10QSB 1 form10-qsb.txt FORM 10QSB 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 September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 000-29929 COMMUNICATE.COM INC. (Exact name of small business as specified in its charter) Nevada 33-0786959 ------------------------------- ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) #600 - 1100 Melville Street, Vancouver, B.C. V6E 4A6 ---------------------------------------------------- (Address of principal executive offices) (604) 697-0136 --------------------------- (Issuer's telephone number) APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Common Stock 14,691,339 shares outstanding $.001 Par Value as of November 6, 2002 Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] COMMUNICATE.COM INC. REPORT ON FORM 10-QSB QUARTER ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Balance sheets as of September 30, 2002 and December 31, 2001 Statements of Operations as of September 30, 2002 and September 30, 2001 Statements of Cash Flows as of September 30, 2002 Notes to the Financial Statements Item 2. Management's discussion and analysis of financial condition and results 3 of operations PART II. OTHER INFORMATION 8 Item 1. Legal Proceedings. 8 Item 2. Changes in Securities. 8 Item 3. Defaults Upon Senior Securities. 8 Item 4. Submission of Matters to a Vote of Security Holders. 9 Item 5. Other Information. 9 Item 6. Exhibits and Reports on Form 8-K. 9 Signatures 10
2 PART I ITEM 1: FINANCIAL STATEMENTS. The response to Item 1 has been submitted as a separate section of this Report beginning on page F-1. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Registrant, through its majority-owned subsidiary, Domain Holdings, Inc. (formerly Communicate.com Inc.) (the "Subsidiary"), is involved in businesses which exploit commercial uses of the Internet. The Subsidiary markets and licenses a portfolio of approximately 40 domain names, 30 of which generate high amounts of internet traffic because of, among other things, their generic description of a specific product or services category. Registrant has focused since the beginning of 2001 on developing revenue streams from its domain names and reducing the debt of the Subsidiary. Registrant generates revenue from leasing domain names, from sales commissions from the sale of third-party products and services utilizing the Internet, from "pay-per-click" revenue and from the sale of domain name assets that Registrant believes are not essential to its business. Registrant presently has one administrative employee and two consultants, both of whom are employed by the Subsidiary. Registrant has relied on hourly-contractors to meet its technical needs and expects to continue the practice for the foreseeable future. (A) SELECTED FINANCIAL DATA The following selected financial data was derived from Communicate's unaudited financial statements. The information set forth below should be read in conjunction with the Company's financial statements and related notes included elsewhere in this report.
For the Quarters Ended For the Nine-Month Ended ------------------------------------------------------------------------------------------------------------------ For the Quarters Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------ Statements of Operations Data ----------------------------- Domain Name Revenue, Net $ 92,931 $ 37,520 $ 252,554 $ 159,248 Other 6,177 -- 43,991 13,551 General and Administrative $ (10,663) $ (22,999) $ (123,640) $ (130,114) Professional Fees (57,702) (42,553) (174,911) (197,459) Depreciation (1,100) (20,056) (3,778) (64,369) Operating Income (Loss) $ 29,643 $ (48,088) $ (5,784) $ (219,143) Interest (11,788) (8,662) (47,215) (31,328) Gain on Write-off & Settlement of Debts 54,403 68,688 198,832 80,881 Loss on Disposal of fixed assets -- -- -- (1,857) Net Income (Loss) $ 72,258 $ 11,938 $ 145,833 $ (171,447) Basic Earnings (Loss) per Share $ 0.01 $ 0.00 $ 0.01 $ (0.01) Weighted Average Shares Outstanding 14,691,339 14,191,339 14,363,500 13,156,475
3 Balance Sheet Data As at September 30, As at December 31, ------------------ 2002 2001 Current Assets $ 88,421 $ 125,931 Fixed Assets 13,654 17,432 Intangible Assets 3,058,389 3,341,577 Total Assets $ 3,160,464 $ 3,484,940 Accounts Payable & Accrued Liabilities $ 370,654 $ 733,751 Loan Payable 378,545 605,000 Deferred Revenue 5,887 9,886 Total Liabilities $ 755,086 $ 1,348,637 Common Stock $ 5,701 $ 5,201 Additional Paid in Capital 2,906,616 2,772,016 Accumulated Deficit $ (506,939) $ (640,914) (B) RESULTS OF OPERATIONS REVENUES. In the third quarter of 2002, Registrant recorded income from the utilization of its domain names (consisting primarily of the lease of domain names, commissions on the sales of products where Registrant's domain names are utilized, and fees received from third parties calculated on the number of Internet users who visit sites identified with Registrant's domain names and gain or loss from domain name sales) of $92,900, an increase of approximately 247% from the third quarter of 2001. The increase primarily resulted from a pay-per-click revenue arrangement that did not generate significant results until the fourth quarter of 2001. Registrant recognized approximately $43,000 from this and other Internet pay-per-click arrangement, based on Registrant receiving a fee for successful click-through traffic, in which users navigating to a site associated with a domain name owned by Registrant are redirected to a site which sells goods and services associated with the domain name. Registrant recorded approximately $15,400 in income from pay-per-click agreements from various different service providers in the third quarter of 2001. Registrant's sales also include commission generating arrangements with several of its health-related domains whereby the Registrant earns a portion of any revenue generated from customers introduced by the Registrant's domain names which generated $19,700 during the third quarter of 2002 compared to $15,100 in the third quarter of 2001. These agreements are arranged on a month-to-month basis and there can be no assurance that they will be renewed or, if renewed, that they will continue to generate income on the same basis as in past periods. 4 Additionally, Registrant earned lease revenue of $15,000 from a geographic domain name used for travel and also recognized from deferred revenue $12,000 related to the lease of a sports domain name in the third quarter of 2002. As noted in the prior quarter, the lessee of the sports domain has decided not to exercise its option to purchase the property, and the Registrant has resumed full ownership and administrative control of the sports domain and arranged to redirect the sports domain traffic to a new lessee for the fourth quarter. In the third quarter of 2001, Registrant earned leasing revenue of $7,000 from sports and geographic domain properties. Management will continue to market selectively individual domain names in its portfolio of domain names for the foreseeable future and identify potential purchasers who have substantial liquid assets to complete any contemplated purchase transactions. Because of the fluid nature of Internet-based businesses, Registrant will require potential purchasers to advance funds as deposits to better assure the consummation of these transactions. Management believes that its portfolio of generic product or services category domain names will continue to generate interest from potential partners or purchasers despite a softened and depressed domain names aftersales market because of the intuitive and traffic-generating characteristics of Registrant's domain names. In the third quarter of 2002, Registrant generated other revenue from the sale of surplus equipment and earned $6,200. No such revenue was generated in the third quarter of 2001. Since 2001, cashflow generated net of monthly cash operating expenses has been applied to reduce debt. This debt management program shall continue for the foreseeable future. GENERAL AND ADMINISTRATIVE. Registrant's general and administrative expenses consist primarily of costs for general and corporate functions, including contract work fees and all facilities and Internet-hosting fees. In the third quarter of 2002, Registrant incurred $10,700 of expenses as compared to $23,000 in the third quarter of 2001. Approximately $12,000 of expenses related to management salaries have been reclassified as consulting fee in this quarter which, when taken into consideration, would have made current quarter administrative expense consistent with the same quarter in the prior year. The expenses in this and the previous year's quarter have been reduced substantially from the comparable quarter in 2000 as a result of management's cost savings program implemented in the last quarter of 2000 and continued to date. Management expects this expense to increase by approximately $10,000 per quarter in the coming quarters as efforts are made by the Company to develop certain domain names to enhance their resale values. There is no certainty that this effort will lead to a corresponding increase in revenue even though it will likely increase the value of the underlying domain assets selected for development. PROFESSIONAL AND CONSULTING FEES. Professional fees relate to legal and audit fees associated with regulatory filings and financial statement preparation and with ongoing litigations, and consulting fees relate to management salaries and benefits. Registrant continues to seek ways to reduce these costs. During the third quarter of 2002, professional and consulting fees totaled $58,000, compared to $43,000 for the same quarter of last year. Taking into consideration $12,000 of management salary previously classified as general and administrative expenses in 2001, professional and consulting fees increased by $5,000 or 11.6% in this quarter as compared to the same quarter in 2001. The increase is 5 directly attributable to ongoing litigation actions against the Registrant's subsidiary. While the Company continues to defend against the litigations, management is unaware of factors that are likely to increase professional fees in the last quarter in 2002. (C) LIQUIDITY AND CAPITAL RESOURCES Registrant seeks to generate revenue from (i) leasing domain names to third parties to conduct on-line businesses; (ii) selling products and services of third parties; (iii) fees resulting from traffic click-through agreements generated by the domain name assets; and (iv) selling of non-core domain name assets. At September 30, 2002 Registrant had current liabilities in excess of current assets resulting in a working capital deficit of $666,700. During the nine-month ended September 30, 2002 Registrant had a net income of $145,800 and an increase in cash of $17,000, compared to a net loss of $171,000 and a decrease in cash of $33,000 for the same nine-month period of last year. Operating activities generated cashflows of $303,000 primarily from the sale of two domain names, from net income generated during the quarter and after payments to trade creditors. The cashflows were used to repay a $150,000 loan, other loans and to pay lease obligations, which in aggregate totaled $274,000. Registrant has accumulated a deficit of $506,900 since inception and has a stockholders' equity of $2,405,400 at September 30, 2002. Due to the working capital deficit, there is substantial doubt about Registrant's ability to continue as a going concern. Registrant will only be able to continue operations if it raises additional funds, either through operations or outside funding. Registrant cannot predict whether it will be able to do so. Notwithstanding these developments, Registrant and the Subsidiary cannot satisfy its cash requirements for the next 12 months without having to raise additional funds. The Subsidiary's expected cash requirement for the next 12 months is $200,000. Registrant expects to raise any additional funds by way of equity and/or debt financing, and through the sale of non-strategic domain name assets. However, Registrant may not be able to raise the required funds from such financings, particularly in light of existing market conditions and the perception by investors of those companies that, like the Registrant, engage in e-commerce and related businesses. In that case Registrant will proceed by approaching current shareholders for loans or equity capital to cover operating costs. Although the foregoing actions are expected to cover Registrant's anticipated cash needs for working capital and capital expenditures for at least the next twelve months, no assurance can be given that Registrant will be able to raise sufficient cash to meet these cash requirements. Registrant has no current plans to purchase any plant or significant equipment. (D) UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS Management's discussion and analysis of Registrant's financial condition and the results of its operations and other sections of this report, contain forward looking statements, that are based upon the current beliefs and expectations of Registrant's management, as well as assumptions made by, and information currently available to, Registrant's management. Because these statements 6 involve risks and uncertainties, actual actions and strategies and the timing and expected results may differ materially from those expressed or implied by the forward-looking statements. As well, Registrant's future results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. 7 PART II OTHER INFORMATION Item 1. Legal Proceedings. -------------------------- In December 1999, the Subsidiary commenced a lawsuit in the Supreme Court of British Columbia (No. C996417) against Paul Green, the former chief executive officer of the Subsidiary, for breach of fiduciary duty for wrongfully attempting to appropriate the Subsidiary's business opportunities. The Subsidiary is seeking an undetermined amount of damages and a declaration that it had just cause to terminate Paul Green as the CEO in or about June 1999. No decision has been rendered in this case and the Company cannot predict whether it will prevail, and if it does, what the terms of any judgment may be. On March 9, 2000, Paul Green commenced a separate action in the Supreme Court of British Columbia (No. S001317) against the Subsidiary. In that action, Paul Green claimed wrongful dismissal and a breach of contract on the part of the Subsidiary. Paul Green is seeking an undetermined amount of damages and, among others, an order of specific performance for the issuance of a number of shares in the capital of the Subsidiary equal to 18.39% or more of the outstanding shares of the Subsidiary. On June 1, 2000, the Subsidiary filed a statement of defence and counterclaim. Management intends to defend this action vigorously. On April 4, 2002, Gartner, Inc. made a claim against the Subsidiary for alleged breach of contract and debt owing for marketing services rendered during April 1, 2000 to March 31, 2001 in the amount of $85,600. On May 16, 2002, the Subsidiary filed a statement of defence. Registrant believes the contract was cancelled properly and intends to defend against the claim vigorously. Registrant is not aware of any other pending or threatened material legal proceedings. Item 2. Changes in Securities. ------------------------------ On July 24, 2002, the Board of Directors granted to J Cameron Pan, an officer of the Company, an option to acquire 580,000 common shares of the Company at a price of $0.10 per share until July 23, 2004 in consideration of debt owing by the Subsidiary to Mr. Pan. The stock option is issued in reliance on Section 4(2) of the Securities Act of 1933, and the common shares, when issued, shall be restricted securities subject to Rule 144. Item 3. Defaults Upon Senior Securities. ---------------------------------------- None. 8 Item 4. Submission of Matters to a Vote of Security Holders. ------------------------------------------------------------- No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the first three months of the fiscal year covered by this report. Item 5. Other Information. -------------------------- None. Item 6. Exhibits and Reports on Form 8-K. ----------------------------------------- (A) Index to and Description of Exhibits. --------------------------------------------- EXHIBIT DESCRIPTION 99.1 Certification of Chief Executive Officer and Chief Financial Officer (B) Reports on Form 8-K. On July 26, 2002, Registrant filed a Form 8-K announcing that, effective July 23, 2002, Mr. R Leigh Jeffs resigned as Director and President, Secretary and Treasurer of the Company and its subsidiary Domain Holdings Inc. Concurrently, Mr. David Jeffs was appointed as Director and President and Secretary of the Company and its subsidiary, and Mr. J Cameron Pan was appointed as Treasurer of the Company and its subsidiary. There were no other reports on Form 8-K filed by Registrant during the third quarter ending September 30, 2002. 9 PART II - SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATE.COM INC. Date: November 6, 2002 By: /s/ David Jeffs 10 COMMUNICATE.COM INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (unaudited) BALANCE SHEETS F-2 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS F-3 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS F-4 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS F-5-F-12 F-1 COMMUNICATE.COM INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2002 2001 ----------------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 69,547 $ 52,672 Accounts receivable 16,893 64,450 Prepaid expenses 1,981 8,809 ---------------------------------------------------------------------------------------------------------------------- 88,421 125,931 FIXED ASSETS (Note 4) 13,654 17,432 INTANGIBLE ASSETS HELD FOR RESALE (Note 3) 3,058,389 3,341,577 ---------------------------------------------------------------------------------------------------------------------- $ 3,160,464 $ 3,484,940 ====================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 360,823 $ 713,514 Loans payable (Note 5) 378,545 605,000 Deferred revenue 5,887 9,886 Lease obligation (Note 4) 9,831 20,237 ---------------------------------------------------------------------------------------------------------------------- 755,086 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 14,691,339 (2001 - 14,191,339) Common shares 5,701 5,201 Additional paid in capital 2,906,616 2,772,016 Accumulated deficit (522,158) (667,991) Accumulated other comprehensive income 15,219 27,077 ---------------------------------------------------------------------------------------------------------------------- 2,405,378 2,136,303 ---------------------------------------------------------------------------------------------------------------------- $ 3,160,464 $ 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 Nine months Nine months ended Sept 30, ended Sept 30, ended Sept 30, ended Sept 30, 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------------------- REVENUES Domain name revenue, net $ 92,931 $ 37,520 $ 252,554 $ 159,248 Other 6,177 -- 43,991 13,551 ------------------------------------------------------------------------------------------------------------------------- 99,108 37,520 296,545 172,799 ------------------------------------------------------------------------------------------------------------------------- EXPENSES General and administrative 10,663 22,999 123,640 130,114 Professional and consulting fees 57,702 42,553 174,911 197,459 Depreciation 1,100 20,056 3,778 64,369 ------------------------------------------------------------------------------------------------------------------------- 69,465 85,608 302,329 391,942 ------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 29,643 (48,088) (5,784) (219,143) INTEREST EXPENSE (11,788) (8,662) (47,215) (31,328) GAIN ON WRITE-OFF AND SETTLEMENT OF DEBTS (NOTE 5) 54,403 68,688 198,832 80,881 LOSS ON DISPOSAL OF FIXED ASSETS -- -- -- (1,857) ------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) FOR THE PERIOD $ 72,258 $ 11,938 $ 145,833 $ (171,447) ========================================================================================================================= BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ 0.00 $ 0.01 $ (0.01) ========================================================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,691,339 14,191,339 14,363,500 13,156,475 =========================================================================================================================
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)
Nine months Nine months ended ended Sept 30, Sept 30, 2002 2001 ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) for the period $ 145,833 $(171,447) Adjustments to reconcile net income (loss) to net cash used in operating activities - gain on write-off and settlement of debts (198,832) (80,881) - loss on disposal of assets -- 1,857 - non-cash cost of fixed revenue 282,400 42,360 - depreciation 4,566 64,369 - accrued interest 37,162 26,163 - deferred revenue (3,999) 21,936 - other receivables -- 96,111 - accounts receivable 47,557 -- - prepaid expenses 6,828 11,496 - accounts payable and accrued liabilities (18,759) (78,758) -------------------------------------------------------------------------------------------------- CASH FROM (USED IN) OPERATING ACTIVITIES 302,756 (66,794) -------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES - proceeds on disposal of assets -- 4,720 -------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES -- 4,720 -------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES - lease obligation repayments (10,406) (64,453) - loan proceeds (repayments) (263,617) 63,391 -------------------------------------------------------------------------------------------------- CASH FLOWS USED IN FINANCING ACTIVITIES (274,023) (1,062) -------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (11,858) 30,081 -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,875 (33,055) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,672 47,823 -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 69,547 $ 14,768 ================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION On June 28, 2002 500,000 shares were issued in settlement of $50,000 of accounts payable. Refer to Note 6. On June 28, 2002 2,000,000 share purchase warrants were issued in settlement of $122,500 of accounts payable. Refer to Note 6.
The accompanying notes are an integral part of these interim consolidated financial statements F-4 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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. After acquiring a further 10% of the outstanding shares of AlbertaCo from minority shareholders in the second quarter of 2002, CMNN owns 93% of the outstanding shares of AlbertaCo. On April 5, 2002 AlbertaCo changed its name to Domain Holdings Inc. ("DHI"). DHI owns a portfolio of simple, intuitive domain names. DHI's current business strategy is to seek partners to develop its domain names to include content, commerce and community applications. DHI has also entered into agreements to sell or lease certain of its domain names (refer to Note 7). The consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At September 30, 2002 the Company has a working capital deficiency of $666,665 (2001 - $1,222,706) and has incurred losses since inception raising substantial doubt as to the Company's ability to continue as a going concern. The Company's continued operations are dependent on its ability to obtain additional financing, settling its outstanding debts and to maintain profitable operations. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They may not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited consolidated financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- BASIS OF PRESENTATION The accompanying financial statements are presented in United States dollars and are prepared in accordance with accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and the 93% interest in its subsidiary, DHI. All significant intercompany balances and transactions are eliminated on consolidation. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is computed at the following rates over the estimated useful lives of the assets: Computer equipment 30% declining balance Furniture and fixtures 20% declining balance Office equipment 20% declining balance One-half year depreciation is taken in the year of acquisition on certain capital assets. F-5 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 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 SEPTEMBER 30, 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 potential dilution of securities has no effect on the current period's basic earnings per share. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity from transactions, events and circumstances, other than those resulting from investments by owners and distributions to owners. Comprehensive income to date consists only of the net loss resulting from translation of the foreign currency financial statements of DHI. INTANGIBLE ASSETS HELD FOR RESALE The Company has adopted the provision of the Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset. Management has determined that as at September 30, 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. NOTE 3 - ACQUISITION -------------------------------------------------------------------------------- By agreement dated November 10, 2000 the Company acquired 52% of the outstanding shares of DHI, for total consideration of $2,000,000 of which $400,000 was paid in cash in 2000, $775,000 was paid in 2000 through the issuance of 1,550,000 shares of the Company's common stock at $0.50 per share and the remaining $825,000 was paid in 2001 through the issuance of 1,650,000 shares of the Company's common stock at $0.50 per share. F-7 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 3 - ACQUISITION (CONT'D) -------------------------------------------------------------------------------- In addition, by offer made November 30, 2000 and completed December 29, 2000, the Company acquired an additional 31% of the remaining minority shareholdings of AlbertaCo for consideration of $880,217 paid through the issuance of 1,375,339 shares of the Company's common stock at $0.64 per share. After completion of these two transactions, the Company owned 83% of the outstanding shares of common stock of DHI. This business combination has been accounted for using the purchase method of accounting. The purchase price has been allocated as follows: Assets acquired at fair value: Current assets $ 350,568 Capital assets 519,798 Intangible assets held for resale - domain names 3,421,135 ----------- 4,291,501 Liabilities assumed at fair value: Accounts payable and accrued liabilities (1,301,421) Lease obligations (109,863) ----------- Purchase price $ 2,880,217 =========== On May 24, 2002 the Company acquired an additional 10% of DHI for $15,471. The Company now owns 93% of the outstanding shares of common stock of DHI. NOTE 4 - FIXED ASSETS -------------------------------------------------------------------------------- September 30, December 31, 2002 2001 ------------- ------------ Computer equipment $ 208,388 $ 208,388 Furniture and fixtures 6,568 6,568 Office equipment 3,993 3,993 --------- --------- 218,949 218,949 Less: accumulated depreciation (60,872) (57,094) Less: accumulated impairment provision (144,423) (144,423) --------- --------- $ 13,654 $ 17,432 ========= ========= As at September 30, 2002, computer equipment includes $56,295 of equipment held under capital lease. In connection with this leased equipment the Company has lease obligations of $9,831 that are due in 2002. During the year ended December 31, 2001 the Company wrote down the carrying value of its fixed assets by $144,423 to reflect the equipment's net realizable value. F-8 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 5 - LOANS PAYABLE -------------------------------------------------------------------------------- In connection with the acquisition of DHI, the Company entered into a Loan and Security Agreement dated November 10, 2000 with Pacific Capital Markets Inc. ("PCMI"), a British Columbia corporation. Under the terms of the agreement, PCMI agreed to loan the Company up to $1,500,000 to satisfy its obligation pursuant to the DHI purchase agreement dated November 10, 2000. Amounts loaned by PCMI are secured by a promissory note payable on demand and bearing interest at the Royal Bank of Canada United States dollar prime rate plus 2%. In the event that the Company fails to repay the amounts due under this agreement, PCMI may, at its option, convert the balance of principal and interest due pursuant to this agreement into shares of the Company's common stock at a price equal to 80% of the average selling price of the Company's common stock for the fifteen days prior to conversions. To September 30, 2002, $400,000 has been loaned by PCMI to the Company and a total of $92,162 of interest has been accrued. During the period $113,617 was repaid to PCMI leaving $378,545 owing as at September 30, 2002. PCMI and certain of its officers and directors were also shareholders of DHI and sold their shareholdings in DHI to the Company in connection with the minority shareholder offer as described in Note 3, and as a result became shareholders of the Company. During the period, the Company issued 2,000,000 share purchase warrants to PCMI in settlement of $122,500 of previously accrued finders' fees owing to PCMI from DHI in connection with a DHI financing completed prior to the Company's acquisition of DHI. The warrants have a fair value of $85,100 and resulted in a gain on settlement of $37,400. (Refer to Note 6) In 2001, the Company and DHI signed a promissory note with Siden Investments Ltd. ("Siden") for $150,000. As consideration for entering into the agreement the Company agreed to pay the lender a $15,000 set up fee. The proceeds of the loan were used to repay a loan from DMD Investments Ltd. in the amount of $65,000 and to further settle liabilities of DHI. The loan bore interest, calculated monthly, at the Royal Bank Prime Rate plus four percent (4%) commencing November 1, 2001. During the period the principal and accrued interest was repaid in full. Subsequent to the date of repayment, a dispute arose between Siden and the Company regarding the exercisability of an Option Agreement (the "Option"). It was the Company's belief that inasmuch as the Option was granted as additional security for the Loan, and as the Loan had been repaid in full, the Option had terminated and was of no further force or effect. While Siden had not attempted to exercise the option, Siden had advised the Company that it believed it was entitled to do so. By settlement agreement dated May 24, 2002, Siden and the Company agreed that the Option is of no further force or effect and released each other from any mutual obligations, commitments or contractual arrangements. As a result, the Company recorded a gain on settlement of debts of $122,500 resulting from the settlement of previously accrued finders' fees owing to Siden from DHI. During the period, the Company settled its debt to an investor of $25,000 for $1,000 and wrote off certain previously accrued liabilities resulting in a gain of $54,403. NOTE 6 - CAPITAL STOCK -------------------------------------------------------------------------------- The authorized capital of the Company consists of 50,000,000 Common Shares with a par value of $.001. During June 2002, the Company issued 500,000 shares of common stock of the Company in settlement of certain accounts payable of DHI in the amount of $50,000 owing to an individual who became a director of the Company in July 2002. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB No. 25 and complies with the disclosure provisions of SFAS No. 123. In accordance with SFAS No. 123 the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants. In addition, the Company has adopted the provisions of FIN 44. F-9 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 6 - CAPITAL STOCK (CONT'D) -------------------------------------------------------------------------------- SHARE PURCHASE WARRANTS On June 28, 2002, the Company issued 2,000,000 share purchase warrants entitling the holder to purchase one share of common stock at $0.05 for a period of two years in settlement of certain accounts payable of $122,500. The Company has accounted for these share purchase warrants in accordance with SFAS No. 123 by applying the fair value method using the Black-Scholes option pricing model assuming a dividend yield of 0%, a risk-free interest rate of 4%, an expected life of two years and an expected volatility of 201%. The fair value of these warrants is $85,100 resulting in a gain on settlement of $37,400. STOCK OPTIONS The Company does not have a formal Stock Option Plan, however, options may be granted with terms and conditions at the discretion of the Company's board of directors. On July 24, 2002 the Company granted an officer 580,000 stock options at an exercise price of $0.10 per share. The options vest evenly over two years commencing July 24, 2002. No compensation expense will be recorded upon vesting of these options in accordance with the provisions of APB No. 25 as the exercise price of the options awarded approximated the market price of the Company's common shares as at the date of the award. In accordance with the provisions of SFAS No. 123, for stock options granted to officers, directors and employees, the Company provides Pro-forma information regarding net income (loss) and net income (loss) per share as if the Company had accounted for these stock options using the fair value method. The fair value of the options granted in the period was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 4%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 205% and a weighted average expected life of the option of 2 years. For purposes of pro-forma disclosures, the estimated fair value of the options of $49,823 is amortized to expense over the vesting period. The Company's pro-forma information relating to the granting and vesting of stock options is as follows:
September 30, September 30, 2002 2001 ------------- ------------- Net income (loss) As reported $ 145,833 $(171,447) SFAS 123 compensation expense Pro-forma 4,641 -- --------- --------- Net income (loss) Pro-forma $ 141,192 $(171,447) ========= ========= Pro-forma basic net income (loss) per share Pro-forma $ 0.01 $ (0.01) ========= =========
NOTE 7 - DOMAIN SALES AND LEASING -------------------------------------------------------------------------------- LEASE OF VANCOUVER.COM By agreement dated March 21, 2001, DHI entered into an agreement to lease its URL domain name (vancouver.com) for a ten year period for consideration of 2% of the gross revenue (exclusive of applicable taxes) generated by the lessee in respect of on-line revenues originating from the domain name URL and 1% of the gross revenue (exclusive of applicable taxes) generated by the lessee in respect of offline revenues originating from the domain name URL. The lessee has the right to purchase the domain name URL prior to the fifth anniversary date for CAN$400,000 less all amounts previously paid to DHI during the lease term. The lessee also has the right to purchase the domain name URL prior to the eighth anniversary date for CAN$800,000 less all amounts previously paid to DHI during the lease term. The lessee may cancel this agreement with 60 days notice of the annual anniversary date. F-10 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 first nine months of 2002. The agreement was terminated in August 2002 subsequent to the Company receiving the $30,000 due in 2002. During the period, $40,000 of income related to the September 14, 2001 agreement was recognized as revenue. During September 2002, the Company received $5,887 US from an alternate party for an agreement to lease the use of its URL domain name (boxing.com) for the period 1 October 2002 to 31 December 2002. SALE OF HOCKEY.COM By agreement dated March 11, 2002, AlbertaCo entered into an agreement to sell its URL domain name (hockey.com) for $200,000. The agreement closed on March 21, 2002 and the gain on the sale of $58,800 has been recognized in Domain Name Revenue, net of the carrying value of hockey.com of $141,200 SALE OF VEGETARIAN.COM By agreement dated May 13, 2002, AlbertaCo entered into an agreement to sell its URL domain name (vegetarian.com) for $60,000. The agreement closed on May 14, 2002 and the loss on the sale of $81,200 has been recognized in Domain Name Revenue, net of the carrying value of vegetarian.com of $141,200. NOTE 8 - RELATED PARTY TRANSACTIONS -------------------------------------------------------------------------------- During the period ended September 30, 2002 management fees and salaries totalling $36,000 were paid to one officer and one director of the Company. During the period ended September 30, 2001 management fees and salaries of totalling $19,658 were paid to two directors of the Company. NOTE 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, and lease obligation. The fair values of these financial instruments approximate their carrying values. F-11 COMMUNICATE.COM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 -------------------------------------------------------------------------------- (UNAUDITED) NOTE 10 - INCOME TAXES -------------------------------------------------------------------------------- The Company's subsidiary, DHI is subject to Canadian federal and British Columbia provincial taxes in Canada and the Company is subject to United States federal and state taxes. As at December 31, 2001 the Company and its subsidiary have net operating loss carryforwards of approximately $3,800,000 that result in deferred tax assets. The carryforwards will expire, it not utilized, commencing in 2006. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history and history of operating losses. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. No tax provision has been recorded in the current period as the Company and DHI have sufficient loss carryforwards to offset all taxable income recorded in the period. NOTE 11 - COMMITMENTS AND CONTINGENCIES -------------------------------------------------------------------------------- CONTINGENCIES The former Chief Executive Officer of DHI commenced a legal action against DHI on March 9, 2000 for wrongful dismissal and breach of contract. He is seeking, at minimum, 18.39% of the outstanding shares of DHI, specific performance of his contract, special damages in an amount of CAN$37,537, aggravated and punitive damages, interest and costs. On June 1, 2000, Communicate.com commenced an action against this individual claiming damages and special damages for breach of fiduciary duty and breach of his employment contract. On April 4, 2002 Gartner Inc. filed a claim against DHI for an alleged breach of contract and debt owing for marketing services rendered during 2000 and 2001 in the amount of $85,600. On May 16, 2002 the Company filed its Statement of Defence. The Company believes the contract was properly cancelled and intends to defend itself against this claim. No provision for loss has been recorded pending outcome of this litigation. F-12