-----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, Spdaq9iMIqK4zKvIYnu1M5xH9yoGmfXsEj4DihC87IqqTq7vkeupHTxDnmifmtD6 ntvRcCicoDdijPFnkt++Iw== 0001005477-02-001270.txt : 20020415 0001005477-02-001270.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001270 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020315 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020318 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18066 FILM NUMBER: 02578076 BUSINESS ADDRESS: STREET 1: 14 METEOR DR STREET 2: BLDG 18 CITY: ETOBOCOKE ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR CITY: ETOBICOKE ONTARIO STATE: A6 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 1 d02-36597.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 8-K 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 (Commission (IRS Employer of jurisdiction 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 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 "A" 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. 2 Attached hereto and made a part hereof are Pro Forma financial projections 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 December 31, 2001. (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. + + Incorporated by reference. See Exhibit Index 3 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: March 18, 2002 By: /s/ Don Pagnutti ------------------------------------- Don Pagnutti, Vice President, Finance and Chief Financial Officer 4 ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ FINANCIAL STATEMENTS JUNE 30, 2001 [LOGO] LOGICORP ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ 2001 CONTENTS PAGE ---- AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statements of Loss and Retained Earnings 3 Statement of Cash Flows 4 Notes to the Financial Statements 5-9 Schedule of Branch Operations 10 Schedule of Corporate Office 11 [LETTERHEAD OF GRANT THORNTON] Auditors' Report To the Shareholders of Logicorp Data Systems Ltd. We have audited the balance sheet of Logicorp Data Systems 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 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 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 operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. /s/ Grant Thornton LLP Edmonton, Canada September 6, 2001 Chartered Accountants ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ BALANCE SHEET AS AT JUNE 30 ASSETS 2001 2000 - -------------------------------------------------------------------------------- CURRENT Accounts receivable $ 8,536,751 $ 7,722,714 Inventory 1,549,794 1,726,787 Income taxes receivable 35,693 37,945 Prepaid expenses 99,227 121,316 - -------------------------------------------------------------------------------- 10,221,465 9,608,762 CAPITAL ASSETS (Note 2) 1,356,880 837,882 - -------------------------------------------------------------------------------- $11,578,345 $10,446,644 ================================================================================ LIABILITIES CURRENT Bank indebtedness (Note 3) $ 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 4) 561,532 524,445 DUE TO RCA TRUSTS (Note 5) 1,020,454 863,195 DUE TO RELATED PARTIES (Note 6) 298,628 73,628 - -------------------------------------------------------------------------------- 11,134,016 9,997,533 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 7) 99 99 RETAINED EARNINGS 444,230 449,012 - -------------------------------------------------------------------------------- 444,329 449,111 - -------------------------------------------------------------------------------- $11,578,345 $10,446,644 ================================================================================ COMMITMENTS (Note 9) APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director See accompanying notes to the financial statements 2. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ STATEMENTS OF LOSS AND RETAINED EARNINGS FOR THE PERIOD ENDED JUNE 30 2001 2000 (12 Months) (4 Months) - -------------------------------------------------------------------------------- EARNINGS (LOSS) FROM BRANCH OPERATIONS (Page 10) $ 603,911 $ (65) (LOSS) EARNINGS FROM CORPORATE OFFICE (Page 11) (200,971) 71,455 - -------------------------------------------------------------------------------- EARNINGS FROM OPERATIONS 402,940 71,390 OTHER REVENUE AND (EXPENSE) Interest revenue 3,593 2,791 Retirement compensation agreements (400,000) -- - -------------------------------------------------------------------------------- NET EARNINGS BEFORE INCOME TAXES 6,533 74,181 PROVISION FOR INCOME TAXES 11,315 7,903 - -------------------------------------------------------------------------------- NET (LOSS) EARNINGS (4,782) 66,278 RETAINED EARNINGS, beginning of period 449,012 382,734 - -------------------------------------------------------------------------------- RETAINED EARNINGS, end of period $ 444,230 $ 449,012 ================================================================================ See accompanying notes to the financial statements 3. ================================================================================ LOGICORP DATA SYSTEMS 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 (loss) earnings $ (4,782) $ 66,278 Items not requiring an outlay of cash: Amortization 122,046 29,075 - -------------------------------------------------------------------------------- 117,264 95,353 CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable (814,037) 1,089,473 Inventory 176,993 (104,290) Prepaid expenses 22,089 (40,512) Accounts payable and accrued liabilities (335,270) (1,591,077) Income taxes receivable 2,252 1,583 - -------------------------------------------------------------------------------- (830,709) (549,470) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Advances from Directors 225,000 -- Advances from (to) affiliated company 37,087 (240,126) Advances from (to) RCA Trusts 157,259 (38,353) - -------------------------------------------------------------------------------- 419,346 (278,479) - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (641,044) (28,954) - -------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (1,052,407) (856,903) BANK INDEBTEDNESS, beginning of period (2,270,523) (1,413,620) - -------------------------------------------------------------------------------- BANK INDEBTEDNESS, end of period $(3,322,930) $(2,270,523) ================================================================================ SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid $ 311,022 $ 59,794 Income taxes 3,294 6,320 See accompanying notes to the financial statements 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 banks, net of bank overdrafts. The operating line of credit is included in cash and cash equivalents. (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. CAPITAL ASSETS Accumulated 2001 2000 Cost Amortization Net Book Net Book Value Value - -------------------------------------------------------------------------------- Automotive equipment $ 23,300 $ 12,027 $ 11,273 $ 318 Computer equipment 38,154 28,613 9,541 9,812 Computer software 888,611 28,985 859,626 325,399 Leasehold improvements 142,004 60,883 81,121 80,531 Office equipment 662,885 267,566 395,319 421,822 Small tools 791 791 -- -- - -------------------------------------------------------------------------------- $1,755,745 $ 398,865 $1,356,880 $837,882 ================================================================================ 3. BANK INDEBTEDNESS Bank indebtedness bears interest at 0.82% over the bank prime rate 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 ================================================================================ 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. 4. DUE TO AFFILIATED COMPANY The amounts due to Logicorp Service Group Ltd. are unsecured, non-interest bearing and have no specific terms of repayment. 6. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 5. DUE TO RCA TRUSTS 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 four years is as follows: 2002 $ 48,000 2003 48,000 2004 48,000 2005 48,000 Subsequent 876,454 6. DUE TO RELATED PARTIES Amounts due to related parties are unsecured, non-interest bearing and have no specific terms of repayment. 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. SHARE CAPITAL Authorized Unlimited Class A common voting shares Unlimited Class B common voting shares Unlimited Class C preferred shares 2001 2000 - -------------------------------------------------------------------------------- Issued 1,980 Class A common voting shares $99 $99 ================================================================================ 7. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 8. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Service Group Ltd. by virtue of common control. During the year the company purchased services from Logicorp Service Group Ltd. and charged fees to Logicorp Service Group Ltd. 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. 9. 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 is as follows: 2002 $530,000 2003 530,000 2004 530,000 2005 530,000 2006 530,000 10. 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. 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. 8. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2001 - -------------------------------------------------------------------------------- 11. COMPARATIVE FIGURES Certain of the prior year's figures have been reclassified to conform to the current period's financial statement presentaion. 9. ================================================================================ 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 Income and Retained Earnings 3 Statement of Cash Flows 4 Notes to Financial Statements 5-9 Schedule of Branch Operations 10 Schedule of Corporate Operations 11 AUDITOR'S REPORT To the Shareholders 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, retained earnings and changes in financial position 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 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 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 the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. Edmonton, Alberta July 19, 2000 CHARTERED ACCOUNTANTS 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) 1,726,787 1,622,497 Income taxes receivable 37,945 39,528 Prepaid expenses 121,316 80,804 - -------------------------------------------------------------------------------- 9,608,762 10,555,016 CAPITAL ASSETS (Note 3) 837,882 838,003 - -------------------------------------------------------------------------------- $10,446,644 $11,393,019 ================================================================================ LIABILITIES CURRENT Bank indebtedness (Note 5) $ 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 6) 524,445 764,571 DUE TO RCA TRUSTS (Note 7) 863,195 901,548 DUE TO SHAREHOLDERS (Note 4) 73,628 73,628 - -------------------------------------------------------------------------------- 9,997,533 11,010,186 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 8) 99 99 RETAINED EARNINGS 449,012 382,734 - -------------------------------------------------------------------------------- 449,111 382,833 - -------------------------------------------------------------------------------- $10,446,644 $11,393,019 ================================================================================ APPROVED ON BEHALF OF THE BOARD: _____________________________ Director _____________________________ Director See accompanying notes to the financial statements 2. ================================================================================ LOGICORP DATA SYSTEMS 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 DATA SYSTEMS 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 income (loss) $ 66,278 $ (22,023) Items not requiring an outlay of cash: Amortization 29,075 94,329 - -------------------------------------------------------------------------------- 95,353 72,306 CHANGES IN NON-CASH WORKING CAPITAL BALANCES Accounts receivable 1,089,473 (1,559,053) Inventory (104,290) 1,008,274 Prepaid expenses (40,512) (10,248) Accounts payable and accrued liabilities (1,591,077) 792,304 Income taxes receivable 1,583 (48,036) - -------------------------------------------------------------------------------- (549,470) 255,547 - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Advances from shareholders -- 75,000 Advances (to) from affiliated company (240,127) 568,278 (Decrease) increase in Due to RCA Trusts (38,353) 234,738 - -------------------------------------------------------------------------------- (278,480) 878,016 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (28,954) (744,030) - -------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (856,904) 389,533 BANK INDEBTEDNESS, beginning of period (1,413,620) (1,803,153) - -------------------------------------------------------------------------------- BANK INDEBTEDNESS, end of period $(2,270,524) $(1,413,620) ================================================================================ Supplementary cash flow information: Interest paid 47,041 86,699 Income taxes 6,320 31,650 See accompanying notes to the financial statements 4. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General 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 banks, net of bank overdrafts. The operating line of credit is included in cash and cash equivalents. (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 During the prior year, the Company changed the estimate of internally used inventory to have an economic life of approximately 4 years. Office inventory was not previously amortized. Beginning the year ended February 29, 2000, office inventory has been amortized on a straight line basis at 2% per month. This change in estimate resulted in recording amortization of inventory of $39,930 for the current 4 month period, (February 29, 2000 - $137,028 for the prior 12 month period). 3. CAPITAL ASSETS
Accumulated June 30, 2000 Feb 29, 2000 Cost Amortization Net Book Net Book Value Value - ---------------------------------------------------------------------------------------- Automotive equipment $ 10,300 $ 9,982 $ 318 $ 352 Computer equipment 35,010 25,198 9,812 10,902 Computer software 346,397 20,998 325,399 190,485 Leasehold improvements 123,452 42,921 80,531 188,481 Office and equipment 598,753 176,931 421,822 447,783 Small tools 791 791 -- -- - ---------------------------------------------------------------------------------------- $1,114,703 $276,821 $837,882 $838,003 ========================================================================================
Amortization recorded in the current year amounted to $29,075; (Feb 29, 2000 - $94,329). 4. DUE TO SHAREHOLDERS Amounts due to shareholders are unsecured, non-interest bearing and have no specific terms of repayment. 6. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 - -------------------------------------------------------------------------------- 5. BANK INDEBTEDNESS Bank indebtedness bears interest at 1% over the bank prime rate 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 Ltd. and guarantees in the amount of $1,800,000 from the Company's Directors. 6. DUE TO AFFILIATED COMPANY The amounts due to Logicorp Service Group Ltd. are unsecured, non-interest bearing and have no specific terms of repayment. 7. DUE TO RCA TRUSTS 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: 2001 $ 48,000 2002 48,000 2003 48,000 2004 48,000 Subsequent 719,195 7. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 - -------------------------------------------------------------------------------- 8. SHARE CAPITAL Unlimited Class A common voting shares Unlimited Class B common voting shares Unlimited Class C preferred shares June 30, 2000 Feb 29, 2000 - -------------------------------------------------------------------------------- Issued 1,980 Class A common voting shares $99 $99 ================================================================================ 9. RELATED PARTY TRANSACTIONS The company is affiliated with Logicorp Service Group Ltd. by virtue of common control. During the year the company purchased services from Logicorp Service Group Ltd. and charged fees to Logicorp Service Group Ltd. 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 Ltd. 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 is as follows. 2001 $495,000 2002 495,000 2003 495,000 2004 495,000 2005 495,000 8. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 - -------------------------------------------------------------------------------- 11. FINANCIAL INSTRUMENTS 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 bank indebtedness, accounts receivable, inventory and payables and accruals 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 shareholders 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. 12. COMPARATIVE FIGURES Certain of the prior year's figures have been restated to conform to the current period's financial statement presentaion. 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. 9. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ SCHEDULE OF BRANCH OPERATIONS FOR THE PERIOD ENDED
Edmonton Calgary Vancouver Saskatoon June 30, 2000 Feb 29, 2000 (4 Months) (12 Months) SALES $7,912,631 $ 6,766,564 $2,757,139 $ 1,332,503 $ 18,768,837 $53,034,932 - ------------------------------------------------------------------------------------------------------------------------------------ COST OF SALES 7,549,535 6,498,782 2,517,431 1,347,343 17,913,091 49,937,473 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS PROFIT 363,096 267,782 239,708 (14,840) 855,746 3,097,459 - ------------------------------------------------------------------------------------------------------------------------------------ EXPENSES Advertising and promotion 16,287 16,107 34,803 4,200 71,397 240,732 Amortization 15,283 4,116 3,215 2,066 24,680 62,248 Bad debt expense -- -- -- -- -- 5,542 Corporate expense allocation 158,484 135,189 55,140 26,609 375,422 1,083,972 Insurance 1,778 1,252 788 493 4,311 8,894 Interest and bank charges 25,826 19,446 9,135 5,386 59,793 199,489 Licences, memberships and taxes 4,209 3,786 750 719 9,464 35,658 Office expenses 18,153 15,551 16,278 9,305 59,287 164,965 Professional fees -- 22,146 2,933 -- 25,079 42,052 Rent 6,453 4,731 6,196 890 18,270 49,999 Salaries and benefits 54,153 37,467 30,508 16,207 138,335 387,539 Telephone 6,801 4,915 4,738 4,153 20,607 129,013 Training 2,976 6,621 -- -- 9,597 80,983 Travel 18,930 12,747 3,557 4,335 39,569 261,600 - ------------------------------------------------------------------------------------------------------------------------------------ 329,333 284,074 168,041 74,363 855,811 2,752,686 - ------------------------------------------------------------------------------------------------------------------------------------ (LOSS)INCOME FROM OPERATIONS $ 33,763 $ (16,292) $ 71,667 $ (89,203) $ (65) $ 344,773 ====================================================================================================================================
See accompanying notes to the financial statements 10. ================================================================================ LOGICORP DATA SYSTEMS LTD. ================================================================================ SCHEDULE OF CORPORATE OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 - -------------------------------------------------------------------------------- (4 Months) (12 Months) Revenues $ 595,895 $1,550,828 - -------------------------------------------------------------------------------- Expenses Advertising and promotion 25,267 87,611 Amortization 4,395 32,081 Insurance 13,887 42,949 Interest and bank charges 4 10,270 Licences, memberships and taxes 3,850 6,731 Office expenses 15,348 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 38,616 - -------------------------------------------------------------------------------- 524,440 1,471,073 - -------------------------------------------------------------------------------- INCOME FROM OPERATIONS $ 71,455 $ 79,755 ================================================================================ See accompanying notes to the financial statements 11. ================================================================================ 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 AUDITOR'S REPORT To the Shareholders 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, retained earnings and changes in financial position 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 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 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 the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. Edmonton, Alberta July 19, 2000 CHARTERED ACCOUNTANTS 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. ================================================================================ STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE PERIOD ENDED JUNE 30, 2000 Feb 29, 2000 (4 Months) (12 Months) - -------------------------------------------------------------------------------- (LOSS) INCOME FROM BRANCH OPERATIONS (Page 10) $ (65) $ 344,773 INCOME FROM CORPORATE OPERATIONS (Page 11) 71,455 79,755 - -------------------------------------------------------------------------------- INCOME FROM OPERATIONS 71,390 424,528 OTHER REVENUE AND (EXPENSE) Interest revenue 2,791 3,449 Retirement compensation agreements -- (450,000) - -------------------------------------------------------------------------------- NET INCOME (LOSS) BEFORE INCOME TAXES 74,181 (22,023) PROVISION FOR INCOME TAXES 7,903 -- - -------------------------------------------------------------------------------- NET INCOME (LOSS) 66,278 (22,023) RETAINED EARNINGS, beginning of period 382,734 404,757 - -------------------------------------------------------------------------------- RETAINED EARNINGS, end of period $ 449,012 $ 382,734 ================================================================================ 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) General 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. 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 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. 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. Financial Statements For the years ended June 30, 2001 and 2000 [BDO LOGO] 591360 Alberta Ltd. Financial Statements For the years ended June 30, 2001 and 2000 Contents ================================================================================ Auditors' Report 2 Financial Statements Balance Sheets 3 Statements of Operations and Retained Earnings 4 Summary of Significant Accounting Policies 5 Notes to Financial Statements 6 [BDO LOGO] [BDO LOGO] BDO Dunwoody LLP 1000 First Edmonton Place Chartered Accountants 10665 Jasper Avenue and Consultants Edmonton Alberta Canada T5J 3S9 Telephone: (780) 423-4353 Telefax: 17801 424-2110 ================================================================================ Auditors' Report - -------------------------------------------------------------------------------- To the Shareholder of 591360 Alberta Ltd. We have audited the balance sheets of 591360 Alberta Ltd. as at June 30, 2001 and 2000 and the statements of operations and retained earnings for the years 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 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. The Company accounts for its investment in a company subject to significant influence on a cost basis. Canadian generally accepted accounting principles require that the investment be accounted for on an equity basis. In our opinion, except that the investment subject to significant influence is accounted for on a cost basis rather than an equity basis, these 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. /s/ BDO Dunwoody LLP Chartered Accountants Edmonton, Alberta January 29, 2002 2 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario ================================================================================ 591360 Alberta Ltd. Balance Sheets June 30 2001 2000 - -------------------------------------------------------------------------------- Assets Current Cash $ 464 $ 442 Long-term investment (Note 1) Due from related parties 10 10 (Note 3) 173,395 119,535 ---------------------- $173,869 $119,987 ================================================================================ 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 170,359 118,727 ---------------------- 170,369 118,737 ---------------------- $173,869 $119,987 ================================================================================ On behalf of the Board: /s/ [ILLEGIBLE] Director - ---------------- The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. [BDO LOGO] 3 ================================================================================ 591360 Alberta Ltd. Statements of Operations and Retained Earnings For the years ended June 30 2001 2001 - -------------------------------------------------------------------------------- Dividend income $ 53,860 $ 50,000 ----------------------- Expenses (recovery) Bank charges and interest (22) 22 Professional fees 2,250 661 ----------------------- 2,228 683 ----------------------- Net income for the year 51,632 49,317 Retained earnings, beginning of year 118,727 106,410 Dividends paid -- (37,000) ----------------------- Retained earnings, end of year $ 170,359 $ 118,727 ================================================================================ The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. [BDO LOGO] 4 ================================================================================ 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 financial statement 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 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 investment in shares in recorded at cost. [BDO LOGO] 5 =============================================================================== 591360 Alberta Ltd. Notes to 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. - -------------------------------------------------------------------------------- 2. Income Taxes The Company has losses available for income tax purposes totalling $5,283. This amount can be used to reduce taxable income of future years, the benefit of which has not been recorded in these financial statements. These losses expire as follows: Year Amount 2003 $ 731 2005 907 2006 734 2007 683 2008 2,228 ------- $ 5,283 ======= - -------------------------------------------------------------------------------- 3. Related Party Transactions At the end of the year, the amounts due from related parties are as follows: 2001 2000 ---------------------- Company under common control $ 69,535 $ 69,535 Company subject to significant influence 103,860 50,000 ---------------------- $173,395 $119,535 ====================== These balances are unsecured, non-interest bearing, with no fixed terms of repayment. - -------------------------------------------------------------------------------- 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 ====================== - -------------------------------------------------------------------------------- [BDO LOGO] 6 ================================================================================ 591360 Alberta Ltd. Notes to Financial Statements June 30, 2001 and 2000 - -------------------------------------------------------------------------------- 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 financial statements. - -------------------------------------------------------------------------------- [BDO LOGO] 7 123557 Alberta Ltd. (Formerly Merc Management Limited) Financial Statements For the years ended October 31, 2001 and 2000 [BDO LOGO] 123557 Alberta Ltd. Financial Statements For the years ended October 31, 2001 and 2000 Contents ================================================================================ Auditors' Report 2 Financial Statements Balance Sheets 3 Statements of Operations and Retained Earnings 4 Summary of Significant Accounting Policies 5 Notes to Financial Statements 6 [BDO LOGO] [BDO LOGO] BDO Dunwoody LLP 1000 First Edmonton Place Chartered Accountants 10665 Jasper Avenue and Consultants Edmonton Alberta Canada T5J 3S9 Telephone: (780) 423-4353 Telefax: (780) 424-2110 ================================================================================ Auditors' Report - -------------------------------------------------------------------------------- To the Shareholders of 123557 Alberta Ltd. We have audited the balance sheets of 123557 Alberta Ltd. as at October 31, 2001 and 2000 and the statements of operations and retained earnings for the years 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 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. The Company accounts for its investment in a company subject to significant influence on a cost basis. Canadian generally accepted accounting principles require that the investment be accounted for on an equity basis. In our opinion, except that the investment subject to significant influence is accounted for on a cost basis rather than an equity basis, these 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. /s/ BDO Dunwoody LLP Chartered Accountants Edmonton, Alberta February 23, 2002 [BDO LOGO] 2 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario ================================================================================ 123557 Alberta Ltd. 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 related parties -- 4,355 ---------------------- -- 62,844 Long-term investment (Note 1) 5,228 5,228 ---------------------- $ 5,228 $ 68,072 ================================================================================ Liabilities and Shareholder's Equity Current Accounts payable and accrued liabilities $ 2,499 $ 3,200 ---------------------- Shareholder's equity Share capital (Note 2) 20 20 Retained earnings 2,709 64,852 ---------------------- 2,729 64,872 ---------------------- $ 5,228 $ 68,072 ================================================================================ On behalf of the Board: /s/ [ILLEGIBLE] Director - ------------------- /s/ [ILLEGIBLE] Director - ------------------- The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. [BDO LOGO] 3 ================================================================================ 123557 Alberta Ltd. Statements of Operations and Retained Earnings For the years ended June 30 2001 2001 - -------------------------------------------------------------------------------- Revenue Consulting $ 9,000 $ 12,000 Investment loss (6,335) (1,315) ----------------------- 2,665 10,685 Expenses Avertising 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 for the year (21,865) (8,927) Retained earnings, beginning of year 64,852 73,779 Dividends paid (36,812) -- Adjustment on transaction with a company under common control (Note 5) (3,466) -- ----------------------- Retained earnings, end of year $ 2,709 $ 64,852 ================================================================================ The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. [BDO LOGO] 4 ================================================================================ 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 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 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 Investments The investment in shares is recorded at cost. [BDO LOGO] 5 ================================================================================ 123557 Alberta Ltd. Notes to 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. - -------------------------------------------------------------------------------- 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 A common shares 10 10 ---------------------- $ 20 $ 20 ====================== - -------------------------------------------------------------------------------- 3. Income Taxes The Company has losses available for income tax purposes totalling $74,210. This amount can be used to reduce taxable income of future years, the benefit of which has not been recorded in these financial statements. These losses expire as follows: Year Amount 2004 $14,431 2005 520 2006 30,242 2007 4,220 2008 24,887 ------- $74,210 ======= - -------------------------------------------------------------------------------- 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 financial statements. - -------------------------------------------------------------------------------- [BDO LOGO] 6 ================================================================================ 123557 Alberta Ltd. Notes to Financial Statements October 31, 2001 and 2000 - -------------------------------------------------------------------------------- 5. Related Party Transaction During the year, the Company transferred a significant portion of its nets 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 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. - -------------------------------------------------------------------------------- 7 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 exchangeable shares of Chell's wholly owned subsidiary Chell Merchant Capital Group. 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 with those of Chell as of the effective date of the Logicorp transaction. The pro forma condensed consolidated balance sheet as of August 31, 2001 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 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 consolidated balance sheet as of December 31, 2001 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 4 months ended December 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, 2001. 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 August 31, 2001 (Unaudited - Expressed in Canadian dollars)
- --------------------------------------------------------------------------------------------------------------- Chell Group Corporation LogiCorp Adjustments Profroma - --------------------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 356,421 -- -- 356,421 Short-term investments 19,676 -- -- 19,676 Accounts receivable, trade - net of allowance for -- -- -- -- doubtful accounts 2,308,790 7,902,741 -- 10,211,531 Other receivables 84,814 -- -- 84,814 Income taxes receivable 155,204 (3,705) -- 151,499 Inventory 105,590 1,589,057 -- 1,694,647 Prepaid expenses 570,868 80,526 -- 651,394 - --------------------------------------------------------------------------------------------------------------- 3,601,363 9,568,619 -- 13,169,982 - --------------------------------------------------------------------------------------------------------------- Property and equipment, net 8,260,282 1,379,045 -- 9,639,327 Licenses, net of accumulated amortization 247,321 -- -- 247,321 Goodwill, net of accumulated amortization 1,795,737 -- 13,799,215 15,594,952 Notes receivable 160,000 -- -- 160,000 Deposit on purchase 1,689,710 -- -- 1,689,710 Other assets, net of amortization 388,032 -- -- 388,032 Net assets from discontinued operations 82,558 -- -- 82,558 - --------------------------------------------------------------------------------------------------------------- 16,225,003 10,947,664 13,799,215 40,971,882 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness -- 3,829,086 -- 3,829,086 Accounts payable - trade 2,469,663 5,662,285 -- 8,131,948 Notes payable -- -- 4,040,000 4,040,000 Accrued liabilities 1,789,042 -- -- 1,789,042 Current portion of long-term debt 3,774,658 -- -- 3,774,658 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 8,033,363 9,491,371 4,040,000 21,564,734 - --------------------------------------------------------------------------------------------------------------- Long-term debt, net of current portion 5,884,339 1,073,459 -- 6,957,798 Deferred income taxes payable 59,173 -- -- 59,173 - --------------------------------------------------------------------------------------------------------------- 13,976,875 10,564,830 4,040,000 28,581,705 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingent liabilities Shareholders' equity Share capital Common shares 604,109 130 394,565 998,804 Capital in excess of par value 14,143,533 -- 9,747,354 23,890,887 Retained earnings (deficit) (12,499,514) 382,704 (382,704) (12,499,514) - --------------------------------------------------------------------------------------------------------------- 2,248,128 382,834 9,759,215 12,390,177 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 16,225,003 10,947,664 13,799,215 40,971,882 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2001 [Unaudited - Expressed in Canadian dollars]
- --------------------------------------------------------------------------------------------------------------------- Chell Group Corporation Logicorp Adjustments Proforma $ $ $ $ - --------------------------------------------------------------------------------------------------------------------- REVENUE 18,222,374 58,759,601 -- 76,981,975 COST OF SALES 6,818,111 51,859,917 -- 58,678,028 - --------------------------------------------------------------------------------------------------------------------- 11,404,263 6,899,684 -- 18,303,947 - --------------------------------------------------------------------------------------------------------------------- EXPENSES Selling, general and administrative 16,421,578 6,134,579 -- 22,556,157 Loss from equity investment in Engyro 301,100 -- -- 301,100 Write-off of leaseholds 355,560 -- -- 355,560 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) before interest & depreciation (5,673,975) 765,105 -- (4,908,870) - --------------------------------------------------------------------------------------------------------------------- Interest and bank charges 881,398 286,395 -- 1,167,793 Depreciation and amortization 3,040,407 60,986 -- 3,101,393 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) before undernoted (9,595,780) 417,724 -- (9,178,056) - --------------------------------------------------------------------------------------------------------------------- Minority interest (27,061) -- -- (27,061) - --------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (9,622,841) 417,724 -- (9,205,117) - --------------------------------------------------------------------------------------------------------------------- Loss from discontinued operations (net of income tax) (1,603,384) -- -- (1,603,384) - --------------------------------------------------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the year (11,226,225) 417,724 -- (10,808,501) ===================================================================================================================== - --------------------------------------------------------------------------------------------------------------------- Proforma information Loss per share $ (1.34) $ (0.79) Shares used in calculation 8,393,589 13,728,589 - ---------------------------------------------------------------------------------------------------------------------
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] Pro forma adjustments to record the purchase of Logicorp: Components of purchase price: Cash 1,500,000 Notes payable 2,540,000 Issuance of shares 10,142,049 Shareholders Equity of Logicorp (382,834) ---------- Goodwill 13,799,215 ========== CHELL GROUP CORPORATION PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS As at Dec 31, 2001 (Unaudited - Expressed in Canadian dollars)
- ------------------------------------------------------------------------------------------------------------------ Chell Group Corporation LogiCorp Adjustments Profroma - ------------------------------------------------------------------------------------------------------------------ ASSETS Current Cash and cash equivalents 165,339 -- -- 165,339 Short-term investments 4,719 -- -- 4,719 Accounts receivable, trade -- net of allowance for -- -- -- -- doubtful accounts 1,979,869 7,862,338 -- 9,842,207 Other receivables 233,236 -- -- 233,236 Income taxes receivable 155,271 1,436 -- 156,707 Inventory 89,535 1,542,340 -- 1,631,875 Prepaid expenses 576,816 52,536 -- 629,352 - ------------------------------------------------------------------------------------------------------------------ 3,204,785 9,458,650 -- 12,663,435 - ------------------------------------------------------------------------------------------------------------------ Property and equipment, net 7,513,307 1,428,067 -- 8,941,374 Licenses, net of accumulated amortization 240,123 -- -- 240,123 Goodwill, net of accumulated amortization 1,764,597 -- 13,730,387 15,494,984 Notes receivable 160,000 -- -- 160,000 Deposit on purchase 1,689,710 -- -- 1,689,710 Other assets, net of amortization 328,682 -- -- 328,682 - ------------------------------------------------------------------------------------------------------------------ 14,901,204 10,886,715 13,730,387 39,518,308 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness -- 3,615,343 -- 3,615,343 Accounts payable -- trade 2,777,433 5,230,816 -- 8,008,249 Notes payable -- -- 4,040,000 4,040,000 Accrued liabilities 1,984,478 -- -- 1,984,478 Current portion of long-term debt 3,625,587 -- -- 3,625,587 - ------------------------------------------------------------------------------------------------------------------ Total current liabilities 8,387,498 8,846,159 4,040,000 21,273,657 - ------------------------------------------------------------------------------------------------------------------ Long-term debt, net of current portion 6,049,797 1,588,896 -- 7,638,693 Deferred income taxes payable 59,173 -- -- 59,173 - ------------------------------------------------------------------------------------------------------------------ 14,496,468 10,435,055 4,040,000 28,971,523 - ------------------------------------------------------------------------------------------------------------------ Commitments and Contingent liabilities Shareholders' equity Share capital Common shares 604,109 130 394,565 998,804 Capital in excess of par value 14,143,533 -- 9,747,354 23,890,887 Retained Earnings (deficit) (12,499,514) 382,704 (382,704) (12,499,514) Net income (loss) (1,843,392) 68,828 (68,828) (1,843,392) - ------------------------------------------------------------------------------------------------------------------ 404,736 451,662 9,690,387 10,546,785 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 14,901,204 10,886,717 13,730,387 39,518,308 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2001 [Unaudited - Expressed in Canadian dollars]
- --------------------------------------------------------------------------------------------------------------------------- Chell Group Corp Logicorp Adjustments Proforma (audited) $ $ $ $ - --------------------------------------------------------------------------------------------------------------------------- REVENUE 5,010,305 14,791,620 19,801,925 COST OF SALES 1,859,279 13,022,951 14,882,230 - --------------------------------------------------------------------------------------------------------------------------- 3,151,026 1,768,669 -- 4,919,695 - --------------------------------------------------------------------------------------------------------------------------- EXPENSES Selling, general and administrative 3,605,574 1,559,626 5,165,200 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) before interest & depreciation (454,548) 209,043 -- (245,505) - --------------------------------------------------------------------------------------------------------------------------- Interest and bank charges 462,933 116,142 579,075 Depreciation and amortization 940,175 24,073 964,248 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) before undernoted (1,857,656) 68,828 -- (1,788,828) - --------------------------------------------------------------------------------------------------------------------------- Minority interest 14,264 -- -- 14,264 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the period (1,843,392) 68,828 -- (1,774,564) =========================================================================================================================== - --------------------------------------------------------------------------------------------------------------------------- Proforma information Loss per share $ (0.20) $ (0.12) Shares used in calculation 9,028,239 14,363,239 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma condensed financial statements CHELL GROUP CORPORATION NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 2001 [Unaudited - Expressed in Canadian dollars] Pro forma adjustments to record the purchase of Logicorp: Components of purchase price: Cash 1,500,000 Notes payable 2,540,000 Issuance of shares 10,142,049 Shareholders Equity of Logicorp (451,662) ----------- Goodwill 13,730,387 =========== EXHIBIT INDEX Exhibit Number Description of Exhibit Location - ------- ---------------------- ---------- 2.1 Share Purchase Agreement by and among Chell Exhibit "A" 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. 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. RESOLUTION OF THE DIRECTORS OF CHELL MERCHANT CAPITAL GROUP INC. (the "Corporation") ALLOTMENT AND ISSUE OF EXCHANGEABLE SHARES FOR CASH BE IT RESOLVED THAT: a) pursuant to a Share Purchase Agreement dated December 13, 2001 and subsequent amendments thereto (collectively the "Agreement") and made between the between Melanie Johannesen, Randy Baxandall, Morris Chynoweth, Elaine Thynoweth, Johannesen Family Trust, Baxandall Family Trust, Merc Family Trust, Logicorp Dan Systems Ltd., 123557 Alberta Ltd., Logicorp Service Group Ltd., 591360 Alberta Ltd., Chell Group Corporation and the Corporation, the board of directors of the Corporation, acting in good faith and in the best interests of the Corporation) hereby allot and issue five million three hundred fifty five thousand (5,355,000) Exchangeable shares in the capital of the Corporation, to die following persons in the numbers and at the subscription prices set opposite their respective names: SUBSCRIPTION NO. OF OF SHARES -------------------------------------------------------------------------- MELAINE JOHANNESEN 1,257,574 JOHANNESEN FAMILY TRUST 527,426 RANDY BAXANDALL 1,596,181 BAXANDALL FAMILY TRUST 188,819 MORRIS CHYNOWETH 703,506 ELAINE CHYNOWETH 703,506 MERC FAMILY TRUST 377,988 b) upon receipt by the Corporation of the consideration set out in the Agreement for the allotment and issue of the said five million three hundred fifty five thousand (5,355,000) Exchangeable shares, the said Exchangeable shares shall be allotted and issued to Baxandall Family Trust Randy Baxandafl, Elaine Chynoweth, Morris Chynoweth, Johannesen Family Trust., Melaine Johannesen and Mere Family Trust as fully paid and non-assessable, and certificates therefor be issued to them or as they may in writing direct. -2- THE FOREGOING RESOLUTION is hereby consented to by all of the directors of the Corporation, as evidenced by their respective signatures hereto in accordance with the provisions of section 129(1) of the Business Corporations Act (Ontario). DATED as of the 1st day of January, 2002. /s/ Donald Pagnutti /s/ Cameron Chell - ------------------------------- ----------------------------- DONALD PAGNUTTI CAMERON CHELL /s/ Gordon Herman - ------------------------------- GORDON HERMAN -----END PRIVACY-ENHANCED MESSAGE-----