10QSB 1 form10_qsb.txt FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 000-29929 COMMUNICATE.COM INC. (Exact name of small business as specified in its charter) Nevada 33-0786959 ------------------ --------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) #600 - 1100 Melville Street, Vancouver, B.C. V6E 4A6 ---------------------------------------------------- (Address of principal executive offices) (604) 697-0136 -------------- (Issuer's telephone number) APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Common Stock 14,191,339 shares outstanding $.001 Par Value as of May 13, 2002 Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 1 COMMUNICATE.COM INC. REPORT ON FORM 10-QSB QUARTER ENDED MARCH 31, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Balance sheets as of March 31, 2002 and December 31, 2001 Statements of Operations as of March 31, 2002 and March 31, 2001 Statements of Cash Flows as of March 31, 2002 Notes to the Financial Statements 3 Item 2. Management's discussion and analysis of financial condition and results of operations 3 PART II. OTHER INFORMATION 7 Item 1. Legal Proceedings. 7 Item 2. Changes in Securities. 8 Item 3. Defaults Upon Senior Securities. 8 Item 4. Submission of Matters to a Vote of Security Holders. 8 Item 5. Other Information. 8 Item 6. Exhibits and Reports on Form 8-K. 8 Signatures 10
2 PART I ITEM 1: FINANCIAL STATEMENTS. --------------------- The response to Item 1 has been submitted as a separate section of this Report beginning on page F-1. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- Registrant is involved in internet-related businesses. Pursuant to an acquisition in November 2000, Registrant acquired an 83% interest in Domain Holdings Inc. (formerly Communicate.com Inc.) (the "Subsidiary") that markets and licenses a portfolio of approximately 80 domain names, 30 of which generate high amount of internet traffic because of, among other things, their generic description of a specific product or services category. Registrant has focused since the beginning of 2001 on developing revenue streams from its domain names and reducing the debt of the Subsidiary. Registrant has been generating revenue from leasing domain names, from sales commissions from the selling of third-party products and services, from pay-per-click revenue and from the sale of non-core domain name assets. Registrant presently has one administrative employee and two consultants employed by the Subsidiary. Registrant has relied on hourly-contractors to meet its technical needs and expects to continue the practice for the foreseeable future. (A) SELECTED FINANCIAL DATA ----------------------- The following selected financial data was derived from Communicate's unaudited financial statements. The information set forth below should be read in conjunction with the Company's financial statements and related notes included elsewhere in this report.
For the Quarters Ended March 31, 2002 March 31, 2001 ------------------------------------------------------------------------------------------------------ Statements of Operations Data ----------------------------- Domain Name Revenue, Net $ 128,322 $ 50,816 Other 25,887 12,520 General and Administrative $ (27,597) $ (51,553) Professional Fees (59,085) (102,033) Depreciation (1,693) (23,135) Operating Income (Loss) $ 65,834 $ (113,385)
3 Interest (22,397) (13,246) Net Income (Loss) $ 43,437 $ (126,631) Basic Earnings (Loss) per Share $ 0.003 ($ 0.01) Weighted Average Shares Outstanding 14,191,339 12,537,428 Balance Sheet Data As at March 31, 2002 As at December 31, 2001 ------------------ Current Assets $ 96,482 $ 125,931 Fixed Assets 16,002 17,432 Intangible Assets 3,200,092 3,341,577 Total Assets $ 3,312,576 $ 3,484,940 Accounts Payable & Accrued Liabilities $ 658,394 $ 733,751 Loan Payable 468,930 605,000 Deferred Revenue -- 9,886 Total Liabilities $ 1,127,122 $ 1,348,637 Common Stock $ 5,201 $ 5,201 Additional Paid in Capital 2,772,016 2,772,016 Accumulated Deficit $ (591,763) $ (640,914)
(b) RESULTS OF OPERATION REVENUES. In the first quarter of 2002, Registrant recorded income from the utilization of its domain names of $128,322, an increase of approximately 252% from the first quarter of 2001. Registrant's increased sales were derived from the net sale of a sports domain name for approximately $59,000, as well as commission generating arrangements with several of its health-related domains whereby the Registrant earns a portion of any revenue generated from customers introduced by the Registrant's domain names which generated $22,000 during the first quarter of 2002 compared to $25,800 in the first quarter of 2001. These agreements are done on a month-to-month basis. In addition, Registrant recognized approximately $38,000 from arrangements entered into with an internet pay-per-click service provider, which will pay the Registrant a fee for successful click-through traffic. Registrant did not record any income from pay-per-click agreements in the first quarter of 2001. Registrant also amortized deferred revenue to generate $9,800 from the leasing of a sports domain name in the first quarter of 2002. Management will continue to market its portfolio of domain names in fiscal 2002 and identify potential purchasers who have substantial liquid assets to complete any contemplated purchase transactions. Management believe that its portfolio of generic product or services category domain names will continue to generate interest from potential partners or purchasers despite a softened and depressed domain names aftersales market because of the intuitive and traffic-generating characteristics of Registrant's domain names. 4 Registrant has negotiated with many of its trade creditors and capital lessors to settle on a reduced amount owing by the Subsidiary. In the first quarter of 2002, gain resulting from debt settlement amounted to $23,000 and has been classified as other revenue. Any cashflow generated, net of monthly cash operating expenses, has been applied to reduce debt. This debt management program shall continue for the foreseeable future. GENERAL AND ADMINISTRATIVE. Registrant's general and administrative expenses consist primarily of salaries and related costs for general and corporate functions, including all facilities fees. These expenses have been reduced substantially from the same quarter in 2001 as a result of management's cost savings program implemented in the last quarter of 2000 and continued to date and the change in business focus in the Subsidiary's business. PROFESSIONAL FEES. A substantial amount of the professional fees were for legal and auditing fees which were related to costs of regulatory filings and financial statement preparation. Registrant continues to seek ways to reduce these costs. During the first quarter of 2002, professional fees totaled $59,000, compared to$102,000 for the same quarter of last year, a reduction of approximately 42%. While the Company continues to pursue litigation, , management is unaware of factors which are likely to increase professional fees for the remaining quarters in 2002. (c) LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002 Registrant had current liabilities in excess of current assets resulting in a working capital deficit of $1,030,640. During the three-month ended March 31, 2002 Registrant had a net income of $43,437 and a decrease in cash of $17,000, compared to a net loss of $126,600 and a decrease in cash of $23,900 for the same quarter of last year. Operating activities generated cashflows of $137,600 primarily from the sale of a domain name, from net income generated during the quarter and after payments to trade creditors. The cashflows were used to repay a $150,000 loan and to pay lease obligations. Registrant has accumulated a deficit of $624,554 since inception and has a stockholders' equity of $2,185,454 at March 31, 2002. Due to the working capital deficit, there is substantial doubt about Registrant's ability to continue as a going concern. Registrant will only be able to continue operations if it raises additional funds, either through operations or outside funding. Registrant cannot predict whether it will be able to do so. Registrant seeks to generate revenue from (i) leasing domain names to third parties to conduct on-line businesses; (ii) selling products and services of third parties; (iii) fees resulting from traffic click-throughs generated by the domain name assets; and (iv) selling of non-core domain name assets. Registrant and the Subsidiary cannot satisfy its cash requirements for the next 12 months without having to raise additional funds. The Subsidiary's expected cash requirement for the next 12 months is $200,000. Registrant expects to raise any additional funds by way of equity and/or debt financing, and through the sale of non-strategic domain name assets. However, Registrant 5 may not be able to raise the required funds from such financings, particularly in light of existing market conditions and the perception by investors of those companies that, like the Registrant, engage in e-commerce and related businesses. In that case Registrant will proceed by approaching current shareholders for loans or equity capital to cover operating costs. Although the foregoing actions are expected to cover Registrant's anticipated cash needs for working capital and capital expenditures for at least the next twelve months, no assurance can be given that Registrant will be able to raise sufficient cash to meet these cash requirements. Registrant has no current plans to purchase any plant or significant equipment. (d) UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS Management's discussion and analysis of Registrant's financial condition and the results of its operations and other sections of this report, contain forward looking statements, that are based upon the current beliefs and expectations of Registrant's management, as well as assumptions made by, and information currently available to, Registrant's management. Because these statements involve risks and uncertainties, actual actions and strategies and the timing and expected results may differ materially from those expressed or implied by the forward-looking statements. As well, Registrant's future results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. 6 PART II OTHER INFORMATION Item 1. Legal Proceedings. -------------------------- In December 1999, the Subsidiary commenced a lawsuit in the Supreme Court of British Columbia (No. C996417) against Paul Green, the former chief executive officer of the Subsidiary, for breach of fiduciary duty for wrongfully attempting to appropriate the Subsidiary's business opportunities. The Subsidiary is seeking an undetermined amount of damages and a declaration that it had just cause to terminate Paul Green as the CEO in or about June 1999. No decision has been rendered in this case and the Company cannot predict whether it will prevail, and if it does, what the terms of any judgment may be. On March 9, 2000, Paul Green commenced a separate action in the Supreme Court of British Columbia (No. S001317) against the Subsidiary. In that action, Paul Green claimed wrongful dismissal and a breach of contract on the part of the Subsidiary. Paul Green is seeking an undetermined amount of damages and, among others, an order of specific performance for the issuance of a number of shares in the capital of the Subsidiary equal to 18.9% or more of the outstanding shares of the Subsidiary. On June 1, 2000, the Subsidiary filed a statement of defence and counterclaim. Management intends to defend this action vigorously. On October 10, 2001, Communicate and the Subsidiary entered into a loan agreement with Siden Investments, Inc. ("Siden"), pursuant to which Siden advanced to Communicate and the Subsidiary an aggregate of $150,000, including funds previously advanced to Communicate and the Subsidiary (the "Loan"). As additional security for the Loan, Communicate entered into an Option Agreement with Siden pursuant to which Siden was given the right to acquire up to 15,000,000 shares of Communicate's common stock at an exercise price of $0.01 per share (the "Option"). The Loan was repaid in full on about March 22, 2002. Since the date of repayment, a dispute has arisen between Siden and Communicate regarding the exercisability of the Option. It is the Company's belief that inasmuch as the Option was granted as additional security for the Loan, and inasmuch as the Loan has been repaid in full, the Option has terminated and is of no further force or effect. While Siden has not attempted to exercise the option, Siden has advised Communicate that it believes it is entitled to do so. Based on the advice of counsel, Communicate believes that while there can be no certainty in this matter absent a settlement or judicial proceeding, neither of which has been commenced, Communicate is able raise additional defences to Siden's claim, should a claim be made or an action brought against Communicate or the Subsidiary. No formal demand has been made with respect to this matter and, therefore, Communicate cannot evaluate whether it would prevail in an action. On April 4, 2002, Gartner, Inc. made a claim against the Subsidiary for alleged breach of contract and debt owing for marketing services rendered during April 1, 2000 to March 31, 2001 in the amount of $85,600. Registrant believes the contract was cancelled properly and intends to defend against the claim vigorously. 7 On April 23, 2002, DNG Capital Corp issued a demand letter to the Subsidiary demanding the payment of Cdn$15,105 for alleged services rendered during November 2001 to January 2002 and return of an investment of $97,000 made in February 2000. Registrant believes the services were provided for and on behalf of Siden and that the investment was for share subscription in the Subsidiary that had been completed. Registrant does not believe the claims have merit and intends to defend against any legal action vigorously. Registrant is not aware of any other pending or threatened material legal proceedings. Item 2. Changes in Securities. ------------------------------ None. Item 3. Defaults Upon Senior Securities. ---------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders. ------------------------------------------------------------- No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the first three months of the fiscal year covered by this report. Item 5. Other Information. -------------------------- Change of Principal Office - the Company and its Subsidiary has relocated to 600 - 1100 Melville Street, Vancouver, BC, V6E 4A6. The new office space, approximately 300 square feet, is sub-leased on a month-to-month basis. Item 6. Exhibits and Reports on Form 8-K. ----------------------------------------- (A) Index to and Description of Exhibits. ---------------------------------------------- EXHIBIT DESCRIPTION F-1 Financial Statements. 27 Financial Data Schedule. (B) Reports on Form 8-K. ----------------------------- 8 On February 8, 2002, Communicate filed a Form 8-K disclosing under Item #2 an arms-length agreement to sell substantially all of the domain name assets of its Subsidiary for $1.5 million as at December 31, 2001 and that approval from the majority of the Subsidiary's shareholders had been received on February 8, 2002. On March 5, 2002, Communicate filed a Form 8-K disclosing under Item #2 that the previous agreement to sell substantially all of the domain name assets of its Subsidiary had been mutually terminated and that Cameron Pan resigned as President and director and that Leigh Jeffs was appointed the President and director of Communicate and its Subsidiary on February 22, 2002. There were no other reports on Form 8-K filed by Registrant during the first quarter ending March 31, 2002. 9 PART II - SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATE.COM INC. Date: May 14, 2002 By: /s/ R. Leigh Jeffs 10 Exhibits Financial Statements......................................................F-1 11 COMMUNICATE.COM INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (Unaudited) BALANCE SHEETS INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS F-1 COMMUNICATE.COM INC. CONSOLIDATED BALANCE SHEETS
December 31, March 31, 2002 2001 ------------------------------------------------------------------------------------------------ (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 35,620 $ 52,672 Accounts receivable 15,725 11,325 Advances receivable 40,745 53,125 Prepaid expenses 4,392 8,809 ------------------------------------------------------------------------------------------------ 96,482 125,931 FIXED ASSETS (Note 4) 16,002 17,432 INTANGIBLE ASSETS HELD FOR RESALE (Note 3) 3,200,092 3,341,577 ------------------------------------------------------------------------------------------------ $ 3,312,576 $ 3,484,940 ================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 648,394 $ 713,514 Loans Payable (Note 5) 468,930 605,000 Deferred revenue - 9,886 Lease obligation (Note 4) 9,798 20,237 ------------------------------------------------------------------------------------------------ 1,127,122 1,348,637 ------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 1 and 11) STOCKHOLDERS' EQUITY Capital stock (note 6) Authorized 50,000,000 Common shares, $.001 par value Issued and outstanding 14,191,339 (2001 - 14,191,339) Common shares 5,201 5,201 Additional paid in capital 2,772,016 2,772,016 Accumulated deficit (624,554) (667,991) Accumulated other comprehensive income 32,791 27,077 ------------------------------------------------------------------------------------------------ 2,185,454 2,136,303 ------------------------------------------------------------------------------------------------ $ 3,312,576 $ 3,484,940 ================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements F-2 COMMUNICATE.COM INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months Three months ended March 31, ended March 31, 2002 2001 ============================================================================================= REVENUES Domain name revenue, net $ 128,322 $ 50,816 Other 25,887 12,520 ----------------------------------------------------------------------------------------- 154,209 63,336 ----------------------------------------------------------------------------------------- EXPENSES General and administrative 27,597 49,937 Professional fees 59,085 102,033 Sales and marketing - 1,616 Depreciation and amortization 1,693 23,135 ----------------------------------------------------------------------------------------- 88,375 176,721 ----------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 65,834 (113,385) INTEREST EXPENSE (22,397) (13,246) ----------------------------------------------------------------------------------------- NET INCOME (LOSS) FOR THE PERIOD $ 43,437 $ (126,631) ========================================================================================= BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.01) ========================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,191,339 12,537,428 =========================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements F-3 COMMUNICATE.COM INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months Three months ended March 31, ended March 31, 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) for the period $ 43,437 $ (126,631) Adjustments to reconcile net loss to net cash used in operating activities - non-cash expenses and costs of revenue 141,222 - - depreciation and amortization 1,693 23,135 - accrued interest 13,930 9,024 - accounts receivable (4,400) 58,306 - advances receivable 12,380 - - other assets - 7,322 - prepaid expenses 4,417 (529) - accounts payable (65,120 (12,598) - deferred revenue (9,886) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 137,673 (41,971) ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES - loan repayments (150,000) - - lease obligation repayments (10,439) (14,553) ------------------------------------------------------------------------------------------------------------------------------- CASH USED IN FINANCING ACTIVITIES (160,439) (14,553) ------------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES 5,714 32,607 ------------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (17,052) (23,917) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,672 47,823 ------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,620 $ 23,906 ===============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION During the period ended March 31, 2001 the Company issued 16,000 common shares in settlement of certain trade accounts payable of $20,000. The accompanying notes are an integral part of these interim consolidated financial statements F-4 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION -------------------------------------------------------------------------------- The Company was incorporated October 10, 1995 under the laws of the State of Nevada and effective August 24, 2000 changed its name from Troyden Corporation to Communicate.com Inc. ("CMNN" or "the Company"). Effective November 10, 2000 the Company acquired a 52% controlling interest in Communicate.com Inc., an Alberta private company ("AlbertaCo") and during December 2000 acquired from minority shareholders an additional 31% of the outstanding shares of AlbertaCo. As a result, CMNN owns 83% of the outstanding shares of AlbertaCo. On April 5, 2002 AlbertaCo changed its name to Domain Holdings Inc. AlbertaCo owns a portfolio of simple, intuitive domain names. AlbertaCo's current business strategy is to seek partners to develop its domain names to include content, commerce and community applications. AlbertaCo has also entered into agreements to sell or lease certain of its domain names (refer to Note 7). The consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At March 31, 2002 the Company has a working capital deficiency of $1,030,640 (2001 - $1,222,706) and has incurred losses since inception raising substantial doubt as to the Company's ability to continue as a going concern. The Company's continued operations are dependent on its ability to obtain additional financing, settling its outstanding debts and to maintain profitable operations. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited consolidated financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------------------- BASIS OF PRESENTATION The accompanying financial statements are presented in United States dollars and are prepared in accordance with accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and the 83% interest in its subsidiary. All significant intercompany balances and transactions are eliminated on consolidation. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is computed at the following rates over the estimated useful lives of the assets: Computer equipment 30% declining balance Furniture and fixtures 20% declining balance Office equipment 20% declining balance One-half year depreciation is taken in the year of acquisition on certain capital assets. F-5 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) -------------------------------------------------------------------------------- REVENUE RECOGNITION Revenues from the sale and lease of domain names, whose carrying values are recorded as intangible assets held for resale, consists primarily of funds earned for the transfer of rights to domain names that are currently in the Company's control. Collectibility of these proceeds is subject to a high level of uncertainty; accordingly revenues are recognized only as received in cash and are shown net of the carrying value of the intangible asset sold. Lease payments paid in advance are recorded as deferred revenue. Web advertising revenue consists primarily of commissions earned from the referral of visitors to the Company's sites to other parties. The amount and collectibility of these referral commissions is subject to uncertainty; accordingly revenues are recognized when the amount can be determined and collectibility can be reasonably assured. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25") and complies with the disclosure provisions of Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the estimated fair value of the Company's stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and pro-rata for future services over the option-vesting period. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18"). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998. INCOME TAXES The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize the future benefit, or if the future deductibility is uncertain. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the periods that the financial statements are prepared. Actual amounts could differ from these estimates. F-6 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSACTIONS The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates that prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing earnings (loss) for the period by the weighted average number of common shares outstanding for the period. Fully diluted earnings (loss) per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred shares, in the weighted average number of common shares outstanding for a period and is not presented where the effect is anti-dilutive. The presentation is only of basic earnings (loss) per share as the effect of the potential dilution of securities is anti-dilutive to the prior period's basic (loss) per share and has no effect on the current period's basic earnings per share. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity from transactions, events and circumstances, other than those resulting from investments by owners and distributions to owners. Comprehensive income to date consists only of the net loss resulting from translation of the foreign currency financial statements of AlbertaCo. INTANGIBLE ASSETS HELD FOR RESALE The Company has adopted the provision of the Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset. Management has determined that as at March 31, 2002 no impairment of intangible assets held for resale has occurred. RECENT ACCOUNTING PRONOUNCEMENTS The Securities and Exchange Commission Staff Accounting Bulletin No. 101 and subsequent amendments and related releases ("SAB 101") released during the year ended September 30, 1999 provide guidance for the recognition of revenue in financial statements. The Company has considered the guidance presented therein and believes that the Company's practices for the recording of revenue are consistent with this guidance. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The adoption of SFAS 141 does not have a material impact on the Company's financial position or results of operations. F-7 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 3 - ACQUISITION -------------------------------------------------------------------------------- By agreement dated November 10, 2000 the Company acquired 52% of the outstanding shares of AlbertaCo, for total consideration of $2,000,000 of which $400,000 was paid in cash in 2000, $775,000 was paid in 2000 through the issuance of 1,550,000 shares of the Company's common stock at $0.50 per share and the remaining $825,000 was paid in 2001 through the issuance of 1,650,000 shares of the Company's common stock at $0.50 per share. In addition, by offer made November 30, 2000 and completed December 29, 2000, the Company acquired an additional 31% of the remaining minority shareholdings of AlbertaCo for consideration of $880,217 paid through the issuance of 1,375,339 shares of the Company's common stock at $0.64 per share. After completion of these two transactions, the Company owns 83% of the outstanding shares of common stock of the AlbertaCo. This business combination has been accounted for using the purchase method of accounting. The purchase price has been allocated as follows: Assets acquired at fair value: Current assets $ 350,568 Capital assets 519,798 Intangible assets held for resale - domain names 3,421,135 ------------ 4,291,501 Liabilities assumed at fair value: Accounts payable and accrued liabilities (1,301,421) Lease obligations (109,863) ------------ Purchase price $ 2,880,217 ============ NOTE 4 - FIXED ASSETS -------------------------------------------------------------------------------- March 31, December 31, 2002 2001 ---------------- --------------- Computer equipment $ 208,388 $ 208,388 Furniture and fixtures 6,568 6,568 Office equipment 3,993 3,993 ---------- ---------- 218,949 218,949 Less: accumulated depreciation (58,524) (57,094) Less: impairment provision (144,423) (144,423) $ 16,002 $ 17,432 ========== ========== -------------------------------------------------------------------------------- As at March 31, 2002, computer equipment includes $56,295 of equipment held under capital lease. In connection with this leased equipment the Company has lease obligations of $9,798, which are due in 2002. During the year ended December 31, 2001 the Company wrote down the carrying value of its fixed assets by $144,423 to reflect the equipment's net realizable value. F-8 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 5 - LOANS PAYABLE -------------------------------------------------------------------------------- In connection with the acquisition of AlbertaCo, the Company entered into a Loan and Security Agreement dated November 10, 2000 with Pacific Capital Markets Inc. ("PCMI"), a British Columbia corporation. Under the terms of the agreement, PCMI agreed to loan the Company up to $1,500,000 to satisfy its obligation pursuant to the AlbertaCo purchase agreement dated November 10, 2000. Amounts loaned by PCMI are secured by a promissory note payable on demand and bearing interest at the Royal Bank of Canada United States dollar prime rate plus 2%. In the event that the Company fails to repay the amounts due under this agreement, PCMI may, at its option, convert the balance of principal and interest due pursuant to this agreement into shares of the Company's common stock of at a price equal to 80% of the average selling price of the Company's common stock for the fifteen days prior to conversions. As at March 31, 2002, $400,000 has been loaned by PCMI to the Company and $68,930 of interest has been accrued. PCMI and certain of its officers and directors were also shareholders of AlbertaCo and sold their shareholdings in AlbertaCo to the Company in connection with the minority shareholder offer as described in Note 3, and as a result became shareholders of the Company. In 2001, the Company and AlbertaCo signed a promissory note with Siden Investments Ltd. ("Siden") for $150,000. As consideration for entering into the agreement the Company agreed to pay the lender a $15,000 set up fee. The proceeds of the loan were used to repay a loan from DMD Investments Ltd. in the amount of $65,000 and to further settle liabilities of AlbertaCo. The loan bears interest, calculated monthly, at the Royal Bank Prime Rate plus four percent (4%) commencing November 1, 2001. To December 31, 2001 $3,342 of interest had been paid in connection with this loan. During the period the principal and accrued interest was repaid in full. The Company provided security for this loan by way of a General Security Agreement, a Promissory Note, an Option Agreement and the transfer of one of the Company's domain names into Escrow until the loan is fully repaid. The Option Agreement provided the lender the option to acquire 15,000,000 restricted shares of the Company's common stock at a price of $0.01 per share for a period of three years. Refer to Note 11. NOTE 6 - CAPITAL STOCK -------------------------------------------------------------------------------- On January 23, 2001, 16,000 shares of common stock were issued in settlement of debts totalling $20,000. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". This method recognizes compensation cost as the amount by which the fair value of the stock exceeds the exercise price at the date of grant. The Company has no stock options outstanding as at March 31, 2002. Options were outstanding to purchase shares of common stock of AlbertaCo as at the date of the acquisition of AlbertaCo. Effective January 1, 2001, the options to purchase shares of common stock of AlbertaCo were cancelled. At as March 31, 2002, the Company had recorded no compensation expense for any period relating to the granting of stock options. Refer to Note 11. NOTE 7 - DOMAIN SALES AND LEASING -------------------------------------------------------------------------------- LEASE OF VANCOUVER.COM By agreement dated March 21, 2001, AlbertaCo entered into an agreement to lease its URL domain name (vancouver.com) for a ten year period for consideration of 2% of the gross revenue (exclusive of applicable taxes) generated by the lessee in respect of on-line revenues originating from the domain name URL and 1% of the gross revenue (exclusive of applicable taxes) generated by the lessee in respect of offline revenues originating from the domain name URL. The lessee has the right to purchase the domain name URL prior to the fifth anniversary date for CAN$400,000 less all amounts previously paid to AlbertaCo during the lease term. The lessee also has the right to purchase the domain name URL prior to the eighth anniversary date for CAN$800,000 less all amounts previously paid to AlbertaCo during the lease term. The lessee may cancel this agreement with 60 days notice of the annual anniversary date. F-9 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 7 - DOMAIN SALES AND LEASING (CONT'D) -------------------------------------------------------------------------------- LEASE OF BOXING.COM By agreement dated September 14, 2001, the Company agreed to lease the use of its URL domain name (boxing.com) for $25,000 paid for the first six months, of which $9,886 is shown as deferred revenue as at December 31, 2001, and $30,000 due for the second six months which was received in April 2002. Included in the agreement is an option to purchase the domain name for $250,000 for 45 days after the one-year anniversary of this agreement and $275,000 for 45 days after the eighteen-month anniversary of this agreement. During the period the $9,886 has been recorded as revenue in connection with this agreement. SALE OF HOCKEY.COM By agreement dated March 11, 2002, AlbertaCo entered into an agreement to sell its URL domain name (hockey.com) for $200,000. The agreement closed on March 21, 2002 and the gain on the sale of $58,800 has been recognized in Domain Name Revenue, net of the carrying value of hockey.com of $141,200 NOTE 8 - RELATED PARTY TRANSACTIONS ------------------------------------------------------------------------------- During the period ended March 31, 2002 management fees and salaries of totalling $2,000 were paid to the sole director of the Company. During the period ended March 31, 2001 management fees and salaries of totalling $24,829 were paid to two directors of the Company. NOTE 9 - FINANCIAL INSTRUMENTS ------------------------------------------------------------------------------- INTEREST RATE RISK EXPOSURE The Company has limited exposure to any fluctuation in interest rates. FOREIGN EXCHANGE RISK The Company is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises form the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. The Company does not actively manage this risk. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and trade accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents on deposit with high credit quality financial institutions. Receivables arising from sales to customers are generally not significant individually and are not collateralized; as a result, management continually monitors the financial condition of its customers to reduce the risk of loss. FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, loan payable, note payable and capital lease obligation. The fair values of these financial instruments approximate their carrying values. The fair value of the Company's capital leases are estimated based on market value of financial instruments with similar terms. Management believes that the fair value of the debt approximates its carrying value. F-10 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 10 - INCOME TAXES ------------------------------------------------------------------------------- The Company's subsidiary, AlbertaCo is subject to Canadian federal and British Columbia provincial taxes in Canada and the Company is subject to United States federal and state taxes. As at December 31, 2001 the Company has net operating loss carryforwards of approximately $5,800,000 which result in deferred tax assets. The carryforwards will expire, it not utilized, commencing in 2006. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history and history of operating losses. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. No tax provision has been recorded in the current period as the Company and AlbertaCo have sufficient loss carryforwards to offset all taxable income recorded in the period. ------------------------------------------------------------------------------- NOTE 11 - COMMITMENTS AND CONTINGENCIES CONTINGENCIES The former Chief Executive Officer of AlbertaCo commenced a legal action against AlbertaCo on March 9, 2000 for wrongful dismissal and breach of contract. He is seeking, at minimum, 18.39% of the outstanding shares of AlbertaCo, specific performance of his contract, special damages in an amount of CAN$37,537, aggravated and punitive damages, interest and costs. On June 1, 2000, Communicate.com commenced an action against this individual claiming damages and special damages for breach of fiduciary duty and breach of his employment contract. The outcome of these legal actions is currently not determinable and as such the amount of loss, if any, resulting from this litigation is presently not determinable. During the period ended March 31, 2002 Company repaid the balance of the principal and interest outstanding in connection with the amounts borrowed from Siden (refer to Note 5). Since the date of repayment, a dispute has arisen between Siden and the Company regarding the exercisability of the Option Agreement (the "Option"). It is the Company's belief that inasmuch as the Option was granted as additional security for the Loan, and inasmuch as the Loan has been repaid in full, the Option has terminated and is of no further force or effect. While Siden has not attempted to exercise the option, Siden has advised the Company that it believes it is entitled to do so. Based on the advice of counsel, the Company believes that while there can be no certainty in this matter absent a settlement or judicial proceeding, neither of which has been commenced, the Company is able to raise additional defences to Siden's claim, should a claim be made or an action brought against the Company or the Subsidiary. No formal demand has been made with respect to this matter and, therefore, the Company cannot evaluate whether it would prevail in an action. On April 4, 2002 Gartner Inc. filed a claim against AlbertaCo for an alleged breach of contract and debt owing for marketing services rendered during 2000 and 2001 in the amount of $85,600. The Company believes the contract was properly cancelled and intends to defend itself against this claim. No provision for loss has been recorded pending outcome of this litigation. On April 23, 2002 DNG Capital Corp. ("DNG") issued a demand letter to AlbertaCo demanding payment of CDN$15,105 for alleged services rendered from November 2001 to January 2002. DNG has also demanded repayment of $97,000 from AlbertaCo for its investment in February 2000. The Company does not believe these claims have any merit and will defend itself against any legal actions taken by DNG. F-11