10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2003 ------------- [ ] 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: 000-26881 --------- NETNATION COMMUNICATIONS, INC. ------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-08034 38 --------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer I.D. No.) of incorporation or organization) 1410 - 555 WEST HASTINGS STREET VANCOUVER, BRITISH COLUMBIA, CANADA V6B 4N6 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) 604/688-8946 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] The number of shares of the registrant's Common Stock outstanding as of August 1, 2003 was 6,083,000.

See accompanying condensed notes to consolidated financial statements. 3

See accompanying condensed notes to consolidated financial statements. 4

See accompanying condensed notes to consolidated financial statements. 5

See accompanying condensed notes to consolidated financial statements. 6 NETNATION COMMUNICATIONS, INC. Condensed Notes to Consolidated Financial Statements (Expressed in U.S. dollars) Six month periods ended June 30, 2003 and 2002 (Unaudited) GENERAL: NetNation Communications, Inc. (the "Company") was incorporated on May 7, 1998 under the laws of the State of Delaware. On November 24, 1999, DomainPeople Inc. ("DomainPeople"), a wholly-owned subsidiary of the Company, was incorporated under the laws of the State of Delaware and was formed to offer domain name registration and related services. DomainPeople is accredited by the Internet Corporation for Assigned Names and Numbers, the regulatory body charged with administering accreditation, as a registrar for top-level domain names. On June 11, 2003, the Company entered into an agreement and plan of merger with Hostway Corporation, a private corporation, in which Hostway seeks to acquire all of NetNation's outstanding shares for cash. In return for all outstanding shares, NetNation's shareholders will collectively receive $10,036,950 in cash or $1.65 per share based on the post reverse stock split (see Note 2) number of shares outstanding. The transaction is expected to close in August 2003. The Board of Directors of the Company has received a favorable fairness opinion from BDO Valuation Inc. ("BDO"), a wholly owned subsidiary of BDO Dunwoody LLP Chartered Accountants and Consultants, for the planned merger. The fairness opinion was dated July 10, 2003. BDO's opinion was that, as of the date of the opinion, the merger consideration of $1.65 per share, post-consolidation, was fair from a financial point of view to NetNation's stockholders. The Company's principal business activities are the provision of web site hosting, domain name registration, and related services to small and medium sized businesses. 1. BASIS OF PRESENTATION: These interim condensed consolidated financial statements have been prepared using generally accepted accounting principles in the United States. The interim financial statements include all adjustments, consisting solely of normal recurring adjustments, which in management's opinion are necessary for fair presentation of the financial results for interim periods. The financial statements have been prepared consistent with the accounting policies described in the Company's annual audited financial statements. Reference should be made to those statements included with the Company's annual report filed on Form 10-K. Certain comparative figures have been reclassified to conform to the presentation adopted in the current period. These condensed consolidated financial statements include the accounts of the Company's wholly owned subsidiaries, NetNation Communications Inc., NetNation Communications (USA) Inc., and DomainPeople Inc. All material intercompany balances and transactions have been eliminated. 2. SIGNIFICANT ACCOUNTING POLICIES: Stock option plan: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - 7 an Amendment of FASB Statement No. 123," ("FAS No. 148"), established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. However, as allowed by FAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described below, and has adopted the disclosure requirements of FAS No. 123 and FAS No. 148. The Company applies the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25," to account for its fixed plan employee stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Any compensation expense recorded is charged against operations over the service period, which generally matches the option vesting period. No stock-based employee compensation cost was recorded for the three months ended and six months ended June 30, 2003, and June 30, 2002, as all options granted under the Company's stock option plan had an exercise price equal to or greater than the market value of the underlying Common stock on the grant date. The following table illustrates the effect on net income and net income per share, if the Company had applied the fair value recognition provisions of FAS No. 123 to stock-based employee compensation using the Black-Scholes option pricing methodology.

Reverse stock split: On June 12, 2003, the Company's shareholders approved a one-for-two and one half (1:2 1/2) reverse stock split of the Company's outstanding common stock. The reverse stock split was effected after the market close on June 13, 2003, thereby reducing 15,206,002 shares of issued common stock to 6,083,000 shares, of which six hundred (600) shares were issued on the rounding up of fractional shares. The par value of the common stock was not affected by the reverse stock split and remained at $0.0001 per share after the reverse stock split. Consequently, the aggregate par value of the issued common stock was reduced affecting the stockholder's equity section of the balance sheet due to reclassifying the par value amount of the reversed common shares from common stock to additional paid-in capital for all periods presented. All per share amounts and outstanding shares, including all common stock equivalents (stock options), have been retroactively restated in the financial statements for all periods presented to reflect the reverse stock split. 8 3. STOCK OPTIONS: On February 14, 2003, the Company's Board of Directors approved the immediate vesting of all non-vested stock options and that all options would expire 30 days from that date if not exercised. On March 16, 2003, all options unexercised at that date expired. A summary of the Company's stock option activity is as follows:

4. SEGMENTED INFORMATION: The Company operates primarily two business segments consisting of web site hosting and domain name registration. These business segments have been segregated based on how management organizes the segments within the business for making operating decisions and assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. The Company's revenues are generated from the following business segments:

The Company's gross profits are generated from the following business segments:

9 All of the Company's assets were located in Canada as at June 30, 2003. 5. COMMITMENTS AND CONTINGENCIES: (a) The Company is committed to total operating lease payments for rent for the remainder of 2003 and 2004 of approximately $63,000 and $42,000, respectively. (b) As at December 1, 2000, the Company discontinued lease payments on the San Diego premises due to a number of circumstances. To date, the landlord has not commenced legal action against the Company. Should the landlord commence legal action against the Company, the outcome of the proceedings is unknown. The remaining lease payments of $381,254 were accrued in the consolidated financial statements as at December 31, 2000, and a gain will be recognized in the event of a favorable outcome. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All share and per share amounts discussed in this Quarterly Report have been adjusted to reflect the one-for-two and one-half reverse stock split effected on June 13, 2003. See Note 2 to the consolidated financial statements "Significant Accounting Policies". The following discussion should be read in conjunction with our condensed unaudited financial statements contained in Item 1 of this quarterly report on Form 10-Q and audited consolidated financial statements contained in our annual report on Form 10-K for the fiscal year ended December 31, 2002. Except for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," or otherwise incorporated by reference into this document contain "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by us. These forward-looking statements involve risks and uncertainties, including those identified within the section entitled "Risk Factors" in our Form 10-K for the fiscal year ended December 31, 2002. The actual results that we achieve may differ materially from any forward-looking projections due to such risks and uncertainties. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Readers are urged not to place undue reliance on these forward-looking statements, and readers should carefully review and consider the various disclosures made by us in this quarterly report on Form 10-Q, our annual report on Form 10-K for the fiscal year ended December 31, 2002 and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. PLANNED MERGER On June 11, 2003, the Company entered into an agreement and plan of merger with Hostway Corporation, a private corporation, in which Hostway seeks to acquire all of NetNation's outstanding shares for cash. In return for all outstanding shares, NetNation's shareholders will collectively receive $10,036,950 in cash or $1.65 per share based on the post reverse stock split number of shares outstanding. The transaction is expected to close in August 2003. The Board of Directors of the Company has received a favorable fairness opinion from BDO Valuation Inc. ("BDO"), a wholly owned subsidiary of BDO Dunwoody LLP Chartered Accountants and Consultants, for the planned merger. The fairness opinion was dated July 10, 2003. BDO's opinion was that, as of the date of the opinion, the merger consideration of $1.65 per share, post-consolidation, was fair from a financial point of view to NetNation's stockholders. Assuming our stockholders approve the merger with Hostway, NetNation will cease to be a publicly-traded company when the merger transaction closes. 10 OVERVIEW We are an internet infrastructure solutions provider focused on meeting the needs of small and medium-sized enterprises ("SMEs") and individuals who are establishing a commercial or informational presence on the Internet. We compete in the web hosting and domain name registration markets. Our products and services are sold worldwide, directly to customers and through value added resellers ("VARs"). We began providing web hosting services in February 1997. In May 1999, we were selected as an official registrar of domain names by ICANN. The accreditation allows us to register top-level domain names ("TLDs") ending in .com, .net, .org, .info, .biz, and .name. Through our wholly-owned subsidiary, DomainPeople, we became operational as a domain name registrar in December of 1999. We generate revenue by providing web hosting services to SMEs and domain name registration. Our web hosting customers normally pay a setup fee and regular charges, either monthly, quarterly, twice-yearly, or annually, thereafter. We offer a variety of hosting packages in addition to a number of value-added services and products. This enables customers to easily select and modify a solution that precisely meets their individual requirements. We generally collect web hosting service fees in advance, and recognize revenue over the period during which services are provided. Setup fees are amortized over the estimated period during which services will be provided, typically one to two years. Recurring service fees are amortized and recognized on a straight-line basis over the period during which services are provided. As a result, we will generally have a significant amount of deferred revenue attributable to web hosting services. An increase in the number of web hosting customers will not necessarily produce corresponding increased revenues, because adding a number of customers with low service levels may not replace the revenue lost if one intensive user of our services decides to use another web hosting service provider. Web hosting expenses are largely paid currently. Our accreditation as an official registrar of domain names has enabled us to register domain names without the involvement of an intermediary. As an accredited registrar, we have assumed responsibility for ensuring that current information obtained from customers is supplied to the central registry. We generally collect domain name registration fees in advance, and recognize revenue on a straight-line basis over the period for which the name is registered. As a result, we will generally have a significant amount of deferred revenue attributable to domain name registration services. An increase in the number of domain names that we register will generally produce a corresponding increase in revenues, subject to changes in the price charged for the service. The domain name registration fee that we pay to the registries for the domain names is paid in advance and is recognized as an expense over the period for which the name is registered. As a result, we will generally have a significant amount of deferred expenses attributable to domain registration services. The majority of cost of sales consists of personnel costs for the network operations center and technical support, bandwidth costs, and the costs to register domain names for our customers. Domain name registration fees are included in cost of sales as they are recognized as an expense over the term of registration. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, our management re-evaluates its estimates and judgments. We believe the following critical accounting policies require our most significant judgment and estimates used in the preparation of the consolidated financial statements. Deferred tax liabilities and assets are recognized for 11 the estimated future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of the deferred tax asset considered realizable could change materially in the near term based on future taxable income during the carry forward period. The deferred tax asset realized during 2002 is based on the assumption that our 2003 income will be generally comparable to our 2002 income. If our future income is substantially greater or substantially less than the income we assume, there would be a corresponding change in the actual amount of the deferred tax asset considered realizable. Revenue from web site hosting set-up fees is recognized over the estimated period the hosting services are provided to customers, which typically ranges from 1 to 2 years. In estimating the period that hosting services are to be provided to customers, our management considers our past history with our customers, the type of services we provide, and other factors that could affect the period of time a customer would be provided services. Accordingly, the estimate of the period of time that hosting services are to be provided to customers is a matter of judgment and could change in the near term based on historical experience and other factors, resulting in a material change to recorded revenue and deferred revenue for web hosting services. For example, if our experience begins to show that customers fitting a certain profile generally use our services for 4 years, and we have been estimating they will use our services for 2 years, we would increase the amortization period to 4 years, effectively reducing the set-up fee revenue recognized for such customers in each of the first 2 years by 50%. RESULTS OF OPERATIONS For the quarter ended June 30, 2003, we achieved net earnings of $59,837 ($0.01 per share) as compared to $151,707 ($0.02 per share) for the same period in 2002 and for the six month period ended June 30, 2003, net earnings of $265,407 ($0.04 per share) as compared to $366,028 ($0.06 per share) for the same period in 2002. Revenue Our revenue of $1,924,951 for the quarter ended June 30, 2003 represents an increase of $183,997 or 11% over the quarter ended June 30, 2002. For the six months ended June 30, 2003, revenue of $3,737,993 was an increase of $310,608 or 9% over the same period in 2002. The increase was due to increases in both our web hosting business and domain name registration business. The following table compares the composition of sales for the three and six months ended June 30, 2003 to the same period in 2002:

The deferred revenue amount on the balance sheet as at June 30, 2003 includes $2,071,806 related to domain name registration and $725,106 related to web hosting services. Cost of sales Cost of sales of $672,687 for the quarter ended June 30, 2003 represents an increase of $97,944 or 17% over the quarter ended June 30, 2002. For the six months ended June 30, 2003, cost of sales of $1,293,807 represents an increase of $175,992 or 16% over the same period in 2002. As a percentage of sales, cost 12 of sales increased from 33% to 35% from the second quarter of 2002 to the same period in 2003. As a percentage of sales, cost of sales increased from 33% to 35% from the first six months of 2002 compared to the same period in 2003. The increase in costs was mainly due to increased personnel costs, increased bandwidth usage, and the costs to register an increased number of domain names. The majority of cost of sales consists of personnel costs for the network operations center and technical support, bandwidth costs, and the costs to register domain names for our customers. Domain name registration fees paid to the central registries are recognized as an expense over the term of registration. Sales and marketing expenses Sales and marketing expenses for the quarter ended June 30, 2003 increased $80,711 or 32% from the same period in 2002. For the six months ended June 30, 2003, sales and marketing expenses increased $139,437 or 27% from the same period in 2002. As a percentage of sales, sales and marketing expenses increased from 15% in the second quarter of 2002 to 17% in the second quarter of 2003. As a percentage of sales, sales and marketing expenses increased from 15% in the first six months of 2002 to 18% in the first six months of 2003. This increase was due to an increase in advertising expenses of $84,467 or 118% in the second quarter of 2003 compared to the same period in 2002 and an increase of $139,241 or 86% for the first six months of 2003 compared to the same period in 2002. This increase in advertising expenses was directed at various online forms of advertising. Sales and marketing expense consists mainly of salaries, bonuses, commissions and advertising costs. General and administration expenses General and administration expenses for the quarter ended June 30, 2003 increased $87,939 or 17% over the same period in 2002. For the six month period ended June 30, 2003, general and administration expenses increased $77,107 or 8% over the same period in 2002. As a percentage of sales, general and administration expenses increased from 30% in the second quarter of 2002 to 31% in the second quarter of 2003. As a percentage of sales, general and administration expenses decreased from 30% in the first six months of 2002 to 29% in the first six months of 2003. The dollar increase was mainly due to higher legal and professional fees associated with our planned merger with Hostway Corporation. General and administrative expenses include administrative personnel costs, rent, general office expenses, audit and legal costs, and investor relations expenses. Foreign currency translation losses Foreign currency translation losses for the quarter ended June 30, 2003 of $117,718 represents an increase of $90,101 or 326% over the same period in 2002. For the six month period ended June 30, 2003, foreign currency translation losses of $121,813 represents an increase of $83,218 or 216% over the same period in 2002. These foreign currency translation losses are due to the significant change in the US dollar to Canadian dollar exchange rate experienced in the last six months. Currently we do not hedge against our exposure to foreign currency risk. Depreciation and amortization Depreciation and amortization for the second quarter of 2003 decreased $53,802 or 28% as compared to the second quarter of 2002. For the six month period ended June 30, 2003, depreciation decreased $34,675 or 10% as compared to the same period in 2002. The decrease in depreciation and amortization expense was due to the fixed assets acquired in 2000 reaching the end of their three-year amortization period. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 2003, operating activities generated net cash of $781,227 compared to $819,809 for the same period in 2002. The main reason for the decrease in cash from operations was the increase in cash expenses including higher advertising expenses, and higher legal and professional fees from the planned merger with Hostway Corporation. 13 During the six months ended June 30, 2003, the Company purchased fixed assets totaling $331,342 compared to $60,071 for the same period in 2002. These expenditures relate mainly to the network operations center and were for customer-specific requirements and general improvements to our data center. We have no contractual obligations to make further capital expenditures, but similar costs may be incurred in the future for expanding the network operations center when appropriate. Net cash used in financing activities for the six months ended June 30, 2003 was $11,037 compared to net cash provided by financing activities of $10,782 for the same period in 2002. In 2002, $22,640 was raised from the exercise of stock options by employees. As at June 30, 2003, the Company has cash and cash equivalents of $3,804,746 compared to $3,334,561 as at December 31, 2002. The increase reflects positive cash flows from operations for the first six months of 2003 after expenditures on fixed assets. Based on management's current projections, the Company believes that it has adequate resources to maintain its current level of operations for the foreseeable future. On June 12, 2003, the Company's shareholders approved a one-for-two and one half (1:2 1/2) reverse stock split of the Company's outstanding common stock. The reverse stock split was effected after the market close on June 13, 2003, thereby reducing 15,206,002 shares of issued common stock to 6,083,000 shares, of which six hundred (600) shares were issued on the rounding up of fractional shares. The par value of the common stock was not affected by the reverse stock split and remained at $0.0001 per share after the reverse stock split. Consequently, the aggregate par value of the issued common stock was reduced affecting the stockholder's equity section of the balance sheet due to reclassifying the par value amount of the reversed common shares from common stock to additional paid-in capital for all periods presented. All per share amounts and outstanding shares, including all common stock equivalents (stock options), have been retroactively restated in the financial statements for all periods presented to reflect the reverse stock split. On July 8, 2002, we received a Letter of Notice from Nasdaq indicating that we were not in compliance with the minimum USD$1.00 per share bid price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4), and therefore, in accordance with Marketplace Rule 4310(c)(8)(D), were provided with 180 calendar days, or until January 6, 2003, to regain compliance. We did not regain compliance by January 6, 2003. On January 7, 2003, we were notified by Nasdaq that we did not meet listing requirements for the Nasdaq SmallCap Market at that time as we were not in compliance with the US$1.00 minimum bid price. We requested to appeal our case before the Nasdaq Qualifications Panel for continued listing on the Nasdaq SmallCap Market and the hearing was held on February 13, 2003. The Qualifications panel granted us an extension to July 3, 2003 to regain compliance with the minimum USD$1.00 per share bid price. On June 12, 2003, at the Company's annual general meeting, the shareholders of the Company approved a proposal to amend our certificate of incorporation to give our Board of Directors discretion to effect a one for two and one-half (1:2.5) reverse stock split to attempt to come into compliance with the minimum USD$1.00 per share bid price requirement. The reverse stock split took effect on June 13, 2003. On July 7, 2003, we received a Letter of Notice from Nasdaq stating that the Company has demonstrated compliance with the minimum closing bid price requirement of US$1.00 per share for ten consecutive trading days, thus granting the Company continued listing on the Nasdaq SmallCap Market. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No significant changes in market risk have occurred since we filed our report on Form 10-K for the fiscal year ended December 31, 2002. 14 ITEM 4: CONTROLS AND PROCEDURES (a) Evaluation of Controls and Procedures Within 90 days prior to the filing of this report, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Securities Exchange Act of 1934, as amended, and the SEC rules thereunder. (b) Changes In Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As at December 1, 2000, we discontinued lease payments on the San Diego premises due to a number of circumstances. To date, the landlord has not commenced legal action against us. Should the landlord commence legal action against us, the outcome of the proceedings is unknown. The remaining lease payments of $381,254 were accrued in the consolidated financial statements as at December 31, 2000, and a gain will be recognized in the event of a favorable outcome. We have been in a dispute with a web hosting company in the Netherlands called Netnation Europe. On March 14, 2002, we won a World Intellectual Property Organization (WIPO) dispute involving Netnation Europe for the domain name "netnation.info". On November 1, 2002, we lost a WIPO decision to Netnation Europe for the domain name "netnation.biz". Netnation Europe had initially registered the domain name during the start-up period for registration of .biz domain names and we contested Netnation Europe's rights to the domain name. At this time, we have not formally served Netnation Europe with notice of legal action. Currently, the Netherland market does not represent a significant part of our business. To the knowledge of our officers and directors, there are no other pending legal proceedings or litigation of a material nature and none of our property is the subject of a pending legal proceeding. Further, our officers and directors know of no legal proceedings against us or our property contemplated by any governmental authority. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 12, 2002, we held our annual general meeting of stockholders in Vancouver, British Columbia. The following matters were considered and voted upon at the annual general meeting. Please note that the number of votes are based on the pre-reverse stock split number of shares outstanding of 15,206,002. 15 The first matter voted upon at the meeting was the election of members to the Board of Directors. David Talmor, Joseph Kibur, Ernest Cheung, Anil Wirasekara, and Jag Gillan were nominated for election as directors of NetNation to hold office until their successor are duly elected or appointed. All of the directors nominated for election served as directors immediately prior to the annual meeting. The votes cast and withheld for such nominees were as follows: Name For Withheld --------------- --------- -------- David Talmor 8,606,025 133,850 Joseph Kibur 8,736,925 2,950 Ernest Cheung 8,709,625 30,250 Anil Wirasekara 8,695,625 44,250 Jag Gillan 8,709,625 30,250 In addition to the election of directors, the following matters were voted upon at the annual meeting: - To ratify the board of directors' selection and appointment of KPMG, LLP, Chartered Accountants, as independent auditors for NetNation for the fiscal year ending December 31, 2003. The votes were cast as follows: 8,737,175 in favor of ratification; 2,700 against ratification; and 0 abstaining. - To approve an amendment to NetNation's certificate of incorporation to effect a 1-for-2 and 1/2 reverse stock split of all the issued and outstanding shares of our common stock, which resolution would give the board of directors authority to, in its sole discretion, implement the reverse stock split at any time prior to the next annual meeting. The votes were cast as follows: 8,735,175 in favor of the amendment; 4,700 against the amendment; and 0 abstaining. No other matters were submitted to our members at the annual meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ------------- ----------------------------------------------------------------- 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On June 4, 2003, we filed a report on Form 8-K dated June 3, 2003 that included an Item 5, Other Events, disclosure. On June 16, 2003, we filed two reports on Form 8-K both dated June 13, 2003 that each included Item 5, Other Events, disclosures. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETNATION COMMUNICATIONS, INC. Date: August 13, 2003 /s/ Joseph Kibur --------------- -------------------------------------- Joseph Kibur Chief Executive Officer Date: August 13, 2003 /s/ Calvin Mah --------------- -------------------------------------- Calvin Mah Chief Financial Officer 17 CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph Kibur, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NetNation Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 /s/ Joseph Kibur --------------- -------------------------------------- Joseph Kibur Chief Executive Officer 18 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Calvin Mah, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NetNation Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 /s/ Calvin Mah --------------- -------------------------------------- Calvin Mah Chief Financial Officer 19 EXHIBIT INDEX Exhibit No. Description ------------- ----------------------------------------------------------------- 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 20

NETNATION COMMUNICATIONS INC 10-Q