10-Q 1 d02-37143.txt FORM 10-Q FORM 10-Q Securities and Exchange Commission Washington D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: February 28, 2002 Commission file number: 0-18066 CHELL GROUP CORPORATION (Exact name of registrant as specified in its charter) New York 11-2805051 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 Meteor Drive Toronto, Ontario, Canada M9W 1A4 (Address of principal executive offices) (Zip Code) (416) 675-6666 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of April 15, 2002: 15,062,040 shares of common stock, par value as US$.0467 per share. CHELL GROUP CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Page ---- Consolidated Balance Sheets - as at February 28, 2002 (unaudited) and August 31, 2001 1 Consolidated Statements of Operations - For the Three Months and Six Months Ended February 28, 2002 and February 28, 2001 (unaudited) 2 Consolidated Statements of Cash Flows - For the Six Months Ended February 28, 2002 and February 28, 2001 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 21 CHELL GROUP CORPORATION CONSOLIDATED BALANCE SHEETS AS AT FEBRUARY 28, 2002 AND AUGUST 31, 2001 (Expressed in Canadian dollars)
===================================================================================================== February 28, 2002 August 31, 2001 (unaudited) [restated Note 11] $ $ ===================================================================================================== ASSETS Current Cash and cash equivalents 97,381 356,421 Short-term investments -- 19,676 Accounts receivable, trade - net of allowance for doubtful accounts of $225,071; August - $150,000 9,486,825 996,557 Other receivables 459,968 84,814 Income taxes receivable 165,005 140,607 Inventory 1,825,015 957 Prepaid expenses 310,793 301,470 ----------------------------------------------------------------------------------------------------- Total current assets 12,344,987 1,900,502 ----------------------------------------------------------------------------------------------------- Property and equipment, net 7,710,280 6,305,405 Licenses, net of accumulated amortization 236,524 229,900 Goodwill, net of accumulated amortization 13,609,273 37,421 Investment in Wareforce 176,518 -- Deposit on purchase 1,689,710 1,689,710 Other assets, net of amortization 614,540 388,032 Net assets from discontinued operations 2,488,932 3,790,424 ----------------------------------------------------------------------------------------------------- 38,870,764 14,341,394 ===================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable - trade 11,893,626 2,044,182 Accrued liabilities 2,006,124 1,259,158 Current portion of long-term debt 9,905,300 3,625,587 ----------------------------------------------------------------------------------------------------- Total current liabilities 23,805,050 6,928,927 ----------------------------------------------------------------------------------------------------- Long-term debt - net of current portion 4,978,074 5,134,339 Deferred income taxes payable 30,000 30,000 ----------------------------------------------------------------------------------------------------- Total liabilities 28,813,124 12,093,266 ----------------------------------------------------------------------------------------------------- Commitments and Contingent liabilities Shareholders' equity Share capital Preferred shares 7,294 -- 14,942,540 common shares [August 2001 - 9,028,239] 1,040,524 604,109 Capital in excess of par value 25,366,699 14,143,533 Accumulated deficit (16,356,877) (12,499,514) ----------------------------------------------------------------------------------------------------- Total shareholders' equity 10,057,640 2,248,128 ----------------------------------------------------------------------------------------------------- 38,870,764 14,341,394 =====================================================================================================
The accompanying notes are an integral part of these statements 1 CHELL GROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in Canadian dollars - unaudited)
=========================================================================================================================== For Three Months Ended For Six Months Ended February 28, February 28, February 28, February 28, 2002 2001 (Restated 2002 2001 (Restated Note 11) Note 11) $ $ $ $ =========================================================================================================================== REVENUE Product sales 9,062,129 -- 9,062,129 -- Service sales 558,243 -- 558,243 -- Network services 1,564,091 1,798,207 3,274,309 3,544,330 Pay-TV 1,204,140 1,511,369 2,736,561 3,296,475 Other (2,592) 49,889 9,647 75,122 --------------------------------------------------------------------------------------------------------------------------- 12,386,011 3,359,465 15,640,889 6,915,927 --------------------------------------------------------------------------------------------------------------------------- COST OF SALES Product sales 8,290,472 -- 8,290,472 -- Service sales 497,354 -- 497,354 -- Network services 633,988 625,717 1,223,105 1,205,529 Pay-TV 636,693 665,252 1,301,516 1,393,520 --------------------------------------------------------------------------------------------------------------------------- 10,058,507 1,290,969 11,312,447 2,599,049 --------------------------------------------------------------------------------------------------------------------------- EXPENSES Selling, general and administrative expenses 3,232,791 4,471,381 4,819,575 8,578,934 Interest and bank charges 918,818 198,812 1,236,522 280,115 Write off of leasehold improvements -- -- -- 355,560 Depreciation and amortization 530,571 631,948 1,137,948 1,295,790 --------------------------------------------------------------------------------------------------------------------------- 4,682,180 5,302,141 7,194,045 10,510,399 --------------------------------------------------------------------------------------------------------------------------- Loss before undernoted (2,354,676) (3,233,645) (2,865,603) (6,193,521) Provision for income taxes -- -- -- -- --------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (2,354,676) (3,233,645) (2,865,603) (6,193,521) Loss from discontinued operations (net of income tax) (385,880) (188,328) (854,744) (519,021) --------------------------------------------------------------------------------------------------------------------------- Loss and comprehensive loss for the period (2,740,556) (3,421,973) (3,720,347) (6,712,542) =========================================================================================================================== Earnings (loss) per share: (Note 4) Basic and diluted from continuing operations (0.18) (0.39) (0.26) (0.74) Basic and diluted from discontinued operations (0.03) (0.02) (0.08) (0.06) --------------------------------------------------------------------------------------------------------------------------- Net loss per share (0.21) (0.41) (0.34) (0.80) ===========================================================================================================================
The accompanying notes are an integral part of these statements 2 CHELL GROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001 (Expressed in Canadian dollars - unaudited)
==================================================================================================================== February 28, 2002 February 28, 2001 (restated - Note 11) $ $ ==================================================================================================================== OPERATING ACTIVITIES Net loss and comprehensive loss for the period (3,720,347) (6,712,542) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization 1,137,948 1,295,790 Beneficial conversion feature of convertible debt 542,567 -- Accretion of interest on non-interest bearing promissory notes 86,538 86,538 Write-off of leasehold improvements -- 355,560 Services rendered for shares 73,962 429,766 Warrants issued -- 152,702 Write-off of prepaids arising from Chell asset purchase 90,682 367,235 Changes in assets and liabilities: Decrease in short-term investments 19,676 250,195 (Increase) decrease in accounts receivable, trade (627,929) 101,969 Increase in income taxes receivable (22,962) (98,475) Increase in inventory (281,717) (29,322) Decrease (increase) in prepaid expenses 43,211 (94,275) (Increase) decrease in other accounts receivable (375,154) 122,035 (Increase) decrease in other assets (317,190) 10,435 (Increase) decrease in net assets from discontinued operations (222,103) 188,265 Increase (decrease) in accounts payable and accrued liabilities 3,553,740 (75,301) -------------------------------------------------------------------------------------------------------------------- Cash (used in) operating activities (19,078) (3,649,405) -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (312,750) (653,940) Increase in deposit on purchase -- (1,689,710) Investment in Logicorp (1,500,000) -- Increase in notes receivable -- (301,100) -------------------------------------------------------------------------------------------------------------------- Cash (used in) investing activities (1,812,750) (2,644,750) -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase in notes and loans payable 3,396,080 5,151,986 Repayment of notes and loans payable (1,976,871) (18,012) Proceeds from exercise of options 153,579 26,243 -------------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 1,572,788 5,160,217 -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents during the period (259,040) (1,133,938) Cash and cash equivalents, beginning of period 356,421 1,355,613 -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 97,381 221,675 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Income Taxes Paid -- 98,491 Interest Paid 206,194 55,508
During the 2002 second fiscal quarter, Logicorp was purchased for $13,953,080 with the non-cash component amounting to $2,300,000 in accounts payable, $395,124 in common shares and $9,757,956 in capital in excess of par value. In addition, $500,000 debt related to the purchase of GalaVu was repaid with shares. Non cash items arose from the purchase of Chell.com assets during the 2001 First Fiscal Quarters. They are $1,936,272 of property & equipment, $107,589 of goodwill, $42,706 of prepaids, $1,404 in other accounts receivable and in addition 5,426,772 shares were issued from the purchase of Cameron Chell and Chell.com assets. In addition, the depreciation from discontinued operations was $352,340. The accompanying notes are an integral part of these statements 3 CHELL GROUP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001 (UNAUDITED) Note 1. Basis of Presentation The accompanying financial statements for the interim periods are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K of Chell Group Corporation (the "Company") (Commission No.:0-18066), filed with the Securities and Exchange Commission on November 30, 2001. The results of operations for the six months ended February 28, 2002 are not necessarily indicative of the results to be expected for the full fiscal year ending August 31, 2002. Note 2. General The financial statements of the Company for the three and six months ended February 28, 2002 (the "2002 Second Fiscal Quarter" and "2002 First Fiscal Half"), include the operations of the Company's wholly-owned subsidiaries Chell Merchant Capital Group Inc. ("CMCG"), Chell.com (USA) Inc., NTN Interactive Network Inc. ("NTNIN"), 3484751 Canada Inc., GalaVu Entertainment Network Inc. ("GalaVu"), and discontinued operations from NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic"), which was sold effective in March 2002. The financial statements for the three months ended February 28, 2002 also include the operations of Logicorp Data Systems Ltd. and Logicorp Service Group Ltd., which will be together referred to as "Logicorp". Logicorp was purchased effective in January 2002. The financial statements of the Company for the three and six months ended February 28, 2001 (the "2001 Second Fiscal Quarter" and "2001 First Fiscal Half"), include the operations of the Company's wholly-owned subsidiaries CMCG, Chell.com (USA), NTNIN, 3484751 Canada Inc., GalaVu and NTNIN's wholly-owned subsidiary Magic. Discontinued operations are the results of NTNIN's wholly-owned subsidiaries Interlynx, which was sold effective in July 2001, and Magic, which was sold effective in March 2002. Prior period's figures have been restated (see note 11) and may have been reclassified to be consistent with any reclassifications in the current period. 4 Note 3. Business Segment Data for the three and six months ended February 28, 2002 and February 28, 2001
================================================================================================================ For Three Months Ended For Six Months Ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 $ $ $ $ ================================================================================================================ External revenue Entertainment 2,770,321 3,349,190 6,023,574 6,899,442 Systems Integration 9,620,372 -- 9,620,372 -- Merchant Services -- -- -- -- Corporate (4,682) 10,275 (3,057) 16,485 ---------------------------------------------------------------------------------------------------------------- 12,386,011 3,359,465 15,640,889 6,915,927 ---------------------------------------------------------------------------------------------------------------- Inter-segment revenue Entertainment -- -- -- -- Systems Integration -- -- -- -- Merchant Services -- -- -- -- Corporate -- -- -- -- ---------------------------------------------------------------------------------------------------------------- -- -- -- -- ---------------------------------------------------------------------------------------------------------------- Operating profit (loss) Entertainment (658,599) (299,654) (611,728) (332,113) Systems Integration (65,560) -- (65,560) -- Merchant Services (269,103) (2,028,649) (522,749) (4,828,305) Corporate (1,361,414) (905,342) (1,665,566) (1,033,103) ---------------------------------------------------------------------------------------------------------------- (2,354,676) (3,233,645) (2,865,603) (6,193,521) ---------------------------------------------------------------------------------------------------------------- Net income (loss) Entertainment (658,599) (299,654) (611,728) (332,113) Systems Integration (65,560) -- (65,560) -- Merchant Services (269,103) (2,028,649) (522,749) (4,828,305) Corporate (1,361,414) (905,342) (1,665,566) (1,033,103) Discontinued Operations (385,880) (188,328) (854,744) (519,021) ---------------------------------------------------------------------------------------------------------------- (2,740,556) (3,421,973) (3,720,347) (6,712,542) ---------------------------------------------------------------------------------------------------------------- ================================================================================================================ As at February 28, February 28, 2002 2001 $ $ ================================================================================================================ Total assets Entertainment 6,162,483 7,549,286 Systems Integration 25,163,648 -- Merchant Services 1,103,300 2,124,984 Corporate 3,952,401 2,913,200 Discontinued Operations 2,488,932 5,048,066 ---------------------------------------------------------------------------------------------------------------- 38,870,764 17,635,536 ----------------------------------------------------------------------------------------------------------------
5 Note 4. Earnings per share Earnings per share were calculated in accordance with Statement of Financial Accounting Standards No. 128. The following table sets forth the computation of basic and diluted earnings per share for the three months and six months ended February 28, 2002 and February 28, 2001:
=========================================================================================================================== For Three Months Ended For Six Months Ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 $ $ $ $ =========================================================================================================================== Numerator: Net loss (numerator for basic and diluted loss per share) from continuing operations (2,354,676) (3,233,645) (2,865,603) (6,193,521) Net loss (numerator for basic and diluted loss per share) from discontinued operations (385,880) (188,328) (854,744) (519,021) --------------------------------------------------------------------------------------------------------------------------- Net loss (numerator for basic and diluted loss per share) (2,740,556) (3,421,973) (3,720,347) (6,712,542) =========================================================================================================================== Denominator for basic and diluted loss per share -adjusted weighted average number of shares and assumed conversions 12,892,028 8,417,123 10,976,487 8,356,045 =========================================================================================================================== Basic and diluted loss per share from continuing operations (0.18) (0.39) (0.26) (0.74) Basic and diluted loss per share from discontinued operations (0.03) (0.02) (0.08) (0.06) --------------------------------------------------------------------------------------------------------------------------- Net loss per share (0.21) (0.41) (0.34) (0.80) ===========================================================================================================================
Note 5. Business Acquisition Effective January 1, 2002, the Company acquired 100% of Logicorp Data Systems Ltd., Logicorp Service Group Ltd., 123557 Alberta Ltd. and 591360 Alberta Ltd. (collectively " Logicorp") for a purchase price of $13,953,080 calculated on a discounted basis. Logicorp is a Canadian systems integrator handling all aspects of IT systems integration and solutions development, including network integration and management, desktop support, hardware/software procurement, systems architecture design and consulting. The acquisition was recorded using the purchase method of accounting and, accordingly the purchase price has been allocated as set out below: $ -------------------------------------------------------------------------------- Goodwill 13,501,419 Net tangible assets 451,661 -------------------------------------------------------------------------------- 13,953,080 -------------------------------------------------------------------------------- The purchase price was satisfied by $1,500,000 in cash, the issuance of two non-interest bearing promissory notes with a maturity value of $2,300,000 and the issuance of 5,355,000 exchangeable shares of CMCG. These shares are exchangeable on a one for one basis for the Common shares of the Company. The first promissory note with a maturity value of $1,800,000 is due June 30, 2002. Prior to payment of the first promissory note, the Company can elect to adjust the purchase price by substituting the $1,800,000 note for an interest-free promissory note in the amount of $2,040,000 one half of which would be due 6 June 30, 2002 and the second half would be due December 31, 2002. The second promissory note has a maturity value of $500,000 and is due March 31, 2003. In addition, the purchase price may be adjusted upwards because the Company is required to pay an amount by which the earnings before taxes, interest, depreciation and amortization (EBITDA) of Logicorp exceeds $1,000,000 for the year ended December 31, 2002. The purchase price may be adjusted downward by three times the amount that EBITDA for this period is less than $1,000,000. The purchase price will be further adjusted on June 30, 2002, in the event that the weighted average closing stock price of the Company's common shares for the 10 trading days prior to June 30, 2002 is less than US$1.00. The Company will issue additional common shares equal to the difference in the weighted common share price and US$1.00 to a maximum of US$0.15 per share multiplied by 5,355,000 shares. However, if the weighted common share price is less than US$0.50, then the maximum adjustment to the purchase price will be US$0.20 per share multiplied by 5,355,000 shares. The operating results of Logicorp are included in the Company's consolidated statements of operations from the effective date of acquisition. Pro forma information The following pro forma information on results of operations assumes that Logicorp was purchased at the beginning of each period presented.
===================================================================================================================== For Three Months Ended For Six Months Ended February 28, February 28, February February 28, 2002 2001 28, 2002 2001 $ $ $ $ --------------------------------------------------------------------------------------------------------------------- Revenues 13,090,941 13,223,204 26,886,710 31,738,981 Loss before extraordinary items (2,120,348) (2,058,831) (2,745,812) (5,763,594) Loss before extraordinary items per share (0.16) (0.24) (0.25) (0.42) Net loss (2,506,228) (2,247,159) (3,600,556) (6,282,615) Net loss per share (0.19) (0.27) (0.33) (0.46) ---------------------------------------------------------------------------------------------------------------------
Note 6. Investment in Wareforce.com, Inc. Effective February 6, 2002, the Company issued 454,545 Series B preferred shares in exchange for 454,545 Series A 6% convertible preferred shares of Wareforce.com, Inc. ("Wareforce). The Wareforce preferred shares have a stated value of US$10.00 per share and can be converted to common shares at 95% of the market price of Wareforce's common shares. The conversion of these preferred shares is limited such that the Company cannot convert if this conversion results in the Company owning more than 5% of the then outsatnding common shares of Wareforce. The investment in Wareforce has been valued based on the market value of Wareforce common shares. This transaction was entered into in part to act as an incentive for the holders of the Series B preferred shares to participate in the private placement discussed in Note 7. Which at February 28, 2002 aggregated $176,518. 7 The Series B preferred shares have a par value of US$.01 per share and a stated value of US$10.00 per share. The aggregate stated value is US$4,545,450 convertible to common shares of the Company at US$1.00. There is a limitation on the conversion feature whereby shares are not convertible if the conversion would result in the holder owning more than 5% of the outstanding common shares of the Company. Note 7. Convertible Promissory Notes The Company has issued 8% convertible notes in the amount of $3,191,568 under a private placement memorandum. These notes are due August 9, 2002. These notes may be voluntarily converted into Common Stock at a price between US$0.80 and US$1.00 per share, calculated as 50% of the average of the closing bid prices for the Common Stock for ten trading days immediately prior to the automatic conversion, but within the price range specified. The notes are automatically converted into Common Stock if prior to their maturity, there are closings of the acquisition of two or more of the following companies: (a) Wareforce.com, Inc. (b) Stardrive Solutions, Inc. and (c) Logicorp Data Systems Ltd. The automatic conversion will be at a price between US$0.50 and US$2.50, calculated as 50% of the average of the closing bid prices for the Common Stock for ten trading days immediately prior to the automatic conversion, but within the price range specified. If all of these convertible notes were converted at the lowest conversion price of US$0.50, the number of common shares issued would be 4,039,960 resulting in a dilution of the current common stockholders. Subsequent to February 28, 2002 all of the 8% convertible notes were converted to Common Stock at US$0.95 resulting in the issuance of approximately 2,126,000 shares. Note 8. Beneficial Conversion Feature Convertible Promissory Notes The beneficial conversion feature of the 8% promissory notes issued in February 2002 has been recognized by recording additional paid in capital and interest expense for the three months ended February 28, 2002. The amount of the beneficial conversion and interest expense is calculated as of the date of issuance as the difference between the conversion price and the fair value of the common stock into which the notes are convertible. The Company recognized beneficial conversion interest expense and corresponding additional paid in capital in the amount of approximately $543,000 for the three months ending February 28, 2002. Series B Preferred Shares The beneficial conversion feature of the Series B preferred shares issued in February 2002 has been recognized by recording additional paid in capital and a deemed dividend for the three months ended February 28, 2002. The amount of the beneficial conversion and deemed dividend is calculated as of the date of issuance as the difference between the conversion price and the fair value of the common stock into which the shares are convertible. The Company recognized a deemed dividend and corresponding additional paid in capital in the amount of approximately $137,000 for the three months ending February 28, 2002. 8 Note 9. Subsequent Events Financing A term sheet for the following transactions has been signed, however all of the conditions for completion of these transactions have not been met. It is anticipated that during the third fiscal quarter, these transactions will be completed and will be effective September 1, 2001. The Company intends to issue secured notes in the aggregate principal amount of U.S$3,370,000. In addition options to purchase 812,000 common shares will be issued. (a) The first part of this transaction will be an exchange of the convertible debentures held by CALP II Limited Partnership ("CALP II") on behalf of Canadian Advantage Limited Partnership ("CALP") and Advantage (Bermuda) Fund Ltd. ("ABFL") for notes and warrants. The existing convertible debentures of the Company, in the aggregate principal amount of US$1,700,000, are currently held by CALP II on behalf of CALP and ABFL. Together with interest at 10% from October 3, 2000, the total amount owing under these convertible debentures at August 31, 2001 was approximately US$1,870,000. The convertible debentures will be cancelled. The Company will issue notes to CALP and ABFL in the aggregate principal amount of US$1,870,000. These notes will have a five year term bearing interest at 10% per annum payable semi-annually in arrears. The interest is payable in stock of the Company calculated at 100% of the market price as at the date such payment is due. Prepayment is permitted at any time on 30 days prior notice. The notes will be secured by a general security agreement against the assets of the Company in priority to all other claims subject to the existing security of the Bank of Montreal and the CIBC. The note will be held as to US$1,365,100 by CALP and as to US$504,900 by ABFL. Five year options to purchase 625,000 shares of common stock of the Company at an exercise price of US$3.00 will be issued by Chell.com Ltd. to CALP and ABFL. Three year options to purchase 187,000 shares of the Company's common stock at an exercise price of US$2.00 will also be issued by Chell.com Ltd. The sole shareholder of Chell.com Ltd. is Cameron Chell, the controlling shareholder of the Company. Therefore the costs associated with these options will be recorded by the Company. The financing cost associated with these options will be approximately US$345,000 and will be amortized over the five year term of the notes payable to CALP and ABFL. (b) The second part of the transaction is the purchase of 250,000 units in VC Advantage (Bermuda) Fund Ltd. in exchange for a US$1,500,000 note. The note will have a term of five years and will bear interest at 3% per annum payable semi-annually in arrears. The interest is payable in stock of the Company calculated at 100% of the market price as at the date such payment is due. The note will be discounted for financial reporting purposes to reflect the Company's cost of borrowing. This discount will result in a maximum of approximately US$178,000 9 additional interest expense over the five year term of the note. Prepayment is permitted at any time on 30 days prior notice. The note will be secured by a general security agreement against the assets of the Company ranking pari passu to the notes in the first part of this transaction. BOTB Corporation, an Alberta corporation of which Cameron Chell is the sole beneficial shareholder, whose sole asset is a residence in Laguna Beach, California, will provide the Company a guarantee with a minimum value of $1,500,000 for the units purchased and will provide a second mortgage on this property to secure the guarantee. Conversion of CALP and ABFL Notes Payable During the third fiscal quarter, agreements were reached with CALP and ABFL to convert the above-noted notes payable and accrued interest into shares of the Common Stock of the Company, at the rate of US$0.80. The Company will issue 2,405,678 shares of Common Stock in full satisfaction of the principal amount of US$1,870,000 plus accrued interest of US$54,542. Sale of Magic Lantern Commencing in the second fiscal quarter, the Company began negotiations to sell Magic Lantern and its subsidiaries. Effective March 18, 2002, the Company completed this sale for cash consideration of $1,850,000. The Company's financial statements have been restated to reflect Magic as a discontinued operation for all periods presented. Summarized operating results of Magic's discontinued operations are as follow:
======================================================================================================================= For Three Months Ended For Six Months Ended February 28, February 28, February February 28, 2002 2001 28, 2002 2001 $ $ $ $ ----------------------------------------------------------------------------------------------------------------------- Revenues 804,707 1,000,803 1,507,993 2,367,520 (Loss) income before extraordinary items (358,880) 23,064 (854,744) (179,304) (Loss) income before extraordinary items per share (0.03) (0.00) (0.08) (0.02) Net (loss) income (358,880) 23,064 (854,744) (179,304) Net (loss) income per share (0.03) (0.00) (0.08) (0.02) -----------------------------------------------------------------------------------------------------------------------
Note 10. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144), that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The new rules on asset impairment supersede SFAS 121, Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations." This Standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction 10 since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The Company is currently assessing the potential impact of SFAS 144 on the operating results and financial position. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, business combinations can no longer be reflected by using the pooling of interests method of accounting and goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter in the year beginning September 1, 2002 (Fiscal 2003). During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of September 1, 2002 and has not yet determined what the effects of these tests will be on the earnings and financial position of the Company. Note 11. Restatement of financial statements In Fiscal 2001, the Company sold its wholly-owned subsidiary, Interlynx. In Fiscal 2002, the Company sold its wholly-owned subsidiary and it's associated subsidiaries, Magic Lantern Communications, Sonoptic Technologies Inc. and Tutorbuddy Inc. The Company's financial statements have been restated to reflect Interlynx and Magic Lantern as discontinued operations for all periods presented. (See Note 9). Note 12. Changes in share capital During the six months ended February 28, 2002, the following transactions resulted in the issuance of 5,914,301 common shares of the Company. The acquisition of Logicorp resulted in the issuance of 5,355,000 common shares of the Company held in escrow pending shareholder approval. In addition 463,051 shares were issued as payment for debt. Also during the six months ended February 28, 2002, options totaling 96,250 were exercised resulting in the issuance of additional 96,250 common shares of the Company. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The financial statements of the Company and the information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are expressed in Canadian dollars. General We are engaged in the business of providing interactive entertainment services, systems integration products and services and merchant capital services. Our core businesses are interactive entertainment services provided by our NTN Interactive Network subsidiary and the merchant capital services provided through our Merchant Capital Group subsidiary. GaluVu is a technology-based entertainment provider of interactive in-room entertainment systems to hotels across Canada. Interactive entertainment services also involve, for example electronic sports trivia games played on computer units installed in bars, pubs and restaurants. System integration products and services are provided by our Logicorp subsidiary. Logicorp is a Western Canadian Network Infrastructure provider, specializing in Server-Based Computing solutions, Managed Services - using Computer Associates' Unicentre, Network design, delivery, administration, and support Procurement services, Warranty/Off-Warranty [W/OW] hardware support services, and Information Storage technologies. Logicorp's primary focus is high-performance computer systems for the corporate market. The firm provides solutions to mid-range and large corporations, as well as the government, education and medical markets. In addition, the business of merchant capital services involves our investment in and acquisition of significant but undervalued operating companies or technologies, to which we then apply management experience, in an effort to appreciate the value of those companies. Our main business strategy is to operate or invest in companies that represent the latest in technological innovations. We apply our expertise, industry contacts, and market foresight to these companies in order to create shareholder value. Results of Operations for the Three Months ended February 28, 2002 The Company's total revenues for the 2002 Second Fiscal Quarter were $12,386,011, compared to $3,359,465 for the 2001 Second Fiscal Quarter, an increase of $9,026,546 or 268.7%. Revenues from product sales for the 2002 Second Fiscal Quarter were $9,062,129. There are no comparative figures for the 2001 Second Fiscal Quarter as the revenues arose from the purchase of Logicorp in January 2002. Revenues from service sales for the 2002 Second Fiscal Quarter were $558,243. There are no comparative figures for the 2001 Second Fiscal Quarter as the revenues arose from the purchase of Logicorp in January 2002. 12 Revenues from network services for the 2002 Second Fiscal Quarter were $1,564,091, compared to $1,798,207 for the 2001 Second Fiscal Quarter, a decrease of $234,116 or 13.0%. The decrease can be attributed to a decrease in event programming of $90,855 offset by an increase of $30,553 in advertising sponsorship. The revenues are decreasing due to a slight decrease in the number of Hospitality sites between the 2002 and 2001 Second Fiscal Quarters. Revenues from Pay-tv for the 2002 Second Fiscal Quarter were $1,204,140 compared to $1,511,369 for the 2001 Second Fiscal Quarter, a decrease of $307,229 or 20.3%. This decrease can be attributed to travel levels still being depressed as a result of September 11th. Total cost of sales for the 2002 Second Fiscal Quarter were $10,058,507, compared to $1,290,969 for the 2001 Second Fiscal Quarter, an increase of $8,767,538 or 679.1%. The increase is primarily the result of the addition of Logicorp's product and service cost of sales to the company. Product ($8,290,472) and service ($497,354) resulted in a total addition of $8,787,826 or almost 100% of the increase. Since Logicorp was added in January 2002, there are no comparative figures for the 2001 Second Fiscal Quarter. Network services cost of sales were $633,988 in the 2002 Second Fiscal Quarter, compared to $625,717 in the 2001 Second Fiscal Quarter, an increase of $8,271 or 1.3%. Pay-TV cost of sales were $636,693 in the 2002 Second Fiscal Quarter, compared to $665,252 in the 2001 Second Fiscal Quarter, a decrease of $28,559 or 4.3%. As a percentage of revenues, cost of sales increased in the 2002 Second Fiscal Quarter to 81.2% from 38.4% in the 2001 Second Fiscal Quarter. Total selling, general and administrative expenses for the 2002 Second Fiscal Quarter were $3,232,791, compared to $4,471,381 for the 2001 Second Fiscal Quarter, a decrease of $1,238,590 or 27.7%. The decrease can be attributed to a couple of items: there was a decrease in the merchant services segment of $2,000,999 resulting from decreased staffing costs and associated cost reductions; offset by an increase resulting from the addition of Logicorp $823,331 which purchased during January 2002, thus resulting in no comparative figures. Total selling, general and administrative expenses for the 2002 Second Fiscal Quarter for Logicorp comprised the following major items salaries of $521,847 and supplies and materials of $197,697. As a percentage of the Company's total revenues, selling, general and administration expenses decreased to 26.1% for the 2002 Second Fiscal Quarter from 133.1% for the 2001 Second Fiscal Quarter. Interest and bank charges for the 2002 Second Fiscal Quarter were $918,818, compared to $198,812 for the 2001 Second Fiscal Quarter, an increase of $720,006 or 362.2%. The increase results from an increase in debt related to the sale of the convertible debenture and bridge financing. The Company is now experiencing a full quarter of the expense for Second Fiscal 2002 as compared to partial months in 2001 Second Fiscal Quarter. In addition, a $542,567 deemed interest expense was incurred on the financing raised. As a percentage of the Company's total revenues, interest and bank charges increased to 7.4% for the 2002 Second Fiscal Quarter from 5.9% for the 2001 Second Fiscal Quarter. 13 Total depreciation and amortization expense for the 2002 Second Fiscal Quarter was $530,571, compared to $631,948 for the 2001 Second Fiscal Quarter, a decrease of $101,377 or 16.0%. This decrease is primarily the result of some assets becoming fully depreciated. The net loss from continuing operations for the 2002 Second Fiscal Quarter was $2,354,676, compared to net loss of $3,233,645 for the 2001 Second Fiscal Quarter, a decrease of $878,969. The decrease primarily resulted from the cost savings in the Merchant Services sector, offset by the increased cost from the addition of Logicorp and increased costs associated with the raising of financing. As a result of all of the above, the net loss for the 2002 Second Fiscal Quarter was $2,740,556, compared to net loss of $3,421,973 for the 2001 Second Fiscal Quarter, a decrease of $681,417. The decrease primarily resulted from the cost savings in the Merchant Services sector, offset by the increased cost from the addition of Logicorp. The 2002 Second Fiscal Quarter loss resulted primarily from the corporate costs associated with running and growing the organization and the decrease in profits from the operating companies due the economic downturn experienced since September 11th. Results of Operations for the Six Months ended February 28, 2002 The Company's total revenues for the 2002 First Fiscal Half were $15,640,889, compared to $6,915,927 for the 2001 First Fiscal Half, an increase of $8,724,962 or 126.2%. Revenues from product sales for the 2002 First Fiscal Half were $9,062,129. There are no comparative figures for the 2001 First Fiscal Half as the revenues arose from the purchase of Logicorp in January 2002. Revenues from service sales for the 2002 First Fiscal Half were $558,243. There are no comparative figures for the 2001 First Fiscal Half as the revenues arose from the purchase of Logicorp in January 2002. Revenues from network services for the 2002 First Fiscal Half were $3,274,309, compared to $3,544,330 for the 2001 First Fiscal Half, a decrease of $270,021 or 7.6%. The decrease can be attributed to a decrease in event programming of $81,075 offset by an increase of $63,064 in advertising sponsorship. The revenues are decreasing due to a slight decrease in the number of Hospitality sites between the 2002 and 2001 First Fiscal Half. Revenues from Pay-tv for the 2002 First Fiscal Half were $2,736,561 compared to $3,296,475 for the 2001 First Fiscal Half, a decrease of $559,914 or 17.0%. This decrease can be attributed to travel levels still being depressed as a result of September 11th. Total cost of sales for the 2002 First Fiscal Half were $11,312,447, compared to $2,599,049 for the 2001 First Fiscal Half, an increase of $8,713,398 or 335.3%. The increase is primarily the result of the addition of Logicorp's product and service cost of sales to the company. Product ($8,290,472) and service ($497,354) resulted in a total addition of $8,787,826 or almost 100% of the increase. Since Logicorp was added in January 2002, there 14 are no comparative figures for the 2001 First Fiscal Half. Network services cost of sales were $1,223,105 in the 2002 First Fiscal Half, compared to $1,205,529 in the 2001 First Fiscal Half, an increase of $17,576 or 1.5%. Pay-TV cost of sales were $1,301,516 in the 2002 First Fiscal Half, compared to $1,393,520 in the 2001 First Fiscal Half, a decrease of $92,004 or 6.6%. As a percentage of revenues, cost of sales increased in the 2002 First Fiscal Half to 72.3% from 37.6% in the 2001 First Fiscal Half. Total selling, general and administrative expenses for the 2002 First Fiscal Half were $4,819,575, compared to $8,578,934 for the 2001 First Fiscal Half, a decrease of $3,759,359 or 43.8%. The decrease can be attributed to a couple of items: there was a decrease in the merchant services segment of $4,025,433 resulting from decreased staffing costs and associated cost reductions; offset by an increase resulting from the addition of Logicorp $823,331 which purchased during January 2002, thus resulting in no comparative figures. Total selling, general and administrative expenses for the 2002 First Fiscal Half for Logicorp comprised the following major items; salaries of $521,847 and supplies and materials of $197,697. As a percentage of the Company's total revenues, selling, general and administration expenses decreased to 30.8% for the 2002 First Fiscal Half from 124.0% for the 2001 First Fiscal Half. During the 2001 First Fiscal Half, Chell Merchant Capital Group Inc. vacated certain leased space and as a result the Company wrote off the net book value of the related leasehold improvements in the amount of $355,560. There were no similar transactions in the 2002 First Fiscal Half. Interest and bank charges for the 2002 First Fiscal Half were $1,236,522, compared to $280,115 for the 2001 First Fiscal Half, an increase of $956,407 or 341.4%. The increase results from an increase in debt related to the sale of the convertible debenture and the bridge financing and the deemed interest expense of $542,567 incurred on the funds raised. These items were not present for the entire 2001 First Fiscal Half. As a percentage of the Company's total revenues, interest and bank charges increased to 4.4% for the 2002 First Fiscal Half from 7.9% for the 2001 First Fiscal Half. Total depreciation and amortization expense for the 2002 First Fiscal Half was $1,137,948, compared to $1,295,790 for the 2001 First Fiscal Half, a decrease of $157,842 or 12.2%. This decrease is primarily the result of some assets becoming fully depreciated. The net loss from continuing operations for the 2002 First Fiscal Half was $2,865,603, compared to net loss of $6,193,521 for the 2001 First Fiscal Half, a decrease of $3,327,918. The decrease primarily resulted from the cost savings in the Merchant Services sector, offset by the increased cost from the addition of Logicorp. As a result of all of the above, the net loss for the 2002 First Fiscal Half was $3,720,347, compared to net loss of $6,712,542 for the 2001 First Fiscal Half, a decrease of $2,992,195. The decrease primarily resulted from the cost savings in the Merchant Services 15 sector, offset by the increased cost from the addition of Logicorp. The 2002 First Fiscal Half loss resulted primarily from the corporate costs associated with running and growing the organization and the decrease in profits from the operating companies due the economic downturn experienced since September 11th. Liquidity and Capital Resources At February 28, 2002, the Company had a working capital deficit of $11,460,063, a decrease of $6,431,638 from working deficit of $5,028,425 at August 31, 2001. For the 2002 First Fiscal Half, the Company had a net decrease in cash of $259,040 compared to a net decrease of $1,133,938 in the 2001 First Fiscal Half. Cash used in operating activities for the 2002 First Fiscal Half was $19,078, compared to $3,649,405 used in operating activities in the 2001 First Fiscal Half. In 2002, the major items that contributed to cash being used in operating activities were as follows: the net loss with non-cash expenses added back of $1,788,650, the increase in accounts receivable of $627,929, the increase in income taxes receivable of $22,962, the increase in inventory of $281,717, the increase in other accounts receivable of $375,154, the increase in other assets of $317,190 and the increase in net assets from discontinued operations of $222,103. The major item that contributed to cash being provided by operating activities was the increase in accounts payable and accrued liabilities of $3,553,740. In 2001, the major items that contributed to cash being used in operating activities were as follows: net loss with non-cash expenses added back of $4,024,951, increases in income taxes receivable and prepaids of $98,475 and $94,275 respectively, and a decrease in accounts payable and accrued liabilities of $75,301. The major sources of operating funds included decreases in short-term investments of $250,195 and accounts receivable of $101,969, a decrease in other accounts receivable of $122,035 and a decrease in net assets from discontinued operations of $188,265. Cash used in investing activities in the 2002 First Fiscal Half was $1,812,750 compared to the $2,644,750 used in investing activities in the 2001 First Fiscal Half, a decrease of $832,000. In the 2002 First Fiscal Half, $312,750 of property and equipment was purchased compared to $653,940 in the 2001 First Fiscal Half, a decrease of $341,190. In the 2002 First Fiscal Half, $1,500,000 was used in the purchase of Logicorp (note 5), where in the 2001 First Fiscal Half; a $1,689,710 deposit on purchase occurred, a decrease of $189,710. In addition, a $301,000 increase in notes receivable occurred in the 2001 First Fiscal Half. There was no similar change in the 2002 First Fiscal Half. Cash provided by financing activities in the 2002 First Fiscal Half was $1,572,788, compared to the $5,160,217 provided in the 2001 First Fiscal Half. This decrease is primarily due to increases in debt repaid and a lower level of new debt incurred in the 2002 First Fiscal Half. During the 2002 Second Fiscal Quarter the Company issued promissory notes in the amount of $3,191,568 under a private placement memorandum. The net proceeds of approximately $2,900,000 were used as follows: to repay debt of approximately $790,000; $1,400,000 was used in the acquisition of Logicorp; and approximately $710,000 was used for working capital and expenses. The Company is in the process of raising additional capital under its private placement memorandum. It is anticipated that such funds raised will be converted to equity. These funds will allow the Company to realize its acquisition strategy and to repay its loan obligations. In addition, in the 2002 Third Fiscal Quarter the Company has negotiated the conversion of approximately $2,954,600 owing to CALP and ABFL to equity. The Company's subsidiaries operating in the entertainment and systems integration segments create liquidity sufficient to fund their operations. Management believes that the current negotiations for terms and financing will be successful and that Company will have the required liquidity for its planned operating activities in the current year. 16 Inflation The rate of inflation has had little impact on the Company's operations or financial position during the six months ended February 28, 2002 and February 28, 2001 and inflation is not expected to have a significant impact on the Company's operations or financial position during the 2002 Fiscal Year. The Company pays a number of its suppliers, including its licensor and principal supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in the value of the Canadian dollar against the US dollar will have an impact on its gross profit as well as its net income. If the value of the Canadian dollar falls against the US dollar, the cost of sales of the Company will increase thereby reducing its gross profit and net income. Conversely, if the value of the Canadian dollar rises against the US dollar, its gross profit and net income will increase. 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None. 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following list sets forth the applicable exhibits (numbered in accordance with Item 601 of Regulation S-K) required to be filed with this Quarterly Report on Form 10-Q: Exhibit Number Title ------ ----- 3.1 Certificate of Incorporation, as amended to date. 3.2 By-Laws, as amended to date. 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc.+ 10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN Canada Inc. and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.). + Option, dated as of October 4, 1994, registered in the name of NetStar Enterprises Inc. (formerly, Labatt Communications Inc). + 10.4 Designation Agreement dated as of October 4, 1994, among Networks North Inc. (formerly know as NTN Canada, Inc.), NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.). + 10.15 Asset Purchase Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario Limited, as Debtor, and the Holder, as Creditor. + 10.17 General Security Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.18 Securities Pledge Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.24 Covenant of Networks North Inc., dated September 13, 1999, to allot and issue and pay to the Bank in writing 100,000 common shares of NETN. + 10.25 Agreement and Plan of Merger and Reorganization, dated November 21, 2001, by and among Chell Group Corporation, Chell Group Corporation, in trust for Chell SSI Acquisition Corp., and Stardrive Solutions Inc. + 10.26 Share Purchase Agreement, dated December 13, 2001, by and among Chell Group 19 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. + 11. List of Subsidiaries 22. Computation of Earnings Per Share (see note 4). + Incorporated by reference. See Exhibit Index. (b) Reports on Form 8-K The Company filed an Amended Current Report on Form 8-KA (Date of Report: December 4, 2000) with the Commission on December 6, 2001, reporting an Agreement and Plan of Merger and Reorganization, dated November 21, 2001, by and among Chell Group Corporation, Chell Group Corporation, in trust for Chell SSI Acquisition Corp., and Stardrive Solutions Inc. The Company filed a Current Report on Form 8-KA (Date of Report: January 16, 2001) with the Commission on December 28, 2001, reporting a Share Purchase Agreement, dated December 13, 2001, 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. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHELL GROUP CORPORATION Dated: April 15, 2002 By: /s/ Cameron Chell ------------------------------------ Cameron Chell, President and Chief Executive Officer (Duly Authorized Officer) Dated: April 15, 2002 By: /s/ Don Pagnutti ------------------------------------ Don Pagnutti, Principal Financial Officer 21 CHELL GROUP CORPORATION FORM 10-Q February 28, 2002 EXHIBIT INDEX Exhibit Number Description of Exhibit Location ------ ---------------------- -------- 3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1 3.2 By-Laws, as amended to date +1, Exh. 3.2 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc. +2, Exh. 10.9 10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc., minus Schedules thereto +3, Exh. 10.1 10.4 Designation Agreement dated as of October 4, 1994, among Networks North Inc. (formerly known as NTN Canada, Inc.), NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.) +4, Exh. C 10.15 Asset Purchase Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. +5, Exh. 10.1 10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario Limited, as Debtor, and the Holder, as Creditor. +5, Exh. 10.2 10.17 General Security Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu.+5, Exh. 10.3 10.18 Securities Pledge Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu+5, Exh. 10.4 10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu.+5, Exh. 10.9 22 10.24 Covenant of Networks North Inc. for valuable consideration to allot and issue and pay to the Bank in writing 100,000 common shares of NETN. +5, Exh. 10.10 10.25 Agreement and Plan of Merger and Reorganization, dated November 21, 2001, by and among Chell Group Corporation, Chell Group Corporation, in trust for Chell SSI Acquisition Corp., and Stardrive Solutions Inc. +6 10.26 Share Purchase Agreement, dated December 13, 2001, 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. +7 11 Computation of earnings per share (see Note 4) 22 List of Subsidiaries +1, Exh. 22 ++1 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Annual Report on Form 10-K of the Company, for its fiscal year ended August 31, 1996 (File No. 0-18066), filed on December 16, 1996. ++2 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Annual Report on Form 10-K of NTN Communications, Inc., for its fiscal year ended December 31, 1990 (File No. 2-91761-C), filed on April 1, 1991. ++3 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Current Report on Form 8-K of the Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996. ++4 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Current Report on Form 8-K of the Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994. ++5 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's 8-K (Date of Report: September 13, 1999) (File No. 0-18066), filed on September 29, 1999. ++6 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's 8-K (Date of Report: November 21, 2001) (File No. 0-18066) filed on December 6, 2001. ++7 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's 8-K (Date of Report: December 13, 2001) (File No. 0-18066) filed on December 28, 2001. ++ Filed electronically pursuant to Item 401 of Regulation S-T. 23