8-K/A 1 amd18-k.txt AMENDMENT NO. 1 TO 2-21-01 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): FEBRUARY 21, 2001 E-TREND NETWORKS, INC. (Exact name of registrant as specified in its charter) DELAWARE 0-28879 APPLIED FOR (State or other jurisdiction of (Commission (IRS Employer incorporation) File Number) Identification No.) 5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3 (Address of principal executive offices) (Zip Code) (403) 252-7766 Registrant's telephone number, including area code COOL ENTERTAINMENT, INC. 10900 N.E. 8TH STREET, SUITE 900, BELLEVUE, WASHINGTON 98004 (Former name or former address, if changed since last report) Exhibit index on consecutive page 4 ITEM 1. CHANGES IN CONTROL OF REGISTRANT See the disclosure in Item 5 below. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS See the disclosure in Item 5 below. ITEM 3. BANKRUPTCY OR RECEIVERSHIP Not Applicable. ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT At a shareholders' meeting held January 26, 2001, the shareholders of E-Trend Networks, Inc., then a private Nevada corporation, approved the election of KPMG LLP to audit the financial statements for the fiscal year ended September 30, 2001. E-Trend's Board of Directors recommended KPMG LLP because that firm is the existing certifying accountant for the registrant, which is now the parent company of E-Trend due to the acquisition described in Item 5 below. Ernst & Young LLP had audited E-Trend's financial statements for the fiscal year ended September 30, 2000. ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE On February 21, 2001, the registrant effected its reorganization. Cool Entertainment, Inc., a Colorado corporation merged into E-Trend Networks, Inc., its wholly-owned Delaware subsidiary. As a result, the registrant changed its name to E-Trend Networks, Inc., changed its domicile to Delaware, and effected a 1-for-100 reverse stock split. The registrant's new CUSIP number is 26924T 10 4 and its new trading symbol is ETDN. Also on February 21, 2001, the registrant closed its acquisition of E-Trend Networks, Inc., a privately-held Nevada corporation ("E-Trend"), pursuant to the terms of a Share Exchange Agreement dated December 22, 2000 (the "Share Exchange Agreement"). E-Trend is now a wholly-owned subsidiary of the registrant. The registrant has issued 4,441,867 (post-reverse split) shares of its common stock to the shareholders of E-Trend. There are now 4,825,273 shares of common stock of the registrant issued and outstanding (without giving effect to the elimination of fractional shares). The registrant's management now consists of designees from E-Trend, with the exception of Len Voth:
Caroline G. Armstrong - President, Chief Executive Officer, and Director Michael McKelvie - Senior Vice President, Marketing & 2 Communications Timothy J. Sebastian - Secretary and General Counsel Trevor Hillman - Director Gregg Johnson - Director Paul Miller - Director Donald Spear - Director Roy Grant - Director Martin McDonough - Director William Christie - Director Len Voth - Director
An interim chief financial officer is currently serving until a permanent replacement is found. Effective May 7, 2001, the board of directors will be reduced to three members: Gregg Johnson, Trevor Hillman, and Len Voth. Since February 22, 2001, the executive offices of the registrant have been located at the facilities of E-Trend in Calgary, Alberta. Founded in April 1999 as a Nevada corporation by VHQ Entertainment Inc. (formerly Video Headquarters Inc.), a Canadian Venture Exchange ("CDNX")-listed company ("VHQ"), E-Trend develops and operates a number of Internet websites which offers a variety of products including music, movies on DVD and VHS, video games, PC gaming software, and other entertainment related products. E-Trend has two existing product-based web sites and one under development that target purchasers of its products and one information-based web site portal that is formatted as an online entertainment magazine: o WWW.MOVIESOURCE.COM, which currently offers filmed entertainment products, including feature films both in VHS cassette and DVD format, and educational, health and fitness and instructional videos and special interest videos; o WWW.VHQMUSIC.COM, which offers a broad range of compact disc and cassette music selections, and music video products; o WWWVHQGAMES.COM, which will offer current top-selling video game titles in popular video game and PC formats, including Sony Play Station, Sony Play Station II, Nintendo 64, and Sega Dreamcast, and focuses on video game enthusiasts; and o WWW.ENTERTAINME.COM which is an on-line entertainment magazine that functions as a portal to E-Trend's e-commerce sites. ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS Not Applicable. 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired: E-Trend's audited statements for the year ended September 30, 2000, and E-Trend's unaudited statements for the three months ended December 31, 2000, are filed herewith. (b) Pro forma financial information: Filed herewith (c) Exhibits
REGULATION CONSECUTIVE S-K NUMBER DOCUMENT PAGE NUMBER 2.1 Share Exchange Agreement dated December 22, 2000 (1) N/A 2.2 Certificate of Ownership Merging Cool Entertainment, Inc. into E-Trend Networks, Inc. Pursuant to Section 253 of the Delaware General Corporation Law and Articles of Merger Pursuant to Section 7-111-105 of the Colorado Business Corporation Act (2) N/A 2.3 Articles of Share Exchange (3) N/A 16 Letter from auditor(4) N/A 99.1 Press Release dated February 21, 2001 (3) N/A --------------- (1) Incorporated by reference to the registrant's definitive proxy statement filed January 2, 2001 (2) Incorporated by reference to the registrant's Form 10-QSB for the fiscal quarter ended December 31, 2000 (3) Filed previously (4) To be filed by amendment
ITEM 8. CHANGE IN FISCAL YEAR The business combination with E-Trend will be accounted for by the purchase method as a reverse take-over transaction with E-Trend identified as the acquiror and the registrant identified as the acquired business. E-Trend's fiscal year end is September 30. Accordingly, the new fiscal year end of the registrant will be September 30 and no transition report is required. ITEM 9. REGULATION FD DISCLOSURE Not applicable. 4 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 hereunto duly authorized. E-TREND NETWORKS, INC. May 7, 2001 By: /s/ CAROLINE G. ARMSTRONG ------------------------------------- Caroline G. Armstrong, President and CEO 5 Unaudited Interim Consolidated Financial Statements E-TREND NETWORKS, INC. Three months ended December 31, 2000 (Expressed in U.S. dollars) 6 E-TREND NETWORKS, INC. Interim Consolidated of Balance Sheets (Expressed in U.S. dollars)
December 31, September 30, 2000 2000 (unaudited) Assets Current assets: Cash and cash equivalents $ 1,451,102 $ 1,866,159 Accounts receivable 307,099 69,583 Due from related company (note 3) - 207,716 Inventory 104,068 40,344 Prepaid expenses 4,995 773 Note receivable from shareholder (note 3) 333,300 - 2,200,564 2,184,575 Investment (note 4) 217,169 232,382 Due from related company (note 3) 356,706 231,709 Property and equipment 296,400 266,641 Goodwill (note 5) 180,086 175,169 ------------ ------------ $ 3,250,925 $ 3,090,476 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Bank indebtedness (note 2) $ 82,547 $ 74,816 Demand loan (note 6) 333,300 - Accounts payable and accrued liabilities 434,083 201,585 ------------ ------------ 849,930 276,401 Stockholders' equity Authorized: 25,000,000 preferred shares, par value $0.001 25,000,000 common shares, par value $0.001 Issued: Common shares (note 7) 8,854 8,854 Additional paid in capital (note 7) 3,601,406 3,601,406 Deficit (1,281,937) (866,495) Unrealized gain from investment 66,484 89,102 Cumulative translation adjustment 6,188 (18,792) ------------ ------------ 2,400,995 2,814,075 ------------ ------------ $ 3,250,925 $ 3,090,476 ============ ============
See accompanying notes to interim consolidated financial statements. 7 E-TREND NETWORKS, INC. Interim Consolidated Statements of Operations and Deficit (Expressed in U.S. dollars) (Unaudited)
Three months Three months ended ended December 31, December 31, 2000 1999 Sales $ 454,517 $ - Cost of sales 397,187 - 57,330 - Interest and other income 43,222 - Expenses: Operating and development 173,698 24,965 General and administrative 257,890 267,958 Advertising costs 17,639 1,073 Sales and marketing 53,209 - Depreciation 10,226 - Amortization of goodwill 3,332 - ------------ ------------ 515,994 293,996 ------------ ------------ Net loss for the period (415,442) (293,996) Other comprehensive income: Unrealized gain from investment 66,484 - Foreign currency translation adjustment 6,188 - ------------ ------------ 72,672 - ------------ ------------ Comprehensive loss $ (342,770) $ (293,996) ============ ============ Deficit, beginning of period (866,495) (55,339) Net loss for the period (415,442) (293,996) ------------ ------------ Deficit, end of period $(1,281,937) $ (349,335) ============ ============
See accompanying notes to interim consolidated financial statements. 8 E-TREND NETWORKS, INC. Interim Consolidated Statements of Cash Flows (Expressed in U.S. dollars) (Unaudited)
Three months Three months ended ended December 31, December 31, 2000 1999 Cash was provided by (used for): Operating activities: Net loss for the period $ (415,442) $ (293,996) Add (deduct) following item: Depreciation and amortization 13,558 - Net change in non-cash working capital (189,222) (65,610) ------------ ------------ (591,106) (359,606) Financing activities: Increase in bank indebtedness 7,731 - Proceeds from demand loan 333,300 - Proceeds from capital contributions - 61,562 Due from related company (124,997) (127,688) ------------ ------------ 216,034 (66,126) Investment activities: Purchase of capital assets (39,985) (62,326) ------------ ------------ Decrease in cash (415,057) (488,058) Cash, beginning of period 1,866,159 638,712 ------------ ------------ Cash, end of period $ 1,451,102 $ 150,654 ============ ============
See accompanying notes to interim consolidated financial statements. 9 E-TREND NETWORKS, INC. Notes to Interim Consolidated Financial Statements, page 2 Three months ended December 31, 2000 and 1999 (Expressed in U.S. dollars) (Unaudited) -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES: The accompanying unaudited consolidated financial statements for E-Trend Investments, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information, including all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position, statement of operations and cash flows for the interim period. The financial information included herein is unaudited; however there have been no changes to the accounting policies as detailed in its audited financial statements dated September 30, 2000 during the interim periods presented. The consolidated financial statements include the accounts of E-Trend Networks, Inc. its wholly owned subsidiary Langara Distribution Inc., an Alberta, Canada Corporation and 100% of the consolidated financial results. 2. BANK INDEBTEDNESS: The Corporation has a line of credit with a limit of $100,000 which accrues interest at prime plus 0.5% per annum. 3. RELATED PARTY TRANSACTIONS: The due from related company of $356,706 represents an advance to the Corporation's major shareholder, Video Headquarters Inc. The advance bears interest at 8% per annum, is unsecured and has no fixed terms of repayment. For the three months ended December 31, 2000 the Corporation accrued interest income of $6,713 from Video Headquarters Inc. During the three months ended December 31, 2000 the Corporation sold $207,410 of its products to Video Headquarters Inc. As at December 31, 2000 Video Headquarters Inc. owes the Corporation $186,140. The note receivable from shareholder represents an advance to a shareholder of the Corporation. The advance bears interest at 20% and is secured by a promissory note. For the three months ended December 31, 2000, the Corporation accrued interest income of $13,332 of which $5,662 remains in accounts receivable at December 31, 2000. 10 E-TREND NETWORKS, INC. Notes to Interim Consolidated Financial Statements, page 2 Three months ended December 31, 2000 and 1999 (Expressed in U.S. dollars) (Unaudited) -------------------------------------------------------------------------------- 4. INVESTMENT: On January 21, 2000 the Corporation swapped 99,900 common shares of Video Headquarters Inc., a publicly-traded Canadian company, for 100,000 shares of the Corporation at a value of $150,000.
DECEMBER 31, 2000 Translated Unrealized Recorded Cost Basis Gain Basis Video Headquarters common shares $ 150,685 $ 66,484 $ 217,169
5. ACQUISITION: The Corporation acquired all of the issued and outstanding shares of Langara Distribution Inc. ("Langara") effective January 1, 2000 for consideration of 200,000 common shares valued at $1.00 per share and 200,000 share purchase warrants exercisable at $2.00 per warrant from the date of issuance. The ascribed value of this transaction was $200,000 and no value has been ascribed to the warrants. This acquisition was accounted for by the purchase method allocating all of the purchase price to goodwill. The operating results of Langara are included in the consolidated statements of operations and deficit from the date of acquisition. 6. DEMAND LOAN: The Corporation has a demand loan which accrues interest at the bank's prime rate and is secured by a pledge over specific assets. 7. SHARE CAPITAL: Issued and outstanding common shares as at December 31, 2000 and September 30, 2000 were 8,853,734. Outstanding options as at December 31, 2000 and September 30, 2000 are 1,488,000 and 1,438,000 respectively. 11 Financial Statements E-TREND NETWORKS, INC. (formerly The Moviesource.com Corp.) September 30, 2000 12 INDEPENDENT AUDITORS' REPORT To the Stockholders of E-Trend Networks, Inc. We have audited the accompanying consolidated balance sheets of E-Trend Networks, Inc. and subsidiary (formerly The Moviesource.com Corp.) as at September 30, 2000 and 1999 and the related statements of operations and deficit, stockholders' equity and cash flows for the year ended September 30, 2000 and for the period from incorporation on April 29, 1999 to September 30, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of E-Trend Networks, Inc. (and subsidiary) as at September 30, 2000 and the results of its operations and its cash flows for the year ended September 30, 2000 and for the period from incorporation on April 29, 1999 to September 30, 1999 in conformity with accounting principles generally accepted in the United States. Calgary, Canada /S/ ERNST & YOUNG LLP November 21, 2000 Chartered Accountants 13 E-TREND NETWORKS, INC. CONSOLIDATED BALANCE SHEETS As at September 30
2000 1999 (U.S. $) (U.S. $) --------------------------- ASSETS CURRENT Cash and cash equivalents [NOTE 6] 1,791,343 638,712 Accounts receivable 69,583 3,297 Due from related company [NOTE 9] 207,716 -- Inventory 40,344 -- Prepaid expenses 773 45,060 --------------------------- 2,109,759 687,069 INVESTMENT [NOTE 4] 232,382 -- DUE FROM RELATED COMPANY [NOTE 9] 231,709 31,487 CAPITAL ASSETS [NOTE 5] 266,641 25,000 GOODWILL [NOTE 3] 175,169 -- --------------------------- 3,015,660 743,556 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities 201,585 17,820 --------------------------- COMMITMENTS [NOTE 11] STOCKHOLDERS' EQUITY Authorized 25,000,000 preferred shares, par value $0.001 25,000,000 common shares, par value $0.001 Issued Common shares [NOTE 7] 8,854 6,850 Additional paid in capital [NOTE 7] 3,601,406 774,225 Accumulated deficit (866,495) (55,339) Unrealized gain from investment 89,102 -- Cumulative translation adjustment (18,792) -- --------------------------- 2,814,075 725,736 --------------------------- 3,015,660 743,556 ===========================
SEE ACCOMPANYING NOTES On behalf of the Board: Director Director 14 E-TREND NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE TWELVE FOR THE PERIOD FROM MONTHS ENDED INCORPORATION ON SEPTEMBER 30, APRIL 29, 1999 TO 2000 SEPTEMBER 30, 1999 (U.S. $) (U.S. $) -------------------------------------- REVENUE 665,075 -- COST OF SALES 503,938 -- -------------------------------------- 161,137 -- -------------------------------------- EXPENSES Operating and development 436,764 -- General and administrative 435,745 59,564 Advertising costs 108,703 -- Sales and marketing 28,921 -- Amortization of capital assets 31,756 -- Amortization of goodwill 20,329 -- -------------------------------------- 1,062,218 59,564 -------------------------------------- LOSS BEFORE THE FOLLOWING (901,081) (59,564) INTEREST INCOME 89,925 4,225 -------------------------------------- NET LOSS FOR THE PERIOD [NOTE 10] (811,156) (55,339) -------------------------------------- OTHER COMPREHENSIVE INCOME Unrealized gain from investment 89,102 -- Foreign currency translation adjustment (18,792) -- -------------------------------------- -------------------------------------- 70,310 -- -------------------------------------- COMPREHENSIVE LOSS (740,846) (55,339) ====================================== DEFICIT, BEGINNING OF PERIOD (55,339) -- NET LOSS FOR THE PERIOD (811,156) (55,339) -------------------------------------- DEFICIT, END OF PERIOD (866,495) (55,339) ====================================== BASIC AND DILUTED LOSS PER SHARE [NOTE 8] (0.10) (0.02) ======================================
SEE ACCOMPANYING NOTES 15 E-TREND NETWORKS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY As at September 30, 2000
COMMON STOCK ----------------------------- PAID IN NUMBER OF AMOUNT CAPITAL SHARES (U.S. $) (U.S. $) ------------------------------------------- Issuance of common stock [NOTE 7] 6,850,000 6,850 774,225 ------------------------------------------- Balance, September 31, 1999 6,850,000 6,850 774,225 Issuance of common shares for cash [NOTE 7] 1,618,734 1,619 2,395,732 Issuance of common shares for services [NOTE 7] 85,000 85 84,915 Issuance of common shares on acquisition of subsidiary [NOTES 3 AND 7] 200,000 200 199,800 Issuance of common shares for shares in investment [NOTES 4 AND 7] 100,000 100 149,900 Share issue costs -- -- (3,166) ------------------------------------------- Balance, September 30, 2000 8,853,734 8,854 3,601,406 ===========================================
SEE ACCOMPANYING NOTES 16 E-TREND NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE FOR THE PERIOD FROM MONTHS ENDED INCORPORATION ON SEPTEMBER 30, APRIL 29, 1999 TO 2000 SEPTEMBER 30, 1999 (U.S. $) (U.S. $) ----------------------------------------- CASH WAS PROVIDED BY (USED FOR): OPERATING ACTIVITIES Net loss for the period (811,156) (55,339) Amortization 52,085 -- Add (deduct) following item: Net change in non-cash working capital (86,294) (30,537) ----------------------------------------- (845,365) (85,876) ----------------------------------------- FINANCING ACTIVITIES Proceeds from capital contributions 2,394,185 781,075 Due from related company (200,222) (31,487) ----------------------------------------- 2,193,963 749,588 ----------------------------------------- INVESTING ACTIVITY Purchase of capital assets (195,967) (25,000) ----------------------------------------- INCREASE IN CASH 1,152,631 638,712 CASH, BEGINNING OF PERIOD 638,712 -- ----------------------------------------- CASH, END OF PERIOD 1,791,343 638,712 =========================================
SEE ACCOMPANYING NOTES 17 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) 1. BASIS OF PRESENTATION The Corporation was incorporated as The Moviesource.com Corp. under the Business Corporations Act (Nevada) on April 29, 1999. The Corporation changed its name effective February 10, 2000 to E-Trend Networks, Inc. The Corporation is committed to the business of e-commerce sales and distribution of filmed entertainment, video games and music. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, Langara Distribution Inc., an Alberta, Canada corporation. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Corporation have been prepared in accordance with accounting principles generally accepted in the United States. The presentation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH EQUIVALENTS The Corporation considers cash invested in money market funds with a maturity of 90 days or less, amounting to $1,812,301 (1999 - $617,328), to be cash equivalents. CAPITAL ASSETS Capital assets are recorded at cost. Amortization is provided on the bases and at rates designed to amortize the cost of assets over their estimated useful lives. Amortization is recorded using the declining balance method at the following annual rates: Furniture and fixtures - 10% Computer hardware - 30% Computer software - 20% Leasehold improvements Over term of lease 18 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) CONCENTRATION OF CREDIT RISK The financial instruments of the Corporation that are exposed to concentration of credit risk consist primarily of cash and short term deposits. The Corporation's cash and cash equivalents are placed with high quality major Canadian chartered banking institutions, limiting its exposure of credit risk. GOODWILL Goodwill is recorded at cost and is being amortized on a straight-line basis over 10 years. The recoverability of goodwill is assessed periodically based on management estimates of undiscounted future operating income from each of the acquired businesses to which the goodwill relates. FINANCIAL INSTRUMENTS Financial instruments of the Corporation consist mainly of cash and cash equivalents, accounts receivable, due from related company and accounts payable and accrued liabilities. At September 30, 2000, there are no significant differences between the carrying values of these amounts and their estimated market values. REVENUE RECOGNITION Gross revenue from product sales is recognized as the product is delivered. Sales returns are limited to 15% of the total sales to each unrelated customer and are credited against future sales. INCOME TAXES Income taxes are computed using the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. INVESTMENT Investment is publicly traded equity securities classified as available for sale and are recorded at market. Unrealized gains and losses are reflected in other comprehensive income. ADVERTISING COSTS Advertising costs are expensed as incurred. 19 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) STOCK BASED COMPENSATION The Corporation applies the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost is recognized in the accounts as options are granted with an exercise price that approximates the prevailing market price. COMPUTATION OF LOSS PER SHARE Basic loss per stock is computed by dividing the net loss attributable to common stockholders by the weighted average number of common stock outstanding for that period. Diluted loss per stock is computed giving effect to all dilutive potential common stock that were outstanding during the period. Dilutive potential common stock consist of incremental common stock issuable upon exercise of convertible securities. At September 30, 2000, there were no dilutive potential common stock and therefore the dilutive loss per stock is equivalent to the basic loss per stock. FOREIGN CURRENCY TRANSLATION The functional currency of the Corporation and its subsidiary is the Canadian dollar. Accordingly, all assets and liabilities are translated at the year end exchange rate and revenues and expenses are translated at average exchange rates. Gains and losses arising from the translation of the financial statements of the Corporation are recorded in a "Cumulative Translation Adjustment" account in stockholders' equity. Transactions denominated in foreign currencies are translated at the exchange rate on the transaction date. Foreign currency denominated monetary assets and liabilities are translated at the exchange rate in effect of the balance sheet date. The resulting exchange gains and losses on these items are included in net earnings. 20 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) 3. ACQUISITION The Corporation acquired all of the issued and outstanding shares of Langara Distribution Inc. ("Langara") effective January 1, 2000 for consideration of 200,000 common shares valued at $1.00 per share and 200,000 share purchase warrants exercisable at $2.00 per warrant from the date of issuance. The ascribed value of this transaction was $200,000 and no value has been ascribed to the warrants. This acquisition was accounted for by the purchase method allocating all of the purchase price to goodwill. The operating results of Langara are included in the consolidated statements of operations and deficit from the date of acquisition. The pro-forma loss and pro-forma loss per share for the year ended September 30, 1999 giving effect to the acquisition of Langara as though it had occurred as at October 1, 1998 do not differ materially from that recorded. 4. INVESTMENT On January 21, 2000, the Corporation swapped 99,900 common shares of Video Headquarters Inc., ("Video Headquarters") a publicly traded Canadian company, for 100,000 shares of the Corporation at a value of $150,000.
SEPTEMBER 30, 2000 ----------------------------------------- TRANSLATED UNREALIZED RECORDED COST BASIS GAIN BASIS $ $ $ ----------------------------------------- Video Headquarters common shares 143,280 89,102 232,382 =========================================
21 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) 5. CAPITAL ASSETS
SEPTEMBER 30, 2000 ---------------------------------------------------- ACCUMULATED NET BOOK VALUE COST AMORTIZATION $ $ $ ---------------------------------------------------- Furniture and fixtures 8,196 404 7,792 Leasehold improvements 25,545 1,277 24,268 Computer hardware 31,718 4,468 27,250 Computer software 232,938 25,607 207,331 ---------------------------------------------------- 298,397 31,756 266,641 ==================================================== SEPTEMBER 30, 1999 ---------------------------------------------------- ACCUMULATED NET BOOK VALUE COST AMORTIZATION $ $ $ ---------------------------------------------------- Computer software 25,000 -- 25,000 ====================================================
6. LINE OF CREDIT The Corporation has a line of credit with a limit of $150,000 which accrues interest at prime plus 0.5% per annum. As at September 30, 2000, this line of credit had an overdraft balance of $74,816. 7. SHARE CAPITAL AUTHORIZED 25,000,000 common shares at $0.001 per value 25,000,000 preferred shares at $0.001 per value COMMON STOCK ISSUED As of September 30, 1999, 6,075,000 and 775,000 common shares had been issued at $0.001 and $1.00 per share. On October 1, 1999, 85,000 common shares were issued for services provided by three consultants in relation to the development of the Corporation's website for $1.00 per share. On March 22, 2000, 1,618,734 common shares were issued for cash consideration at prices of $1.00 and $1.50 per share. 22 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) On January 21, 2000, 100,000 common shares were issued at $1.50 in exchange for common shares in Video Headquarters. On January 1, 2000, 200,000 shares were issued to acquire Langara with an ascribed value of $1.00 per share. OPTIONS The Company is authorized to grant employees, directors and officers options to purchase up to 2,000,000 common shares. The following table details the options outstanding at September 30, 2000:
NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE # $ --------------------------------------- Outstanding at September 30, 1999 -- -- Granted 1,438,000 1.99 --------------------------------------- Outstanding at September 30, 2000 1,438,000 1.99 ======================================= Exercisable at September 30, 2000 9,700 1.26 =======================================
The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions.
2000 $ --------------- Risk free interest rate 7.50% Dividend yield 0% Volatility factors of expected market price 100% Weighted average expected life of the options 2 years
23 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the valuation model calculates the expected stock price volatility based on highly subjective assumptions. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma disclosures of loss and loss per common share are presented below as if the Corporation had adopted the cost recognition requirements under FAS 123. The compensation cost for the stock-based compensation was approximately $1,048,300.
2000 $ --------------- Loss As reported 811,156 Pro forma 1,859,456 Basic and diluted loss per common share As reported ($/share) (0.10) Pro forma ($/share) (0.23)
WARRANTS On September 30, 2000, there were 200,000 common share purchase warrants issued and outstanding. Each warrant entitles the holder to purchase one common share of the Corporation for $2.00 per share expiring April 20, 2002. 8. LOSS PER SHARE
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 $ $ ------------------------------- Net loss 811,156 55,339 Weighted average number of common shares outstanding 7,946,310 2,857,943 ------------------------------- Loss per common share - basic and diluted (0.10) (0.02) ===============================
9. RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCE The due from related company of $231,709 represents an advance to the Corporation's major shareholder, Video Headquarters. The advance bears interest at 8% per annum, is unsecured and has no fixed terms of repayment. At September 30, 2000, the Corporation received interest income of $17,056 from Video Headquarters. 24 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) The Corporation sold $608,305 of its products to Video Headquarters and at September 30, 2000, owes the Corporation $207,716 in trade receivables. The Corporation does not limit sales returns from Video Headquarters and receives 91.5% of its sales from Video Headquarters. 10. INCOME TAXES The income tax benefit differs from the amount computed by applying the Canadian federal statutory tax rates to the loss before income taxes for the following reasons:
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 $ $ ------------------------------- Income tax benefit at Canadian statutory rates (44.62%) (373,714) (24,692) Increase (decrease) in taxes resulting from: Change in deferred tax asset valuation allowance 373,714 24,692 ------------------------------- Income tax benefit -- -- ===============================
Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Corporation's future income tax assets are as follows:
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 $ $ ------------------------------- Non-capital loss carryforwards 371,374 24,692 Undepreciated capital costs in excess of book value of capital assets 17,961 -- ------------------------------- Net future tax assets 389,335 24,692 Valuation allowance (389,335) (24,692) ------------------------------- -- -- ===============================
11. COMMITMENTS The Corporation is committed to the following rental payments under various equipment leases:
$ ------------- 2001 82,820 2002 53,958 2003 55,812 2004 21,404 2005 5,351 25 E-Trend Networks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENT September 30, 2000 (expressed in U.S. dollars) ------------- 219,345 =============
12. SUBSEQUENT EVENT On November 3, 2000, the Corporation entered into a letter of intent to be acquired, by way of a share exchange and reorganization, by Cool Entertainment Inc. The Corporation will be the successor company after conclusion of the proposed transaction. 26 Pro Forma Consolidated Financial Statements of E-TREND NETWORKS, INC. Period ended December 31, 2000 (Unaudited) 27 E-TREND NETWORKS, INC. Pro Forma Consolidated Balance Sheet December 31, 2000 (Unaudited) (Expressed in U.S. Dollars)
Pro forma adjustments Cool and E-Trend Entertainment, eliminating Pro forma Networks, Inc. Inc. entries consolidated (note 3 (a)) Assets Current assets: Cash and cash equivalents $ 1,451,102 $ 205 $ (23,000) 2(d) $ 1,428,307 Accounts receivable 307,099 90 - 307,189 Inventory 104,068 - - 104,068 Prepaid expenses 4,995 - - 4,995 Note receivable from shareholder 333,300 - - 333,300 ------------- ------------- ------------- ------------- 2,200,564 295 (23,000) 2,177,859 Investment 217,169 - - 217,169 Due from related company 356,706 - - 356,706 Property and equipment 296,400 10,940 68,000 2(d) 375,340 Goodwill 180,086 - - 180,086 ------------- ------------- ------------- ------------- $ 3,250,925 $ 11,235 $ 45,000 $ 3,307,160 ============= ============= ============= ============= Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Bank indebtedness $ 82,547 $ - $ - $ 82,547 Demand loan 333,300 - - 333,300 Accounts payable and accrued liabilities 434,083 72,646 506,729 Payable to related party - 93,789 (51,544) 2(e) 42,245 Promissory note - - 45,000 2(d) - (45,000) 2(d) ------------- ------------- ------------- ------------- 849,930 166,435 (51,544) 964,821 Shareholders' equity (deficiency): Common stock 8,854 13,488,710 (13,488,710) 2(b) 105,398 45,000 2(d) 51,544 2(e) Additional paid-in capital 3,601,406 11,166 (11,166) 2(b) 3,601,406 Deficit (1,281,937) (13,655,076) (155,200) 2(b) (1,437,137) 13,655,076 2(b) Cumulative translation adjustment 6,188 - - 6,188 Unrealized gain from investment 66,484 - - 66,484 ------------- ------------- ------------- ------------- 2,400,995 (155,200) 96,544 2,342,339 ------------- ------------- ------------- ------------- $ 3,250,925 $ 11,235 $ 45,000 $ 3,307,160 ============= ============= ============= =============
See accompanying notes to pro forma consolidated financial statements. 28 E-TREND NETWORKS, INC. Pro Forma Consolidated Statement of Operations Year ended September 30, 2000 (Unaudited) (Expressed in U.S. Dollars)
Cool E-Trend Entertainment, Pro forma Pro forma Networks, Inc. Inc. adjustments consolidated (note 3(b)) Sales $ 665,075 $ 3,518 $ - $ 668,593 Cost of sales 503,938 3,092 - 507,030 ------------- ------------- ------------- ------------- 161,137 426 - 161,563 Interest income 89,925 79 - 90,004 Operating expenses: Operating and development 436,764 12,639,635 - 13,076,399 Management fees - 347,064 - 347,064 General and administrative 435,745 461,097 - 896,842 Depreciation 31,756 16,754 16,000 64,510 Amortization of goodwill 20,329 - - 20,329 Advertising costs 108,703 - - 108,703 Sales and marketing 28,921 - - 28,921 ------------- ------------- ------------- ------------- 1,062,218 13,464,550 16,000 14,542,768 ------------- ------------- ------------- ------------- Net loss for the period $ (811,156) $(13,464,045) $ (16,000) $(14,291,201) ------------- ------------- ------------- ------------- Net loss per common share, basic $ - $ (0.36) $ - $ (2.94) ============= ============= ============= ============= Weighted average common shares outstanding, basic - 37,200,888 - 4,853,876 ============= ============= ============= =============
See accompanying notes to pro forma consolidated financial statements. 29 E-TREND NETWORKS, INC. Pro Forma Consolidated Statement of Operations Three months ended December 31, 2000 (Unaudited) (Expressed in U.S. Dollars)
Cool E-Trend Entertainment, Pro forma Pro forma Networks, Inc. Inc. adjustments consolidated (note 3(b)) Sales $ 454,517 $ - $ - $ 454,517 Cost of sales 397,187 - - 397,187 ------------- ------------- ------------- ------------- 57,330 - - 57,330 Interest and other income 43,222 73 - 43,295 Operating expenses: Operating and development 173,698 14,947 - 188,645 Management fees - 41,341 - 41,341 General and administrative 257,890 13,813 - 271,703 Depreciation 10,226 3,706 2,700 16,632 Amortization of goodwill 3,332 - - 3,332 Advertising costs 17,639 - - 17,639 Sales and marketing 53,209 - - 53,209 ------------- ------------- ------------- ------------- 515,994 73,807 2,700 592,501 ------------- ------------- ------------- ------------- Net loss for the period $ (415,442) $ (73,734) $ (2,700) $ (491,876) ============= ============= ============= ============= Net loss per common share, basic $ - $ (0.00) $ - $ (0.10) ============= ============= ============= ============= Weighted average common shares outstanding, basic - 37,950,611 - 4,862,642 ============= ============= ============= =============
See accompanying notes to pro forma consolidated financial statements. 30 E-TREND NETWORKS, INC. Notes to Pro Forma Consolidated Financial Statements, page 3 Three months ended December 31, 2000 (Unaudited) (Expressed in U.S. Dollars) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION: These pro forma consolidated financial statements give effect to the arrangement that closed on February 21, 2001 between E-Trend Networks, Inc. ("E-Trend") and Cool Entertainment, Inc. ("Cool") which will result in the exchange by the shareholders of E-Trend of all of its issued and outstanding common shares for 4,441,867 common shares of Cool. These pro forma consolidated financial statements are not necessarily indicative of what the financial position or results of operations would have been if the transactions described below had been completed at the dates indicated or purport to be indicative of the results that may be expected in the future. The pro forma consolidated financial statements have been prepared from: (a) the audited financial statements of E-Trend for the year ended September 30, 2000; (b) the unaudited interim financial statements of E-Trend as at and for the three months ended December 31, 2000; (c) the audited financial statements of Cool for the year ended June 30, 2000; (d) the unaudited interim financial statements of Cool for the three months ended September 30, 2000; (e) the unaudited interim financial statements of Cool as at and for the three and six months ended December 31, 2000; (f) the additional information set out in notes 2 and 3. The pro forma consolidated financial statements should be read in conjunction with the financial statements of E-Trend and Cool referred to above. 2. PRO FORMA TRANSACTIONS: The pro forma consolidated financial statements give effect to the following transactions relating to the proposed arrangement between E-Trend and Cool: (a) a redomiciliation of Cool to Delaware followed by a 1 for 100 reverse stock split of Cool's outstanding common stock; (b) issuance of 4,441,867 common shares of Cool to the shareholders of E-Trend in exchange for all of the issued and outstanding shares of E-Trend; 31 E-TREND NETWORKS, INC. Notes to Pro Forma Consolidated Financial Statements, page 3 Three months ended December 31, 2000 (Unaudited) (Expressed in U.S. Dollars) 2. PRO FORMA TRANSACTIONS (CONTINUED): (c) at the closing date, each unexpired and unexercised outstanding stock option of E-Trend will be assumed by Cool. Each option assumed shall be subject to the same terms and conditions as the existing E-Trend options. As at December 31, 2000 E-Trend had 1,488,000 options outstanding at a weighted average exercise price of $2.01 per option of which 9,700 were exercisable at a weighted average exercise price of $1.26 per option. (d) the cash payment of $23,000 (Cdn $35,000) and the issuance of a promissory note of $45,000 by E-Trend to Fictional Media Inc., a company controlled by stockholders of Cool, in exchange for property and equipment, and the repayment of the note for consideration equal to 15,000 common shares of Cool upon completion of the proposed arrangement. (e) the repayment of a portion of the payable to related party, being Fictional Media Inc., for consideration assumed to be equal to 25,000 common shares of Cool upon completion of the proposed arrangement. On completion of these transactions, Cool proposes to change its name to E-Trend Networks, Inc. 3. PRO FORMA ASSUMPTIONS: (a) Pro forma consolidated balance sheet: The pro forma consolidated balance sheet gives effect to the transactions described in note 2 as if they had occurred on December 31, 2000. As a result of the issuance of Cool's shares on the arrangement, the former shareholders of E-Trend will gain control over Cool. For accounting purposes, this business combination will be accounted for by the purchase method as a reverse-take-over transaction with E-Trend identified as the acquiror and Cool identified as the acquired business. For purposes of these pro forma consolidated financial statements, the fair value of the net assets acquired is equal to their book values. The excess of the value assigned to the liabilities assumed over the assets acquired of $155,200 has been recognized as a capital transaction and charged directly to deficit. 32 E-TREND NETWORKS, INC. Notes to Pro Forma Consolidated Financial Statements, page 3 Three months ended December 31, 2000 (Unaudited) (Expressed in U.S. Dollars) 3. PRO FORMA ASSUMPTIONS (CONTINUED): (b) Pro forma consolidated statements of operations: The pro forma consolidated statements of operations give effect to the transactions described in note 2 as if they had occurred at the beginning of the respective periods presented. As the values assigned to the net assets acquired equal their book values, no adjustments are required to recognize impacts of the business combination. The pro forma consolidated statements of operations include an adjustment for depreciation of the acquired equipment described in note 2(d) as follows:
Three months ended December 31, 2000 $ 2,700 Year ended September 30, 2000 16,000
4. SHARE CAPITAL:
Number of shares Amount Authorized: 20,000,000 Common shares, no par value Issued: Balance before transaction per Cool financial statements 38,340,636 $ 13,488,710 Reverse stock split 1 for 100 (37,957,230) - ------------ ------------- 383,406 13,488,710 Shares issued at fair value to purchase all issued and outstanding shares of E-Trend 4,441,867 - Adjustments of Cool share capital to comply with reverse-take-over accounting: Elimination of Cool share capital - (13,488,710) E-Trend share capital - 8,854 Issued on settlement of note payable (note 2(d)) 15,000 45,000 Issued on settlement of payable to related party (note 2(e)) 25,000 51,544 ------------ ------------- Pro-forma balance, December 31, 2000 4,865,273 $ 105,398 ============ =============
The pro forma consolidated financial statements reflect a reduction in authorized share capital to 20,000,000 common shares on April 20, 2001. 33 Pro Forma Consolidated Financial Statements of COOL ENTERTAINMENT, INC. Period ended September 30, 2000 (Unaudited) 34 COOL ENTERTAINMENT, INC. Pro Forma Consolidated Balance Sheet (Unaudited) (Expressed in U.S. Dollars) As at September 30, 2000
=============================================================================================================== Pro forma adjustments Cool and Cool Entertainment, E-Trend eliminating Entertainment, Inc. Networks, Inc. entries Inc. --------------------------------------------------------------------------------------------------------------- (note 3 (a)) Assets Current assets: Cash and cash equivalents $ - $ 1,791,343 $ (23,000) 2(d) $ 1,768,343 Accounts receivable 90 69,583 - 69,673 Inventory - 40,344 - 40,344 Due from related company - 207,716 - 207,716 Prepaid expenses - 773 - 773 ---------------------------------------------------------------------------------------------------------- 90 2,109,759 (23,000) 2,086,849 Investment - 232,382 - 232,382 Due from related company - 231,709 - 231,709 Property and equipment 14,644 266,641 68,000 2(d) 349,285 Goodwill - 175,169 - 175,169 --------------------------------------------------------------------------------------------------------------- $ 14,734 $ 3,015,660 $ 45,000 $ 3,075,394 =============================================================================================================== Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Bank indebtedness $ 1,030 $ - $ - $ 1,030 Accounts payable and accrued liabilities 43,626 201,585 - 245,211 Payable to related party 51,544 - (51,544) 2(e) - Promissory note - - 45,000 2(d) - (45,000) 2(d) - ---------------------------------------------------------------------------------------------------------- 96,200 201,585 (51,544) 246,241 Shareholders' equity (deficiency): Common stock 13,388,710 8,854 (13,388,710) 2(b) 105,398 45,000 2(d) 51,544 2(e) Additional paid-in capital 111,166 3,601,406 (111,166) 2(b) 3,601,406 Deficit (13,581,342) (866,495) (81,466) 2(b) (947,961) 13,581,342 2(b) Cumulative translation adjustment - (18,792) - (18,792) Unrealized gain from investment - 89,102 - 89,102 ---------------------------------------------------------------------------------------------------------- (81,466) 2,814,075 96,544 2,829,153 --------------------------------------------------------------------------------------------------------------- $ 14,734 $ 3,015,660 $ 45,000 $ 3,075,394 ===============================================================================================================
See accompanying notes to pro forma consolidated financial statements. 35 COOL ENTERTAINMENT, INC. Pro Forma Consolidated Statement of Operations and Deficit (Unaudited) (Expressed in U.S. Dollars) Year ended June 30, 2000
=============================================================================================================== Cool E-Trend Entertainment, Networks, Pro forma Pro forma Inc. Inc. adjustments consolidated --------------------------------------------------------------------------------------------------------------- (note 3(b)) Sales $ 3,178 $ 665,075 $ - $ 668,253 Cost of sales 2,765 503,938 - 506,703 --------------------------------------------------------------------------------------------------------------- 413 161,137 - 161,550 Interest income - 89,925 - 89,925 Operating expenses: Operating and development 12,612,461 436,764 - 13,049,225 Management fees 261,945 - - 261,945 General and administrative 418,151 435,745 - 853,896 Depreciation 13,049 31,756 16,000 60,805 Amortization of goodwill - 20,329 - 20,329 Advertising costs - 108,703 - 108,703 Sales and marketing - 28,921 - 28,921 ------------------------------------------------------------------------------------------------------------ 13,305,606 1,062,218 16,000 14,383,824 --------------------------------------------------------------------------------------------------------------- Net loss for the period $ (13,305,193) $ (811,156) $ (16,000) $ (14,132,349) =============================================================================================================== Net loss per common share, basic $ (0.52) $ - - $ (2.98) =============================================================================================================== Weighted average common shares outstanding, basic 25,383,924 - - 4,735,706 ===============================================================================================================
See accompanying notes to pro forma consolidated financial statements. 36 COOL ENTERTAINMENT, INC. Pro Forma Consolidated Statement of Operations and Deficit (Unaudited) (Expressed in U.S. Dollars) Three months ended September 30, 2000
=============================================================================================================== Cool E-Trend Entertainment, Networks, Pro forma Pro forma Inc. Inc. adjustments consolidated --------------------------------------------------------------------------------------------------------------- (note 3(b)) Sales $ 340 $ 259,637 $ - $ 259,977 Cost of sales 327 189,406 - 189,733 --------------------------------------------------------------------------------------------------------------- 13 70,231 - 70,244 Interest and other income 79 47,151 - 47,230 Operating expenses: Operating and development 27,174 155,156 - 182,330 Management fees 85,119 - - 85,119 General and administrative 42,946 149,951 - 192,897 Depreciation 3,705 5,000 3,000 11,705 Amortization of goodwill - 4,540 - 4,540 Advertising costs - 46,766 - 46,766 Sales and marketing - 16,835 - 16,835 --------------------------------------------------------------------------------------------------------------- 158,944 378,248 3,000 540,192 --------------------------------------------------------------------------------------------------------------- Net loss for the period $ (158,852) $ (260,866) $ (3,000) $ (422,718) =============================================================================================================== Net loss per common share, basic $ (0.00) $ - - $ (0.09) =============================================================================================================== Weighted average common shares outstanding, basic 37,672,890 - - 4,858,596 ===============================================================================================================
See accompanying notes to pro forma consolidated financial statements. 37 COOL ENTERTAINMENT, INC. Notes to Pro Forma Consolidated Financial Statements (Unaudited) (Expressed in U.S. Dollars) ================================================================================ 1. BASIS OF PRESENTATION: The accompanying pro forma consolidated financial statements have been compiled for purposes of inclusion in the information statement for the special meeting of shareholders of Cool Entertainment, Inc. (the "Company") to be held on January 26, 2001. The pro forma consolidated financial statements give effect to the proposed arrangement between the Company and E-Trend Networks, Inc. ("E-Trend") which will result in the exchange by the shareholders of E-Trend of all of its issued and outstanding common shares for 4,441,867 common shares of the Company. These pro forma consolidated financial statements are not necessarily indicative of what the financial position or results of operations would have been if the transactions described below had been completed at the dates indicated or purport to be indicative of the results that may be expected in the future. The pro forma consolidated financial statements have been prepared from: (a) the audited financial statements of the Company for the year ended June 30, 2000; (b) the unaudited financial statements of the Company as at and for the three months ended September 30, 2000; (c) the audited financial statements of E-Trend as at and for the year ended September 30, 2000; (d) unaudited internal financial information of E-Trend for the three months ended September 30, 2000; and (e) the additional information set out in notes 2 and 3. The consolidated financial statements should be read in conjunction with the financial statements of the Company and E-Trend included elsewhere herein. 2. PRO FORMA TRANSACTIONS: The pro forma consolidated financial statements give effect to the following transactions relating to the proposed arrangement between the Company and E-Trend: (a) a redomiciliation of the Company to Delaware followed by a 1 for 100 reverse stock split of Cool's outstanding common stock; (b) issuance of 4,441,867 common shares of Cool to the shareholders of E-Trend in exchange for all of the issued and outstanding common shares of E-Trend; and (c) at the closing date each unexpired and unexercised outstanding stock option of E-Trend will be assumed by the Company. Each option assumed shall be subject to the same terms and conditions as the existing E-Trend options. As at September 30, 2000, E-Trend had 1,438,000 options outstanding at a weighted average exercise price of $1.99 per option of which 9,700 were exercisable at a weighted average exercise price of $1.26 per option. 38 COOL ENTERTAINMENT, INC. Notes to Pro Forma Consolidated Financial Statements, page 2 (Unaudited) (Expressed in U.S. Dollars) Period ended September 30, 2000 ================================================================================ (d) the cash payment of $23,000 (Cdn $35,000) and the issuance of a promissory note of $45,000 by E-Trend to Fictional Media Inc., a company controlled by stockholders of Cool, is in exchange for property and equipment, and the repayment of the note for consideration equal to 15,000 common shares of Cool upon completion of the proposed arrangement. (e) The repayment of the payable to related party, being Fictional Media Inc., for consideration assumed to be equal to 25,000 common shares of Cool upon completion of the proposed arrangement. On completion of these transactions, the Company proposes to change its name to E-Trend Networks, Inc. 3. PRO FORMA ASSUMPTIONS: (a) Pro forma consolidated balance sheet: The pro forma consolidated balance sheet gives effect to the transactions described in note 2 as if they had occurred on September 30, 2000. As a result of the issuance of the Company's shares on the arrangement, the former shareholders of E-Trend will gain control over the Company. For accounting purposes, this business combination will be accounted for by the purchase method as a reverse take-over transactions with E-Trend identified as the acquiree and the Company identified as the acquired business. For purposes of these pro forma consolidated financial statements, the fair value of the net assets acquired is equal to their book values. The excess of the value assigned to the liabilities assumed over the assets acquired of $81,466 has been recognized as a capital transaction and charged directly to deficit. (b) Pro forma consolidated statements of operations: The pro forma consolidated statements of operations give effect to the transactions described in note 2 as if they had occurred at the beginning of the periods presented. As the values assigned to the net assets acquired equal their book values, no adjustments are required to recognize impacts of the business combination. The pro forma consolidated statements of operations include an adjustment for depreciation of the acquired equipment described in note 2(c) as follows: Three months ended September 30, 2000 $ 3,000 Year ended June 30, 2000 16,000 39 COOL ENTERTAINMENT, INC. Notes to Pro Forma Consolidated Financial Statements, page 3 (Unaudited) (Expressed in U.S. Dollars) Period ended September 30, 2000 ================================================================================ 4. SHARE CAPITAL:
========================================================================================================== Number of shares Amount ---------------------------------------------------------------------------------------------------------- Authorized: 100,000,000 Common shares, no par value Issued: Balance before transaction per Cool financial statements 37,752,401 $ 13,388,710 Reverse stock split 1 for 100 (37,374,877) - ------------------------------------------------------------------------------------------------------ 377,524 13,388,710 Shares issued at fair value to purchase all issued and outstanding shares of E-Trend 4,441,867 - Adjustments of Cool share capital to comply with reverse take-over accounting: Elimination of Cool share capital - (13,388,710) E-Trend share capital - 8,854 Issued on settlement of note payable 15,000 45,000 Issued on settlement of payable to related party 25,000 51,544 ---------------------------------------------------------------------------------------------------------- Pro forma balance, September 30, 2000 4,859,391 $ 105,398 ==========================================================================================================
40