediately preceding a sale.
Under Rule 144, a person who is not an affiliate of ours during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitation and other conditions described above.
As of June 30, 2002, non-qualified options to purchase an aggregate of 1,000,000
shares of common stock were issued and outstanding which vest and become
exercisable commencing May 2001 through April 2002.
INDEMNIFICATION MATTERS
In accordance with Section 78.037 of the Nevada Revised Statutes ("NRS"),
Article IX of our by-laws provides that no director or officer of Universe2U be
personally liable to Universe2U or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability for (1) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (2) the payment of distributions in violation of NRS Section 78.300,
which provides that (a) the directors of a corporation shall not make
distributions to stockholders except as provided by this chapter; and (b) in
case of any willful or grossly negligent violation of the provisions of this
section, the directors under whose administration the violation occurred,
excepting dissenters to those acts, are jointly and severally liable, at any
time within three (3) years after each violation, to the corporation, and, in
the event of its dissolution or insolvency, to its creditors at the time of the
violation, or any of them, to the lesser of the full amount of the distribution
made or of any loss sustained by the corporation by reason of the distribution
to stockholders. In addition, our amended and restated certificate of
62
incorporation provides that if the Nevada Revised Statutes are amended to
authorize the further elimination or limitation of the liability of directors
and officers, then the liability of a director and/or officer of the corporation
shall be eliminated or limited to the fullest extent permitted by the Nevada
Revised Statutes, as so amended.
Article IX of our amended and restated by-laws provides for indemnification by
Universe2U of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of Universe2U if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of Universe2U, and, with respect to criminal actions or proceedings,
if such person had no reasonable cause to believe his or her conduct was
unlawful.
We have also entered into indemnification agreements with each of our directors
and certain of our executive officers. These agreements provide that we
indemnify each of our directors and such officers to the fullest extent
permitted under law and our by-laws, and provide for the advancement of expenses
to each director and each such officer. We have also obtained directors and
officers insurance against certain liabilities.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF NEVADA LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Provisions of our certificate of incorporation and bylaws described below may be
deemed to have an anti-takeover effect and may discourage takeover attempts not
first approved by our board of directors, including takeovers, which particular
stockholders may deem to be in their best interests. These provisions also
could have the effect of discouraging open market purchases of our common stock
because they may be considered disadvantageous by a stockholder who desires
subsequent to such purchases to participate in a business combination
transaction with us or elect a new director to our board.
Director Vacancies and Removal. Our by-laws provide that vacancies on our board
of directors may be filled for the unexpired portion of the term of the Director
whose place is vacant by the affirmative vote of a majority of the remaining
directors. Our by-laws provide that directors may be removed from office with
or without cause by a majority vote of shareholders entitled to vote at an
election of Directors. We do not elect a classified board.
Actions by Written Consent. Our by-laws provide that any action required or
permitted to be taken by our stockholders or Directors at an annual or special
meeting of stockholders or Directors may be effected without a meeting and may
be taken or effected by a written memorandum of the respective stockholders or
Directors, setting forth the action taken and signed by all the shareholders or
Directors, as the case may be. Such consent may be by proxy or attorney, but
all such proxies and powers of attorney must be in writing.
Special Meetings of Stockholders. Our certificate of incorporation and bylaws
provide that a special meeting of stockholders may be called at any time by our
President, board of directors, or a majority thereof. Our bylaws provide that
only those matters included in the notice of the special meeting may be
considered or acted upon at that special meeting unless otherwise provided by
law.
Advance Notice of Director Nominations and Stockholder Proposals. Our bylaws
include advance notice and informational requirements and time limitations on
any director nomination or any new proposal, which a stockholder wishes to make
at an annual meeting of stockholders.
Amendment of the Certificate of Incorporation. As required by Nevada law,
certain amendments to our certificate of incorporation must be approved by a
majority of the outstanding shares entitled to vote with respect to such
amendment.
Amendment of Bylaws. Our certificate of incorporation and bylaws provide that
63
our bylaws may be amended or repealed by our board of directors or by the
stockholders.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for the company by Ehrenreich Eilenberg & Krause LLP.
EXPERTS
The financial statements and schedules included in this prospectus and elsewhere
in the registration statement have been audited by Moore Stephens Cooper
Molyneux LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the SEC for the common
stock we are offering by this prospectus. This prospectus does not include all
of the information contained in the registration statement. You should refer to
the registration statement and its exhibits for additional information.
Whenever we make reference in this prospectus to any of our contracts,
agreements or other documents, you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. When we complete this offering, we will also be required to file
annual, quarterly, and special reports, proxy statements, and other information
with the SEC. We intend to furnish to our stockholders annual reports
containing audited financial statements for each fiscal year.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC- 0330 for further information on the operation of the public reference
facilities.
64
UNIVERSE2U INC. and subsidiaries
Index to Financial Statements
Page
----
Universe2U Inc. Unaudited Interim Combined Financial Statements
As of March 31, 2002 F-2
Universe2U Inc. Combined Financial Statements for
December 31, 2001 and 2000 F-26
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
$466,132of 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.
- -------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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
Universe2U Inc.
Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
F-20
Auditors' Report
To the Shareholders of Universe2U Inc.
We have audited the consolidated balance sheets of Universe2U Inc. ("the
Company") as at December 31, 2001 and 2000 and the consolidated statements of
operations, deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects except as described below, the financial position of the
Company as at December 31, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended in accordance with generally accepted
accounting principles in the United States.
The Company has incurred losses to date, has a deficit as at December 31, 2001
of $(13,964,156), has a working capital deficiency of $2,725,127 and used
$1,673,295 of cash for operating activities during the year. In addition, the
Company has been unable to meet its payroll obligations, trade obligations,
operating lease commitments, 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 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
inability to locate sufficient financing (see notes 2, 12 and 17).
Signed: "Moore Stephens Cooper Molyneux LLP"
Chartered Accountants
Toronto, Ontario March 28, 2002
F-21
Universe2U Inc.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2001 2000
------------- -------------
Assets
Current assets
Cash and cash equivalents $ - $ 21,216
Accounts receivable (net of allowance of $230,371, 2000-$197,351) 138,578 1,486,519
Due from officers and directors (note 5) 45,044 160,968
Due from related parties (note 5) - 63,461
Prepaid expenses and deposits 138,295 131,372
Inventory 33,674 180,433
------------- -------------
355,591 2,043,969
Deferred charges (note 17a) 1,017,188 -
Capital assets (note 3 and 12) 578,124 1,411,237
------------- -------------
$ 1,950,903 $ 3,455,206
============= =============
Liabilities
Current liabilities
Bank indebtedness (note 4) $ 21,172 $ 200,050
Accounts payable and accrued liabilities 2,873,322 1,573,063
Income taxes payable 49,697 43,294
Current portion of capital lease obligation (note 8) - 13,646
Current portion of long-term debt (note 7) 136,527 8,003
------------- -------------
3,080,718 1,838,056
Loan payable (note 6) 171,611 -
Long-term debt (note 7) 13,938 23,595
------------- -------------
3,266,267 1,861,651
------------- -------------
Commitments and contingencies (note 12 and 17) - -
------------- -------------
Shareholders' equity
Share capital (note 9)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 38,912,491 Common shares 389 367
Additional paid in capital 14,282,080 6,330,042
Accumulated other comprehensive income (loss) 141,323 (75,138)
Deposit on net asset acquisition (note 17b) (1,775,000) -
Deficit (13,964,156) (4,661,716)
------------- -------------
(1,315,364) 1,593,555
$ 1,950,903 $ 3,455,206
============= =============
The accompanying notes are an integral part of these financial statements.
Approved on behalf of the Board
Signed: "Kim Allen" Signed: "Angelo Boujos"
- --------------------------------------- -----------------------------------
Director Director
F-22
Universe2U Inc.
- -------------------------------------------------------------------------------
Consolidated Statements of Deficit
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------- ----------
Deficit, beginning of years $ (4,661,716) $ (466,263)
Net loss for the years (9,302,440) (4,195,453)
- ----------------------------------------------------------------- ----------
Deficit, end of years $ (13,964,156) $(4,661,716)
================================================================= ==========
The accompanying notes are an integral part of these financial statements.
F-23
Universe2U Inc.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations
for the years ended December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------ ------------
Revenue $ 1,224,334 $ 5,653,709
- ------------------------------------------------------------------------------ ------------
Cost of sales 1,960,543 3,342,410
- ------------------------------------------------------------------------------ ------------
Gross profit (736,209) 2,311,299
- ------------------------------------------------------------------------------ ------------
Expenses
Selling, general and administration 4,919,920 3,477,439
Stock based compensation (note 9) 2,425,519 2,387,958
Interest and financing costs 1,056,755 258,361
Interest expense - related parties (note 5) - 10,679
Depreciation and amortization 100,576 231,782
- ------------------------------------------------------------------------------ ------------
8,502,770 6,366,219
- ------------------------------------------------------------------------------ ------------
Loss from operations (9,238,979) (4,054,920)
Share of loss of significantly influenced investment 63,461 19,452
- ------------------------------------------------------------------------------ ------------
Loss before provision for income taxes (9,302,440) (4,074,372)
Provision for income taxes (note 10) - 121,081
- ------------------------------------------------------------------------------ ------------
Net loss for the years $ (9,302,440) $ (4,195,453)
============================================================================== ============
Net loss per share - basic and fully diluted $ (0.25) $ (0.12)
============================================================================== ============
Weighted average shares outstanding 37,596,066 36,006,392
============================================================================== ============
The accompanying notes are an integral part of these financial statements.
F-24
Universe2U Inc.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
for the years ended December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2001 2000
------------- -------------
Cash flow from operating activities (note 13)
Net loss for the years $ (9,302,440) $ (4,195,453)
Items not affecting cash
Amortization of capital assets 218,141 273,186
Amortization of deferred charges 145,313 -
Stock option compensation 2,425,519 2,387,958
Issuance of warrants 785,428 -
Imputed interest - 10,679
Equity loss of significantly influenced investment 63,461 19,452
Loss on disposal of capital assets 572,194 -
Future income taxes - 121,081
------------- -------------
(5,092,384) (1,383,097)
Other sources (uses) of cash from operations
Increase in accounts receivable 1,347,941 (935,661)
Increase in inventory 146,759 (140,940)
Increase in prepaid expenses and deposits (6,923) (2,195)
Increase in accounts payable and accrued liabilities 1,931,312 1,153,536
------------- -------------
(1,673,295) (1,308,357)
------------- -------------
Cash flow from investing activities
Acquisition of subsidiary - (1,039,346)
Proceeds on disposal of capital assets 8,105 -
Purchase of capital assets (67,073) (199,783)
------------- -------------
(58,968) (1,239,129)
------------- -------------
Cash flow from financing activities
Proceeds from long-term debt 125,565 22,091
Repayments on long-term debt (20,344) (328,518)
Proceeds from loan payable 171,611 -
Proceeds from debenture - 322,237
Proceeds from issue of share capital 1,178,956 2,766,306
(Decrease) increase in bank indebtedness (157,662) 130,618
Increase (decrease) in related party advances 179,385 (270,063)
------------- -------------
1,477,511 2,642,671
------------- -------------
Effect of exchange rate changes on cash 233,536 (86,309)
------------- -------------
Increase in cash (21,216) 8,876
Cash and cash equivalents, beginning of years 21,216 12,340
------------- -------------
Cash and cash equivalents, end of years $ - $ 21,216
============= =============
The accompanying notes are an integral part of these financial statements.
F-25
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
1. Business of the Company
- -------------------------------------------------------------------------------
Universe2U Inc. ("the Company") was incorporated under the laws of Nevada
and carries on the business of providing dedicated fiber optic
infrastructure and high-bandwidth Internet connectivity for communications
carriers and corporate and government customers in North America.
2. Significant Accounting Policies
- -------------------------------------------------------------------------------
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 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 December 31, 2001, the Company has incurred significant losses, has
a deficit as at December 31, 2001 of $(13,964,156), has a working capital
deficiency of $2,725,127 and used $1,673,295 of cash for operating
activities during the year. In addition, the Company has been unable to
meet its payroll obligations, trade obligations, operating lease
commitments, and long-term debt commitments as they become due as a result
of their cash flow deficiency.
Subsequent to December 31, 2001, the Company established a $800,000 CDN
term loan (note 17d). In order to fund additional cash flow requirements
in 2002, the Company plans to seek additional public financing during the
year (note 17g).
Basis of presentation
On May 17, 2000, Universe2U Inc. (formerly Paxton Mining Corporation)
issued 250,000 shares for 100% of the shares of Universe2U Canada Inc. For
accounting purposes, the acquisition is being recorded as a
recapitalization of Universe2U Inc., with Universe2U Canada Inc. as the
acquiror. The 250,000 shares issued are treated as issued by Universe2U
Inc. for cash and are shown as outstanding for all prior periods presented
in the same manner as for a stock split. Prior to the acquisition there
were 5,510,200 shares outstanding in Universe2U Inc. In addition, the
recapitalization reflects 4,000,000 shares tendered for cancellation and
the declaration of a stock dividend on a 19 to 1 basis, representing
33,443,800 shares, which formed part of the acquisition transaction. The
consolidated financial statements of the Company reflect the results of
operations of Universe2U Inc. and Universe2U Canada Inc. from January 1,
2001 to December 31, 2001 and from May 17, 2000 to December 31, 2000. The
combined financial statements prior to May 17, 2000 reflect the results of
operations and financial position of Universe2U Canada Inc. only. Pro
forma information on this transaction is not presented as, at the date of
this transaction, Universe2U Inc. is considered a public shell and
accordingly, the transaction will not be considered a business
combination.
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock options
to purchase 200,000 shares at a price of $7.50 Canadian. This transaction
was accounted for under the purchase method of accounting. The total cost
of the acquired net assets was $1,500,000 Canadian, which was equal to the
purchase price of the CableTec stock. The results of operations of the
acquired entity are included in the accompanying financial statements since
the date of acquisition.
F-26
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
- -------------------------------------------------------------------------------
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.
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid
short-term interest bearing securities with maturity at the date of
purchase of three months or less. The Company did not have any cash
equivalents at December 31, 2001 and 2000.
Inventory
Raw materials are valued at the lower of cost and replacement cost.
Finished goods are valued at the lower of cost and net realizable value.
Cost is determined on the first-in, first-out basis.
Capital assets
Capital assets are recorded at cost and amortized over their estimated
useful lives as follows:
Computer software - 100 % declining balance
Computer equipment - 30 % declining balance
Vehicles and machinery - 30 % declining balance
Furniture and fixtures - 20 % declining balance
Leasehold improvements - straight-line, over
life of lease
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less the cost to sell.
Revenue recognition
Revenue for services provided are recognized in the period the services
are performed based on the costs incurred. Revenue on long-term
construction contracts is recognized using the percentage of completion
method on the basis of percentage of costs incurred to date on a contract,
relative to the estimated total contract costs. Profit estimates on
long-term contracts are revised periodically based on changes in
circumstances and any losses on contracts are recognized in the period
that such losses become known. Generally, the terms of long-term contracts
provide for progress billings based on completion of certain phases of
work.
F-27
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
- -------------------------------------------------------------------------------
Future income taxes
The Company has adopted the asset/liability method of accounting for
future income taxes whereby future income tax liabilities are determined
by applying the tax rate at the end of the fiscal year to temporary
differences between the accounting and tax bases of the assets and the
liabilities of the Company. The future income tax asset results from
differences between the tax base and carrying values of capital and other
assets, differences in the accounting and tax treatment of certain costs,
and the recognition of prior year losses for tax purposes.
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 year end rate of
exchange, and revenue and expenses of such operations are translated using
the average rate of exchange for the year. The related foreign exchange
gains and losses arising on translation of the Company's Canadian
operations are included in shareholders' equity until realized.
Earnings (loss) per share
Basic earnings (loss) per common share have been determined based upon the
weighted average number of common shares issued and outstanding throughout
the period as restated to reflect the recapitalization as a result of the
reverse acquisition (see notes 2 and 15). Diluted earnings (loss) per
common share are presented using the treasury stock method and are
calculated by dividing net earnings (loss) applicable to common shares by
the sum of the weighted average number of common shares outstanding and
all additional common shares that would have been outstanding if
potentially dilutive common shares had been issued. Diluted information is
not presented, as it is anti-dilutive as a result of having incurred
losses in each year.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year's presentation.
Fair value
The carrying amount of accounts receivable, bank loans, accounts payable
and accrued liabilities approximates their fair value because of the
short-term maturities of these items. The fair value of the loans with
related parties are not determinable, as these amounts are due on demand
without interest, and, accordingly, cannot be ascertained with reference
to similar debt with non-related parties.
F-28
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
- -------------------------------------------------------------------------------
Recent accounting pronouncements
(a) 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.
(b) 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.
(c) 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 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.
3. Capital Assets (see note 12)
- -------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
2001 2000
----------------- ----------------
Accumulated Net Book Net Book
Cost Amortization Value Value
- ------------------------------------------------------------------------------------------------------
Computer software $ 27,255 $ 24,787 $ 2,468 $ 5,357
Computer equipment 212,732 81,277 131,455 184,552
Vehicles and machinery 699,868 376,438 323,430 1,062,977
Furniture and fixtures 98,595 30,702 67,893 88,113
Leasehold improvements 82,840 29,962 52,878 70,238
- ------------------------------------------------------------------------------------------------------
$1,121,290 $ 543,166 $578,124 $1,411,237
======================================================================================================
F-29
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
4. Bank Indebtedness
- -------------------------------------------------------------------------------
Bank indebtedness is due on demand and is secured by a personal guarantee
from one of the Company's shareholders. The indebtedness bears interest at
prime plus 1% over the bank's base rate of interest, payable monthly. The
month end prime rate as at December 31, 2001 was approximately 4.0% (2000
- 7.5%).
5. Related Party Balances
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------- --------
Loan to significantly influenced company $ - $ 63,461
Amounts due from officers and directors 45,044 160,968
- -------------------------------------------------------------------- --------
$ 45,044 $224,429
- -------------------------------------------------------------------- --------
The amounts due from a significantly influenced company are non-interest
bearing, due on demand and have no fixed repayment terms.
The amounts due to and from officers and directors are non-interest
bearing, due on demand and have no fixed repayment terms. During the year,
the Company imputed interest of nil (2000 -$10,679) to officers and
directors on advances made to the Company.
On June 9, 2000, the Board of Directors adopted a resolution to convert a
loan of $428,968 previously made by an officer and director of the Company
into 100,000 common shares of the Company (note 9).
6. Loan Payable
- -------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------- --------
Loan payable bearing interest at 8% per annum
compounded monthly. The line may be drawn on 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 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. $ 171,611 $ -
===================================================================== ========
F-30
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
7. Long-Term Debt
- -------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------- --------
Term loan bearing interest at 8.9% per annum, with monthly
principal and interest payments of $330, maturing in
December 2004, secured by the vehicle. $ 9,934 13,220
Term loan bearing interest at 1.9% per annum, with monthly
principal and interest payments of $547, maturing in March
2002, secured by the vehicle. 14,966 18,378
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 Canadian. Penalty provisions require a payment
of 500,000 shares if the loan is not repaid by the end of
the first 60-day period and an additional 250,000 shares if
the loan is not repaid by the end of the second 60-day
period (note 17f). 125,565 -
- --------------------------------------------------------------------------------- --------
150,465 31,598
Less: Current portion 136,527 8,003
- --------------------------------------------------------------------------------- --------
$ 13,938 $ 23,595
================================================================================= ========
The month end prime rate as at December 31, 2001 was approximately 4.0%
(2000 - 7.5%).
Principal repayments on long-term debt are as follows:
2002 $136,527
2003 9,088
2004 4,850
- -------------------------------------------------------------------------------
$150,465
===============================================================================
F-31
Universe2U Inc.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
8. Obligation Under Capital Lease
- -------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------- --------
Office furniture and computer equipment lease contract,
bearing interest at 11.33% per annum, required blended
monthly payments of $1,315 to November 2001, secured by
the office furniture and computer equipment; $ - $ 13,646
Less: Current portion - 13,646
- ---------------------------------------------------------------------------------- --------
$ - $ -
================================================================================== ========
9. 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 December 31, 2001, 1,887,751 (2000 -
nil) options were granted and outstanding under the Plan. Such options have
been granted at exercise prices ranging from $0.01 per share to $5.00 per
share and as of December 31, 2001, options to purchase 526,084 (2000 - nil)
share of common stock of the Company were vested.
As of December 31, 2001, an aggregate of 1,217,250 (2000 - 1,661,000)
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 December 31, 2001, options to purchase 1,180,000 (2000
- 600,000) shares of common stock of the Company were vested.
F-32
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
9. Share Capital - continued
- -------------------------------------------------------------------------------
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 option grants to the extent that
the estimated fair value of the stock exceeds the exercise price of the
option at the measurement date. 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 $2,425,519 for the year
(2000 - $2,387,958). In accordance with FAS 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 2001 2000
- ----------------------------------------------------------------------- -------
Dividend yield - -
Expected volatility 75% 75%
Risk free interest rate 5.53% 5.2%
Expected option term 5.0 5.0
- ------------------------------------------------------------------------ -------
Fair market value per share of options granted $ 3.34 $ 4.99
- ------------------------------------------------------------------------ -------
Compensation expense recorded under FAS No. 123 would have been
approximately $4,844,009 in 2001 (2000 - $3,198,786), increasing the loss
per share by $0.06 in 2001 (2000 - $0.02).
As at December 31, 2001, details of options outstanding were as follows:
- ------------------------------------------------------------------------------------------------------
Outstanding Exercisable
- ------------------------------------------------------------------------------------------------------
weighted average weighted average
number exercise price number exercise price
December 31, 1999 700,000 $ 0.01 500,000 $ 0.01
Granted 1,016,500 $ 1.80 680,000 $ 0.60
Expired (55,500) $ 4.51 - $ -
- ------------------------------------------------------------------------------------------------------
December 31, 2000 1,661,000 $ 0.95 1,180,000 $ 0.35
Granted 2,253,762 $ 2.72 526,084 $ 5.00
Exercised (263,547) $ 0.44 - $ -
Expired (546,214) $ 3.08 - $ -
- ------------------------------------------------------------------------------------------------------
December 31, 2001 3,105,001 $ 1.90 1,706,084 $ 2.31
======================================================================================================
F-33
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
9. Share Capital - continued
- -------------------------------------------------------------------------------
As at December 31, 2001, stock options expire as follows:
- --------------------------------------------------------------------------------
weighted
number average number
outstanding exercise price exercisable
- --------------------------------------------------------------------------------
2004 400,000 $ 0.01 400,000
2005 817,250 $ 0.50 780,000
2006 626,084 $ 4.72 526,084
2007 636,667 $ 3.75 -
2008 325,000 $ 0.01 -
2009 300,000 $ 0.01 -
- --------------------------------------------------------------------------------
3,105,001 $ 1.90 1,706,084
================================================================================
As at December 31, 2001, details of share purchase warrants outstanding
were as follows:
- -------------------------------------------------------------------------------
weighted
number average expiry
outstanding exercise price date
- -------------------------------------------------------------------------------
821,500 $ 4.39 2002
377,257 $ 3.64 2003
102,348 $ 1.77 2004
375,000 $ 3.00 2006
- -------------------------------------------------------------------------------
1,676,105 $ 4.27
===============================================================================
F-34
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
9. 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, 1999 35,204,000 $352 $ 67,467 $ - $ (17,091) $ (466,263) $ (415,535)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - (4,195,453) - (4,195,453) (4,195,453)
Exchange differences - - - 58,047) (58,047) - (58,047)
-----------
Total comprehensive (loss) (4,253,500)
-----------
Conversion of debentures 833,000 8 668,665 - - 668,673
Conversion of share-
holder advances 100,000 1 428,967 - - 428,968
Private placements 621,500 6 2,766,306 - - 2,766,312
Stock option compensation - - 2,387,958 - - 2,387,958
Imputed interest - - 10,679 - - 10,679
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 36,758,500 $367 $ 6,330,042 $ (75,138) $ (4,661,716) $ 1,593,555
- --------------------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - (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 17a) 375,000 4 1,162,496 - - 1,162,500
Deposit on net asset
acquisition (note 17b) 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
- --------------------------------------------------------------------------------------------------------------------------------
F-35
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
10. Income Taxes
- -------------------------------------------------------------------------------
The following is a reconciliation of income taxes, calculated at the
Canadian combined federal and provincial income tax rate, to the income tax
benefit (provision) included in the accompanying Consolidated Statements of
Operations for the year ended December 31:
- -------------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------
Income tax recovery at Canadian statutory rates (2001 -
40.8%, 2000 - 42.3%) $(3,795,396) $ (1,723,459)
Difference between Canadian rate and rates applicable to
the parent company and subsidiaries in the United States 61,948 87,496
Expenses deducted in the accounts that had no
corresponding deduction for tax purposes currently,
primarily share of loss of significantly influenced
investment, loss on disposal of capital assets, and stock
option compensation 1,248,959 1,049,330
Temporary difference between the deduction available for
the amortization of capital assets and finance fees for
accounting purposes and tax purposes 289,961 55,043
Other non-deductible items for tax purposes 4,705 9,728
- --------------------------------------------------------------------------------- ------------
(2,189,823) 521,862)
Change in valuation allowance 2,189,823 642,943
- --------------------------------------------------------------------------------- ------------
Income tax provision (benefit) $ - $ 121,081
================================================================================= ============
The following table shows the significant components included in future
income taxes as at December 31:
Assets:
Tax benefit of loss carryforwards $ 2,680,553 $ 507,408
Capital assets 49,772 -
- -------------------------------------------------------------------------------- ------------
2,730,325 507,408
Valuation allowance (2,694,752) (296,251)
- --------------------------------------------------------------------------------- ------------
35,573 211,157
- --------------------------------------------------------------------------------- ------------
Liabilities:
Deferred charges 35,573 -
Capital assets - 211,157
- --------------------------------------------------------------------------------- ------------
35,573 211,157
- --------------------------------------------------------------------------------- ------------
Net deferred income tax assets $ - $ -
=============================================================================== ==============
F-36
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
10. Income Taxes - continued
- --------------------------------------------------------------------------------
The potential income tax benefits resulting from the application of income
tax losses have not been recognized in these financial statements. The
following losses include 100% of the respective losses of the subsidiary
companies and will expire as follows:
2004 $ 7,490
2005 235,946
2006 64,377
2007 390,263
2008 3,314,251
2020 247,175
2021 240,107
- -------------------------------------------------------------------------------
$ 4,499,609
===============================================================================
11. Concentration of Credit Risk
- -------------------------------------------------------------------------------
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist primarily of cash and
cash equivalents and accounts receivable. The Company limits its exposure
to credit loss by placing its cash and cash equivalents with high quality
financial institutions. Concentrations of credit risk with respect to
accounts receivable are considered to be limited due to the credit quality
of the customers comprising the Company's customer base.
The Company performs ongoing credit evaluations of its customers'
financial condition to determine the need for an allowance for doubtful
accounts. The Company has not experienced significant credit losses to
date. Accounts receivable was comprised of 4 customers at December 31,
2001 and 27 customers at December 31, 2000.
The Company's three largest customers represented 45.44%, 15.82% and
11.48% of the Company's total revenue for the year ended December 31, 2001
and 37.51%, 27.65%, and 10.36% of the Company's revenue for the year ended
December 31, 2000.
12. Commitments and Contingencies
- -------------------------------------------------------------------------------
Lease commitments
At December 31, 2001, the Company's total future obligations, under
various operating leases for equipment and occupied premises, exclusive of
realty taxes and other occupancy charges, are as follows:
2002 $ 348,769
2003 192,085
2004 117,823
2005 45,415
- -------------------------------------------------------------------------------
Total $ 704,092
===============================================================================
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 December 31,
F-37
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
12. Commitments and Contingencies - continued
- -------------------------------------------------------------------------------
Employment contracts
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The agreements generally
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
December 31, 2001, the minimum annual commitment under these agreements
was approximately $386,113 (2000 - $632,052).
Legal proceedings
At December 31, 2001, the Company and its wholly owned subsidiaries are
involved in various suits, claims, proceedings, and investigations which
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 which 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 December 31, 2001. The Company is working
with the creditors to establish suitable payment arrangements. Subsequent
to year end, several of the secured creditors exercised their rights to
repossess equipment and vehicles provided to the Company.
13. Supplemental Cash Flow Information
- -------------------------------------------------------------------------------
During the year, the Company had cash flows arising from interest and
income taxes paid as follows:
- -------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------- --------
Interest paid (note 5) $ 114,403 $ 48,712
Income taxes paid $ - $ 26,642
================================================================= ========
F-38
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
13. Supplemental Cash Flow Information - continued
- -------------------------------------------------------------------------------
During the year, the Company had non-cash investing and financing
activities as follows:
- ----------------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------ ----------
Financing commitment fee settled with 375,000 Common shares $ 1,162,500 $ -
Employee obligations settled with 671,992 Common shares $ 624,657 $ -
Conversion of shareholder advances for 100,000 Common shares $ - $ 428,967
Conversion of debentures for 833,000 Common shares $ - $ 668,665
===================================================================================== =========
14. Information on Operating Segments
- -------------------------------------------------------------------------------
General description
The Company's operations are organized into segments based on the nature
of products and services provided and into geographical segments based on
the location of customers. The Company's operations can be 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.
The FC&MS segment 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.
The FN&SED segment 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.
The S&M segment is responsible for all direct sales that 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.
The NS segment is a support service for the other operating segments.
The accounting policies of the segments are the same as those described in
note 2. The Company evaluates 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 year ended December 31, 2001 and the year ended December 31, 2000.
F-39
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
14. Information on Operating Segments - continued
- -------------------------------------------------------------------------------
Operating segments
Information by operating segment as at and for the year ended December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
- ------------------------------------------------------------------------------------------------ ------------
Revenue $ 405,597 372,164 300,918 145,655 $ 1,224,334
Interest expense $ 413,465 349,792 285,874 7,624 $ 1,056,755
Amortization of
capital assets $ 109,555 23,077 19,247 50,604 $ 202,483
(Loss) before
income taxes $ (3,359,540) (1,484,291) (1,175,405) (843,275) $ (6,862,511)
Total assets $ 453,081 60,101 30,554 228,351 $ 772,087
Capital assets $ 266,186 24,551 29,886 227,028 $ 547,651
Capital asset additions $ 48,664 - - - $ 48,664
- --------------------------------------------------------------------------------------------------------------------
Reconciliations to combined results as at and for the year ended December 31, 2001:
- --------------------------------------------------------------------------------------------------------------------
Segmented Corporate Total
- ----------------------------------------------------------------------------------------------- ------------
Revenue $ 1,224,334 - $ 1,224,334
Loss before income taxes $ (6,862,511) (2,439,929) $ (9,302,440)
Total assets $ 772,087 1,178,816 $ 1,950,903
Capital assets $ 547,651 30,473 $ 578,124
Capital asset additions $ 48,664 18,409 $ 67,073
- ----------------------------------------------------------------------------------------------- ------------
Information by operating segment as at and for the year ended December 31, 2000:
- --------------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
- ------------------------------------------------------------------------------------------------ -------------
Revenue $ 3,685,555 393,573 1,183,140 391,441 $ 5,653,709
Interest expense $ 10,434 12,475 14,837 858 $ 38,604
Amortization of
capital assets $ 122,079 29,020 14,309 99,325 $ 264,733
(Loss) before
income taxes $ (622,292) (151,547) (346,913) (135,353) $ (1,256,105)
Total assets $ 1,550,729 310,407 285,388 1,171,287 $ 3,317,811
Capital assets $ 488,308 126,276 59,523 707,722 $ 1,381,829
Capital asset additions $ 350,279 15,881 42,702 792,123 $ 1,200,985
- --------------------------------------------------------------------------------------------------------------------
F-40
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
14. Information on Operating Segments - continued
- -------------------------------------------------------------------------------
Reconciliations to combined results as at and for the year ended December
31, 2000:
- -------------------------------------------------------------------------------------
Segmented Corporate Total
- ------------------------------------------------------------------- ------------
Revenue $ 5,653,709 - $ 5,653,709
Loss before income taxes $ (1,256,105) (2,818,267) $ (4,074,372)
Total assets $ 3,317,811 137,395 $ 3,455,206
Capital assets $ 1,381,829 29,408 $ 1,411,237
Capital asset additions $ 1,200,985 38,144 $ 1,239,129
- ------------------------------------------------------------------- ------------
Geographic information
Information by geographic region as at and for the year ended December 31,
2001:
- -------------------------------------------------------------------------------------
Canada United States Total
- ------------------------------------------------------------------- ------------
Revenue $ 1,177,878 46,456 $ 1,224,334
Interest expense $ 1,056,610 145 $ 1,056,755
Amortization of capital assets $ 210,295 7,846 $ 218,141
Loss before income taxes $ (6,573,121) (2,729,319) $ (9,302,440)
Total assets $ 865,345 1,085,558 $ 1,950,903
Capital assets $ 553,966 24,158 $ 578,124
Capital asset additions $ 67,073 - $ 67,073
- ------------------------------------------------------------------- ------------
Information by geographic region as at and for the year ended December 31,
2000:
- -------------------------------------------------------------------------------------
Canada United States Total
- ------------------------------------------------------------------- ------------
Revenue $ 5,585,132 68,577 $ 5,653,709
Interest expense $ 40,905 11,992 $ 52,897
Amortization of capital assets $ 260,222 4,511 $ 264,733
Loss before income taxes $ (1,233,783) (2,840,589) $ (4,074,372)
Total assets $ 3,292,735 162,471 $ 3,455,206
Capital assets $ 1,379,233 32,004 $ 1,411,237
Capital asset additions $ 1,205,467 33,662 $ 1,239,129
- -------------------------------------------------------------------------------------
Revenues are attributed to countries based on location of customers.
F-41
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
15. Earnings per Share
- -------------------------------------------------------------------------------
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Shares" which requires companies to report basis 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 year. Options that may potentially
dilute EPS in the future are listed in note 9.
2000 2000
- ------------------------------------------------------------------------- -------------
Basic EPS Computation:
Net loss for the years $ (9,302,440) $ (4,195,453)
Weighted average outstanding shares 37,596,066 36,006,392
Basic EPS $ (0.25) $ (0.12)
- ------------------------------------------------------------------------- -------------
16. Acquisition
- -------------------------------------------------------------------------------
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock options
to purchase 200,000 shares at a price of $7.50 Canadian per share. This
transaction was accounted for under the purchase method of accounting. The
total cost of the acquired net assets was $1,500,000 Canadian, which was
equal to the purchase price of the CableTec stock. The results of operations
of the acquired entity are included in the accompanying financial statements
since the date of acquisition.
The following results report on a pro forma basis the results of operations
had the acquisition occurred on the first day of the earliest period
reported, being January 1, 1999.
- ------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------ -------------
Revenue $ 1,224,334 $ 5,670,484
- ------------------------------------------------------------------------ -------------
Net loss $ (9,302,440) $ (3,750,262)
- ------------------------------------------------------------------------ -------------
Loss per share $ (0.25) $ (0.10)
======================================================================== =============
F-42
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
17. Subsequent Events
- -------------------------------------------------------------------------------
Subsequent to the year 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 year-end.
(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.
F-43
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
17. Subsequent Events - continued
- -------------------------------------------------------------------------------
(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 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 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 February 15, 2002, the Company established an $800,000 CDN loan
with a third party to be used as the cash security for the Laurentian
credit facility. The loan requires monthly interest only payments of
$8,834 CDN and matures August 15, 2002. In addition, the Company has
committed to paying all expenses associated with establishing the loan
and providing the lender with 5,500 common shares of the Company for
each day the loan is outstanding to a maximum of 1,000,000 shares.
Such shares will be issued without registration rights. 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
loan.
(e) On February 22, 2002, the Company established a credit facility with
the Laurentian Bank of Canada. The 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 CDN. 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.
(f) On February 28, 2002, the Company made a principal repayment in the
amount of $120,000 CDN on the $200,000 loan payable that was due on
February 18, 2002 (note 7). In addition the $10,000 CDN late payment
fee was paid. Due to the fact that the Company triggered the penalty
clauses of the Loan Agreement, the 750,000 common shares will be
issued without registration rights to the lender subsequent to
year-end.
F-44
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
17. Subsequent Events - continued
- -------------------------------------------------------------------------------
(g) 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 10 days from April 11, 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 is 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:
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.
(h) On April 8, 2002, the Company and Wisper Inc. announced a signed a
Letter of Intent for the Company to acquire the broadband assets of
Wisper Networks Inc. Under the contemplated agreement, some of
Wisper's key staff would become available to the Company as employees
or consultants. Under the contemplated terms, Wisper Inc. would
receive up to $430,000 CDN in cash and Company shares, subject to
shareholder and regulatory approval. The transaction is subject to
mutually agreeable definitive terms, as well as regulatory and
exchange approvals which have not yet been obtained. There can be no
certainty that the acquisition will be completed.
F
F-45
Universe2U Inc.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(expressed in U.S. dollars)
- -------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
- -------------------------------------------------------------------------------
The following table contains Statement of Operations information for each
quarter of 2000 and 2001. The Company believes that the following
information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the period presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------- -------------
Total revenues $ 638,816 $ 297,224 $ 212,106 $ 76,188
Net loss $ (2,529,229) $ (2,182,076) $ (1,709,416) $ (2,881,719)
2000
Total revenues $ 1,510,519 $ 1,090,840 $ 1,605,697 $ 1,446,653
Net loss $ (10,419) $ (743,880) $ (1,172,535) $ (2,268,619)
============================================================================= ============
F-46
Prospective investors may rely only on the information contained in this
prospectus. Universe2U Inc. has not authorized anyone to provide prospective
investors with different or additional information. This prospectus is not an
offer to sell nor is it seeking an offer to buy these securities in any
jurisdiction where such offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any sale of these
securities.
Until July XX, 2002 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
18,873,016 shares
Common Stock
PROSPECTUS
July XX, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 78.037 of the Nevada Revised Statutes ("NRS"),
Article IX of our by-laws provides that no director or officer of Universe2U be
personally liable to Universe2U or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability for (1) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (2) the payment of distributions in violation of NRS Section 78.300,
which provides that (a) the directors of a corporation shall not make
distributions to stockholders except as provided by this chapter; and (b) in
case of any willful or grossly negligent violation of the provisions of this
section, the directors under whose administration the violation occurred,
excepting dissenters to those acts, are jointly and severally liable, at any
time within three (3) years after each violation, to the corporation, and, in
the event of its dissolution or insolvency, to its creditors at the time of the
violation, or any of them, to the lesser of the full amount of the distribution
made or of any loss sustained by the corporation by reason of the distribution
to stockholders. In addition, our amended and restated certificate of
incorporation provides that if the Nevada Revised Statutes are amended to
authorize the further elimination or limitation of the liability of directors
and officers, then the liability of a director and/or officer of the corporation
shall be eliminated or limited to the fullest extent permitted by the Nevada
Revised Statutes, as so amended.
Article IX of our amended and restated by-laws provides for indemnification by
Universe2U of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of Universe2U if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of Universe2U, and, with respect to criminal actions or proceedings,
if such person had no reasonable cause to believe his or her conduct was
unlawful.
We have also entered into indemnification agreements with each of our directors
and certain of our executive officers. These agreements provide that we
indemnify each of our directors and such officers to the fullest extent
permitted under law and our by-laws, and provide for the advancement of expenses
to each director and each such officer. We have also obtained directors and
officers insurance against certain liabilities.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
Nature of Expense Amount
------
SEC Registration Fee . . . . . . . . $ 360
Accounting Fees and Expenses. . . . 40,000
Legal Fees and Expenses . . . . . . 50,000
Miscellaneous . . . . . . . . . . . . 30,000
--------
TOTAL . . . . . . . . . . . . . . . . $120,360
The amounts set forth above, except for the Securities and Exchange Commission
fee, are in each case estimated.
II-1
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has sold or issued the following securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
No underwriters were used in connection with these sales and issuances.
On May 17, 2000, we issued an aggregate of 5,000,000 shares of common stock to
Angelo Boujos, Josie Boujos, Andrew Eyres, and William McGill in connection with
the acquisition of Universe2U Inc. (Ontario) pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
In May 2000, an Ontario, Canadian subsidiary of ours issued an aggregate of
833,000 shares of exchangeable securities. Such securities are exchangeable at
any time on a one-for-one basis for shares of our common stock without payment
of further consideration. The exchangeable securities were issued in connection
with the conversion of debentures held by thirteen non-U.S. investors. Such
issuance was made under Regulation S of the Securities Act. Such debentures had
been issued by Universe2U Inc. (Ontario) prior to its acquisition by the
company.
From June through November 2000, we sold to non-U.S. investors as part of a
private placement offering under Regulation S of the Securities Act an aggregate
of 621,500 shares of common stock at a purchase price of $5.00 per share and
warrants exercisable for the purchase of 621,500 shares of common stock at an
exercise price of $5.00 per share.
In June 2000, we issued 20,000 shares of common stock to one accredited U.S.
investor under Section 4(2) of the Securities Act.
On June 9, 2000, we issued to Mr. Angelo Boujos 100,000 shares of common stock
in exchange for the conversion of approximately $429,000 of indebtedness owed to
Mr. Boujos. We company relied upon Section 4(2) of the Securities Act with
respect to the issuance of the foregoing shares.
In March 2001, we issued 219,729 shares of common stock to Dominion Fixed Income
Plus Investments Limited for a total purchase price of $550,000, or
approximately $2.50 per share. These issuances were pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
On May 24, 2001, we issued 50,000 shares of common stock to 1469008 Ontario Inc.
in consideration for $150,000, or $3.00 per share, pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
In August 2001, we issued 375,000 shares of common stock and warrants to
purchase 375,000 shares of common stock to Fusion Capital Fund II, LLC in
consideration for its commitment to find an equity line of credit of up to
$12,000,000. The warrants were initially exercised at $4.00 per share. In June
2002, we reduced the warrant exercise price to $1.00 per share in exchange for
Fusion's consent to the June 2002 Purchase Placement and an extension of the
term of the equity line to 52 months. The issuance to Fusion was pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
In February 2002, we agreed to issue shares of common stock as partial
consideration for a loan from an unrelated party in the amount of $800,000 CDN.
We agreed to issue such shares at the rate of 5,500 shares per day that the loan
is outstanding, up to a maximum of 1,000,000 shares. The loan bears interest of
$8,834 CDN per month and matures August 15, 2002. The issuance was pursuant to
an exemption from registration under Section 4(2) of the Securities Act of 1933,
as amended.
From July 2001 to March 2002, we issued warrants to purchase an aggregate of
133,455 shares of common stock to Palm Trading Ltd. as consideration for
drawdowns under a line of credit of up to $500,000. The warrants are
exercisable at prices ranging from $0.38 to $1.28. The issuance to Palm
Trading was pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended.
II-2
In May 2002, we issued 800,000 shares of common stock to Palm Trading Ltd.
pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as
amended, in consideration for the cancellation of $400,000 in indebtedness.
In May 2002, we issued 750,000 shares of common stock to Frank Servedio as late
payment penalties under a loan in the principal amount of $200,000 CDN from that
party. In ____, we issued 45,000 shares of common stock to the lender as
interest under the loan. These issuances were pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
In June 2002, we issued secured convertible debentures in the principal amount
of $500,000 and warrants to purchase 500,000 shares of common stock to the
selling security holders in the June 2002 Private Placement. Unlike the terms
of the agreement with the investors, the investors agreed to purchase a like
principal amount of debentures and a like number of warrants at the same
purchase price on each of the following dates (i) within 10 days of our filing
of the registration statement with the SEC and (ii) within 10 days of the
effective date of this registration statement, subject to certain exceptions.
We also issued 225,000 shares of common stock to the NIR Group, LLC for
consulting services. These issuances were pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
From August 2000 to May 2002, we have issued an aggregate of 6,644,507 options
and warrants to officers, directors, employees and consultants. The exercise
price of such securities range from $0.01 to $5.00. These issuances were all
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended.
Item 27. EXHIBITS
The following exhibits are filed as part of this registration statement:
Exhibit No. Description of document
- ----------- -------------------------
3.1(a) Certificate of Incorporation as filed with the Commission as Exhibit 3.1
to Paxton Mining Corporation's Form SB-2 filed on September 1, 1999, is
incorporated herein by reference thereto.
3.1(b) Certificate of Amendment of Articles of Incorporation, as filed with the
Commission as Exhibit 3.1(b) to the Company's Form 10-QSB filed on August
21, 2000, is incorporated herein by reference thereto.
3.1(c) Certified Copy of Amendment to the Articles of Incorporation, as
filed with the Commission as Exhibit 4.1 to the Company's Registration Statement
on Form S-3 filed on August 6, 2001, is incorporated herein by reference
thereto.
3.2(a) Amended and Restated By-laws, as filed with the Commission as Exhibit
4.2 to the Company's Registration Statement on Form S-3 filed on August 6, 2001,
is incorporated herein by reference thereto.
4.1 Specimen Stock Certificate, as filed with the Commission as Exhibit 4.1
to the Company's Form 10-QSB filed on August 21, 2000, is incorporated herein by
reference thereto.
5.1** Opinion of Ehrenreich Eilenberg & Krause LLP.
10.01* Asset Purchase Agreement made as of the 14th day of May, 2002,
between Universe2U Canada Inc., Universe2U Inc. and Wisper
Networks Inc., and Wisper Inc.
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10.02* Marketing Agreement dated April 12, 2002 between Universe 2U Inc. and
EBI Communications, Inc.
10.03* General Assignment Of Book Debts dated February 22, 2002 by 1418276
ONTARIO INC. in favor of Laurentian Bank of Canada.
10.04* General Security Agreement dated 22nd day of February, 2002 between
1418276 ONTARIO INC., and Laurentian Bank Of Canada (a similar form of
agreement dated the same date was entered into with our subsidiaries
CableTec Communications Inc. and Universe2U Canada Inc.)
10.05* General security agreement between Cabletec Communications Inc. and
Laurentian Bank Of Canada
10.06* General security agreement between Universe2u Canada Inc. and
Laurentian Bank Of Canada
10.07* Guarantee dated February 22, 2002 to Laurentian Bank Of Canada dealing
with 1418276 Ontario Inc.
10.08* Operating Line of Credit Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.09** Agreement Concerning Loans and Advances and Related Security dated
February 22, 2002 between Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.10* Postponement of Claim Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.11* Specific Security Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.12* U.S. Dollar Commercial Line Of Credit Agreement dated February 22,
2002 between Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.13* Operation of Account Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.14 Form of Secured Convertible Debenture dated June 25, 2002 issued to AJW
Partners, LLC, New Millennium Capital Partners II, LLC, Pegasus Capital
Partners, LLC, and AJW/New Millennium Offshore Ltd., as filed with the
Commission as Exhibit 10.01 to the Company's Form 8-K filed on July 2,
2002, is incorporated herein by reference thereto.
10.15 Securities Purchase Agreement dated June 25, 2002, by and among Universe2U
Inc. and AJW Partners, LLC, New Millennium Capital Partners II, LLC,
Pegasus Capital Partners, LLC, and AJW/New Millennium Offshore Ltd., as
filed with the Commission as Exhibit 10.02 to the Company's Form 8-K filed
on July 2, 2002, is incorporated herein by reference thereto.
10.16 Form of Stock Purchase Warrant dated June 25, 2002,issued to AJW Partners,
LLC, New Millennium Capital Partners II, LLC, Pegasus Capital Partners,
LLC, and AJW/New Millennium Offshore Ltd., as filed with the Commission as
Exhibit 10.03 to the Company's Form 8-K filed on July 2, 2002, is
incorporated herein by reference thereto.
10.17 Security Agreement dated June 25, 2002, by and among Universe2U Inc. and
AJW Partners, LLC, New Millennium Capital Partners II, LLC, Pegasus Capital
Partners, LLC, and AJW/New Millennium Offshore Ltd., as filed with the
Commission as Exhibit 10.04 to the Company's Form 8-K filed on July 2,
2002, is incorporated herein by reference thereto.
II-4
10.18 Guaranty and Pledge Agreement dated June 25, 2002, by and among Universe2U
Inc., Angelo Boujos and AJW Partners, LLC, New Millennium Capital Partners
II, LLC, Pegasus Capital Partners, LLC, and AJW/New Millennium Offshore
Ltd., as filed with the Commission as Exhibit 10.05 to the Company's Form
8-K filed on July 2, 2002, is incorporated herein by reference thereto.
10.19 Registration Rights Agreement dated June 25, 2002, by and among Universe2U
Inc. and AJW Partners, LLC, New Millennium Capital Partners II, LLC,
Pegasus Capital Partners, LLC, and AJW/New Millennium Offshore Ltd., as
filed with the Commission as Exhibit 10.06 to the Company's Form 8-K filed
on July 2, 2002, is incorporated herein by reference thereto.
10.20 Share Purchase Agreement dated January 25, 2000, between 1348485 Ontario
Inc. and Bernie Tan Investments Inc. o/a CableTec Communications and
Bernard Tanunagara and Barbara Tanunagara and Edward Tanunagara, as filed
with the Commission as Exhibit 10.1 to the Company's Form 10-QSB filed on
August 21, 2000, is incorporated herein by reference thereto.
10.21 Amending Agreement dated March 1, 2000, between Universe2U Inc. (formerly
1348485 Ontario Inc.), Bernie Tan Investments Inc. o/a CableTec
Communications, Bernard Kris Tanunagara, Barbara J. Tanunagara, and Edward
Tanunagara, as filed with the Commission as Exhibit 10.2 to the Company's
Form 10-QSB filed on August 21, 2000, is incorporated herein by reference
thereto.
10.22 Second Amending Agreement dated May 31, 2000, between Universe2U Inc.
(formerly 1348485 Ontario Inc.), Bernie Tan Investments Inc. o/a CableTec
Communications, Bernard Kris Tanunagara, Barbara J. Tanunagara and Edward
Tanunagara, as filed with the Commission as Exhibit 10.3 to the Company's
Form 10-QSB filed on August 21, 2000, is incorporated herein by reference
thereto.
10.23 Share Option Agreement dated May 31, 2000 between Universe2U Inc., and
Bernard Kris Tanunagara, as filed with the Commission as Exhibit 10.4 to
the Company's Form 10-QSB filed on August 21, 2000, is incorporated herein
by reference thereto.
10.24 Escrow Agreement dated May 31, 2000, between Universe2U Inc. (formerly
1348485 Ontario Inc.), Bernard Tanunagara, Barbara Tanunagara, Edward Tanunagara
and Rigobon, Carli, Barristers & Solicitors, as filed with the Commission as
Exhibit 10.5 to the Company's Form 10-QSB filed on August 21, 2000, is
incorporated herein by reference thereto.
10.25 Indemnification Agreement between Universe2U Inc. and Indemnitee, as
filed with the Commission as Exhibit 10.6 to the Company's Form 10-QSB filed on
August 21, 2000, is incorporated herein by reference thereto.
10.26 Executive Employment Agreement dated November 24, 1999 between 1348485
Ontario Inc. and Kim Allen, as filed with the Commission as Exhibit 10.7 to the
Company's Form 10-QSB filed on August 21, 2000, is incorporated herein by
reference thereto.
10.27 Executive Employment Agreement dated December 22, 1999 between
Universe2U Inc. and Angelo Boujos, as filed with the Commission as Exhibit 10.8
to the Company's Form 10-QSB filed on August 21, 2000, is incorporated herein by
reference thereto.
10.28 Executive Employment Agreement dated December 21, 1999 between
Canadian Cable Consultants Inc. and William McGill, as filed with the Commission
as Exhibit 10.9 to the Company's Form 10-QSB filed on August 21, 2000, is
incorporated herein by reference thereto.
II-5
10.29 Executive Employment Agreement dated June 1, 2000 between Universe2U
Inc. and Andrew Eyres, as filed with the Commission as Exhibit 10.10 to the
Company's Form 10-QSB filed on August 21, 2000, is incorporated herein by
reference thereto.
10.30 Executive Employment Agreement dated April 19, 2000, between Fiber
Optic Corporation of Canada and Jeff Rosenthal, as filed with the Commission as
Exhibit 10.11 to the Company's Form 10-QSB filed on August 21, 2000, is
incorporated herein by reference thereto.
10.31 Employment Agreement dated May 31, 2000 between CableTec and Bernard
Tanunagara, as filed with the Commission as Exhibit 10.12 to the Company's Form
10-QSB filed on August 21, 2000, is incorporated herein by reference thereto.
10.32 Share Purchase Agreement dated May 16, 2000, between Universe2U,
1418276 Ontario Inc., Universe2U Inc., Angelo Boujos, Josie Boujos, Josie
Boujos, in trust, Bill McGill and Andrew Eyres, as filed with the Commission as
Exhibit 10.13 to the Company's Form 10-QSB filed on August 21, 2000, is
incorporated herein by reference thereto.
10.33 Share Exchange Agreement dated May 16, 2000, between Universe2U Inc.,
1418276 Ontario Inc., Angelo Boujos, Josie Boujos, Josie Boujos, in trust,
Bill McGill and Andrew Eyres, as filed with the Commission as Exhibit 10.14
to the Company's Form 10-QSB filed on August 21, 2000, is incorporated
herein by reference thereto.
10.34 Support Agreement dated May 16, 2000, between Universe2U Inc., 1418276
Ontario Inc., Angelo Boujos, Josie Boujos, Josie Boujos in trust, Bill
McGill and Andrew Eyres, as filed with the Commission as Exhibit 10.15 to
the Company's Form 10-QSB filed on August 21, 2000, is incorporated herein
by reference thereto.
10.35 Engagement Letter Agreement dated July 17, 2000 between Universe2U Inc.,
and First Union Asset Management, as filed with the Commission as Exhibit
10.16 to the Company's Form 10-QSB filed on August 21, 2000, is
Incorporated herein by reference thereto.
10.36 Waiver and Release dated May 17, 2000 between Universe2U Inc., and First
Union Asset Management, as filed with the Commission as Exhibit 10.17 to
the Company's Form 10-QSB filed on August 21, 2000, is incorporated herein
by reference thereto.
10.37 Operating Agreement of T-E Realty And Rights-of-way Agency, L.L.C., as
filed with the Commission as Exhibit 10.18 to the Company's Form 10-QSB
filed on November 14, 2000, is incorporated herein by reference thereto.
10.38 Executive Employment Agreement dated July 26, 2000, between Universe2U
Inc. and R. John Slattery, as filed with the Commission as Exhibit 10.19 to
the Company's Form 10-QSB filed on November 14, 2000, is incorporated
herein by reference thereto.
10.39 Joint Venture Term Sheet, between T- Enterprises, Inc., and the
Right-of-Ways Agency Inc., dated July 13, 2000, as filed with the
Commission as Exhibit 10.20 to the Company's Form 10-QSB filed on November
14, 2000, is incorporated herein by reference thereto.
10.40 Form of Common Stock Purchase Agreement, dated as of August 1, 2001 by and
between Universe2U, Inc. and Fusion Capital Fund II, LLC, as filed with the
Commission as Exhibit 10.21 to the Company's Registration Statement on Form
S-3 filed on August 6, 2001, is incorporated herein by reference thereto.
II-6
10.41 Form of Registration Rights Agreement, dated as of August 1, 2001 by and
between Universe2U, Inc. and Fusion Capital Fund II, LLC, as filed with the
Commission as Exhibit 10.22 to the Company's Registration Statement on Form
S-3 filed on August 6, 2001, is incorporated herein by reference thereto.
10.42 Form of Warrant issued to Fusion Capital Fund II, LLC in connection with
and pursuant to the Common Stock Purchase Agreement dated as of August 1,
2001, by and between Universe2U, Inc., and Fusion Capital Fund II, LLC, as
filed with the Commission as Exhibit 10.23 to the Company's Registration
Statement on Form S-3 filed on August 6, 2001, is incorporated herein by
reference thereto.
10.45 Universe2U Inc. 2000 Equity Incentive Plan, as filed with the Commission
as Exhibit B to the Registrant's Definitive Proxy, filed on April 27, 2001,
is hereby incorporated by reference thereto.
10.46 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 Registrant's Form 10-KSB filed on April
15, 2002, is hereby incorporated by reference thereto.
10.47* Loan Agreement dated February 28, 2002 between 1418276 Ontario Inc., our
non-operating holding company holding all the shares of Universe2U Canada
Inc. and 1463549 Ontario Inc.
10.48* Loan Agreement dated February 18, 2002 between Universe2U Canada Inc. and
Frank Servedio.
16.1 Letter from Williams & Webster, P.S., dated June 15, 2000, regarding change
in certifying accountant, as filed with the Commission as Exhibit 16 to the
Company's Form 8-K filed on June 16, 2000, is incorporated herein by
reference thereto.
21.1 List of Subsidiaries of Registrant, as filed with the Commission as Exhibit
21.1 to the Registrant's Form 10-KSB filed on April 15, 2002, is hereby
incorporated by reference thereto.
23.1* Consent of Moore Stephens Cooper Molyneux LLP.
23.2 Consent of Ehrenreich Eilenberg & Krause LLP (see Exhibit 5.1).
24.1 Powers of Attorney. Included on the signature page hereto.
___________________
* Filed herewith.
** To be filed by amendment.
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") may be permitted towards directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
For purposes of registration of securities under Rule 415 promulgated under the
Securities Act, the undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in the registration
statement. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) promulgated under the Securities Act if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Richmond Hill, Ontario,
on July 29, 2002.
UNIVERSE2U INC.
By: /s/ Kim Allen
-------------------------
Kim Allen
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kim Allen his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and in his name, in any and
all capacities, to sign all amendments (including post-effective amendments) to
the registration statement to which this power of attorney is attached, and to
file all those amendments and all exhibits to them and other documents to be
filed in connection with them, including any registration statement pursuant to
Rule 462 under Securities Act of 1933, with the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the Town of Richmond
Hill, Ontario, on July 29, 2002.
Signature Title Date
/s/ Angelo Boujos
- ----------------------------- Chairman July 29, 2002
Angelo Boujos
/s/ Kim Allen
- ----------------------------- Chief Executive Officer, Director July 29, 2002
Kim Allen and Principal Financial Officer
/s/Jeff Rosenthal
- ----------------------------- Director July 29, 2002
Jeff Rosenthal
/s/ Paul Pathak
- ----------------------------- Director July 29, 2002
Paul Pathak
II-9
EXHIBITS INDEX
Exhibit No. Description of document
- ------------ -------------------------
10.01 Asset Purchase Agreement made as of the 14th day of May, 2002, between
Universe2U Canada Inc., Universe2U Inc. and Wisper Networks
Inc., and Wisper Inc.
10.02 Marketing Agreement dated April 12, 2002 between Universe 2U Inc. and
EBI Communications, Inc.
10.03 General Assignment Of Book Debts dated February 22, 2002 by 1418276
ONTARIO INC. in favor of Laurentian Bank of Canada.
10.04 General Security Agreement dated 22nd day of February, 2002 between
1418276 ONTARIO INC., and Laurentian Bank Of Canada (a similar form of agreement
dated the same date was entered into with our subsidiaries CableTec
Communications Inc. and Universe2U Canada Inc.)
10.05 General Security Agreement between Cabletec Communications Inc. and
Laurentian Bank of Canada
10.06 General Security Agreement between Universe2U Canada Inc. and
Laurentian Bank of Canada
10.07 Guarantee dated February 22, 2002 to Laurentian Bank Of Canada dealing
with 1418276 Ontario Inc.
10.08 Operating Line of Credit Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.10 Postponement of Claim Agreement dated February 22, 2002 between
Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.11 Specific Security Agreement dated February 22, 2002 between Laurentian
Bank of Canada and 1418276 ONTARIO INC.
10.12 U.S. Dollar Commercial Line Of Credit Agreement dated February 22,
2002 between Laurentian Bank of Canada and 1418276 ONTARIO INC.
10.13 Operation of Account Agreement dated February 22, 2002 between Laurentian
Bank of Canada and 1418276 ONTARIO INC.
10.47 Loan Agreement dated February 28, 2002 between 1418276 Ontario Inc., our
non-operating holding company holding all the shares of Universe2U Canada
Inc. and 1463549 Ontario Inc.
10.48 Loan Agreement dated February 18, 2002 between Universe2U Canada Inc. and
Frank Servedio.
23.1 Consent of Moore Stephens Cooper Molyneux LLP.