-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mh4MROhz7ONctvTQZQP8intqFQn0NQTP4wWRYTz2U3nhZCMgA7vmjMRuSiOZkMyv 0cjQ6Sep7P4228jG3NTREw== 0000891554-02-003668.txt : 20020524 0000891554-02-003668.hdr.sgml : 20020524 20020524172837 ACCESSION NUMBER: 0000891554-02-003668 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020315 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 20020524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHELL GROUP CORP CENTRAL INDEX KEY: 0000797313 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 112805051 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18066 FILM NUMBER: 02662786 BUSINESS ADDRESS: STREET 1: 14 METEOR DR STREET 2: BLDG 18 CITY: ETOBICOKE ONTARIO STATE: A6 ZIP: M9W 1A4 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR STREET 2: ETOBICOKE CITY: ONTARIO CANADA STATE: A6 ZIP: M9W 1A4 FORMER COMPANY: FORMER CONFORMED NAME: NTN CANADA INC DATE OF NAME CHANGE: 19961016 FORMER COMPANY: FORMER CONFORMED NAME: TRIOSEARCH INC DATE OF NAME CHANGE: 19880718 FORMER COMPANY: FORMER CONFORMED NAME: NETWORKS NORTH INC DATE OF NAME CHANGE: 19980811 8-K/A 1 d37443_8k-a.txt CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) March 15, 2002 CHELL GROUP CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 005-524525 112805051 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 14 METEOR DRIVE, TORONTO, ONTARIO CANADA, M9W 1A4 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (416) 675-6666 (Former name or former address, if changed since last report.) Item 2. Acquisition or Disposition of Assets On March 15, 2002, Chell Group Corporation (the "Company") closed the Share Purchase Agreement (the "Agreement") dated as of December 13, 2001, as amended, by and among the Company, Chell Merchant Capital Group, Inc., a wholly-owned subsidiary of the Company (the "Buyer"), Melanie Johannesen, Randy Baxandall, Morris Chynoweth, Elaine Chynoweth, the Johannesen Family Trust, the Baxandall Family Trust, the Merc Family Trust, Logicorp Data Systems Ltd. ("Logicorp Data"), 123557 Alberta Ltd. ("123557"), Logicorp Service Group Ltd. ("Logicorp Group") and 591360 Alberta Ltd. ("591360"). Although not required by New York corporate law, the transaction is subject to shareholder approval for purposes of compliance with Nasdaq Marketplace Rule 4350(i)(1)(D)(ii). Mr. Cameron Chell, the Company's Chief Executive Officer, has executed an irrevocable proxy on behalf of Chell.com, Ltd., the Company's majority shareholder as of the record date set for the upcoming Shareholders' Meeting agreeing to vote its shares to approve the Logicorp transaction at the shareholders' meeting at which such approval will be submitted to the shareholders for ratification. Pursuant to the Logicorp transaction, the Company acquired all of the issued and outstanding securities of Logicorp Data, 123557, Logicorp Group and 591360 (the "Logicorp Securities"). In consideration for such acquisition, in addition to cash payments in the amount of Cdn$1,500,000 and the issuance of Promissory Notes in the amount of Cdn$2,540,000, the Company is issuing to the former shareholders of the Logicorp Securities five million three hundred fifty five thousand (5,355,000) exchangeable shares of the Company's wholly-owned subsidiary Chell Merchant Capital Group ("CMCG"), which are being valued for purposes of the transaction at US$1.20 per share, representing the market price of the Company's shares on the effective date of the Agreement (the "Exchangeable Shares"). Accordingly, such issuance has resulted in an increase of US$6,426,000 million dollars in the Company's shareholders' equity. The Exchangeable Shares are exchangeable into shares of the Company's Common Stock on a one for one basis upon the occurrence of the events set forth below and have the same voting rights in the Company as if the Exchangeable Shares were exchanged for Common Stock of the Company. Upon filing a registration statement for 2,677,500 shares of its common stock within six (6) months from the Effective Date and for a further 2,677,500 shares of its common stock within one (1) year from the Effective Dat pursuant to a Registration Rights Agreement, and subject to the rights, privileges, restrictions and conditions set forth in the Articles of Incorporation of Chell Merchant Capital Group, as amended: (a) each of the Sellers may from time to time and at any time thereafter exercise their right to exchange their respective Chell Merchant Capital shares, or such number thereof as they determine, for the Company shares set forth in each registration statement, on a one-for-one basis, (b) the Chell Merchant Capital Group and the Company shall not exchange any Chell Merchant Capital Group Shares for Company Shares without first receiving notice to do so from the Seller or the trustee of the Seller holding the Chell Merchant Capital Group Shares, and then only for such number of shares set forth in such notice, and (c) subject to the filing of the respective registration 2 statements pursuant to the Registration Rights Agreement, each Seller may give one or more notices to the Company for all or any portion of the Chell Merchant Capital Group's Shares. The Exchangeable Shares have voting rights in the Company equivalent to the number of shares into which they are exchangeable and are exchangeable into shares of the Company's Common Stock on a one for one basis upon the occurrence of certain events. In addition, the Exchangeable Shares were deposited in escrow at the closing of the transaction and will not be released until the shareholders of the Company ratify the Logicorp transaction and approve the issuance of the shares of the Common Stock of the Company issuable upon the exchange of the Exchangeable Shares. While the Exchangeable Shares are in escrow, the holders of the Exhangeable Shares are not entitled to vote, transfer or encumber such shares, nor are they entitled to dividends. Attached as Exhibit "99.1" and made a part hereof is a schedule of the holders of the Exchangeable Shares. We have been advised that such holders do not have an agreement with each other with respect to the voting of the Company's shares. No shareholder or related shareholders are receiving a number of Exchangeable Shares which upon conversion into shares of Common Stock of the Company will be in excess of approximately 12% of the number of issued and outstanding shares of Common Stock of the Company. Attached hereto and made a part hereof are Pro Forma financial statements with respect to the Logicorp transaction as of August 31, 2001 the last day of the Company's last fiscal year and December 31, 2001. Item 7. Financial Statements and Exhibits Set forth below is a list of the Exhibits applicable to this Current Report on Form 8-K numbered in accordance with Item 601 of Regulation S-K. (a) Financial Statements of the businesses in which the Registrant acquired securities. Balance sheet and statements of income and cash flows of Logicorp Data Systems, Ltd., Logicorp Service Group, Ltd. and 591360 Alberta Ltd. for the fiscal years ended June 30, 2001 and 2000 and 123557 Alberta Ltd for the fiscal years ended October 31, 2001 and 2000. (b) Pro forma financial data reflecting the combination of the Company and Logicorp Data, 123557, Logicorp Group and 591360 for the periods ended August 31, 2001 and February 28 , 2002. 3 (c) Set forth below is a list of the Exhibits applicable to this Current Report on Form 8-K, numbered in accordance with Item 601 of Regulation S-K. Exhibit "2.1" Share Purchase Agreement by and among Chell Group Corporation, Chell Merchant Capital Group, Inc., Melanie Johannesen, Randy Baxandall, Morris Chynoweth, Elaine Chynoweth, the Johannesen Family Trust, the Baxandall Family Trust, the Merc Family Trust, Logicorp Data Systems Ltd., 123557 Alberta Ltd., Logicorp Service Group Ltd. and 591360 Alberta Ltd. + Exhibit 99.1 Resolution of the Directors of Chell Merchant Capital Group, Inc. + Incorporated by reference. See Exhibit Index 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. Chell Group Corporation a New York Corporation Date: May 22, 2002 By: /s/ Don Pagnutti ------------------------------------- Don Pagnutti, Chief Financial Officer 5 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------- ---------------------- 2.1 Share Purchase Agreement by and among Chell Group Corporation, Chell Merchant Capital Group, Inc., Melanie Johannesen, Randy Baxandall, Morris Chynoweth, Elaine Chynoweth, the Johannesen Family Trust, the Baxandall Family Trust, the Merc Family Trust, Logicorp Data Systems Ltd., 123557 Alberta Ltd., Logicorp Service Group Ltd. and 591360 Alberta Ltd.+ 99.1 Resolution of the Directors of Chell Merchant Capital Group, Inc.++ + All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's Form 8-KA (Date of Report: January 22, 2002) (File No. 0-18066), filed with the Securities and Exchange Commission on January 22, 2002. ++ All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's Form 8-K/A (Date of Report: March 15, 2002) (File No. 0-18066), filed with the Securities and Exchange Commission on March 21, 2002. 6 EXHIBIT "A" ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ FINANCIAL STATEMENTS JUNE 30, 2001 [LOGO] LOGICORP ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ JUNE 30, 2001 CONTENTS Page ---- AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statement of Loss and Retained Earnings 3 Statement of Cash Flows 4 Notes to Financial Statements 5 - 9 Schedule of Direct Selling Expenses 10 Grant Thornton LLP Chartered Accountants [LOGO] Canadian Member Firm of Grant Thornton International Auditors' Report To the Directors of Logicorp Service Group Ltd. We have audited the balance sheet of Logicorp Service Group Ltd. as at June 30, 2001 and the statements of loss and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Canada and the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at June 30, 2001 and the results of its opoerations and cash flows for the year then ended in conformity with accounting principles generally accepted in Canada and the United States of America. Edmonton, Canada /s/ Grant Thornton LLP September 6, 2001 Chartered Accountants 2400 Scotia Place 1 10060 Jasper Avenue Edmonton, Alberta T5J 3R8 Tel: (780) 422-7114 Fax: (780) 426-3208 e-mail: edmonton@GrantThornton.ca ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ BALANCE SHEET AS AT JUNE 30 ASSETS 2001 2000 - -------------------------------------------------------------------------------- CURRENT Accounts receivable (Note 2) $ 8,536,751 $ 7,722,714 Inventory (Note 3) 733,139 812,832 Income taxes receivable 35,693 37,945 Prepaid expenses 99,227 121,316 - -------------------------------------------------------------------------------- 9,404,810 8,694,807 CAPITAL ASSETS (Note 4) 2,173,535 1,751,837 - -------------------------------------------------------------------------------- $11,578,345 $10,446,644 ================================================================================ LIABILITIES CURRENT Bank indebtedness (Note 5) $ 3,322,930 $ 2,270,523 Accounts payable and accrued liabilities 5,882,472 6,217,742 Current portion of amounts Due to RCA Trusts 48,000 48,000 - -------------------------------------------------------------------------------- 9,253,402 8,536,265 DUE TO AFFILIATED COMPANY (Note 6) 561,532 524,445 DUE TO RCA TRUSTS (Note 7) 1,020,454 863,195 DUE TO RELATED PARTIES (Note 8) 298,628 73,628 - -------------------------------------------------------------------------------- 11,134,016 9,997,533 - -------------------------------------------------------------------------------- SHAREHOLDER'S EQUITY SHARE CAPITAL (Note 9) 99 99 RETAINED EARNINGS 444,230 449,012 - -------------------------------------------------------------------------------- 444,329 449,111 - -------------------------------------------------------------------------------- $11,578,345 $10,446,644 ================================================================================ Commitments (Note 11) APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director 2. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ STATEMENT OF LOSS AND RETAINED EARNINGS FOR THE PERIOD ENDED JUNE 30 2001 2000 (12 Months) (4 Months) - -------------------------------------------------------------------------------- SALES $ 60,460,114 $18,989,310 COST OF SALES 56,912,928 17,878,719 - -------------------------------------------------------------------------------- GROSS PROFIT 3,547,186 1,110,591 SELLING EXPENSES (Page 10) 1,417,906 514,761 - -------------------------------------------------------------------------------- EARNINGS FROM OPERATIONS 2,129,280 595,830 GENERAL AND ADMINISTRATIVE EXPENSES Advertising and promotion 55,706 25,267 Amortization 86,350 9,954 Insurance 34,773 13,887 Interest and bank charges 538 4 Licences, memberships and taxes 16,959 3,850 Office expenses 58,668 9,789 Professional fees 95,554 59,852 Rent 105,333 29,661 Salaries and benefits 1,155,525 338,093 Telephone 22,465 5,590 Training 24,668 3,736 Travel 69,801 24,757 - -------------------------------------------------------------------------------- NET EARNINGS BEFORE OTHER REVENUE AND (EXPENSE) 1,726,340 524,440 - -------------------------------------------------------------------------------- 402,940 71,390 OTHER REVENUE AND (EXPENSE) Interest revenue 3,593 2,791 Retirement compensation agreements (400,000) -- - -------------------------------------------------------------------------------- NET EARNINGS BEFORE INCOME TAX 6,533 74,181 PROVISION FOR INCOME TAXES 11,315 7,903 - -------------------------------------------------------------------------------- NET (LOSS) EARNINGS (4,782) 66,278 RETAINED EARNINGS, beginning of year 449,012 382,734 - -------------------------------------------------------------------------------- RETAINED EARNINGS, end of year $ 444,230 $ 449,012 ================================================================================ 3. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30 2001 2000 (12 Months) (4 Months) - ------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES Net (loss) Earnings $ (4,782) $ 66,278 Items not requiring an outlay of cash: Amortization 249,336 69,005 - ------------------------------------------------------------------------------- 244,554 135,283 CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable (814,037) 1,089,473 Inventories 79,693 (110,692) Prepaid expenses and deferred charges 22,089 (40,512) Accounts payable and accrued liabilities (335,270) (1,591,078) Income taxes payable 2,252 1,583 - ------------------------------------------------------------------------------- (800,719) (515,943) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Advances from (to) shareholders 225,000 -- Advances from related parties 37,087 (240,126) Increase (decrease) in Due to RCA Trusts 157,259 (38,353) - ------------------------------------------------------------------------------- 1,471,753 578,424 - ------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (671,034) (62,481) - ------------------------------------------------------------------------------- INCREASE IN CASH -- -- CASH AND CASH EQUIVALENTS, beginning of year -- -- - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ -- $ -- =============================================================================== 4. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of operations The company is a computer service organization which specializes in the supply and integration of computer products, with branches in Vancouver, Calgary, Edmonton and Saskatoon. The company serves both large and small organizations and is particularly valued by organizations having complex data and communication configurations. (b) Cash and Cash equivalents Cash and cash equivalents include cash on hand and balances with bank. (c) Inventory Inventory is valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. (d) Capital Assets Capital assets are recorded at cost. Amortization is provided annually at rates calculated to write-off the assets over their estimated useful lives as follows: Automotive equipment 30% diminishing balance Computer equipment 30% diminishing balance Computer software 30% diminishing balance Leasehold improvements 20% diminishing balance Office equipment 20% diminishing balance Small tools 100% diminishing balance (e) Revenue Recognition For product sold, revenue is recognized when the product is shipped. For maintenance contracts, revenue is recognized when the service has been provided. (f) Use of Estimates In preparing the company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. 5. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 2. ACCOUNTS RECEIVABLE 2001 2000 ------------------------------------------------------------------------- Trade accounts receivable 8,591,938 7,722,714 Allowance for doubtful accounts (55,187) -- ------------------------------------------------------------------------- 8,536,751 7,722,714 ========================================================================= 3. INVENTORY 2001 2000 ------------------------------------------------------------------------- Inventory for resale 825,231 890,863 Provision for obsolete inventory (92,092) (78,031) ------------------------------------------------------------------------- 733,139 812,832 ========================================================================= 4. CAPITAL ASSETS
2001 2000 Accumulated Net Book Net Book Cost Amortization Value Value ---------------------------------------------------------------------------------------------- Automobiles $ 23,300 $ 12,027 $ 11,273 $ 318 Computer equipment 1,159,056 332,860 826,196 923,767 Computer software 888,611 28,985 859,626 325,399 Leasehold improvements 142,004 60,883 81,121 80,531 Office furniture and equipment 662,885 267,566 395,319 421,822 Small tools 791 791 -- -- ---------------------------------------------------------------------------------------------- $2,876,647 $ 703,112 $2,173,535 $1,751,837 ==============================================================================================
5. BANK INDEBTEDNESS Bank indebtedness bears interest at 7.07% and consists of the following: 2001 2000 ------------------------------------------------------------------------- Bank overdraft $ 927,112 $ 615,523 Operating line of credit 2,395,818 1,655,000 ------------------------------------------------------------------------- $3,322,930 $2,270,523 ========================================================================= 6. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- As collateral for the bank indebtedness the company has provided a General Security Agreement, a guarantee and postponement of claim for amounts owed to Directors, related companies and RCA Trusts. in addition, the company's Directors have provided guarantees in the amount of $1,050,000. Credit available under the operating line of credit is $3,000,000. The operating line of credit is reviewed annually by the bank. The next scheduled review date is Nov 30, 2001. 6. DUE TO AFFILIATED COMPANY The amounts due to Logicorp Service Group Inc. are unsecured, non-interest bearing and have no specific terms of repayment. 7. DUE TO RCA TRUSTS The retirement compensation trusts were set up pursuant to section 248(1) of the Income Tax Act of Canada to provide retirement income to the three individuals who own Logicorp. Logicorp has no current or future obligation to fund theses trusts other than the obligation stated here.
2001 2000 -------------------------------------------------------------------------------------------- Amounts due to retirement compensation agreements (RCA) trusts $1,068,454 $911,195 Less amounts due within one year 48,000 48,000 -------------------------------------------------------------------------------------------- $1,020,454 $863,195 ============================================================================================
The amounts due to the RCA Trusts are secured by promissory notes repayable in quarterly installments of $12,000 plus interest at prime + 4 3/4%. Estimated principal repayments in each of the next five years is as follows: 2002 $ 48,000 2003 48,000 2004 48,000 2005 48,000 Subsequent 876,454 8. DUE TO RELATED PARTIES Amounts due to related parties are unsecured, non-interest bearing and have no specific terms of repayment. 2001 2000 ------------------------------------------------------------------------- Due to (from) Directors $ 19,794 $ (55,206) Due to Director's Family Trusts 200,000 100,000 Due to other related parties 78,834 28,834 ------------------------------------------------------------------------- $298,628 $ 73,628 ========================================================================== 7. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 9. SHARE CAPITAL Class A common voting shares Class B common voting shares Class C preferred shares 2001 2000 ------------------------------------------------------------------------- Issued 1,980 Class A common voting shares $ 99 $ 99 ========================================================================= 10. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Service Group Inc. by virtue of common control. During the year the company purchased services from Logicorp Service Group Inc. and charged fees to Logicorp Service Group Inc. as follows: 2001 2000 - ------------------------------------------------------------------------------- Services Purchased 1,674,325 $ 633,456 Administrative support charged $ 780,392 $ 474,000 The administrative support consists of rent allocation, business taxes, insurance, administrative wages and other administration charges paid by the company on behalf of Logicorp Service Group Ltd.. 11. LEASE COMMITMENTS The company leases office space and equipment for its operations in Edmonton, Calgary, Vancouver and Saskatoon. Lease terms vary from four to six years. Base lease payable for the next five years as follows. 2002 $ 530,000 2003 530,000 2004 530,000 2005 530,000 2006 530,000 12. FINANCIAL INSTRUMENTS Financial instruments consist of accounts receivable, bank indebtedness, accounts payable and accrued liabilities, amounts due to affiliated company, amounts due to RCA trusts and amounts due to related parties. Credit risk The company is subject to credit risk through trade receivables. Credit risk is minimized by a large 8. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- customer base and its geographic dispersion. The company maintains provisions for potential credit losses and any such losses to date have been within management's expectations. Fair value of financial instruments The carrying value of accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximate fair value because of the near term maturity of these instruments. It was not practicable to determine the fair value of amounts due to affiliated company, RCA trusts or related parties as there is no secondary market for these financial instruments. Interest rate risk Bank indebtedness bears interest at a floating rate. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates. It is management's opinion that interest rate risk is not significant. 13. COMPARATIVE FIGURES Certain of the prior year's figures have been reclassified to conform reporting standards acceptable in the United States of America. As such, internally used inventory for sale previously classified as inventory in current assets, has been classified as capital assets in the long-term section. In the previous year the company changed its fiscal year end from February 29 to June 30 to better reflect the natural operating cycle of the business. As a result, the comparative figures contain four months of operating results. 9. SCHEDULE OF DIRECT SELLING EXPENSES FOR THE PERIOD ENDED JUNE 30 2001 2000 (12 Months) (4 Months) - -------------------------------------------------------------------------------- DIRECT SELLING EXPENSES Advertising and promotion 135,445 71,397 Amortization 162,986 59,051 Bad debt expense 43,589 -- Insurance 18,214 4,312 Interest and bank charges 310,484 59,795 Licences, memberships and taxes 28,181 9,464 Office expenses 195,273 49,288 Presentation expense -- 10,000 Professional fees 13,317 25,079 Rent 55,665 18,268 Salaries and benefits 334,014 138,333 Telephone 69,217 20,607 Training 33,294 9,597 Travel 18,227 39,570 ---------------------------------------------------------------------------- 1,417,906 514,761 ============================================================================ 10. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ FINANCIAL STATEMENTS JUNE 30, 2000 [LOGO] LOGICORP ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ JUNE 30, 2000 CONTENTS Page ---- AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statement of Loss and Retained Earnings 3 Statement of Cash Flows 4 Notes to Financial Statements 5 - 8 Schedule of Direct Selling Expenses 10 Grant Thornton LLP Chartered Accountants [LOGO] Management Consultants Canadian Member of Grant Thornton International Auditors' Report To the Directors of Logicorp Data Systems Ltd. We have audited the balance sheet of Logicorp Data Systems Ltd. as at June 30, 2000 and the statements of income and retained earnings and cash flows for the period then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Canada and the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at June 30, 2000 and the results of its operations and cash flows for the period then ended in conformity with accounting principles generally accepted in Canada and the United States of America. Edmonton, Canada /s/ Grant Thornton LLP November 2, 2000 Chartered Accountants 2400 Scotia Place 1 10060 Jasper Avenue Edmonton, Alberta T5J 3R8 Tel: (780) 422-7114 Fax: (780) 426-3208 e-mail: edmonton@GrantThornton.ca 1. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ BALANCE SHEET AS AT ASSETS JUNE 30, 2000 Feb 29, 2000 - -------------------------------------------------------------------------------- CURRENT Accounts receivable $ 7,722,714 $ 8,812,187 Inventory (Note 2) 812,832 702,140 Income taxes receivable 37,945 39,528 Prepaid expenses 121,316 80,804 - -------------------------------------------------------------------------------- 8,694,807 9,634,659 CAPITAL ASSETS (Note 3) 1,751,837 1,758,360 - -------------------------------------------------------------------------------- $10,446,644 $11,393,019 ================================================================================ LIABILITIES CURRENT Bank indebtedness (Note 4) $ 2,270,523 $ 1,413,620 Accounts payable and accrued liabilities 6,217,742 7,808,819 Current portion of amounts Due to RCA Trusts 48,000 48,000 - -------------------------------------------------------------------------------- 8,536,265 9,270,439 DUE TO AFFILIATED COMPANY (Note 5) 524,445 764,571 DUE TO RCA TRUSTS (Note 6) 863,195 901,548 DUE TO SHAREHOLDERS (Note 7) 73,628 73,628 - -------------------------------------------------------------------------------- 9,997,533 11,010,186 - -------------------------------------------------------------------------------- SHAREHOLDER'S EQUITY SHARE CAPITAL (Note 8) 99 99 RETAINED EARNINGS 449,012 382,734 - -------------------------------------------------------------------------------- 449,111 382,833 - -------------------------------------------------------------------------------- $10,446,644 $11,393,019 ================================================================================ Commitments (Note 10) APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director 2. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - ------------------------------------------------------------------------------- SALES $18,989,310 $ 53,501,788 COST OF SALES 17,878,719 49,854,443 - ------------------------------------------------------------------------------- GROSS PROFIT 1,110,591 3,647,345 SELLING EXPENSES (Page 10) 514,761 1,726,496 - ------------------------------------------------------------------------------- EARNINGS FROM OPERATIONS 595,830 1,920,849 GENERAL AND ADMINISTRATIVE EXPENSES Advertising and promotion 25,267 87,611 Amortization 9,954 57,328 Insurance 13,887 42,949 Interest and bank charges 4 10,270 Licences, memberships and taxes 3,850 6,731 Office expenses 9,789 49,520 Professional fees 59,852 84,335 Rent 29,661 26,732 Salaries and benefits 338,093 1,056,149 Telephone 5,590 13,315 Training 3,736 22,764 Travel 24,757 38,617 - ------------------------------------------------------------------------------- NET EARNINGS BEFORE OTHER REVENUE AND (EXPENSE) 524,440 1,496,321 - ------------------------------------------------------------------------------- 71,390 424,528 OTHER REVENUE AND (EXPENSE) Interest revenue 2,791 3,449 Retirement compensation agreements -- (450,000) - ------------------------------------------------------------------------------- NET EARNINGS (LOSS) BEFORE INCOME TAX 74,181 (22,023) PROVISION FOR INCOME TAXES 7,903 -- - ------------------------------------------------------------------------------- NET EARNINGS (LOSS) 66,278 (22,023) RETAINED EARNINGS, beginning of period 382,734 404,757 - ------------------------------------------------------------------------------- RETAINED EARNINGS, end of period $ 449,012 $ 382,734 ================================================================================ 3. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - ------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES Net Earnings (loss) $ 66,278 $ (22,023) Items not requiring an outlay of cash: Amortization 69,005 231,357 - ------------------------------------------------------------------------------- 135,283 209,334 CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable 1,089,473 (1,559,053) Inventories (110,692) 1,928,631 Prepaid expenses and deferred charges (40,512) (10,248) Accounts payable and accrued liabilities (1,591,077) 792,304 Income taxes payable 1,583 (48,036) - ------------------------------------------------------------------------------- (515,942) 1,312,932 - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Advances from (to) shareholders -- 75,000 Advances (to) from related parties (240,126) 568,278 (Decrease) increase in Due to RCA Trusts (38,353) 234,738 (Increase) decrease in Bank indebtedness 856,903 (389,533) - ------------------------------------------------------------------------------- 578,424 488,483 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (62,482) (1,801,415) - ------------------------------------------------------------------------------ INCREASE IN CASH -- -- CASH AND CASH EQUIVALENTS, beginning of period -- -- - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ -- $ -- =============================================================================== 4. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of operations The company is a computer service organization which specializes in the supply and integration of computer products, with branches in Vancouver, Calgary, Edmonton and Saskatoon. The company serves both large and small organizations and is particularly valued by organizations having complex data and communication configurations. (b) Cash and Cash equivalents Cash and cash equivalents include cash on hand and balances with bank. (c) Inventory Inventory is valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. (d) Capital Assets Capital assets are recorded at cost. Amortization is provided annually at rates calculated to write-off the assets over their estimated useful lives as follows: Automotive equipment 30% diminishing balance Computer equipment 30% diminishing balance Computer software 30% diminishing balance Leasehold improvements 20% diminishing balance Office equipment 20% diminishing balance Small tools 100% diminishing balance (e) Revenue Recognition For product sold, revenue is recognized when the product is shipped. For maintenance contracts, revenue is recognized when the service has been provided. (f) Use of Estimates In preparing the company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. 5. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 2. INVENTORY JUNE 30, 2000 Feb 29, 2000 ------------------------------------------------------------------------- Inventory for resale 890,863 780,171 Provision for obsolete inventory (78,031) (78,031) ------------------------------------------------------------------------- 812,832 702,140 ========================================================================= 3. CAPITAL ASSETS
JUNE 30, 2000 Feb 29, 2000 Accumulated Net Book Net Book Cost Amortization Value Value ---------------------------------------------------------------------------------------------- Automobiles $ 10,300 $ 9,982 $ 318 $ 353 Computer equipment 1,125,923 202,156 923,767 931,258 Computer software 346,397 20,998 325,399 190,485 Leasehold improvements 123,452 42,921 80,531 188,481 Office furniture and equipment 598,753 176,931 421,822 447,783 Small tools 791 791 -- -- ---------------------------------------------------------------------------------------------- $2,205,616 $ 453,779 $1,751,837 $1,758,360 ==============================================================================================
4. BANK INDEBTEDNESS Bank indebtedness bears interest at 8.5% and consists of the following: JUNE 30, 2000 Feb 29, 2000 -------------------------------------------------------------------------- Bank overdraft $ 615,523 $ 488,620 Operating line of credit 1,655,000 925,000 -------------------------------------------------------------------------- $2,270,523 $1,413,620 ========================================================================== As collateral for the bank indebtedness the company has provided a General Security Agreement, guarantee and postponement of claim in the amount of $425,000 from Logicorp Service Group Inc. and guarantees in the amount of $1,800,000 from the Company's Directors. Credit available under the operating line of credit is $2,000,000. The operating line of credit is reviewed annually by the bank. The next scheduled review date is Nov 30, 2000. 6. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 5. DUE TO AFFILIATED COMPANY The amounts due to Logicorp Service Group Inc. are unsecured, non-interest bearing and have no specific terms of repayment. 6. DUE TO RCA TRUSTS The retirement compensation trusts were set up pursuant to section 248(1) of the Income Tax Act of Canada to provide retirement income to the three individual shareholders who own Logicorp. Logicorp has no current or future obligation to fund theses trusts other than the obligation stated here.
JUNE 30, 2000 Feb 29, 2000 ------------------------------------------------------------------------------------------ Amounts due to retirement compensation agreements (RCA) trusts $911,195 $949,548 Less amounts due within one year 48,000 48,000 ------------------------------------------------------------------------------------------ $863,195 $901,548 ==========================================================================================
The amounts due to the RCA Trusts are secured by promissory notes repayable in quarterly installments of $12,000 plus interest at prime + 4 3/4%. Estimated principal repayments in each of the next five years is as follows: 2000 $ 48,000 2001 48,000 2002 48,000 2003 48,000 Subsequent 719,195 7. DUE FROM (TO) SHAREHOLDERS Amounts due from (to) shareholders are unsecured, non-interest bearing and have no specific terms of repayment. 8. SHARE CAPITAL Class A common voting shares Class B common voting shares Class C preferred shares JUNE 30, 2000 Feb 29, 2000 -------------------------------------------------------------------------- Issued 1,980 Class A common voting shares $ 99 $ 99 ========================================================================== 7. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 9. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Service Group Inc. by virtue of common control. During the year the company purchased services from Logicorp Service Group Inc. and charged fees to Logicorp Service Group Inc. as follows: JUNE 30, 2000 Feb 29, 2000 -------------------------------------------------------------------------- Services Purchased 633,456 $1,804,344 Administrative support charged $474,000 $1,035,000 The administrative support consists of rent allocation, business taxes, insurance, administrative wages and other administration charges paid by the company on behalf of Logicorp Service Group Inc. 10. LEASE COMMITMENTS The company leases office space and equipment for its operations in Edmonton, Calgary, Vancouver and Saskatoon. Lease terms vary from four to six years. Base lease payable for the next five years as follows. 2001 $ 495,000 2002 495,000 2003 495,000 2004 495,000 2005 495,000 11. FINANCIAL INSTRUMENTS Financial instruments consist of accounts receivable, bank indebtedness, accounts payable and accrued liabilities, amounts due to affiliated company, amounts due to RCA trusts and amounts due to related parties. Credit risk The company is subject to credit risk through trade receivables. Credit risk is minimized by a large customer base and its geographic dispersion. The company maintains provisions for potential credit losses and any such losses to date have been within management's expectations. Fair value of financial instruments The carrying value of accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximate fair value because of the near term maturity of these instruments. It was not practicable to determine the fair value of amounts due to affiliated company, RCA trusts or related parties as there is no secondary market for these financial instruments. 8. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- Interest rate risk Bank indebtedness bears interest at a floating rate. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates. It is management's opinion that interest rate risk is not significant. 12. COMPARATIVE FIGURES Certain of the prior year's figures have been reclassified to conform reporting standards acceptable in the United States of America. As such, internally used inventory for sale previously classified as inventory in current assets, has been classified as capital assets in the long-term section. 13. CHANGE OF FISCAL YEAR The company has changed its fiscal year end from February 29 to June 30 to better reflect the natural operating cycle of the business. As a result, the current period contains four months of operating results. 9. SCHEDULE OF DIRECT SELLING EXPENSES FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - ------------------------------------------------------------------------------- DIRECT SELLING EXPENSES Advertising and promotion 71,397 240,732 Amortization 59,051 174,029 Bad debt expense -- 5,542 Insurance 4,311 8,894 Interest and bank charges 59,793 199,489 Licences, memberships and taxes 9,464 35,658 Office expenses 49,287 164,965 Presentation expense 10,000 -- Professional fees 25,079 42,052 Rent 18,270 (4,000) Salaries and benefits 138,335 387,539 Telephone 20,607 129,013 Training 9,597 80,983 Travel 39,569 261,600 --------------------------------------------------------------------------- 514,760 1,726,496 =========================================================================== 10. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ FINANCIAL STATEMENTS JUNE 30, 2001 [LOGO] LOGICORP ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ 2001 CONTENTS Page ---- AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statements of Earnings and Deficit 3 Statement of Cash Flows 4 Notes to the Financial Statements 5 - 7 Grant Thornton LLP Chartered Accountants [LOGO] Canadian Member Firm of Grant Thornton International Auditors' Report To the Directors of Logicorp Service Group Ltd. We have audited the balance sheet of Logicorp Service Groups Ltd. as at June 30, 2001 and the statements of loss and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Canada and the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at June 30, 2001 and the results of its opoerations and cash flows for the year then ended in conformity with accounting principles generally accepted in Canada and the United States of America. Edmonton, Canada /s/ Grant Thornton LLP September 6, 2001 Chartered Accountants 2400 Scotia Place 1 10060 Jasper Avenue Edmonton, Alberta T5J 3R8 Tel: (780) 422-7114 Fax: (780) 426-3208 e-mail: edmonton@GrantThornton.ca ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ BALANCE SHEET AS AT JUNE 30 ASSETS 2001 2001 - ------------------------------------------------------------------------------- CURRENT Cash and cash equivalents $ 6,374 $ 3,940 Accounts receivable 42,964 98,298 Income taxes receivable -- 28,613 Prepaid expenses -- 43 - ------------------------------------------------------------------------------- 49,338 130,894 DUE FROM AFFILIATED COMPANY (Note 2) 561,532 524,445 GOODWILL 1 1 - ------------------------------------------------------------------------------- $ 610,871 $ 655,340 =============================================================================== LIABILITIES CURRENT Salaries and wages payable $ 253 $ 6,293 Income taxes payable 13,602 -- Due to related parties (Note 3) 161,581 150,000 - ------------------------------------------------------------------------------- 175,436 156,293 DEFERRED REVENUE (Note 4) 458,446 521,965 - ------------------------------------------------------------------------------- 633,882 678,258 - ------------------------------------------------------------------------------- SHAREHOLDERS' DEFICIENCY SHARE CAPITAL (Note 5) 31 31 DEFICIT (23,042) (22,949) - ------------------------------------------------------------------------------- (23,011) (22,918) - ------------------------------------------------------------------------------- $ 610,871 $ 655,340 =============================================================================== APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director See accompanying notes to the financial statements 2. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ STATEMENTS OF EARNINGS AND DEFICIT FOR THE PERIOD ENDED JUNE 30
2001 2000 (12 Months) (4 Months) - ----------------------------------------------------------------------------------- REVENUE (Note 6) $ 1,674,325 $ 633,456 - ----------------------------------------------------------------------------------- COST OF SALES Product 274,546 85,918 Logistical and administrative support (Note 6) 780,392 474,000 Salaries, wages and benefits 291,680 101,186 - ----------------------------------------------------------------------------------- 1,346,618 661,104 - ----------------------------------------------------------------------------------- GROSS PROFIT 327,707 (27,648) - ----------------------------------------------------------------------------------- EXPENSES Advertising and promotion 397 -- Bad debt expense 50,060 -- Interest and bank charges 128 1,491 Office expense 819 41 Salaries and benefits 76,440 33,856 Training 703 728 Travel -- 580 - ----------------------------------------------------------------------------------- 128,547 36,696 - ----------------------------------------------------------------------------------- EARNINGS (LOSS) FROM OPERATIONS 199,160 (64,344) - ----------------------------------------------------------------------------------- OTHER REVENUE Interest revenue 821 -- - ----------------------------------------------------------------------------------- NET EARNINGS (LOSS) BEFORE INCOME TAX 199,981 (64,344) PROVISION FOR (RECOVERY OF) INCOME TAXES 38,493 (7,568) - ----------------------------------------------------------------------------------- NET EARNINGS (LOSS) 161,488 (56,776) (DEFICIT) RETAINED EARNINGS, beginning of period (22,949) 33,827 DIVIDENDS (161,581) -- - ----------------------------------------------------------------------------------- DEFICIT, end of period $ (23,042) $ (22,949) ===================================================================================
See accompanying notes to the financial statements 3. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30 2001 2000 (12 Months) (4 Months) - ------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES Net earnings (loss) $ 161,488 $ (56,776) CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable 55,334 (26,568) Prepaid expenses 43 94 Salaries and wages payable (6,040) 146 Income taxes payable/receivable 42,215 (15,551) Payable to related parties 11,581 -- Deferred revenue (63,519) (138,720) - ------------------------------------------------------------------------------- 201,102 (237,375) - ------------------------------------------------------------------------------- FINANCING ACTIVITIES Advances from (to) affiliated company (37,087) 240,126 Dividends (161,581) -- - ------------------------------------------------------------------------------- (198,668) 240,126 - ------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 2,434 2,751 CASH AND CASH EQUIVALENTS, beginning of period 3,940 1,189 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 6,374 $ 3,940 =============================================================================== Supplementary cash flow information: Income taxes paid $ 2,039 $ 6,117 4. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of operations The company is a computer service organization which specializes in the supply and integration of computer products. The company serves both large and small organizations and is particularly valued by organizations having complex data and communication configurations. (b) Revenue recognition For product sold, revenue is recognized when the product is shipped. For maintenance contracts, revenue is recognized when the service has been provided. (c) Use of estimates In preparing the company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. (d) Cash and cash equivalents Cash and cash equivalents include cash on hand and balances with banks, net of bank overdrafts. 2. DUE FROM AFFILIATED COMPANY The amounts due from Logicorp Data Systems Ltd. are unsecured, non-interest bearing and have no specific terms of repayment. 3. DUE TO RELATED PARTIES Amounts due to related parties are unsecured, non-interest bearing and have no specific terms of repayment. 4. DEFERRED REVENUE Deferred revenue represents maintenance contracts for which the company has received consideration, but has yet to provide the services called for under the contract. 5. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 5. SHARE CAPITAL Authorized Unlimited Class A common voting shares Unlimited Class B common non-voting shares Unlimited Class I preferred non-voting shares redeemable at issue price Unlimited Class II preferred non-voting shares 2001 2000 -------------------------------------------------------------------------- Issued 3,000 Class A common voting shares $ 30 $ 30 1 Class I preferred non-voting share 1 1 -------------------------------------------------------------------------- $ 31 $ 31 -------------------------------------------------------------------------- 6. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Data Systems Ltd. by virtue of common control. During the period the company sold services to Logicorp Data Systems Ltd. and was charged fees from Logicorp Data Systems Ltd. as follows:
2001 2000 (12 Months) (4 Months) -------------------------------------------------------------------------------- Services sold $1,674,325 $633,456 Logistical and administrative support fees charged $ 780,392 $474,000
The administrative support fee consists of rent allocation, business taxes, insurance, administrative wages and other administration charges from Logicorp Data Systems Ltd. 7. COMPARATIVE FIGURES Certain balances of the preceding period have been reclassified to conform with the current period's financial statement presentation. 6. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 8. FINANCIAL INSTRUMENTS Credit risk The company is subject to credit risk through trade receivables. The company maintains provisions for potential credit losses and any such losses to date have been within management's expectations. Fair value of financial instruments The carrying value of cash and cash equivalents, accounts receivable, salaries and wages payable approximate fair value because of the near term maturity of these instruments. It was not practicable to determine the fair value of amounts due from the affiliated company or to related parties as there is no secondary market for these financial instruments. 9. ECONOMIC DEPENDENCE All of the company's sales were to Logicop Data Systems Ltd., a related company. 7. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ FINANCIAL STATEMENTS JUNE 30, 2000 [LOGO] LOGICORP ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ JUNE 30, 2000 CONTENTS Page ---- AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statements of Loss and Deficit 3 Statement of Cash Flows 4 Notes to Financial Statements 5 - 7 Grant Thornton LLP Chartered Accountants [LOGO] Management Consultants Canadian Member of Grant Thornton International Auditors' Report To the Directors of Logicorp Service Group Ltd. We have audited the balance sheet of Logicorp Service Group Ltd. as at June 30, 2000 and the statements of income and retained earnings and cash flows for the period then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Canada and the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at June 30, 2000 and the results of its operations and cash flows for the period then ended in conformity with accounting principles generally accepted in Canada and the United States of America. Edmonton, Canada /s/ Grant Thornton LLP November 2, 2000 Chartered Accountants 2400 Scotia Place 1 10060 Jasper Avenue Edmonton, Alberta T5J 3R8 Tel: (780) 422-7114 Fax: (780) 426-3208 e-mail: edmonton@GrantThornton.ca 1. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ BALANCE SHEET AS AT ASSETS JUNE 30, 2000 Feb 29, 2000 - -------------------------------------------------------------------------------- CURRENT Cash and cash equivalents $ 3,940 $ 1,189 Accounts receivable 98,298 71,730 Income taxes receivable 28,613 13,062 Prepaid expenses 43 137 - -------------------------------------------------------------------------------- 130,894 86,118 DUE FROM AFFILIATED COMPANY (Note 2) 524,445 764,571 GOODWILL 1 1 - -------------------------------------------------------------------------------- $ 655,340 $850,690 ================================================================================ LIABILITIES CURRENT Salaries and wages payable $ 6,293 $ 6,147 Due to related parties (Note 3) 150,000 150,000 - -------------------------------------------------------------------------------- 156,293 156,147 DEFERRED REVENUE (Note 4) 521,965 660,685 - -------------------------------------------------------------------------------- 678,258 816,832 - -------------------------------------------------------------------------------- SHAREHOLDERS' DEFICIENCY SHARE CAPITAL (Note 5) 31 31 (DEFICIT) RETAINED EARNINGS (22,949) 33,827 - -------------------------------------------------------------------------------- (22,918) 33,858 - -------------------------------------------------------------------------------- $ 655,340 $850,690 ================================================================================ APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director See accompanying notes to the financial statements 2. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ STATEMENTS OF LOSS AND DEFICIT FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - ------------------------------------------------------------------------------- SALES $ 633,456 $ 1,804,346 - ------------------------------------------------------------------------------- COST OF SALES Product 85,918 112,007 Administrative support 474,000 1,035,000 Salaries, wages and benefits 101,186 373,793 - ------------------------------------------------------------------------------- 661,104 1,520,800 - ------------------------------------------------------------------------------- GROSS PROFIT (27,648) 283,546 - ------------------------------------------------------------------------------- EXPENSES Advertising and promotion -- 5,895 Interest and bank charges 1,491 3,800 Office expense 41 8,973 Professional fees -- 591 Salaries and benefits 33,856 30,050 Training 728 11,809 Travel 580 19,931 - ------------------------------------------------------------------------------- 36,696 81,049 - ------------------------------------------------------------------------------- (LOSS) INCOME FROM OPERATIONS (64,344) 202,497 - ------------------------------------------------------------------------------- OTHER REVENUE Interest revenue -- 68 - ------------------------------------------------------------------------------- NET (LOSS) INCOME BEFORE INCOME TAXES (64,344) 202,565 (RECOVERY OF) PROVISION FOR INCOME TAXES (7,568) 32,624 - ------------------------------------------------------------------------------- NET (LOSS) INCOME (56,776) 169,941 RETAINED EARNINGS, beginning of period 33,827 13,886 DIVIDENDS -- (150,000) - ------------------------------------------------------------------------------- (DEFICIT) RETAINED EARNINGS, end of period $ (22,949) $ 33,827 =============================================================================== See accompanying notes to the financial statements 3. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - ------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES Net (loss) income $ (56,776) $ 169,941 CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable (26,568) 14,105 Prepaid expenses 94 735 Salaries and wages payable 146 5,140 Income taxes receivable (15,551) (34,407) Deferred revenue (138,720) 562,666 - ------------------------------------------------------------------------------- (237,375) 718,180 FINANCING ACTIVITIES Advances from (to) affiliated company 240,126 (568,278) Dividends -- (150,000) - ------------------------------------------------------------------------------- 240,126 (718,278) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,751 (98) CASH AND CASH EQUIVALENTS, beginning of period 1,189 1,287 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 3,940 $ 1,189 =============================================================================== Supplementary cash flow information: Income taxes paid 6,117 32,624 4. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of operations The company is a computer service organization which specializes in the supply and integration of computer products. The company serves both large and small organizations and is particularly valued by organizations having complex data and communication configurations. (b) Revenue Recognition For product sold, revenue is recognized when the product is shipped. For maintenance contracts, revenue is recognized when the service has been provided. (c) Use of Estimates In preparing the company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. (d) Cash and cash equivalents Cash and cash equivalents include cash on hand and balances with banks, net of bank overdrafts. 2. DUE FROM AFFILIATED COMPANY The amounts due from Logicorp Data Systems Ltd. are unsecured, non-interest bearing and have no specific terms of repayment. 3. DUE TO RELATED PARTIES Amounts due to related parties are non-interest bearing and have no specific terms of repayment. 4. DEFERRED REVENUE Deferred revenue represents maintenance contracts for which the company has received consideration, but has yet to provide the services called for under the contract. 5. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 5. SHARE CAPITAL Authorized Unlimited Class A common voting shares Unlimited Class B common non-voting shares Unlimited Class II preferred non-voting shares Unlimited Class I preferred non-voting shares redeemable at issue price June 30, 2000 Feb 29, 2000 -------------------------------------------------------------------------- Issued 3,000 Class A common voting shares $ 30 $ 30 1 Class I preferred non-voting share 1 1 -------------------------------------------------------------------------- $ 31 $ 31 ========================================================================== 6. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Data Systems Ltd. by virtue of common control. During the period the company sold services to Logicorp Data Systems Ltd. and was charged fees from Logicorp Data Systems Ltd. as follows: June 30, 2000 Feb 29, 2000 (4 Months) (12 Months) ------------------------------------------------------------------------- Services Sold $633,456 $1,804,346 Administrative support fees charged $474,000 $1,035,000 The administrative support fee consists of rent allocation, business taxes, insurance, administrative wages and other administration charges from Logicorp Data Systems Ltd. 7. COMPARATIVE FIGURES Certain balances of the preceding period have been reclassified to conform with the current period's financial statement presentation. 6. ================================================================================ LOGICORP SERVICE GROUP LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2000 - -------------------------------------------------------------------------------- 8. FINANCIAL INSTRUMENTS Credit risk The company is subject to credit risk through trade receivables. The company maintains provisions for potential credit losses and any such losses to date have been within management's expectations. Fair value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, salaries and wages payable approximate fair value because of the near term maturity of these instruments. It was not practicable to determine the fair value of amounts due from the affiliated company or to related parties as there is no secondary market for these financial instruments. 9. ECONOMIC DEPENDENCE All of the company's sales were to Logicop Data Systems Ltd., a related company. 10. CHANGE OF FISCAL YEAR The company has changed its fiscal year from February 29 to June 30 to better reflect the natural operating cycle of the business. 7. 591360 Alberta Ltd. Amended Financial Statements For the years ended June 30, 2001 and 2000 591360 Alberta Ltd. Amended Financial Statements For the years ended June 30, 2001 and 2000 Contents ================================================================================ Auditors' Report 2 Amended Financial Statements Amended Balance Sheets 3 Amended Statements of Retained Earnings 4 Amended Statements of Operations 5 Summary of Significant Accounting Policies 6 Notes to Amended Financial Statements 7 1000 First Edmonton Place 10665 Jasper Avenue BDO Dunwoody LLP Edmonton, Alberta Canada T5J 3S9 Chartered Accountants Telephone: (780) 423-4353 and Consultants Telefax: (780) 424-2110 ================================================================================ Auditors' Report - -------------------------------------------------------------------------------- To the Shareholder of 591360 Alberta Ltd. We have audited the amended balance sheets of 591360 Alberta Ltd. as at June 30, 2001 and 2000 and the amended statements of retained earnings and operations for the years then ended. These amended financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these amended financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these amended financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2001 and 2000 and the results of its operations for the years then ended in accordance with Canadian generally accepted accounting principles. The previous report dated January 29, 2002 has been withdrawn and the financial statements have been amended as explained in Note 6. /s/ BDO Dunwoody LLP Chartered Accountants Edmonton, Alberta January 29, 2002 Except the amendment described in Note 6 dated May 2, 2002 2 ================================================================================ 591360 Alberta Ltd. Amended Balance Sheets June 30 2001 2000 - -------------------------------------------------------------------------------- Assets Current Cash $ 464 $ 442 Long-term investment (Note 1) 146,190 92,361 Due from a company under common control (Note 3) 34,535 34,535 ---------------------- $181,189 $127,338 ================================================================================ Liabilities and Shareholder's Equity Current Accounts payable and accrued liabilities $ 3,500 $ 1,250 ---------------------- Shareholder's equity Share capital (Note 4) 10 10 Retained earnings 177,679 126,078 ---------------------- 177,689 126,088 ---------------------- $181,189 $127,338 ================================================================================ On behalf of the Board: - ----------------------------------- Director The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 3 ================================================================================ 591360 Alberta Ltd. Amended Statements of Retained Earnings
For the years ended June 30 2001 2000 - --------------------------------------------------------------------------------------- Retained earnings, beginning of year, as previously stated $118,727 $ 106,410 Change in accounting policy (Note 6) 7,351 19,629 ----------------------- Retained earnings, beginning of year, as restated 126,078 126,039 Net income for the year 51,601 37,039 Dividends paid -- (37,000) ----------------------- Retained earnings, end of year $177,679 $ 126,078 =======================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 4 ================================================================================ 591360 Alberta Ltd. Amended Statements of Operations For the years ended June 30 2001 2000 - -------------------------------------------------------------------------------- Equity income $ 53,829 $37,722 -------------------------- Expenses (recovery) Bank charges and interest (22) 22 Professional fees 2,250 661 -------------------------- 2,228 683 -------------------------- Net income for the year $ 51,601 $37,039 ================================================================================ The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 5 ================================================================================ 591360 Alberta Ltd. Summary of Significant Accounting Policies June 30, 2001 and 2000 - -------------------------------------------------------------------------------- Nature of Business The Company is incorporated under the laws of Alberta and is a holding company. Management Estimates These amended financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Because the precise determination of many assets, liabilities, revenue and expenses is dependent on future events, the preparation of financial statements for a period necessarily includes the use of estimates and approximations which have been made using careful judgement. Actual results could differ from those estimates. These amended financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting principles summarized below. Financial Instruments The Company as part of its operations carries a number of financial instruments. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. Long-term Investment The Company accounts for its investment in a company subject to significant influence on the equity method. 6 ================================================================================ 591360 Alberta Ltd. Notes to Amended Financial Statements June 30, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Long-term Investment The Company owns 1/3 of the outstanding shares of Logicorp Service Group Ltd., a Canadian private company. 2001 2000 ------------------------- Shares $ 10 $ 10 Advances receivable 153,860 100,000 Share of undistributed earnings (7,680) (7,649) ------------------------- $ 146,190 $ 92,361 ========================= - -------------------------------------------------------------------------------- 2. Income Taxes The Company has losses available for income tax purposes totaling $5,283. This amount can be used to reduce taxable income of future years, the benefit of which has not been recorded in these amended financial statements. These losses expire as follows: Year Amount 2003 $ 731 2005 907 2006 734 2007 683 2008 2,228 -------- $ 5,283 ======== - -------------------------------------------------------------------------------- 3. Due From a Company Under Common Control The balance due from a company under common control is unsecured, non-interest bearing, with no anticipated repayments within one year. - -------------------------------------------------------------------------------- 7 ================================================================================ 591360 Alberta Ltd. Notes to Amended Financial Statements June 30, 2001 and 2000 - -------------------------------------------------------------------------------- 4. Share Capital Authorized An unlimited number of Class A common, voting shares An unlimited number of Class B common, non-voting shares An unlimited number of Class I and II preferred, non-voting shares Issued 2001 2000 ----------------------- 1,000 Class A common shares $ 10 $ 10 ======================= - -------------------------------------------------------------------------------- 5. Statement of Cash Flows A statement of cash flows was not presented since the cash flow information is readily apparent from other financial statements or is adequately disclosed in the notes to these amended financial statements. - -------------------------------------------------------------------------------- 6. Amended Financial Statements The Company has amended its financial statements to reflect that during the year, the Company changed its method of accounting for the investment in a company subject to significant influence from the cost method to the equity method. In addition, the Company corrected the advances receivable from this company. The retroactive application of the above adjustments resulted in the following changes:
2001 2000 ----------------------- Increase in long-term investment $ 42,320 $ 42,351 Decrease in balance due from a company under common control (35,000) (35,000) ----------------------- Increase in assets $ 7,320 $ 7,351 ======================= Increase in opening retained earnings $ 7,351 $ 19,629 Increase in equity income from long-term investment 53,829 37,722 Decrease in dividend income (53,860) (50,000) ----------------------- Increase in ending retained earnings $ 7,320 $ 7,351 =======================
- -------------------------------------------------------------------------------- 8 123557 Alberta Ltd. (Formerly Merc Management Limited) Amended Financial Statements For the years ended October 31, 2001 and 2000 123557 Alberta Ltd. Amended Financial Statements For the years ended October 31, 2001 and 2000 Contents ================================================================================ Auditors' Report 2 Financial Statements Amended Balance Sheets 3 Amended Statements of Retained Earnings 4 Amended Statements of Operations 5 Summary of Significant Accounting Policies 6 Notes to Amended Financial Statements 7 1000 First Edmonton Place 10665 Jasper Avenue BDO Dunwoody LLP Edmonton, Alberta Canada T5J 3S9 Chartered Accountants Telephone: (780) 423-4353 and Consultants Telefax: (780) 424-2110 ================================================================================ Auditors' Report - -------------------------------------------------------------------------------- To the Shareholders of 123557 Alberta Ltd. We have audited the amended balance sheets of 123557 Alberta Ltd. as at October 31, 2001 and 2000 and the amended statements of retained earnings and operations for the years then ended. These amended financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these amended financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. In our opinion, these amended financial statements present fairly, in all material respects, the financial position of the Company as at October 31, 2001 and 2000 and the results of its operations for the years then ended in accordance with Canadian generally accepted accounting principles. The previous report dated February 23, 2002 has been withdrawn and the financial statements have been amended as explained in Note 6. /s/ BDO Dunwoody LLP Chartered Accountants Edmonton, Alberta February 23, 2002 Except the amendment described in Note 6 dated May 1, 2002 2 ================================================================================ 123557 Alberta Ltd. Amended Balance Sheets October 31 2001 2000 - -------------------------------------------------------------------------------- Assets Current Cash $ -- $ 4,267 Short-term investments -- 48,522 Accounts receivable -- 1,000 Income taxes recoverable -- 4,700 Due from shareholders -- 4,355 ----------------------- -- 62,844 Long-term investment (Note 1) 151,943 153,537 ----------------------- $151,943 $216,381 ================================================================================ Liabilities and Shareholders' Equity Current Accounts payable and accrued liabilities $ 2,499 $ 3,200 ----------------------- Shareholders' equity Share capital (Note 2) 20 20 Retained earnings 149,424 213,161 ----------------------- 149,444 213,181 ----------------------- $151,943 $216,381 ================================================================================ On behalf of the Board: - ----------------------------- Director - ----------------------------- Director The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 3 ================================================================================ 123557 Alberta Ltd. Amended Statements of Retained Earnings
For the years ended October 31 2001 2000 - ---------------------------------------------------------------------------------------------------- Retained earnings, beginning of year, as previously stated $ 64,852 $ 73,779 Change in accounting policy (Note 6) 148,309 133,557 ------------------------ Retained earnings, beginning of year, as restated 213,161 207,336 Net income (loss) for the year (23,459) 5,825 Dividends paid (36,812) -- Adjustment on transaction with a company under common control (Note 5) (3,466) -- ------------------------ Retained earnings, end of year $ 149,424 $213,161 ====================================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 4 ================================================================================ 123557 Alberta Ltd. Amended Statements of Operations For the years ended October 31 2001 2000 - ------------------------------------------------------------------------------- Revenue Consulting $ 9,000 $ 12,000 Investment loss (6,335) (1,315) Equity income (loss) on long-term investment (1,594) 14,752 ----------------------- 1,071 25,437 ----------------------- Expenses Advertising and promotion 8,049 7,802 Automotive 4,400 4,466 Bank charges and interest 38 60 Office 2,246 3,104 Professional fees 5,185 1,114 Telephone and utilities -- 109 Travel 4,612 2,957 ----------------------- 24,530 19,612 ----------------------- Net income (loss) for the year $(23,459) $ 5,825 =============================================================================== The accompanying summary of significant accounting policies and notes are an integral part of these amended financial statements. 5 ================================================================================ 123557 Alberta Ltd. Summary of Significant Accounting Policies October 31, 2001 and 2000 - -------------------------------------------------------------------------------- Nature of Business The Company is incorporated under the laws of Alberta and is a holding company. Management Estimates These amended financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Because the precise determination of many assets, liabilities, revenue and expenses is dependent on future events, the preparation of financial statements for a period necessarily includes the use of estimates and approximations which have been made using careful judgement. Actual results could differ from those estimates. These amended financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting principles summarized below. Financial Instruments The Company as part of its operations carries a number of financial instruments. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. Short-term Investments Temporary investments are stated at the lower of cost and market value. Long-term Investment The Company accounts for its investment in a company subject to significant influence on the equity method. 6 ================================================================================ 123557 Alberta Ltd. Notes to Amended Financial Statements October 31, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Long-term Investment The Company owns 1/3 of the outstanding shares of Logicorp Data Systems Ltd., a Canadian private company. 2001 2000 --------------------------- Shares $ 33 $ 33 Advances receivable 3,833 3,833 Share of undistributed earnings 148,077 149,671 --------------------------- $151,943 $153,537 =========================== - -------------------------------------------------------------------------------- 2. Share Capital Authorized 10,000 Class A common, voting shares 5,000 Class B common, non-voting shares 5,000 preferred, non-voting shares Issued 2001 2000 ----------------------- 100 Class A common shares $ 10 $ 10 10 Class B common shares 10 10 ----------------------- $ 20 $ 20 ======================= - -------------------------------------------------------------------------------- 3. Income Taxes The Company has losses available for income tax purposes totaling $74,210. This amount can be used to reduce taxable income of future years, the benefit of which has not been recorded in these amended financial statements. These losses expire as follows: Year Amount 2004 $ 14,341 2005 520 2006 30,242 2007 4,220 2008 24,887 -------- $ 74,210 ======== - -------------------------------------------------------------------------------- 7 ================================================================================ 123557 Alberta Ltd. Notes to Amended Financial Statements October 31, 2001 and 2000 - -------------------------------------------------------------------------------- 4. Statement of Cash Flows A statement of cash flows was not presented since the cash flow information is readily apparent from other financial statements or is adequately disclosed in the notes to these amended financial statements. - -------------------------------------------------------------------------------- 5. Related Party Transaction During the year, the Company transferred a significant portion of its net assets to a company under common control for the following proceeds, which approximate fair market value. Cash $ 406 Short-term investments 38,725 Accounts receivable 2,000 Income taxes recoverable 4,700 ------- Total proceeds $45,831 ======= Assumption of accounts payable $ 5,885 Assumption of shareholders' loans 39,946 ------- Total consideration $45,831 ======= This transaction has been recorded in these amended financial statements at the carrying amount of the assets as reflected on the books of the seller being $49,297. The difference between the consideration paid and the carrying amount has been recorded as a reduction to retained earnings of $3,466. - -------------------------------------------------------------------------------- 6. Amended Financial Statements The Company has amended its financial statements to reflect that during the year, the Company changed its method of accounting for the investment in a company subject to significant influence from the cost method to the equity method. In addition, the Company corrected the advances receivable from this company. The retroactive application of the above adjustments resulted in the following changes:
2001 2000 ------------------------ Increase in long-term investment $ 146,715 $148,309 ======================== Increase in opening retained earnings $ 148,309 $133,557 Increase in equity income (loss) on long-term investment (1,594) 14,752 ------------------------ Increase in ending retained earnings $ 146,715 $148,309 ========================
- -------------------------------------------------------------------------------- 8 EXHIBIT "B" CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited - Expressed in Canadian dollars) On March 15, 2002, Chell Group Corporation ("Chell"), through its wholly-owned subsidiary Chell Merchant Capital Group, acquired, effective as of January 1, 2002, all of the outstanding capital stock of Logicorp Data Systems Ltd., Logicorp Service Group Ltd., 123557 Alberta Ltd. and 591360 Alberta Ltd. ("Logicorp"). The aggregate purchase price was $14,182,048, satisfied by $1,500,000 in cash, the issuance of two non-interest bearing promissory notes with a maturity value of $2,540,000 and the issuance of 5,355,000 shares. The acquisition is accounted for using the purchase method of accounting, with the assets acquired and the liabilities assumed recorded at fair values. The results of operations of Logicorp will be included as with those of Chell as of the acquisition date. The pro forma condensed consolidated balance sheet as of February 28, 2002 is based on the historical balance sheet of Chell and Logicorp as of that date. The pro forma condensed consolidated statement of operations for the 6 months ended February 28, 2002 is based on the historical statement of operations of Chell and Logicorp for that period. The pro forma statement of operations assumes the acquisition took place on September 1, 2001. The pro forma condensed consolidated statement of operations for the year ended August 31, 2001 is based on the historical statement of operations of Chell and Logicorp for that period. The pro forma statement of operations assumes the acquisition took place on September 1, 2000. The pro forma condensed financial statements are not intended to be indicative of the financial position or results of operations which actually would have been realized had the acquisition occurred at the date assumed, nor of the future results of operations of the combined entities. The accompanying pro forma condensed financial statements should be read in conjunction with the historical financial statements and notes of Chell CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS As at February 28, 2002 (Unaudited - Expressed in Canadian dollars)
Logicorp 591360 123557 Chell Group Logicorp Data Service Alberta Alberta Adjustments Corporation Systems Ltd. Group Ltd. Ltd. Ltd. (Note 2) Pro forma ----------- ----------- --------- -------- --------- ----------- ----------- ASSETS Current Cash and cash equivalents 1,597,381 -- -- 464 -- (1,500,000) 97,845 Accounts receivable, trade - net 858,705 9,003,263 -- -- -- -- 9,861,968 Other receivables 459,968 -- -- 173,395 -- (173,395) 459,968 Income taxes receivable 140,689 4,850 19,467 -- -- -- 165,006 Inventory 693 1,824,322 -- -- -- -- 1,825,015 Prepaid expenses 258,528 52,265 -- -- -- -- 310,793 ----------- ----------- --------- ------- ----------- ----------- ----------- 3,315,964 10,884,700 19,467 173,859 -- (1,673,395) 12,720,595 ----------- ----------- --------- ------- ----------- ----------- ----------- Property and equipment, net 6,272,179 1,438,100 1 -- -- -- 7,710,280 Licenses, net 236,524 -- -- -- -- -- 236,524 Goodwill, net 107,854 -- -- -- -- 13,448,111 13,555,965 Investment in Wareforce 176,518 -- -- -- -- -- 176,518 Deposit on purchase 1,689,710 -- -- -- -- -- 1,689,710 Other assets, net of amortization 614,540 -- -- -- -- -- 614,540 Long-term investments -- -- -- 10 5,228 -- 5,238 Inter-company receivable -- -- 1,308,945 -- -- (1,308,945) -- Net assets from discontinued operations 2,488,932 -- -- -- -- -- 2,488,932 ----------- ----------- --------- ------- ----------- ----------- ----------- 14,902,221 12,322,800 1,328,413 173,869 5,228 10,465,771 39,198,302 =========== =========== ========= ======= =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable - trade 2,098,766 7,480,322 14,539 3,500 2,499 2,300,000 11,899,626 Accrued liabilities 1,532,155 218,235 561,889 -- -- (146,965) 2,165,314 Current portion of long-term debt 7,872,726 2,037,432 -- -- -- -- 9,910,158 ----------- ----------- --------- ------- ----------- ----------- ----------- Total current liabilities 11,503,647 9,735,989 576,428 3,500 2,499 2,153,035 23,975,098 ----------- ----------- --------- ------- ----------- ----------- ----------- Long-term debt, net of current portion 3,398,324 1,579,750 -- -- -- -- 4,978,074 Deferred income taxes payable 30,000 -- -- -- -- -- 30,000 Inter-company payable -- 1,308,945 -- -- -- (1,308,945) -- ----------- ----------- --------- ------- ----------- ----------- ----------- 14,931,971 12,624,684 576,428 3,500 2,499 844,090 28,983,172 ----------- ----------- --------- ------- ----------- ----------- ----------- Commitments and Contingent liabilities Shareholders' equity Share capital Preferred shares 7,294 -- -- -- -- -- 7,294 Common shares 645,400 99 31 10 20 394,964 1,040,524 Capital in excess of par value 15,608,743 -- -- -- -- 9,757,956 25,366,699 Retained earnings (deficit) (16,291,187) (301,983) 751,954 170,359 2,709 (531,239) (16,199,387) ----------- ----------- --------- ------- ----------- ----------- ----------- (29,750) (301,884) 751,985 170,369 2,729 9,621,681 10,215,130 ----------- ----------- --------- ------- ----------- ----------- ----------- 14,902,221 12,322,800 1,328,413 173,869 5,228 10,465,771 39,198,302 =========== =========== ========= ======= =========== =========== ===========
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THE SIX MONTHS ENDED FEBRUARY 28, 2002 (Unaudited - Expressed in Canadian dollars)
Logicorp 123557 Chell Group Logicorp Data Service 591360 Alberta Adjustments Corporation Systems Ltd. Group Ltd. Alberta Ltd. Ltd. (Note 2) Pro forma $ $ $ $ $ $ $ ---------- ----------- ------- -------- -------- ---------- ----------- REVENUE 6,020,517 24,395,268 824,647 -- -- -- 31,240,432 COST OF SALES 2,524,622 22,300,948 249,681 -- -- -- 25,075,251 ---------- ----------- ------- -------- -------- ---------- ----------- 3,495,895 2,094,320 574,966 -- -- -- 6,165,181 ---------- ----------- ------- -------- -------- ---------- ----------- EXPENSES Selling, general and administrative 3,996,244 2,400,979 2,045 -- -- -- 6,399,268 Interest and bank charges 1,172,627 163,764 278 -- -- 26,430 1,363,099 Depreciation and amortization 1,127,068 34,953 -- -- -- -- 1,162,021 ---------- ----------- ------- -------- -------- ---------- ----------- Income (loss) from continuing operations (2,800,044) (505,376) 572,643 -- -- (26,430) (2,759,207) ---------- ----------- ------- -------- -------- ---------- ----------- Loss from discontinued operations (net of income tax) (854,744) -- -- -- (854,744) ---------- ----------- ------- -------- -------- ---------- ----------- Net income (loss) and comprehensive income (loss) for the period (3,654,788) (505,376) 572,643 -- -- (26,430) (3,613,951) ========== =========== ======= ======== ======== ========== =========== Pro forma information Loss per share $ (0.38) $ (0.24) Shares used in calculation 9,587,540 14,942,540 ---------- ----------- ------- -------- -------- ---------- -----------
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 (Unaudited - Expressed in Canadian dollars) Note 1. Significant accounting policies Basis of presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. They are expressed in Canadian dollars which is the currency of the primary economic environment in which operations are conducted. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Basis of consolidation All significant intercompany transactions have been eliminated. Foreign exchange translation U.S. dollar accounts in these consolidated financial statements are translated into Canadian dollars on the following bases: [a] The assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the consolidated balance sheet dates. [b] Revenue and expenses are translated at a rate approximating the rates of exchange prevailing on the dates of the transactions. [c] Any gains and losses on foreign currency transactions are recorded in operations as incurred. Revenues Revenue from network services is recognized on a monthly basis beginning when the systems are installed on the purchasers' premises. The payment terms are on a monthly basis. Revenue from Pay-tv is recognized at the time of viewing. Revenue from event programming is recognized upon completion of the contract. Revenue from advertising sponsorship is recognized on a monthly basis over the term of the contract. Revenue from video sales and video dubbing is recognized upon shipment. Revenue from the sale of computer products is recognized when the products are shipped. Revenue from maintenance contracts is recognized when the service has been provided. Software sales are recognized in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition." Pursuant to SOP 97-2, software sales are recognized on sales contracts when all of the following conditions are met: a signed contract is obtained, delivery has occurred, the total sales price is fixed and determinable, collectibility is probable, and any uncertainties with regard to customer acceptance are insignificant. For those contracts that include a combination of software and services, sales are allocated among the different elements based on company-specific evidence of fair value of each element. Sales allocated to software are recognized as the above criteria are met. Sales allocated to services are recognized as services are performed and accepted by the customer or, for maintenance agreements, ratably over the life of the related contract. Cash and cash equivalents Cash and cash equivalents include cash and term deposits, which mature in less than three months from the date of issue. The carrying value of term deposits approximates their fair values. Short-term investments Investments at February 28, 2002 and 2001 consist of debt securities and marketable equity securities. The Company has classified its portfolio as "trading". Trading securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized gains and losses on trading securities are included in the determination of net income (loss) for the year. The fair value of these securities represents current quoted market offer prices. Inventory Inventory consists of finished goods held for sale or rent, which are valued at the lower of cost, using the first-in, first-out method, and net realizable value. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Equipment is depreciated using a declining balance rate of 20%. Computer equipment as well as masters and libraries are depreciated using a declining balance rate of 30%. Automobiles are depreciated on a straight-line basis over 3 years, buildings on a straight-line basis over 25 years, software on a straight-line basis over 3 years and rental equipment and leasehold improvements both on a straight-line basis over 5 years. On an ongoing basis, management reviews the valuation and depreciation of property and equipment, taking into consideration any events and circumstances which might have impaired the carrying value. The Company assumes there is an impairment if the carrying amount is greater than the expected net future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows, using a discount rate that reflects the Company's average cost of funds. Software development costs The Company capitalizes the costs of software development when technological feasibility of the computer software product is established. Capitalization of software ceases when the product is available for release to customers. Capitalized costs are amortized on the basis of products sold. Licenses and goodwill Licenses are stated at cost less accumulated amortization. Amortization for the NTNC license is provided over a 25-year period using the straight-line basis to December 31, 2015. Accumulated amortization amounted to $143,763 at February 28, 2002 [2001 - $131,260]. On August 28, 1998, the Company entered into an agreement [the "Players license"] for $78,401 [U.S.$50,000] with Players Network Inc. ["Players"], whereby the Company was appointed by Players as the exclusive Canadian distributor of its products. The Company was also granted the irrevocable option, by Players, to purchase from treasury up to 50,000 common shares in the capital stock of Players, at a purchase price of $1.75 per share (U.S.). This option expired on August 28, 2000 and was not exercised. The agreement provided the Company the right to terminate the agreement for the 30-day period immediately following the end of the first year of the term of the agreement. In the event the agreement is so terminated, the Company would receive, from treasury, 50,000 common shares in the capital stock of Players. The agreement was not terminated. Amortization of this license is provided over a 10-year period using the straight-line basis to 2009. Accumulated amortization amounted to $27,463 [2001 - $19,617]. Goodwill is stated at cost less accumulated amortization. Amortization is provided using the straight-line basis over a period varying from 10 to 20 years, depending on the transaction that generated the goodwill. Accumulated amortization amounted to $28,924 [2001 - $nil], net of amounts included in discontinued operations. On an ongoing basis, management reviews the valuation and amortization of the licenses and goodwill, taking into consideration any events and circumstances which might have impaired the fair value. The Company assumes there is an impairment if the carrying amount is greater than the expected net future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows, using a discount rate that reflects the Company's average cost of funds. (See "Recent Pronouncements" below) Other assets Other assets are stated at cost net of amortization. Amortization is provided using a straight-line basis over the estimated life of the assets. Income taxes The Company accounts for deferred income tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in accordance with SFAS No. 109. Earnings per share Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period excluding contingent shares issued in accordance with SFAS No. 128. Diluted earnings per share are calculated in accordance with the treasury stock method and are based on the weighted average number of common shares and dilutive common share equivalents outstanding. Employee stock options The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued to Employees" ["APB 25"]. Note 2. Pro forma adjustments Pro forma adjustment to record the purchase of Logicorp: Components of purchase price: Cash 1,500,000 Notes payable 2,300,000 Issuance of shares 10,153,080 Shareholders Equity of Logicorp (504,969) ----------- Goodwill 13,448,111 =========== Pro forma adjustment to record interest expense on notes payable issued to purchase Logicorp: Interest expense 26,430 Accrued liabilities 26,430 Pro forma adjustment to eliminate intercompany accounts: Inter-company payable (Logicorp Data Systems Ltd.) 1,308,945 Accrued Liabilities (Logicorp Service Group Ltd.) 173,395 Inter-company receivable (Logicorp Service Group Ltd.) 1,308,945 Other receivables (591360 Alberta Ltd.) 173,395 CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THE YEAR ENDED AUGUST 31, 2001 (Unaudited - Expressed in Canadian dollars)
Logicorp 591360 123557 Chell Group Logicorp Data Service Group Alberta Alberta Adjustments Corporation Systems Ltd. Ltd. Ltd. Ltd. (Note 1) Pro forma $ $ $ $ $ $ $ ------------ ---------- --------- ------ ---------- ----------- ------------ REVENUE 18,222,374 60,315,656 1,696,592 50,000 10,685 -- 80,295,307 COST OF SALES 6,818,111 54,132,802 633,490 -- -- -- 61,584,403 ------------ ---------- --------- ------ ---------- ----------- ------------ 11,404,263 6,182,854 1,063,102 50,000 10,685 -- 18,710,904 ------------ ---------- --------- ------ ---------- ----------- ------------ EXPENSES Selling, general and administrative 16,421,578 5,610,940 869,911 683 19,612 -- 22,922,724 Loss from equity investment 301,100 -- -- -- -- -- 301,100 Write-off of leaseholds 355,560 -- -- -- -- -- 355,560 Interest and bank charges 881,398 286,395 -- -- -- 125,157 1,292,950 Depreciation and amortization 3,040,407 60,986 -- -- -- -- 3,101,393 Minority Interest 27,061 -- -- -- -- -- 27,061 ------------ ---------- --------- ------ ---------- ----------- ------------ Income (loss) from continuing operations (9,622,841) 224,533 193,191 49,317 (8,927) (125,157) (9,289,884) ------------ ---------- --------- ------ ---------- ----------- ------------ Loss from discontinued operations (net of income tax) (1,603,384) -- -- -- -- -- (1,603,384) ------------ ---------- --------- ------ ---------- ----------- ------------ Net income (loss) and comprehensive income (loss) for the period (11,226,225) 224,533 193,191 49,317 (8,927) (125,157) (10,893,268) ============ ========== ========= ====== ========== =========== ============ Pro forma information Loss per share $ (1.34) $ (0.79) Shares used in calculation 8,393,589 13,748,589 ------------ ---------- --------- ------ ---------- ----------- ------------
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2001 (Unaudited - Expressed in Canadian dollars) Note 1. Pro forma adjustments Pro forma adjustment to record interest expense on notes payable issued to purchase Logicorp: Interest expense 125,157 Accrued liabilities 125,157 -----END PRIVACY-ENHANCED MESSAGE-----