-----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, V4TMsC/cQ40CXKhOlzJK6S811dE9KfUBwuxKvq0nVW17+HiknUKJq3Xl5dKgRElU D/q1n5GHTJM+HoWQLA+Q9g== 0001005477-02-002272.txt : 20020522 0001005477-02-002272.hdr.sgml : 20020522 20020522172507 ACCESSION NUMBER: 0001005477-02-002272 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020522 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: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18066 FILM NUMBER: 02660247 BUSINESS ADDRESS: STREET 1: 14 METEOR DR STREET 2: BLDG 18 CITY: ETOBICOKE ONTARIO STATE: A6 ZIP: M9W 1A4 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR STREET 2: ETOBICOKE CITY: ONTARIO CANADA STATE: A6 ZIP: M9W 1A4 FORMER COMPANY: FORMER CONFORMED NAME: NTN CANADA INC DATE OF NAME CHANGE: 19961016 FORMER COMPANY: FORMER CONFORMED NAME: TRIOSEARCH INC DATE OF NAME CHANGE: 19880718 FORMER COMPANY: FORMER CONFORMED NAME: NETWORKS NORTH INC DATE OF NAME CHANGE: 19980811 10-Q/A 1 d37441_10-qa.txt QUARTERLY REPORT FORM 10-Q/A 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: November 30, 2001 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 January 11, 2002: 9,491,787 shares of common stock, par value $.0467 per share. CHELL GROUP CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Page Consolidated Balance Sheets - as at November 30, 2001 (unaudited) and August 31, 2001 1 Consolidated Statements of Operations - For the Three Months Ended November 30, 2001 and November 30, 2000 (unaudited) 2 Consolidated Statements of Cash Flows - For the Three Months Ended November 30, 2001 and November 30, 2000 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 16 2 CHELL GROUP CORPORATION CONSOLIDATED BALANCE SHEETS AS AT NOVEMBER 30, 2001 AND AUGUST 31, 2001 (Expressed in Canadian dollars)
November 30, 2001 August 31, (unaudited) 2001 $ $ - -------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 301,870 356,421 Short-term investments 4,659 19,676 Accounts receivable, trade - net of allowance for doubtful accounts of $237,000; [Aug 2001 - $227,000] 2,071,091 2,308,790 Other receivables 279,805 84,814 Income taxes receivable 155,239 155,204 Inventory 86,157 105,590 Prepaid expenses 565,412 570,868 - -------------------------------------------------------------------------------------------------- Total current assets 3,464,233 3,601,363 - -------------------------------------------------------------------------------------------------- Property and equipment, net 7,692,144 8,260,282 Licenses, net of accumulated amortization 241,923 247,321 Goodwill, net of accumulated amortization 1,765,274 1,795,737 Notes receivable 160,000 160,000 Deposit on purchase 1,689,710 1,689,710 Other assets, net of amortization 342,691 388,032 Net assets from discontinued operations -- 82,558 - -------------------------------------------------------------------------------------------------- 15,355,975 16,225,003 - -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable - trade 2,610,152 2,469,663 Accrued liabilities 1,775,556 1,789,042 Current portion of long-term debt 4,048,356 3,774,658 - -------------------------------------------------------------------------------------------------- Total current liabilities 8,434,064 8,033,363 - -------------------------------------------------------------------------------------------------- Long-term debt, net of current portion 5,594,401 5,884,339 Deferred income taxes payable 59,173 59,173 - -------------------------------------------------------------------------------------------------- Total liabilities 14,087,638 13,976,875 - -------------------------------------------------------------------------------------------------- Commitments and Contingent liabilities Shareholders' equity Share capital 9,028,239 common shares [Aug 2001 - 9,028,239] 604,109 604,109 Capital in excess of par value 14,143,533 14,143,533 Deficit (13,479,305) (12,499,514) - -------------------------------------------------------------------------------------------------- Total shareholders' equity 1,268,337 2,248,128 - -------------------------------------------------------------------------------------------------- 15,355,975 16,225,003 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements 1 CHELL GROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000 (Expressed in Canadian dollars - unaudited)
- --------------------------------------------------------------------------------------------------- November 30, 2001 November 30, 2000 (restated - Note 7) $ $ - --------------------------------------------------------------------------------------------------- REVENUE Network services 1,710,218 1,746,123 Pay-TV 1,532,421 1,785,106 Video/software sales 615,648 1,031,854 Digital encoding 87,209 228,609 Other 12,670 27,173 - --------------------------------------------------------------------------------------------------- 3,958,166 4,818,865 - --------------------------------------------------------------------------------------------------- COST OF SALES Network services 589,117 579,812 Pay-TV 664,823 728,268 Video/software sales 133,830 388,885 Digital encoding -- 5,916 - --------------------------------------------------------------------------------------------------- 1,387,770 1,702,881 - --------------------------------------------------------------------------------------------------- EXPENSES Selling, general and administrative expenses 2,482,750 4,993,216 Bad debt 16,108 34,879 Interest and bank charges 321,206 85,263 Write off of leasehold improvements -- 355,560 Depreciation and amortization 730,123 825,878 - --------------------------------------------------------------------------------------------------- 3,550,187 6,294,796 - --------------------------------------------------------------------------------------------------- Loss before undernoted (979,791) (3,178,812) Provision for income taxes -- -- Minority interest -- (10,180) - --------------------------------------------------------------------------------------------------- Loss from continuing operations (979,791) (3,188,992) Loss from discontinued operations (net of income tax) -- (101,577) - --------------------------------------------------------------------------------------------------- Loss and comprehensive loss for the period (979,791) (3,290,569) - --------------------------------------------------------------------------------------------------- Earnings (loss) per share [Note 4]: Basic and diluted from continuing operations (0.11) (0.38) Basic and diluted from discontinued operations -- (0.01) - --------------------------------------------------------------------------------------------------- Net loss per share (0.11) (0.39) - ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements 2 CHELL GROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000 (Expressed in Canadian dollars - unaudited)
- -------------------------------------------------------------------------------------------------------- November 30, 2001 November 30, 2000 (restated - Note 7) $ $ - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss and comprehensive loss for the period (979,791) (3,290,569) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 730,123 825,878 Accretion of interest on non-interest bearing promissory notes 45,825 45,896 Write-off of leasehold improvements -- 355,560 Write-off services rendered for shares 36,725 -- Write-off of equity positions -- 1,333 Write-off of prepaids arising from Chell asset purchase 45,341 359,662 Changes in assets and liabilities: Decrease (increase) in short-term investments 15,017 (18,125) Decrease in accounts receivable, trade 237,699 383,433 Increase in income taxes receivable (35) (77,415) Decrease (increase) in inventory 19,433 (14,439) Decrease in prepaid expenses 5,456 19,081 Decrease (increase) in other accounts receivable (194,991) 49,934 Decrease in other assets -- 16,000 Increase in net assets from discontinued operations -- (67,804) Increase in accounts payable and accrued liabilities 127,011 307,316 - -------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 87,813 (1,104,259) - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (126,124) (747,213) Increase in deposit on purchase -- (614,400) - -------------------------------------------------------------------------------------------------------- Cash used in investing activities (126,124) (1,361,613) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase in notes and loans payable -- 2,296,599 Repayment of notes and loans payable (16,240) (13,933) Proceeds from exercise of options -- 26,681 - -------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (16,240) 2,309,347 - -------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents during the period (54,551) (156,525) Cash and cash equivalents, beginning of period 356,421 1,355,613 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 301,870 1,199,088 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Income Taxes Paid 35 77,415 Interest Paid 68,388 46,559
Non cash items are $82,558 from the net assets from discontinued operations, as this was transferred to other receivables during the 2002 First Fiscal Quarter. 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. The accompanying notes are an integral part of these statements 3 CHELL GROUP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000 (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 three months ended November 30, 2001 are not necessarily indicative of the results for the full fiscal year ending August 31, 2002. Note 2. General The financial statements of the Company for the three months ended November 30, 2001 (the "2002 First Fiscal Quarter"), 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 NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic"). The financial statements of the Company for the three months ended November 30, 2000 (the "2001 First Fiscal Quarter"), 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. Discontiued operations are the results of NTNIN's wholly-owned subsidiary Interlynx, which was sold in July 2001. Magic conducts its operations directly and through its wholly owned subsidiary, TutorBuddy Inc. and its 75% ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic"). Prior period's figures have been reclassified to be consistent with any reclassifications in the current period. 4 Note 3. Business Segment Data for the three months ended November 30, 2001 and November 30, 2000 - -------------------------------------------------------------------------------- For Three Months Ended November 30, November 30, 2001 2000 $ $ - -------------------------------------------------------------------------------- External revenue Entertainment 3,253,254 3,550,252 Education 703,287 1,262,403 Corporate 1,625 6,210 - -------------------------------------------------------------------------------- 3,958,166 4,818,865 - -------------------------------------------------------------------------------- Inter-segment revenue Education -- 52,157 - -------------------------------------------------------------------------------- -- 52,157 - -------------------------------------------------------------------------------- Operating profit (loss) Entertainment 46,871 (109,692) Education (468,865) (141,704) Merchant Services (253,646) (2,799,656) Corporate (304,151) (127,760) - -------------------------------------------------------------------------------- (979,791) (3,178,812) - -------------------------------------------------------------------------------- Net income (loss) Entertainment 46,871 (109,692) Education (468,865) (151,884) Merchant Services (253,646) (2,799,656) Corporate (304,151) (127,760) Discontinued operations -- (101,577) - -------------------------------------------------------------------------------- (979,791) (3,290,569) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As at November 30, November 30, 2001 2000 $ $ - -------------------------------------------------------------------------------- Total assets Entertainment 8,809,323 10,524,578 Education 2,459,331 3,998,133 Merchant Services 1,259,738 1,349,043 Corporate 2,827,583 2,094,010 Discontinued operations -- 1,228,740 - -------------------------------------------------------------------------------- 15,355,975 18,079,394 - -------------------------------------------------------------------------------- 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 ended November 30, 2001 and November 30, 2000: - ------------------------------------------------------------------------------- For Three Months Ended November 30, November 30, 2001 2000 $ $ - ------------------------------------------------------------------------------- Numerator: Net loss (numerator for basic and diluted loss per share) from continuing operations (979,791) (3,188,992) Net loss (numerator for basic and diluted loss per share) from discontinued operations -- (101,577) - ------------------------------------------------------------------------------- Net loss (numerator for basic and diluted loss per share) (979,791) (3,290,569) =============================================================================== Denominator for basic and diluted loss per share -adjusted weighted average number of shares and assumed conversions 9,028,239 8,356,045 =============================================================================== Basic and diluted loss per share from continuing operations $ (0.11) $ (0.38) Basic and diluted loss per share from discontinued operations -- $ (0.01) - ------------------------------------------------------------------------------- Net loss per share $ (0.11) $ (0.39) =============================================================================== Note 5. 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 second fiscal quarter, these transactions will be completed and will be effective September 1, 2001. The Company will 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 6 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 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 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. Subsequent to the initial filing of this Form 10-Q the convertible debenture was converted, effective September 2001, into the following: (i) the Company issued a Promissory Note in the principal amount of $1,365,100 to CALP (the "CALP Promissory Note") and (ii) the Company issued a Promissory Note in the principal amount of $504,900 to ABFL (the "ABFL Promissory Note"). Pursuant to a Conversion Agreement, as of March 28, 2002, in full satisfaction of the CALP Promissory Note, the Company agreed to issue 1,314,000 shares of the Company's Common Stock immediately and 442,145 shares of the Company's Common Stock upon the approval of the Shareholders of the Company. In addition, pursuant to a Conversion Agreement, as of March 28, 2002, in full satisfaction of the ABFL Promissory Note, the Company agreed to issue 486,000 shares of the Company's Common Stock immediately and 163,533 shares of the Company's Common Stock upon the approval of the Shareholders of the Company. The conversion of the CALP Promissory Note and ABFL Promissory Note has effectively resulted in reducing the Company's debt, eliminating the accruing interest with respect to such debt, and increasing the shareholders' equity. 7 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. Private Offering Pursuant to a Private Placement Memorandum, dated December 1, 2001, the company conducted an offering to raise a maximum of US$8,000,000, consisting of 8% promissory notes which were convertible into shares of common stock. The 8% convertible promissory notes offering has closed. Pursuant to such offering, the Company raised $4,154,880 in convertible debt. All of the investors in the 8% promissory notes offering have voluntarily converted their promissory notes, including accrued interest, into shares of the company's common stock, to be issued upon shareholder approval. Such conversion will result in the issuance of 4,373,558 shares of the Company's common stock, which represents approximately 18.8% of the company's issued and outstanding shares of common stock as of April 24, 2002. Such percentage assumes the approval of the issuance of shares of the Company's common stock pursuant to the Logicorp transaction, the issuance of shares of the Company's common stock pursuant to the conversion of the 8% convertible promissory notes and the issuance of shares of the Company's common stock pursuant to the conversion of two promissory notes issued by the Company. The Company financed the acquisition of Logicorp in part by using the proceeds which were obtained from the 8% convertible promissory notes offering. The net proceeds from such offering were also used for debt repayment, a merger fee to the placement agent of such offering, and will be used for working capital and expenses. The financing raised pursuant to the 8% convertible promissory notes offering has placed the Company in a "cash-positive" position. Bank Debt Effective December 3, 2001 the company has changed its bank from the Royal Bank of Canada to the Bank of Montreal. Under the new agreement with the Bank of Montreal, two credit facilities are available to the Company. The first credit facility is a revolving demand operating loan in the amount of $300,000 bearing interest at the Bank of Montreal's 8 prime rate plus 1.75% payable monthly in arrears. The second credit facility is a non-revolving demand loan, and/or Fixed Rate Term Loan in the amount of $1,250,000 bearing interest at the Bank of Montreal's prime rate plus 1.75% payable monthly in arrears. This loan replaces the Matched Fund Term Loan previously provided by the Royal Bank of Canada. The loan is amortized over 10 years. The company may convert the demand loan to a Fixed Rate Term Loan at any time subject to review and approval by the Bank of Montreal. These loans are secured by general security agreement providing a first charge over all accounts receivable, inventory and equipment of the Company. Collateral mortgages in the amount of $1,550,000 provide the Bank of Montreal a first position on the properties known as 10 Meteor Drive, Toronto, 14 Meteor Drive, Toronto and 775 Pacific Road, Units 36, 37 & 38, Oakville. The mortgage security is a blanket charge on all properties and includes assignment of rents. Note 6. 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 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). Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $110,976 ($0.01) per year. 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. 9 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 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. Note 7. Restatement of financial statements In Fiscal 2001, the Company sold its wholly-owned subsidiary, Interlynx. The Company's financial statements have been restated to reflect Interlynx as a discontinued operation for all periods presented. 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, electronic/online 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. Our Magic Lantern subsidiary and its subsidiaries are involved in the marketing and distribution of educational video and media resources, providing interactive online educational video services and the conversion of analog video to digital video formats. Electronic/online products and services involve providing business software applications and support, as well as educational tools, over the Internet to registered subscribers. In addition, 10 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 November 30, 2001 The Company's total revenues for the 2002 First Fiscal Quarter were $3,958,166, compared to $4,818,865 for the 2001 First Fiscal Quarter, a decrease of $860,699 or 17.9%. Revenues from network services for the 2002 First Fiscal Quarter were $1,710,218, compared to $1,746,123 for the 2001 First Fiscal Quarter, a decrease of $35,905 or 2.1%. These revenues have decreased due to the number of Hospitality sites decreasing to 513 from 551 between the 2002 and 2001 First Fiscal Quarters. Revenues from Pay-tv for the 2002 First Fiscal Quarter were $1,532,421 compared to $1,785,106 for the 2001 First Fiscal Quarter, a decrease of $252,685 or 14.2%. This decrease can be attributed to not as many "blockbuster" movies available in the 2002 First Fiscal Quarter than in the 2001 First Fiscal Quarter. In addition there was a decrease in the amount of guests, due to decreased levels of travel arising from September 11th. Revenues from video and software sales for the 2002 First Fiscal Quarter were $615,648, compared to $1,031,854 for the 2001 First Fiscal Quarter, a decrease of $416,206 or 40.3%. The decrease is primarily the result of weaker foreign sales, and a decrease in analog video sales, as the demand for digital video has not increased at the same corresponding levels. Revenues from digital encoding were $87,209 for the 2002 First Fiscal Quarter, compared to $228,609 for the 2001 First Fiscal Quarter, a decrease of $141,400 or 61.9%. The decrease can be attributed a decreased level of sales compared to the 2001 First Fiscal Quarter. Total cost of sales for the 2002 First Fiscal Quarter were $1,387,770 compared to $1,702,881 for the 2001 First Fiscal Quarter, a decrease of $315,111 or 18.5%. The decrease is consummate with the decreased level of sales. As a percentage of revenues, cost of sales decreased in the 2002 First Fiscal Quarter to 35.1% from 35.3% in the 2001 First Fiscal Quarter. Total selling, general and administrative expenses for the 2002 First Fiscal Quarter were $2,482,750, compared to $4,993,216 for the 2001 First Fiscal Quarter, a decrease of $2,510,466 or 50.3%. The significant reduction in the number of employees and related costs, that took place in the 2001 Second Fiscal Quarter in the Merchant Services segment caused the decrease; $145,306 in 2002 First Fiscal Quarter compared to $2,335,459 in 2001 First Fiscal Quarter, a decrease of $2,190,153. In addition, during the 2001 First Fiscal Quarter, there was a one-time 11 $337,779 compensation charge resulting from a change in the conversion rate on the preferred shares. As a percentage of the Company's total revenues, selling, general and administration expenses decreased to 62.7% for the 2002 First Fiscal Quarter from 103.6% for the 2001 First Fiscal Quarter. Interest and bank charges for the 2002 First Fiscal Quarter were $321,206, compared to $85,263 for the 2001 First Fiscal Quarter, an increase of $235,943 or 276.7%. This increase results from an increase in debt related to the purchase of the Richard Wolff Enterprises, Inc. assets, the Chanana note payable and the convertible debenture. As a percentage of the Company's total revenues, interest and bank charges increased to 8.1% for the 2002 First Fiscal Quarter from 1.8% for the 2001 First Fiscal Quarter. There was no provision for income taxes recorded in the 2002 First Fiscal Quarter compared with no provision of income taxes for the 2001 First Fiscal Quarter. As the tax provision is based upon the individual companies' taxable income, no provision was incurred, as the companies are not in a taxable position. There are no deferred tax assets recorded by the Company. As a result of all of the above, the net loss for the 2002 First Fiscal Quarter was $979,791, compared to net loss of $3,290,569 for the 2001 First Fiscal Quarter, a decrease of $2,310,778. The 2002 First Fiscal Quarter reduced loss resulted primarily from a decrease in selling, general and administrative costs as a result of the staff and related cost reductions in the Merchant Services segment, offset by the decreased level in sales. Liquidity and Capital Resources The Company's working capital deficit changed from $4,432,000 at August 31, 2001 to $4,969,831 at November 30, 2001, an increase of $537,831. For the 2002 First Fiscal Quarter, the Company had a net decrease of cash of $54,551 compared to a net decrease of $156,525 in the 2001 First Fiscal Quarter. Cash provided by operating activities for the 2002 First Fiscal Quarter was $87,813, compared to $1,104,259 used in operating activities in the 2001 First Fiscal Quarter. 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 $121,777, and the increase in other accounts receivable of $194,991. The major items that contributed to cash being provided by operating activities were as follows: the decrease in accounts receivable of $237,699 and an increase in accounts payable and accrued liabilities of $127,011. 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 $1,702,240, increases in income taxes receivable $77,415, and a decrease in net assets from discontinued operations of $67,805. The major sources of cash 12 provided by operating activities included decreases in accounts receivable $383,433 and an increase in accounts payable and accrued liabilities of $307,316. Cash used in investing activities in the 2002 First Fiscal Quarter was $126,124 compared to the $1,361,613 used in investing activities in the 2001 First Fiscal Quarter, a decrease of $1,235,489. The decrease was primarily the result of a decrease in the purchase of property and equipment of $621,089 and the deposit of $614,400 on the future purchase of certain equity shares of a company in the 2001 First Fiscal Quarter Cash used in financing activities in the 2002 First Fiscal Quarter was $16,240, compared to the $2,309,347 provided in the 2001 First Fiscal Quarter. The decrease is primarily due to the sale of the convertible debenture in the 2001 First Fiscal Quarter. Our business plan for 2002 contemplates obtaining additional working capital through refinancings or restructurings of our existing loan agreements, reducing operating overhead (which has already begun through workforce consolidation), and the possible sale of some of our existing subsidiaries. Our management is of the opinion that they will be able to obtain enough working capital and that together with funds provided by operations, there will be sufficient working capital for the Company's requirements. Inflation The rate of inflation has had little impact on the Company's operations or financial position during the three months ended November 30, 2001 and November 30, 2000 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. 13 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. 14 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 10.16 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. + 15 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. + 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. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHELL GROUP CORPORATION Dated: May 22, 2002 By: --------------------------------------- Cameron Chell, President and Chief Executive Officer (Duly Authorized Officer) Dated: May 22, 2002 By: --------------------------------------- Don Pagnutti, Principal Financial Officer 17 CHELL GROUP CORPORATION FORM 10-Q November 30, 2001 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 18 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. 19 -----END PRIVACY-ENHANCED MESSAGE-----