<PAGE>
-------------
U.S. 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 period ended September 30, 2000
( ) Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______ to _______
Commission file number 333-86331
UNIVERSE2U INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0433489
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 West Beaver Creek Road,
Suite 109, Richmond Hill, ON, Canada L4B 3K1
------------------------------------ -------
(Address of Principal (Zip Code)
Executive Offices)
(905) 881-3284
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
-------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
---
State the number of shares outstanding of each of the issuer's common equity as
of November 7, 2000: 36,758,500 shares of Common Stock, $.00001 par value.
================================================================================
<PAGE>
INDEX
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION Page
----
Item 1. Unaudited Interim Combined Financial Statements
for the nine month period ended September 30, 2000
Review Engagement Report 1
Unaudited Combined Balance Sheet - September 30, 2000 2
Unaudited Interim Combined Statement of Deficit for
the nine month period ended September 30, 2000
and September 30, 1999 3
Unaudited Interim Combined Statement of Operations for
the nine month period ended September 30, 2000 and
September 30, 1999 4
Unaudited Interim Combined Statement of Operations for
the three month period ended September 30, 2000 and
September 30, 1999 5
Unaudited Interim Combined Statement of Cash Flows for
the nine month period ended September 30, 2000 and
September 30, 1999 6
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000 7
Item 2. Management's Discussion and Analysis Of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION.
Universe2U Inc.
Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
<PAGE>
[LETTERHEAD OF MOORE STEPHENS COOPER MOLYNEUX LLP]
Review Engagement Report
To the Shareholders of
Universe2U Inc.
We have reviewed the interim balance sheet and statement of deficit of
Universe2U Inc. as at September 30, 2000, the interim statement of operations
for the three month and nine month periods then ended and the statement of cash
flows for the nine month period then ended. Our review was made in accordance
with generally accepted standards for review engagements and accordingly
consisted primarily of enquiry, analytical procedures and discussion related to
information supplied to us by the Company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles in the United States.
Signed: "Moore Stephens Cooper Molyneux LLP"
Chartered Accountants
Toronto, Ontario
November 8, 2000
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Unaudited Interim Combined Balance Sheet
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
Current assets
<S> <C>
Cash and cash equivalents $ 16,852
Accounts receivable (net of allowance for doubtful accounts of $112,093) 1,511,536
Share subscriptions receivable (note 6) 905,000
Due from officers and directors (note 4) 159,158
Due from related parties (note 4) 25,923
Inventory 28,267
Prepaid expenses and deposits 91,883
-------------------------------------------------------------------------------- -----------
2,738,619
Future income taxes 243,517
Capital assets (at cost less accumulated amortization of $469,140) 1,390,920
-------------------------------------------------------------------------------- -----------
$ 4,373,056
================================================================================ ===========
Liabilities
Current liabilities
Bank indebtedness $ 29,057
Accounts payable and accrued liabilities 1,310,253
Income taxes payable 146,404
Current portion of capital lease obligations 19,497
Current portion of long-term debt (note 5) 8,136
-------------------------------------------------------------------------------- -----------
1,513,347
Obligations under capital lease 17,077
Long-term debt (note 5) 17,777
-------------------------------------------------------------------------------- -----------
1,548,201
-------------------------------------------------------------------------------- -----------
Commitments and contingencies (note 10) -
-------------------------------------------------------------------------------- -----------
Shareholders' equity
Share capital (note 6)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 36,577,500 Common shares 365
Additional paid in capital (net of share issuance costs of $341,237) 5,451,966
Accumulated other comprehensive (loss) (41,249)
Deficit (2,586,227)
-------------------------------------------------------------------------------- -----------
2,824,855
-------------------------------------------------------------------------------- -----------
$ 4,373,056
================================================================================ ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Unaudited Interim Combined Statement of Deficit
for the nine month period ended September 30, 2000 and September 30, 1999
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Deficit, beginning of period $ (466,263) $ (39,540)
Net loss for the period (2,119,964) (327,928)
-------------------------------------------------------------------------------- ----------- -----------
Deficit, end of period $(2,586,227) $ (367,468)
================================================================================ =========== ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Unaudited Interim Combined Statement of Operations
for the nine month period ended September 30, 2000 and September 30, 1999
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Revenue $ 4,207,056 $ 404,436
Cost of sales 2,493,605 391,649
-------------------------------------------------------------------------------- ----------- -----------
Gross profit 1,713,451 12,787
-------------------------------------------------------------------------------- ----------- -----------
Expenses
Selling, general and administration 2,012,806 325,303
Stock based compensation (note 6) 1,509,880 -
Interest and financing costs 208,653 36,989
Interest expense - related parties (note 4) 10,679 34,228
Depreciation and amortization 55,494 33,161
-------------------------------------------------------------------------------- ----------- -----------
3,797,512 429,681
-------------------------------------------------------------------------------- ----------- -----------
Loss from operations (2,084,061) (416,894)
Share of loss of significantly influenced investment (17,561) -
-------------------------------------------------------------------------------- ----------- -----------
Loss before provision for income taxes (2,101,622) (416,894)
Income tax expense - current 107,346 -
Income tax (benefit) - future (125,688) (88,966)
-------------------------------------------------------------------------------- ----------- -----------
Net loss for the period $(2,119,964) $ (327,928)
================================================================================ =========== ===========
Net loss per share - basic and fully diluted $(0.06) $(0.01)
================================================================================ =========== ===========
Weighted average shares outstanding 35,751,974 35,204,000
================================================================================ =========== ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Unaudited Interim Combined Statement of Operations
for the three month period ended September 30, 2000 and September 30, 1999
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Revenue $ 1,605,697 $ 175,001
Cost of sales 983,678 170,814
-------------------------------------------------------------------------------- ----------- -----------
Gross profit 622,019 4,187
-------------------------------------------------------------------------------- ----------- -----------
Expenses
Selling, general and administration 725,771 122,453
Stock based compensation (note 6) 1,047,119 -
Interest and financing costs 8,235 19,927
Interest expense - related parties (note 4) - 14,378
Depreciation and amortization 20,418 11,914
-------------------------------------------------------------------------------- ----------- -----------
1,801,543 168,672
-------------------------------------------------------------------------------- ----------- -----------
Loss from operations (1,179,524) (164,485)
Share of loss of significantly influenced investment (17,561) -
-------------------------------------------------------------------------------- ----------- -----------
Loss before provision for income taxes (1,197,085) (164,485)
Income tax expense - current 21,297 -
Income tax (benefit) - future (45,847) (31,059)
-------------------------------------------------------------------------------- ----------- -----------
Net loss for the period $(1,172,535) $ (133,426)
================================================================================ =========== ===========
Net loss per share - basic and fully diluted $(0.03) $(0.00)
================================================================================ =========== ===========
Weighted average shares outstanding 36,440,109 35,204,000
================================================================================ =========== ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Unaudited Interim Combined Statement of Cash Flows
for the nine month period ended September 30, 2000 and September 30, 1999
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------- ----------- -----------
Cash flow from operating activities
<S> <C> <C>
Net loss for the period $(2,119,964) $ (327,928)
Items not affecting cash
Depreciation and amortization 156,545 78,104
Stock option compensation (note 6) 1,509,880 -
Imputed interest 10,679 -
Equity loss of significantly influenced investment 17,561 -
Future income taxes (125,688) (88,966)
-------------------------------------------------------------------------------- ----------- -----------
(550,987) (338,790)
Other sources (uses) of cash from operations
(Increase) decrease in accounts receivable (960,677) 130,568
(Increase) in subscriptions receivable (905,000) -
Decrease (increase) in inventory 11,226 (38,844)
Decrease (increase) in prepaid expenses and deposits 37,294 (2,402)
Increase in accounts payable and accrued liabilities 847,432 74,985
Increase in income taxes payable 118,087 (1,374)
-------------------------------------------------------------------------------- ----------- -----------
(1,402,625) (175,857)
-------------------------------------------------------------------------------- ----------- -----------
Cash flow from investing activities
Purchase of capital assets (1,102,171) (211,779)
-------------------------------------------------------------------------------- ----------- -----------
Cash flow from financing activities
Net (repayments) advances on long-term debt and capital leases (289,184) 164,737
Net proceeds from issue of share capital 3,434,935 -
(Decrease) increase in bank indebtedness (28,035) 45,456
(Decrease) increase in due to related parties (646,099) 175,231
-------------------------------------------------------------------------------- ----------- -----------
2,471,617 385,424
-------------------------------------------------------------------------------- ----------- -----------
Effect of exchange rate changes on cash 50,031 2,212
-------------------------------------------------------------------------------- ----------- -----------
Increase in cash 16,852 -
Cash and cash equivalents, beginning of period - -
-------------------------------------------------------------------------------- ----------- -----------
Cash and cash equivalents, end of period $ 16,852 $ -
================================================================================ =========== ===========
Supplemental cash flow information
Cash paid during the period for:
Income taxes $ 26,794 $ -
Interest $ 77,075 $ 71,217
================================================================================ =========== ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
1. Basis of Presentation
--------------------------------------------------------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary in order to make the financial statements not misleading have been
included. Results for the nine months ended September 30, 2000, are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2000. For further information, refer to the
combined financial statements and footnotes thereto included in Universe2U
Inc.'s ("the Company") Form 8-K filed on July 24, 2000 for the year ended
December 31, 1999.
On May 17, 2000, Universe2U Inc. (Nevada) (formerly Paxton Mining
Corporation) issued 250,000 shares for 100% of the shares of Universe2U Inc.
(Ontario). For accounting purposes, the acquisition is being recorded as a
recapitalization of Universe2U Inc. (Ontario), with Universe2U Inc. (Ontario)
as the acquiror. The 250,000 shares issued are treated as issued by
Universe2U Inc. (Nevada) for cash and are shown as outstanding for all
periods presented in the same manner as for a stock split. Prior to the
acquisition there were 5,510,200 shares outstanding in Universe2U Inc.
(Nevada). In addition, the recapitalization reflects 4,000,000 shares
tendered for cancellation and the declaration of a stock dividend on a 19 to
1 basis, representing 33,443,800 shares, which formed part of the acquisition
transaction. The combined financial statements of the Company reflect the
results of operations of Universe2U Inc. (Nevada) and Universe2U Inc.
(Ontario) from May 17, 2000 to September 30, 2000. The combined financial
statements prior to May 17, 2000, reflect the results of operations and
financial position of Universe2U Inc. (Ontario). Pro forma information on
this transaction is not presented as, at the date of this transaction,
Universe2U Inc. (Nevada) is considered a public shell and accordingly, the
transaction will not be considered a business combination.
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock options
to purchase 200,000 shares at a price of $7.50 Canadian. This transaction
was accounted for under the purchase method of accounting. The total cost of
the acquired net assets was $1,500,000 Canadian, which was equal to the
purchase price of the CableTec stock. The results of operations of the
acquired entity are included in the accompanying financial statements since
the date of acquisition.
2. Basis of Combination
--------------------------------------------------------------------------------
These unaudited financial statements have been prepared on a combined basis
and not on a consolidated basis due to the reorganization of the corporate
structure, which was effective April 1, 1999. Prior to the exchange, the
subsidiaries were controlled by a group that subsequently controls the
Company. These financial statements have been presented on the basis that
the present share structure existed from the date of incorporation of each
subsidiary.
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
2. Basis of Combination - continued
--------------------------------------------------------------------------------
These financial statements have been prepared on a combined basis and include
100% owned subsidiaries' assets and liabilities as well as the revenues and
expenses arising from their respective incorporation or acquisition dates.
Investments in entities over which the Company has significant influence but
not control are accounted for under the equity method of accounting.
3. Foreign Exchange
--------------------------------------------------------------------------------
The Company's Canadian operations are self-sustaining and therefore their
assets and liabilities are translated into U.S. dollars, the basis of
presentation of these financial statements, using the period end rate of
exchange. Revenue and expenses of such operations are translated using the
average rate of exchange for the period. The related foreign exchange gains
and losses arising on translation of the Company's Canadian operations are
included in shareholders' equity until realized.
4. Transactions with Related Parties
--------------------------------------------------------------------------------
During the period, the Company imputed interest of $10,679 (1999 - interest
paid of $34,228) to officers and directors on advances made to the Company
and management fees of $ nil (1999 - $68,903) to officers and directors for
services provided to the Company. Interest was waived by the officers and
directors in the current period.
On June 9, 2000, the Board of Directors adopted a resolution to convert a
loan of $428,968 previously made by a shareholder of the Company into 100,000
common shares of the Company.
As of September 30, 2000, the following balances were due from related
parties:
Directors and officers $159,158
Loans to significantly influenced companies $25,923
These balances are non-interest bearing and due on demand. The Company does
not intend to demand repayment of these balances during the subsequent
quarter.
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
5. Long-Term Debt
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Promissory note bearing interest at prime plus 3% per annum with monthly principal repayments of
$1,449 plus interest, repaid during the period, secured by a general security agreement and a limited
guarantee by an officer and director of the Company; $ - $158,920
Promissory note bearing interest at prime plus 2.5% per annum with monthly principal repayments of
$2,875 plus interest, repaid during the period, secured by a general security agreement and a limited
guarantee by an officer and director of the Company; - 156,172
Term loan bearing interest at 8.9% per annum, with monthly principal and interest payments of $345,
maturing in October 2004, secured by the vehicle; 13,873 -
Term loan bearing interest at 1.9% per annum, with monthly principal and interest payments of $473,
maturing in November 2002, secured by the vehicle; 12,040 -
----------------------------------------------------------------------------------------------------------- ---------- --------
25,913 315,092
Less: Current portion 8,136 49,816
----------------------------------------------------------------------------------------------------------- ---------- --------
$17,777 $265,276
=========================================================================================================== ========== =========
</TABLE>
The month end prime rate as at September 30, 2000 was approximately 7.5%
(1999 - 6.25%).
The promissory notes payable represented government assisted Small Business
Loans that became payable once the Company became publicly owned. As a
result of the reverse acquisition on May 17, 2000, the notes were repaid in
full in the current period.
6. Share Capital
--------------------------------------------------------------------------------
Stock options
The Company has in effect a Stock Option Plan ("the Plan") that provides for
the potential grant of options to directors and employees. The terms of the
awards under the Plan are determined by a Board appointed committee. The
Company accounts for stock-based compensation under the provisions of APB No.
25 "Accounting for Stock Issued to Employees" and, accordingly, recognizes
compensation expense for stock option grants to the extent that the estimated
fair value of the stock exceeds the exercise price of the option at the
measurement date. This non-cash compensation expense is charged against
operations ratably over the vesting period of the options or service period,
whichever is shorter, and was $1,509,880 for the period (1999 - $ nil). In
accordance with FAS No. 123, "Accounting for Stock-Based Compensation", the
fair value of each fixed option granted is estimated on the date of grant
using the Black-Scholes option pricing model, as follows:
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6. Share Capital - continued
Stock options - continued
Option assumptions
2000 1999
-------------------------------------------------------- ----- ------
<S> <C> <C>
Dividend yield - -
Expected volatility 75% -
Risk free interest rate 5.2% -
Expected option term 5.0 -
Fair value per share of options granted $4.99 -
-------------------------------------------------------- ----- ------
</TABLE>
Compensation expense recorded under FAS No. 123 would have been approximately
$2,018,137 in 2000 (1999 - $ nil), reducing earnings per share by $0.01 in
2000 (1999 - $ nil).
As at September 30, 2000, details of options outstanding were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-----------------------------------------------------------------------------------------------------------------------------
weighted average weighted average
number exercise price number exercise price
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1999 - $ - - $ -
Granted 700,000 $ 0.01 - -
-----------------------------------------------------------------------------------------------------------------------------
December 31, 1999 700,000 $ 0.01 - $ -
Granted - first quarter 47,000 $ 0.01 - -
Granted - second quarter 887,000 $ 1.59 - -
Granted - third quarter 55,000 $ 5.00 - -
Cancelled- third quarter (5,500) $ 0.01 - -
-----------------------------------------------------------------------------------------------------------------------------
September 30, 2000 1,683,500 $ 1.06 - $ -
-----------------------------------------------------------------------------------------------------------------------------
As at September 30, 2000, stock options expire as follows:
-----------------------------------------------------------------------------------------------------------------------------
number exercise number
outstanding price exercisable
-----------------------------------------------------------------------------------------------------------------------------
2001 200,000 $0.01 -
2004 700,000 $0.01 -
2005 135,000 $5.00 -
2005 648,500 $0.01 -
-----------------------------------------------------------------------------------------------------------------------------
1,683,500
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
6. Share Capital - continued
--------------------------------------------------------------------------------
As at September 30, 2000, details of share purchase warrants outstanding
were as follows:
number exercise expiry
outstanding price date
----------------------------------------------------------
440,500 $ 5.00 2005
----------------------------------------------------------
Continuity of stockholders' equity
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
accumulated
other comp-
common par paid in rehensive
shares value capital income (loss) deficit total
---------------------------------------------------------------------------------------------------------------------
Recapitalization
as a result of merger
<S> <C> <C> <C> <C>
(see Note 1) 35,204,000 $ 352 $43,528 - - $ 43,880
---------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - - (39,540) (39,540)
Exchange differences - - - 10,228 - 10,228
---------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) - - - 10,228 (39,540) (29,312)
Imputed interest - - 3,672 - - 3,672
---------------------------------------------------------------------------------------------------------------------
December 31, 1998 35,204,000 $ 352 47,200 10,228 (39,540) 18,240
---------------------------------------------------------------------------------------------------------------------
Net loss for the year - - - - (426,723) (426,723)
Exchange differences - - - (27,319) - (27,319)
---------------------------------------------------------------------------------------------------------------------
Total comprehensive
(loss) - - - (27,319) (426,723) (454,042)
Stock option
compensation - - 20,267 - - 20,267
---------------------------------------------------------------------------------------------------------------------
December 31, 1999 35,204,000 352 67,467 (17,091) (466,263) (415,535)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
6. Share Capital - continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999 35,204,000 352 67,467 (17,091) (466,263) (415,535)
---------------------------------------------------------------------------------------------------------------------
Net loss for the period - - - - (2,119,964) (2,119,964)
Exchange differences - - - (24,158) - (24,158)
---------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) - - - (24,158) (2,119,964) (2,144,122)
Conversion of
debentures 833,000 8 668,665 - - 668,673
Conversion of share-
holder advances 100,000 1 428,967 - - 428,968
Private placements 440,500 4 1,951,808 - - 1,951,812
Subscription receivable - - 814,500 - - 814,500
Stock option
compensation - - 1,509,880 - - 1,509,880
Imputed interest - - 10,679 - - 10,679
---------------------------------------------------------------------------------------------------------------------
September 30, 2000 36,577,500 $365 $5,451,966 $(41,249) $(2,586,227) $ 2,824,855
---------------------------------------------------------------------------------------------------------------------
</TABLE>
During the period, investors subscribed for an additional 181,000 common
shares at $5.00 which includes 181,000 share purchase warrants, each
exercisable to purchase 1 common share at $5.00 for a period of 5 years. The
gross proceeds on the subscription amount to $905,000, net proceeds of
$814,500, were received subsequent to the end of the period.
7. Information on Operating Segments
--------------------------------------------------------------------------------
General description
The Company's subsidiaries are organized into operating segments based on the
nature of products and services provided and into geographical segments based
on the location of customers. The Company's operations can be classified
into four reportable operating segments; Fiber Construction and Maintenance
Services ("FC&MS"), Fiber Network and System Engineering and Design
("FN&SED"), Sales and Marketing ("S&M"), and Network Services ("NS") and also
into two reportable geographic regions; Canada and the United States.
The FC&MS segment is responsible for building and maintaining the telecom
infrastructure including long-haul network builds, regional networks,
community networks, and in-building networks. The focus is on physical
infrastructure to support telecommunications encompassing fiber, wireless and
copper based telecommunications.
The FN&SED segment is responsible for all engineering and design activities
including permits, designs, mapping, GIS, structural design, engineered
drawings, network design, equipment specifications, research and development
and the securing and perfecting of rights of ways.
The S&M segment is responsible for all direct sales which involve the sale of
telecom infrastructure products to telecommunication companies,
telecommunication services on behalf of telecommunications companies and
services on behalf of the right of way owners. The segment also acts as
broker for sales of rights of ways.
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
The NS segment is a support service for the other operating segments.
7. Information on Operating Segments - continued
The accounting policies of the segments are the same as those described in
the Company's historical financial statements. The Company evaluates
financial performance based on measures of gross revenue and profit or loss
from operations before income taxes. The following tables set forth
information by operating segment as at, and for the nine month period ended
September 30, 2000 and the nine month period ended September 30, 1999.
Operating segments
Information by operating segment as at and for the nine month period ended
September 30, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $2,542,329 485,451 902,661 276,615 $ 4,207,056
Interest expense $ 30,493 12,943 22,644 343 $ 66,423
Amortization of
capital assets $ 70,205 21,559 7,615 56,905 $ 156,284
Income (loss) before
income taxes $ 124,676 197,074 34,287 45,769 $ 401,806
Total assets $ 316,870 199,536 64,601 1,157,644 $ 1,738,651
Capital assets $ 455,813 117,812 47,044 753,146 $ 1,373,815
-----------------------------------------------------------------------------------------------------------------------------------
Reconciliations to combined results as at and for the nine month period ended September 30, 2000:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Segmented Corporate Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $4,207,056 $ - $ 4,207,056
Income (loss) before income taxes $ 401,806 $(2,503,428) $(2,101,622)
Total assets $1,738,651 $ 2,634,405 $ 4,373,056
-----------------------------------------------------------------------------------------------------------------------------------
Information by operating segment as at and for the nine month period ended September 30, 1999:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
FC&MS FN&SED S&M NS Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 175,810 4,748 223,878 - $ 404,436
Interest expense $ 52,676 9,616 8,925 - $ 71,217
Amortization of
capital assets $ 55,427 17,338 5,339 - $ 78,104
Loss before
income taxes $ (326,310) (87,945) (2,639) - $ (416,894)
Total assets $ 381,959 216,787 47,869 - $ 646,615
Capital assets $ 253,581 140,106 33,748 - $ 427,435
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
7. Information on Operating Segments - continued
Reconciliations to combined results as at and for the nine month period ended
September 30, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Segmented Corporate Total
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Revenue $ 404,436 - $ 404,436
Loss before income taxes $ (416,894) - $ (416,894)
Total assets $ 660,803 - $ 660,803
-----------------------------------------------------------------------------------------------------------------------------------
Geographic information
Information by geographic region as at and for the nine month period ended September 30, 2000:
-----------------------------------------------------------------------------------------------------------------------------------
Canada United States Total
-----------------------------------------------------------------------------------------------------------------------------------
Revenue $4,162,322 44,734 $ 4,207,056
Interest expense $ 76,814 261 $ 77,075
Amortization of capital assets $ 154,206 2,339 $ 156,545
Loss before income taxes $ (148,837) (1,952,785) $(2,101,622)
Total assets $ 397,385 3,975,671 $ 4,373,056
Capital assets $1,371,995 18,925 $ 1,390,920
Information by geographic region as at and for the nine month period ended September 30, 1999:
-----------------------------------------------------------------------------------------------------------------------------------
Canada United States Total
-----------------------------------------------------------------------------------------------------------------------------------
Revenue $ 404,436 - $ 404,436
Interest expense $ 71,217 - $ 71,217
Amortization of capital assets $ 78,104 - $ 78,104
Loss before income taxes $ (414,394) (2,500) $ (416,894)
Total assets $ 646,615 - $ 646,615
Capital assets $ 427,435 - $ 427,435
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues are attributed to countries based on location of customers.
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
8. Earnings per Share
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Shares" which requires companies to report basis and fully diluted earnings
per share ("EPS") computations effective with the Company's quarter ending
December 31, 1997. Basic EPS excludes dilution and is based on the weighted-
average common shares outstanding and diluted EPS gives effect to potential
dilution of securities that could share in the earnings of the Company.
Diluted EPS has not been presented as it is anti-dilutive as a result of
having incurred losses in each period
Nine Months Ended September 30
2000 1999
-----------------------------------------------------------------------
Basic EPS Computation:
Net loss for the period $(2,119,964) $ (327,928)
Weighted average outstanding shares 35,751,974 35,204,000
Basic EPS $ (0.06) $ (0.01)
-----------------------------------------------------------------------
9. Acquisition
--------------------------------------------------------------------------------
On May 31, 2000, the Company acquired all of the outstanding shares of
CableTec Communications Inc. ("CableTec") (formerly Bernie Tan Investments
Inc.), a company involved in underground excavation and cable installation
activities, for cash consideration of $1,500,000 Canadian and stock options
to purchase 200,000 shares at a price of $7.50 Canadian per share. This
transaction was accounted for under the purchase method of accounting. The
total cost of the acquired net assets was $1,500,000 Canadian, which was
equal to the purchase price of the CableTec stock. The results of operations
of the acquired entity are included in the accompanying financial statements
since the date of acquisition.
The following results report on a pro forma basis the results of operation
had the acquisition occurred on the first day of the earliest period
reported, being January 1, 1999. Pro forma results presented are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2000.
--------------------------------------------------------------------------------
Nine Months Ended Year Ended
September 30, December 31,
2000 1999 1999
--------------------------------------------------------------------------------
Revenue $ 4,223,831 $ 744,398 $2,477,510
--------------------------------------------------------------------------------
Net loss $(1,674,773) $(274,235) $ (509,299)
--------------------------------------------------------------------------------
Loss per share $ (0.05) $ (0.01) $ (0.01)
================================================================================
<PAGE>
Universe2U Inc.
--------------------------------------------------------------------------------
Notes to Unaudited Interim Combined Financial Statements
September 30, 2000
(expressed in U.S. dollars)
--------------------------------------------------------------------------------
10. Commitments and Contingencies
--------------------------------------------------------------------------------
Lease commitments
At September 30, 2000, the Company's total obligations, under various
operating leases for equipment and occupied premises, exclusive of realty
taxes and other occupancy charges, are as follows:
2001 $394,969
2002 321,075
2003 169,540
2004 52,318
2005 12,478
----------------------------------------------------------------
Total $950,380
================================================================
Employment contracts
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The majority of agreements
continue until terminated by the executive or the Company and do not provide
for severance payments of any kind upon termination. Certain agreements do
provide for severance payments of six months of regular compensation provided
the termination is not voluntary or for cause. The agreements include a
covenant against competition with the Company, which extends for a period of
time after termination for any reason. As of September 30, 2000, the minimum
annual commitment under these agreements was approximately $667,000.
Contractual commitments
The Company has a commitment to pay its joint venture partner, T-Enterprises
Inc., the sum of $200,000 worth of its shares upon the date of closing of the
first right-of-way transaction completed by the joint venture or one of the
Company's subsidiaries, Multilink Network Services Inc.
Legal proceedings
At September 30, 2000, the Company and its wholly owned subsidiaries are
involved in litigation and claims, which arise from time to time in the
normal course of business. The Company believes these claims are without
merit and intends to vigorously defend these matters. No amount has been
accrued in the accounts in respect of these matters and any amounts
ultimately awarded against the Company are not expected to have a significant
adverse effect on the combined financial statements of the Company.
11. Comparative Figures
--------------------------------------------------------------------------------
Certain accounts in the prior period financial statements have been
reclassified for comparative purposes to conform with the presentation
adopted in the current period financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Company is the product of an acquisition, completed on May 17, 2000, in
which Paxton Mining Corporation acquired all of the outstanding shares of
Universe2U Inc. Upon completion of the acquisition, we changed our corporate
name to Universe2U Inc. In connection with the acquisition, the management of
the Company changed. We also elected to change our fiscal year end from June 30
of each year to December 31 of each year.
Prior to the acquisition, under the name Paxton Mining Corporation, we were a
very early stage development company originally organized to acquire, explore
and develop mining properties. Due to disappointing results, we decided to
pursue another line of business. We subsequently acquired Universe2U Inc., an
Ontario, Canada corporation. Following the acquisition, we ceased our mining-
related activities.
Our Company provides telecommunications access solutions to communities,
communications carriers, building owners and corporate and government customers
in North America. We are a facilities-based provider of advanced fiber optic
solutions and high-bandwidth connectivity that enables high-speed "managed
broadband" access to the Internet, telecommunications, and other data networks
to provide an overall improvement in the quality of life. We provide open
access networks that are available to all service providers and we are not a
carrier nor do we provide regulated telecommunications services
Our telecommunications operations focus on the following areas:
. engineering and design;
. infrastructure installation and maintenance;
. network servicing; and
. marketing services.
We are currently pursuing a two-prong business strategy:
. to design and build fiber optic networks and market telecommunication
services for major telephone and cable television companies; and
. to be a pioneer in developing "SmartCommunity" networks in partnership with
local governments; "SmartBuilding" networks in partnership with institutions,
businesses; and "SmartLinks" in partnership with right-of-way owners, where
we may take an equity position in the network.
We believe that our two-prong business strategy exploits growth opportunity in
Tier 2 and Tier 3 communities, where roughly two-thirds of the North American
population is located, as well as in the high population density urban areas
where most investment in high-speed network infrastructure has been focused to
date. In addition, our strategy enables us to pursue the growth areas of in-
building networks and linking networks to connect communities together.
Our business strategy focuses on the concept that each of our subsidiaries is
responsible for establishing and growing its own unique profitable
organizations. This is primarily achieved through the development of
relationships in its core strength area and the provision of contractual
services. The individual companies may act as service providers to other
telecommunications companies.
<PAGE>
In addition, our subsidiaries act as integrated business units to provide
turnkey service offerings. In this case instead of contractual project clients,
we expect to target strategic alliances, partnerships and joint ventures where
equity ownership is an integral component of the deal structure. We expect our
SmartCommunity networks, SmartBuilding networks and SmartLink models will all be
designed on this basis. Where initially the primary revenue stream will be from
the individual companies, we anticipate that the long term revenue stream and
profitability will be driven by our equity/partnership model in all three
network applications.
Some of our contracts will be operating leases under which we recognize
recurring monthly revenues. Under other contracts we recognize revenue from the
sale of fiber. Effective June 30, 1999, the Financial Accounting Standards Board
issued FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires
that sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as opposed to the current method
of recognizing revenue during the period over which we deliver the fiber. As a
result, this change in accounting treatment would reduce the revenue and income
that we would recognize in the earlier years of the contract and spread it out
over the life of the contract regardless of when the cash was received or the
delivery of the fiber took place.
We have experienced operating losses and expect to continue to generate losses
during the foreseeable future. As a result of our limited operating history,
prospective investors have limited operating and financial data upon which to
evaluate our performance.
FACTORS AFFECTING FUTURE OPERATIONS
REVENUE. We generate revenues from engineering and design work, building
networks, selling voice, data and other telecommunications services. The
majority of our revenues are generated on non-recurring charges for one-time
services. The remainder is derived from charges on a monthly recurring basis. We
expect future contracts to have duration between 12 and 18 months. The value of
our contracts could increase significantly, if we become the supplier of the
fiber optic cable, and depending on the fiber count a customer selects, however
there can be no assurance in this regard.
Fiber Optics Corporation of Canada and Photonics Engineering and Design have
ongoing relationships with Windsor Utility Commission and Grimsby Hydro. We
continue to build their networks through a series of purchase orders. We are
supplying the fiber optic cable and the major components needed to build their
networks. We expect these to be long-term relationships.
Most other revenue is obtained through purchase orders ranging in value from a
few thousand dollars to over a quarter of a million dollars.
We believe that our ability to generate revenues in the future will be affected
primarily by the following factors, some of which we cannot control:
. Our ability to grow our engineering, design, construction and direct sales
business to drive the organic growth;
<PAGE>
. Our ability to obtain customers before our competitors do;
. Our ability to deal effectively with anticipated changes in regulations to
deliver telecommunications services;
. Our ability to achieve adequate margins on materials;
. The level of competition we face from other telecommunications service
providers, including price competition, which has resulted in a trend of
declining prices and margins for communications services over time;
. The demand for our network services;
. The ability of the "new" entrants into the telecommunications industry to
pay for our services on a timely basis; and
. possible regulatory changes, including regulations requiring building
owners to give access to competitive providers of communications services.
COST OF SALES. Our cost of sales consists primarily of costs of infrastructure
materials, and associated costs of installation such as labor costs, equipment
lease costs and fixed asset amortization expense. We expect these costs to
increase in aggregate dollar amount as we continue to grow our business but to
decline as a percentage of revenues with respect to materials costs due to
economies of scale, expected improvements in technology and price competition
from an increased number of vendors, however, there can be no assurance in this
regard.
SALES, GENERAL AND ADMINISTRATION EXPENSES. Sales and marketing expenses include
applicable employee salaries and commission payments and marketing, advertising
and promotional expenses. We expect to incur significant sales and marketing
expenses as we continue to grow our business and build our brand. General and
administrative expenses include costs associated with the recruiting and
compensation of corporate administration, customer care and technical services
personnel as well as costs of travel, entertainment, back office systems, legal,
accounting and other professional services. We expect these costs to increase
significantly as we expand our operations, but decline as a percentage of
revenues due to economies of scale, however there can be no assurance in this
regard.
ACQUISITION STRATEGY. We intend to pursue acquisitions or other strategic
relationships to expand our customer base, our ability to offer turnkey
solutions and geographic presence. We expect these activities to significantly
affect our results of operations and require us to raise additional capital. We
expect to acquire well-run subsidiaries and expect to retain their key
management teams in place, however there can be no assurance in this regard.
RESULTS OF OPERATIONS
The financial information has been presented on a combined basis due to the
reorganization of the corporate structure, which was effective April 1, 1999.
Prior to the reorganization, the subsidiaries were controlled by a group that
subsequently controls the Company. The financial information has been presented
on the basis that the present structure existed from the date of incorporation
of each subsidiary.
Certain accounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation adopted in the current
period financial statements.
REVENUES-Total sales increased $3.8 million, or 940% to $4.2 million for the
nine-months ended September 30, 2000 from $0.4 million for the nine-months ended
September 30, 1999. The increase can largely be attributed to the change in
business strategy to build turnkey solutions for customers. This would include
the
<PAGE>
start of two community projects in the third quarter of 1999. The acquisition of
CableTec Communications Inc. ("CableTec"), effective May 31, 2000, increased
sales for the nine-month period ended September 30, 2000 by $0.3 million
For the three-months ended September 30, 2000, sales were $1.6 million, an
increase of $1.4 over the comparable period ended September 30, 1999. The
increase is largely attributed to revenue increases at Fiber Optics Corporation
of Canada of $1.0 million, at Photonics Engineering and Design of $0.1 million
and CableTec's contribution for the quarter of $0.3 million.
COST OF SALES-Cost of sales include costs of providing services through the
different subsidiaries and are as follows:
. Fiber Construction and Maintenance: these costs are comprised of labor,
equipment rentals, fixed asset amortization, materials and subcontracting
expenses;
. Fiber Network System Design and Engineering: these costs consist primarily
of wages and, to a minor degree, materials;
. Sales and Marketing: these costs are made up of wages for tele-marketers
and sales representatives as well as sub-contracting expenses for
tele-marketing services and field sales representatives; and,
. Network Services: these costs are made up of the wages for technical and
construction workers, equipment rentals, fixed assets amortization, as
well as sub-contracting expenses.
Consolidated cost of sales increased $2.1 million or 537% to $2.5 million for
the nine-months ended September 30, 2000, from $0.4 million for the nine-months
ended September 30, 1999. The increase was principally the result of higher
sales experienced throughout all the divisions. For the three-month period
ended September 30, 2000, cost of sales rose $0.8 million, to $1.0 million from
the $0.2 million incurred in the three-month period ended September 30, 2000.
Sales volumes again were primarily the reason for the rise in these costs. The
acquisition of CableTec, effective May 31, 2000, increased cost of sales expense
for the nine-months ended September 30, 1999, by $0.2 million.
GROSS PROFIT-Gross profit for the three-months and nine-months ended September
30, 2000 was $0.6 million and $1.7 million respectively, verses $4 thousand and
$13 thousand in the same periods in 1999. The increases in gross profits
reflect the increased activity of the operations relative to the comparable
period in 1999.
SELLING, GENERAL AND ADMINISTRATION EXPENSES-Selling, general and administration
expenses primarily include administrative management wages, professional fees,
customer service costs, advertising, sales and marketing expenses, order
processing, telecommunications, and general and administrative expenses. These
costs for Universe2U Inc. increased $1.7 million, to $2.0 million for the nine-
months ended September 30, 2000 from $0.3 million for the nine-months ended
September 30, 1999. In the third quarter, selling, general and administration
expense was $0.7 million verses $0.1 million for the comparable period ended
September 30, 1999.
STOCK BASED COMPENSATION EXPENSE-Stock based compensation expense for the three-
months and nine-months ended September 30, 2000 was $1.0 million and $1.5
million respectively, verses nil for the same periods in 1999. The Company
accounts for stock-based compensation under the provisions of APB No. 25
"Accounting for Stock Issued to Employees" and accordingly, recognizes
compensation expense for stock options to the extent the estimated fair value of
the stock exceeds the exercise
<PAGE>
price of the option at the measurement date. This non-cash compensation expense
is charged against operations ratably over the vesting period of the options or
the service period, whichever is shorter. Much of the stock option expense
relates to employee option grants provided before, or soon after, the Company
was acquired on May 17, 2000.
The Company anticipates expensing an additional $2.6 million of stock
compensation expense over the next seven quarters relating to stock options
existing as at September 30, 2000, of which approximately $2.4 million is
expected to be expensed by June 30, 2001. As at September 30, 2000 there were
1,683,500 stock options outstanding with a weighted average excise price of
$1.06. In the third quarter 55,000 stock options were granted and 5,500
cancelled.
INTEREST AND FINANCING COSTS-Interest and financing costs expense totaled $209
thousand for the nine-months ended September 30, 2000, an increase of $171
thousand from the $37 thousand for the nine-months ended September 30, 1999.
This was a direct result of increased financing necessary for capital
expenditures and to fund the operating losses. During the first six months of
the current year the Company experienced cash flow shortages on a number of
occasions and had been unable to meet all of its payable obligations on a timely
basis. Three of the operating subsidiaries failed to consistently remit payroll
withholding and sales taxes to the tax authorities. Included in the September 30
year-to-date costs are approximately $37 thousand of late payment penalties and
interest charges. In August 2000, the Company completed additional funding
arrangements, satisfied the outstanding obligations and has kept such
obligations current during the third quarter.
For the three-months ended September 30, 2000, interest costs were $8 thousand
compared to the $34 thousand incurred in the comparable period ended September
30, 1999. The decrease reflects the repayment by the Company of two promissory
notes, which became due and payable when the Company became public, totaling
$289 thousand during the third quarter.
DEPRECIATION AND AMORTIZATION-Depreciation and amortization costs totaled $157
thousand for the nine-months ended September 30, 2000, compared to $78 thousand
for the nine-months ended September 30, 1999. The increase of $79 thousand was
the result of a substantial addition in fixed assets primarily in Fiber Optics
Corporation of Canada, as well as, the acquisition of CableTec, which increased
amortization expense by $57 thousand for the nine-months ended September 30,
2000.
SHARE OF LOSS OF SIGNIFICANTLY INFLUENCED INVESTMENT-The loss of $17 thousand
represents start up costs associated with a 49% owned investment, T-E Realty and
Rights of Ways Agency LLC., which began operations in the third quarter of the
current year.
NET LOSS -The Company incurred net losses for the nine-month periods ended
September 30, 2000, and September 30, 1999, of $2.1 million and $0.3 million,
respectively. Non-cash stock based compensation accounted for $1.5 million of
the loss in the nine-month period ended September 30, 2000.
For the three-month periods ended September 30, 2000, and September 30, 1999,
the Company incurred net losses of $1.2 million and $0.1 million respectively.
During the three-month period ended September 30, 2000, non-cash stock based
compensation was $1.0 million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our current growth plan is twofold:
1. To design, build, and market for telecommunication companies; and
2. To design, build, and market:
. SmartBuildings;
. SmartCommunities; and
. SmartLinks (e.g. fiber networks between cities).
We believe that all of these market segments provide high-growth potential.
Based on our current growth plan, we expect to require a substantial amount of
capital to expand the development of operations and networks into new geographic
areas of target markets in North America. We need capital to fund the
construction of advanced fiber optic networks, upgrade our underground
construction equipment, repay our debts and acquire strategic companies.
For all of our operations, materials, supplies and equipment are all readily
available; therefore, we anticipate being able to schedule capital expenditures
simultaneously with anticipated growth in each of the subsidiaries. Most of the
capital expenditures will be in fiber construction and maintenance services
where equipment requirements will mirror revenue growth and where equipment
purchases are large ticket items. Based on our current growth plan, we expect
to require a substantial amount of capital to expand the development of
operations and networks throughout the new geographic areas of target markets in
North America. The capital is needed to fund the construction of advanced fiber
optic networks and upgrade our underground construction equipment.
By comparison, in the fiber design and engineering companies and the sales and
marketing operations, revenue growth is expected to be supported primarily by an
increased labor force and only on a minor basis with increased capital
expenditures.
We intend to reduce the requirement for cash flow to fund operating equipment as
much as possible by leasing a substantial portion of our operating equipment.
We expect the significant cash flow requirements will be for strategic
acquisitions in each of our operation's industries. Our current growth plan
includes strategic acquisitions to expand the development of operations and
networks into new geographic areas of target markets in North America.
Not including cash flow requirements for strategic acquisitions and major
projects where we are taking an equity position, we currently estimate that our
capital requirements for the period from September 30, 2000, to December 31,
2000, at approximately $2.5 million and requirements for the 2001 fiscal year
are expected to be approximately $7.0 million exclusive of cash flow
requirements to fund acquisitions and major projects where we are taking an
equity position. These estimates are forward-looking statements that may change
if circumstances related to third party materials and labor costs, revenue
growth expectations, construction, change of regulatory regime requirements and
opportunities to deploy the Company's smart building, community and links
networks do not occur as expected.
<PAGE>
Sources of funding for our current and future financing requirements may include
vendor financing, public offerings or private placements of equity and/or debt
securities, commercial credit facilities and bank loans. There can be no
assurance that sufficient additional financing will continue to be available to
us or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain financing could result in the delay or curtailment of
our development and expansion plans and expenditures. Any of these events could
have a material adverse effect on our business.
For the nine-months ended September 30, 2000, the Company's net cash used in
operating activities was $1.4 million. This amount includes adjustments for:
non-cash items comprised of an add-back for depreciation and amortization of
$0.2 million, stock option compensation of $1.5 million, and a deduction for
future income taxes totaling $0.1 million. Furthermore it includes a net
negative working capital change of $0.9 million largely attributable to $0.9
million of share subscriptions receivable at September 30, 2000, which was
received shortly after the end of the third quarter 2000. For the nine-months
ended September 30, 1999, the Company's net cash used in operating activities
was $0.2 million attributable to a loss of $0.3 million offset by a deduction
for future income taxes of $0.1 million.
For the nine-months ended September 30, 2000, net cash used in investing
activities was $1.1 million and was principally attributable to the acquisition
of CableTec, on May 31, 2000. For the nine-months ended September 30, 1999, net
cash used in investing activities was $0.2 million, which consisted of additions
to property, plant and equipment.
For the nine-months ended September 30, 2000, net cash provided by financing
activities of $2.5 million included the following: net repayments on long-term
debt of $0.3 million, which became due when the Company became public, net
proceeds from the issue of share capital of $3.4 million, offset by a net
decrease in due to related parties of $0.6 million. For the nine-months ended
September 30, 1999, net cash provided by financing activities of $0.4 million
included a net increase in long-term debt of $0.2 million and a net increase in
debts due to related parties of $0.2 million.
Effective as of May 31, 2000, the Company, through a wholly owned subsidiary
incorporated pursuant to the laws of the Province of Ontario, completed the
acquisition of CableTec (formerly Bernie Tan Investments Inc.). Subco had
entered into a definitive share purchase agreement to acquire CableTec on
January 25, 2000 (the "Agreement"). Pursuant to the terms of the Agreement,
Subco agreed to acquire all of the outstanding shares of CableTec in
consideration for the payment of Cdn$1.5 million. The transaction was originally
intended to close in February 2000. The terms of the Agreement were amended in
March and in May 2000 to, amongst other things, extend the closing date to May
31, 2000. In addition, the Agreement was amended to grant Bernard Tanunagara,
currently President of the Company's CableTec Communications subsidiary, an
option to acquire up to 200,000 common shares of the Company at an exercise
price of Cdn$7.50 per share (the "Option"). Effective as of May 31, 2000, the
transaction was completed and the cash consideration of Cdn$1.5 million was
paid, and the Option was granted, to Bernard Tanunagara.
During the second quarter of the year 2000 the Company engaged Goepel McDermid
Inc. to provide assistance to the Company with regard to a financing program.
There can be no assurance that Goepel McDermid will succeed in its efforts on
behalf of the Company.
<PAGE>
During the third quarter of the year 2000, a subsidiary of the Company acquired
a 49% interest in T-E Realty and Right-of-Way Agency, LLC which was established
to act as a marketing agent for leasing rights-of-way and easements to others
for the purpose of developing long-haul, point-to-point telecommunication
services. As part of the agreement the Company committed to transfer $200,000
worth of shares of Universe2U Inc. common stock to the other LLC partner on the
date of closing of the first right-of-way transaction of the LLC or Multilink
Network Services.
The Company and certain of its subsidiaries are named as defendants in two
wrongful dismissal lawsuits brought by two former employees, as described in
detail under Item 1 of Part II of this Quarterly Report and incorporated herein
by reference thereto. The Company believes that such law suits are without
merit and intends to vigorously defend such actions.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently has no items that relate to "trading portfolios". The
Company did not include trade accounts payable and trade accounts receivable in
the "other than trading portfolio" because their carrying amounts approximate
fair value. We may from time to time enter into interest rate protection
agreements.
We are subject to market risks due to fluctuation in foreign currency exchange
rates as the Company reports in US dollars yet the bulk of the corporation's
assets are located in Canada. We have not made significant use of financial
instruments to minimize the exposure to foreign currency fluctuations
RECENT ACCOUNTING PRONOUNCEMENTS
Except as discussed above, with respect to dark fiber classification and the
recently issued FIN 43, we do not believe that any recent accounting
pronouncements will have a material impact on our financial statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to several lawsuits as described in greater detail below.
The Management of the Company believes that its positions are meritorious and
that it will prevail in all such actions, however, there can be no assurance in
this regard.
The Company is a defendant in Hollands v. Universe2U Inc., brought in the
Ontario Superior Court of Justice, court file no. 00-CV-197308, commenced
September 15, 2000. The Plaintiff is Robert Hollands. The Defendants are the
Company, and Company officers Kim Allen, Angelo Boujos and Andrew Eyres. Robert
Hollands is a former employee of the Company who is suing for, inter alia,
damages for wrongful dismissal, alleged outstanding commissions as well as the
delivery to him of certain shares which he claims are owed to him by way of
signing bonus and pursuant to stock options. Mr. Hollands employment was
governed by an employment contract which, among other things, required Mr.
Hollands to achieve certain sales for the Company. According to the Company's
records and advice Mr. Hollands in fact completed no sales during his employment
as to which his stock based compensation was tied and it is the Company's
position that his employment was terminated for cause pursuant to the terms of
his employment contract for having, inter alia, failed to achieve required sales
despite warning both orally and in writing. Having been terminated for cause,
Mr. Hollands is not entitled to any of the shares for which he is suing the
Company. As against the Company, Mr. Hollands is seeking damages for wrongful
dismissal and loss of opportunity in the sum of $4,000,000.00, a declaration
that the plaintiff is the owner of 2,000,000 common shares (giving effect to the
May 2000 stock dividend) of the Company as those shares existed on December 21,
1999 and a
<PAGE>
mandatory order requiring the Company to issue the stock to the Plaintiff,
equitable damages to compensate the Plaintiff for any reduction in value to the
Plaintiff's shares, an accounting of the Company's sales and projected sales,
and a declaration that the Plaintiff is not bound by any non-competition
covenant, and against all of the Defendants: a declaration that the Plaintiff
has been oppressed and relief from oppression by requiring the Defendants to
purchase 2,000,000 shares of the Company for the Plaintiff, damages in the
amount of $5,000,000.00 for conspiracy to interfere with economic relations. The
Company and the other defendants believe Mr. Holland's allegations are without
merit and the defendants intend to vigorously defend Mr. Holland's action.
The Company's subsidiaries, Canadian Cable Consultants Inc. and CableTec
Communications Inc. are the plaintiffs in Canadian Cable Consultants Inc. et al.
v. Dan McAleer et al., brought in Ontario Superior Court of Justice, court file
no. 00-CV-197416, commenced September 18, 2000. The Defendants are Dan McAleer,
Gerry Roy and 1353042 Ontario Limited, c.o.b. Northern Call Solutions Inc.
Canadian Cable Consultants out sourced telemarketing work to Northern Call
Solutions. The relationship was governed by a written contract. Canadian Cable
Consultants has sued Northern Call Solutions for breach of contract for having
wrongfully solicited certain of Canadian Cable's key employees to leave Canadian
Cable and work for Northern Call Solutions and for having wrongfully solicited
the customers and work of Canadian Cable. Canadian Cable has sued Dan McAleer
and Gerry Roy, both former employees of Canadian Cable, for having solicited the
employees and customers of Canadian Cable. As against Northern Call Solutions,
the relief sought includes an interim and permanent injunction restraining the
Defendants from soliciting the employees and customers of Canadian Cable and
returning confidential information, damages for breach of contract, breach of
fiduciary duty and tortious interference with economic interests in the amount
of $1,000,000, punitive damages in the amount of $100,000, an interim
interlocutory and permanent injunction, requiring Northern to provide Canadian
Cable Consultants Inc. ("Canadian") with all daily reports previously prepared
but not delivered, and all future daily reports, which reports list all of the
calls made on any particular day by each telemarketer of Northern in accordance
with Article 3 of the telemarketing services agreement between Northern and
Canadian, dated January 7, 2000 (the "Northern Call Centre Agreement"),
requiring Northern to provide Canadian with appropriate access to Northern's
books, records and other supporting documentation of Northern in order to enable
Canadian to perform the audit provided in the Northern Call Centre Agreement,
requiring Northern deliver to Canadian any and all material prepared or
developed by Northern or any materials furnished to Northern by Canadian in
connection with the Northern Call Centre Agreement, restraining Northern from
divulging to third parties any information obtained from or through Canadian or
developed by Northern in connection with the Northern Call Centre Agreement, and
as against Daniel McAleer, damages in the amount of $1,000,000 for breach of
contract, breach of fiduciary duty, tortious interference with business
relations, and tortious interference with economic expectancy, punitive damages
in the amount of $100,000.00, and an interim interlocutory and permanent
injunction restraining McAleer from disclosing to any person or in any way
making use of, in any manner, any of the Trade Secrets of Canadian, as provided
in the employment agreement between McAleer and Canadian, dated February 2, 2000
(the "McAleer Employment Agreement"), restraining McAleer from (i) being a party
to or abetting any solicitations of customers, clients or suppliers of Canadian
or any of its associates or affiliates, (ii) transferring business from Canadian
or any of its associates or affiliates to any other person, or (iii) seeking in
any way to persuade or entice any executive employee of Canadian or any of its
associates or affiliates to leave that employment or from being a party to or
abetting any such action, as provided in the McAleer Employment Agreement,
restraining McAleer from, in any capacity
<PAGE>
whatsoever, carrying on, being engaged in, being employed by, or having any
interest in any business similar to the business carried on by Canadian or any
of its associates or affiliates for a period of one year following the date of
termination of his employment. The Plaintiff, CableTec Communications Inc.,
claims against the Defendant, Gerry Roy, damages in the amount of $500,000.00
for breach of contract, breach of fiduciary duty and tortious interference with
economic relations, punitive damages in the amount of $25,000.00, and an
interlocutory and permanent injunction restraining Roy from (i) being a party to
or abetting any solicitations of customers, clients or suppliers of CableTec
Communications Inc. or any of its associates or affiliates, (ii) transferring
business from CableTec or any of its associates or affiliates to any other
person, or (iii) seeking in any way to persuade or entice any executive employee
of CableTec or any of its associates or affiliates to leave that employment or
from being a party to or abetting any such action, as provided in that certain
employment agreement between CableTec and Roy dated August 11, 2000 (the "Roy
Employment Agreement"), and restraining Roy from impairing or diminishing the
goodwill of CableTec with respect to those of CableTec's customers, clients and
suppliers with whom Roy, except by virtue of his employment with CableTec, would
not have developed a close and direct relationship.
The Company's subsidiary, Canadian Cable Consultants Inc., and Company employees
William McGill and others are defendants in a lawsuit brought by Northern Call
Solutions, which is essentially a counterclaim to the action described
immediately above. The proceeding is pending in Ontario Superior Court of
Justice as court file no. 00-CV-198071, commenced September 29, 2000. Northern
Call Solutions has claimed breach of contract for accounts alleged to have not
been paid and for breach of contract of the telemarketing agreement between the
companies. Northern Call Solutions has also sued certain of Canadian Cable's
employees personally for having allegedly wrongfully solicited certain Northern
Call Solution employees. Canadian Cable Consultants denies all of the
allegations. The relief sought, as against all the Defendants, includes an
interim and permanent injunction restraining the defendants from soliciting the
plaintiff's employees or making use of confidential information, damages for
breach of contract, breach of fiduciary duty and tortious interference with
economic interests in the amount of $1,000,000, punitive damages in the amount
of $100,000, and as against the Defendant Canadian Cable Consultants, the sum of
$85,275.79 for unpaid accounts, and damages for breach of contract and
misrepresentation in the amount of $1,000,000. The Company believes the
counterclaims are without merit and the Company intends to vigorously defend
this action.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information.
Not Applicable.
<PAGE>
Item 6. Exhibits and Reports
FORMS 8-K
---------
Form 8-K/A, filed July 14, 2000, amending Form 8-K filed June 16, 2000,
reporting change of the Company's certifying accountant.
Form 8-K/A, filed July 24, 2000, amending Form 8-K filed on May 25, 2000,
consisting of financial statements regarding the acquisition of Universe2U Inc.
(Ontario) by Universe2U Inc. (Nevada).
Form 8-K, filed July 25, 2000, reporting the acquisition by a wholly-owned
subsidiary of the Company of CableTec Communications Inc.
Form 8-K/A, filed August 14, 2000, amending the Form 8-K filed July 25, 2000,
consisting of financial statements regarding the acquisition of CableTec
Communications Inc.
EXHIBITS
--------
Exhibit No. Description of document
----------- -----------------------
10.18 Operating Agreement of T-E Realty And Right-Of-Way Agency, L.L.C.
10.19 Executive Employment Agreement dated July 26, 2000, between
Universe2U Inc. and R. John Slattery
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNIVERSE2U INC.
By: /s/ Kim Allen Date: November 14, 2000
------------------------------------
Kim Allen, CEO
By: /s/ John Slattery Date: November 14, 2000
------------------------------------
R. John Slattery
Executive Vice President, Finance
and Chief Financial Officer
