These documents were prepared for Genterra by CVS. CVS charged Genterra $11,720 for the preparation of these three documents.
CMI’s Independent Committee interviewed a number of qualified Business Valuators regarding their possible engagement to prepare the CMI Formal Valuation. Based upon these interviews CMI’s Independent Committee decided that HJF Financial Inc. were best suited and engaged them to prepare the CMI Formal Valuation. CMI and HJF Financial Inc. did not have any prior relationship. HJF Financial Inc. were paid $10,500 by CMI for the CMI Formal Valuation and $3,500 for the update thereto.HJF is not entitled to any further compensation contingent upon the completion of the amalgamation.
Other than the discussions leading to the amalgamation agreement, there have been no material contacts between Genterra and CMI.
None.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
GCI will be organized under the laws of Ontario, Canada. All of the directors and officers of GCI will be residents of Canada and all or a substantial portion of their assets are located in Canada. As a result, it may be difficult for holders of GCI securities to effect service within the United States upon such directors and officers who are not resident of the United States or to enforce against such persons, in Canada or the United States, judgments of courts of the United States, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States.
Upon completion of the Amalgamation, a significant portion of a GCI’s assets will be comprised of industrial commercial rental real estate properties located in the province of Ontario. Following the amalgamation, in order to maximize shareholder returns, GCI will seek to ensure that it continues to have these properties leased to quality tenants at market related rents and that any vacancies that may arise are quickly replaced with new such tenants. In order to do so, Management has and will continue to use its own substantial contact network and where deemed appropriate, will make use of professional rental organizations upon a fee-for-service basis. When new leases are negotiated, Management will attempt to negotiate these on a net-net basis so as to ensure that any future increase in costs associated with the property are borne by the tenant. Management will also attempt to ensure that upon the expiration of any of the mortgages associated with these properties, that extensions or new mortgages are negotiated on terms favorable to the Company based upon the circumstances at that time. The various properties will be managed by the company in conjunction with 3rd party managers as appropriate. Together, this will ensure that rents are collected on time and that the necessary appropriate repairs and maintenance are undertaken. Management will continue to analyze future potential real estate investments in order deploy available resources to expand GCI’s portfolio. Management seeks to acquire real estate investments that provide both income and the potential for capital appreciation. The financing of any acquisitions will normally be through a combination of internal resources and commercial/institutional mortgages.
The property, plants and equipment of GCI will be comprised of the property, plants and equipment of Genterra and CMI. Accordingly, we refer the reader to “INFORMATION CONCERNING GENTERRA – PROPERTY, PLANTS AND EQUIPMENT” beginning on page 110 and to “INFORMATION CONCERNING CMI – PROPERTY,PLANTS AND EQUIPMENT” beginning on page 39.
The purpose of the GCI Option Plan is to attract and retain directors, senior officers, employees and consultants of GCI and such affiliates of GCI as may be designated by the Board of Directors for purposes of the Plan from time to time, and to provide a strong incentive for employees and consultants to put forth maximum effort for the continued success and growth of GCI and its subsidiaries.
The GCI Option Plan will be administered by the Compensation Committee. Each of the Board of Directors and the Compensation Committee will have full and complete authority to interpret the GCI Option Plan, to prescribe such rules and regulations as it deems necessary for the proper administration of the GCI Option Plan and to make such determinations and to take such actions in connection therewith as it deems necessary or advisable. The aggregate maximum number of Common Shares that may be reserved for issuance under the GCI Option Plan is 2,000,000 representing approximately 19.3% of the issued and outstanding Common Shares (on a non-diluted basis) of GCI upon the amalgamation.
Options granted under the GCI Option Plan must have an exercise price of not less than the closing price of the Common Shares on the TSX on the business day prior to the day on which the option is granted or, if the Common Shares were not traded on such day, then an amount equal to the weighted average trading price for shares traded on the TSX for the five trading days immediately preceding such day on which shares did trade, or, if the requirements of the TSX specify a different amount, then such amount determined in accordance with the requirements of the TSX in effect on the date upon which the option is granted. Options granted under the GCI Option Plan are exercisable for a period not to exceed five years. The term and vesting of stock options is at the discretion of the Compensation Committee. Options typically vest equally over a five year period as to one-fifth after the first anniversary of the date of grant and as to additional one-fifths after the second, third, fourth and fifth anniversaries of the date of grant, with the Board of Directors or Compensation Committee having the authority to accelerate the vesting of all or any part of the options. Options are not assignable and terminate: (i) 90 days following the termination of an optionee's employment for any reason other than death; and (ii) within a period of six months following the death of an optionee, subject to any extension or acceleration of the right to exercise at the sole discretion of the Board of Directors or the Compensation Committee.
Under the terms of the GCI Option Plan, the Board of Directors reserves the right to amend, modify or terminate the GCI Option Plan at any time if and when it is advisable in the absolute discretion of the Board of Directors without shareholder approval. Certain types of amendments to the GCI Option Plan or to an option granted thereunder, as more particularly set forth below, shall be effective only upon approval of the shareholders of GCI. Any amendment to any provision of the GCI Option Plan shall be subject to any necessary approvals by any stock exchange or regulatory body having jurisdiction over the securities of GCI.
The text of the proposed resolutions approving the GCI Option Plan are set forth in this Prospectus beginning on page 197. The Boards of Directors of Genterra and CMI, respectively, unanimously recommend that shareholders vote in favour of these resolutions.
Neither Genterra nor CMI is currently involved in any litigation or proceedings which are material either individually or in the aggregate and to knowledge of the Management of Genterra and CMI, no legal proceedings of a material nature involving their respective companies are currently contemplated by any individuals, entities or governmental authorities.
In the normal course of its operations, subsidiaries and/or equity investees of GCI, from time to time, may be named in legal actions seeking monetary damages.
Apart from the ICA, there are no other limitations on the right of non-resident or foreign owners to hold or vote securities imposed by Canadian law or the Articles of Incorporation of GCI. There are no other decrees or regulations in Canada which restrict the export or import of Capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of the Company's securities except as discussed at below, "Taxation."
The following is a general discussion of the income tax aspects under Canadian law relating to ownership of GCI’s Common Shares and Class A Preference Shares. These income tax aspects will vary according to the circumstances of each shareholder, including his place of residence and the place in which he carries on business or has a permanent establishment, as the case may be, so that a shareholder must investigate the tax consequences of his personal situation by obtaining advice from his own tax advisor. This summary does not consider U.S. federal or state income tax provisions or Canadian Provincial income tax provisions, which may be at variance with the provisions contained in the Income Tax Act (Canada) and is not intended to be, nor should it be construed as, legal or tax advice.
Dividends paid to a non-resident of Canada, including distributions or redemptions which are treated as dividends and certain stock dividends, are subject to Canadian income tax. The Canadian non-resident withholding tax would be withheld by the Company who would remit only the net amount to the shareholder. By virtue of Article X of the Canada United States Tax Convention, which came into force on August 16, 1984, (and was amended by the Protocol signed on September 21, 2007), the rate of tax for dividends paid to a resident of the U.S. is limited to 15%. The withholding tax rate is reduced to 5% for a corporate shareholder owning at lease 10% of the voting stock of the Company, either directly or through an entity that is considered fiscally transparent under the laws of the United States and is not a resident of Canada. In the absence of any treaty provisions, the rate of tax imposed would be 25% of the applicable amounts.
Stock dividends received by non-residents from GCI would be subject to Canadian non-resident withholding tax as noted above, to the extent that the paid-up capital of GCI has been increased as a result of the stock dividend.
Gain from the sale of Common Shares and Preference Shares of GCI by a non-resident of Canada will not be subject to Canadian tax provided the shareholder has not held a "substantial interest" (25% or more of the shares of any class of GCI stock) in GCI, at any time in the five preceding years. By virtue of Article XIII of the Canada-United States Tax Convention, shareholders who are resident in the United States and hold a substantial interest in the GCI's Common Shares or Preference Shares will not be subject to Canadian tax on gain from sale of the shares of GCI provided that the value of the shares does not derive principally from real property situated in Canada.
For information concerning the proposed Directors and Officers of GCI, please refer to “VOTING AND MANAGEMENT INFORMATION – Directors and Officers of GCI”, beginning on page 205.
As described herein, the holders of Genterra securities and the holders of CMI securities will consider and vote upon the Amalgamation. Pursuant to the terms of the Amalgamation Agreement Each Genterra Shareholder (other than Dissenting Shareholders) will receive 1 GCI Common Share for every 3.6 Genterra Common Shares held and each CMI Shareholder (other than Dissenting Shareholders) will receive 1 GCI Common Share in exchange for every 1 CMI Share held (as applicable). Each holder of Genterra Class A Shares (other than Dissenting Shareholders) will receive 1 GCI Class A Share in exchange for every 1 Genterra Class A Share held (as applicable). Each holder of Genterra Class B Shares (other than Dissenting Shareholders) will receive 1 GCI Class B Share in exchange for every 1 Genterra Class B Share held (as applicable). Any fractional interests resulting from the foregoing transactions will be rounded up or down to the nearest whole GCI Security. For Canadian GAAP, the transaction is accounted for using the purchase method with CMI considered the acquirer. For U.S. GAAP, the transaction is accounted as a reorganization of entities under common control using historical carrying values. The pro forma financial statements included herein give effect to the transaction based on the U.S GAAP criteria.
On March 9, 2009 Consolidated Mercantile Incorporated (“CMI”) and Genterra Inc. (“Genterra”) announced that their respective boards of Directors have approved a business combination by way of a proposed amalgamation of the two companies (“GCI”).
These unaudited pro forma consolidated financial statements have been prepared to give effect to the proposed amalgamation. These unaudited pro forma consolidated financial statements have been prepared on the basis that the shareholders of CMI and Genterra will receive shares of common stock of GCI in exchange for their shares.
These unaudited pro forma consolidated financial statements have been compiled from and include:
The unaudited pro forma consolidated financial statements have been compiled using significant accounting policies as set out in the audited financial statements of CMI and Genterra for the years ended December 31, 2008 and September 30, 2008, respectively. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical financial statements and the notes thereto of CMI and Genterra described above.
It is management’s opinion that these unaudited pro forma consolidated financial statements include all adjustments necessary for the fair presentation of the transaction described in Note 2 in accordance with U.S. generally accepted accounting principles.
The unaudited pro forma consolidated financial statements are not intended to reflect the results of operations or the financial position of the Company which would have actually resulted had the proposed amalgamation been effected on the dates indicated. Furthermore, the unaudited pro forma financial information is not necessarily indicative of the results of operations that may be obtained in the future. The impact of integration activities, the timing of the completion of the amalgamation and other changes in the net tangible and intangible assets prior to the amalgamation, which have not been incorporated into these unaudited pro forma consolidated financial statements, could cause material differences in the information presented.
On March 9, 2009 CMI and Genterra announced that their respective boards of Directors have approved a business combination by way of a proposed amalgamation of the two companies (“GCI”). The unaudited pro-forma consolidated balance sheet gives effect to the proposed amalgamation of CMI and Genterra as if the amalgamation had occurred on December 31, 2008 on the following basis:
The unaudited pro forma consolidated financial statements incorporate the following pro forma assumptions:
The remaining outstanding shares of the amalgamating companies will be exchanged for shares of GCI as follows:
Pro forma basic earnings per share has been calculated based on number of common shares of GCI issued in these pro forma consolidated financial statements.
CMI was incorporated on August 12, 1940 under the Companies Act of the Province of Ontario under the name of “Erie Flooring and Wood Products Limited”. It became a public company on December 2, 1948 changed its name to “Erie Diversified Industries Ltd.” on December 5, 1968, changed its name to “Lambda Mercantile Corporation Ltd.” on August 10, 1973, changed its name to “Consolidated Mercantile Corporation” on September 30, 1987.
By Certificate and Articles of Amalgamation filed pursuant to the Business Corporation Act (Ontario) and effective on December 30, 1994, Consolidated Mercantile Corporation amalgamated with Lam-Tar Inc. and continued as Consolidated Mercantile Corporation. On October 22, 1998, Consolidated Mercantile Corporation changed its name to “Consolidated Mercantile Incorporated”.
The head office of CMI is located at 106 Avenue Road, Toronto, Ontario M5R 2H3.
CMI owns 100% of the issued and outstanding shares of, 2041804 Ontario Inc., an Ontario corporation which holds investments in marketable securities.
CMI also holds a 1.51% equity interest in Genterra.
The business objective of CMI is to create and maximize shareholder value through internal growth of investments and acquisitions of companies having synergistic product lines and technologies, management strength and a presence in markets with the potential for sales of complementary products. CMI’s investment strategy, , is to assist operating units in taking advantage of their strengths by investment in and by the provision of management and merchant banking services, with the objective of creating added value to CMI and its shareholders.
Over the past number of years, CMI’s investment interests in both Polyair Inter Pack Inc. (“Polyair”) - a manufacturer of protective packaging products, and Distinctive Designs Furniture Inc. (“Distinctive”) - a manufacturer of furniture, incurred substantial operating losses. During this period, Management of CMI spent considerable time and effort in assisting these business units in restructuring their operations and enhancing their ability to be more competitive in their respective industries. These efforts provided CMI with the opportunity to maximize shareholder value, culminating in the December 2007 sale of both units. With these divestiture transactions completed, CMI has the financial and management resources to seek out new long-term strategic acquisitions with the potential for future growth. In the interim period, CMI has invested a portion of its working capital in a combination of relatively short-term income producing assets.
In August 2007 Distinctive filed a Proposal to restructure its unsecured liabilities. The Proposal was accepted by Distinctive’s unsecured creditors and approved by the Ontario Superior Court of Justice. In August 2007 CMI announced its intention to initiate a process to sell its investment interest in Distinctive and effective December 28, 2007, sold its shares and the debt owed by Distinctive to Distinctive’s other major shareholder. Accordingly, the operating results of Distinctive have been reported by CMI as Discontinued Operations.
In March 2004, CMI completed the sale of approximately 48% of its holdings in Polyair. On December 31, 2007, CMI completed a private sale of all of its remaining shareholdings in Polyair.
CMI’s head office, shared with a number of other corporations, is located at 106 Avenue Road, Toronto, Ontario, Canada, M5R 2H3. CMI's cost of its head office facilities is borne, on a pro-rata basis, as part of the management fees charged by CMI to its subsidiaries and investment interests for providing management services to such entities.
In the opinion of management, CMI is not currently involved in any litigation or proceedings which are material either individually or in the aggregate and to CMI's knowledge, no legal proceedings of a material nature involving CMI are currently contemplated by any individuals, entities or governmental authorities.
In the normal course of its operations, subsidiaries and/or equity investees of CMI have been or, from time to time, may be named in legal actions seeking monetary damages.
The Investment Canada Act (the "ICA"), which became effective on June 30, 1985, prohibits the acquisition of control of a Canadian business enterprise in Canada by non-Canadians without prior consent of the Investment Canada Agency (with ultimate appeal to the Federal Cabinet), unless such acquisition is exempt under the provisions of the ICA. Both acquisition of natural resource properties and acquisition of producing properties may be considered to be the acquisition of control of a Canadian business enterprise for ICA purposes. The ICA also covers acquisition of control of Canadian corporate enterprises, whether by purchase of assets or shares. As at December 31, 2008, all of the directors of the Company are, and 78.41% of its voting shares were owned by Canadians. CMI is satisfied that it complies with ICA at present and accordingly is not a non-Canadian person as defined in ICA.
The ICA will substantially reduce the regulatory requirements for acquisition of interests in Canadian businesses under prior legislation, most importantly, (i) by providing that foreign investments below specified threshold sizes (generally, direct acquisitions of Canadian business with gross assets less than $5 million, or "indirect acquisitions" of businesses with gross assets less than $50 million) have only a notification, as opposed to a substantive review, requirement, and (ii) by liberalizing the review standards for approval.
Apart from the ICA, there are no other limitations on the right of non-resident or foreign owners to hold or vote securities imposed by Canadian law or the Articles of Incorporation of CMI. There are no other decrees or regulations in Canada which restrict the export or import of Capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of CMI's securities except as discussed at Paragraph E, "Taxation."
The following is a general discussion of the income tax aspects under Canadian law relating to ownership of CMI’s Common Shares and Class A Preference Shares. These income tax aspects will vary according to the circumstances of each shareholder, including his place of residence and the place in which he carries on business or has a permanent establishment, as the case may be, so that a shareholder must investigate the tax consequences of his personal situation by obtaining advice from his own tax advisor. This summary does not consider U.S. federal or state income tax provisions or Canadian Provincial income tax provisions, which may be at variance with the provisions contained in the Income Tax Act (Canada) and is not intended to be, nor should it be construed as, legal or tax advice.
Dividends paid to a non-resident of Canada, including distributions or redemptions which are treated as dividends and certain stock dividends, are subject to Canadian income tax. The Canadian non-resident withholding tax would be withheld by the Company who would remit only the net amount to the shareholder. By virtue of Article X of the Canada United States Tax Convention, which came into force on August 16, 1984 (and was amended by the Protocol signed on September 21, 2007), the rate of tax for dividends paid to a resident of the U.S. is limited to 15%. The withholding tax rate is reduced to 5% for a corporate shareholder owning at lease 10% of the voting stock of the Company, either directly or through an entity that is considered fiscally transparent under the laws of the United States and is not a resident of Canada. In the absence of any treaty provisions, the rate of tax imposed would be 25% of the applicable amounts.
Stock dividends received by non-residents from CMI would be subject to Canadian non-resident withholding tax as noted above, to the extent that the paid-up capital of CMI has been increased as a result of the stock dividend.
Gain from the sale of Common Shares and Preference Shares of CMI by a non-resident of Canada will not be subject to Canadian tax provided the shareholder has not held a "substantial interest" (25% or more of the shares of any class of Company stock) in the Company, at any time in the five preceding years. By virtue of Article XIII of the Canada-United States Tax Convention, shareholders who are resident in the United States and hold a substantial interest in CMI’s Common Shares or Preference Shares will not be subject to Canadian tax on gain from sale of the shares of CMI provided that the value of the shares does not derive principally from real property situated in Canada.
The following unaudited financial information was derived directly and indirectly from CMI’s financial statements which are included herein, beginning on Page 63.
The effect of the differences between accounting principles generally accepted in Canada and those accepted in the United States on working capital, total assets, long-term debt, shareholders’ equity, and cash dividend per share as described in Note 12 to the Audited Consolidated Financial Statements for the five years ended December 31, 2008, 2007, 2006, 2005 and 2004 are summarized as follows:
On November 12, 2003, the Company redesignated the non-voting, non-participating, $0.04 cumulative, redeemable, Preference shares, Series 1, as non-voting, non-participating, redeemable non-cumulative, Class A Preference shares, cancelled all arrears of cumulative dividends outstanding on the Preference shares, Series 1, and consolidated the Preference shares, Series 1, on the basis of one new Class A Preference share for two old Preference shares, Series 1. The prices of the Preference shares have been adjusted to reflect the effect of a 1 for 2 reverse split which became effective November 12, 2003. As part of this redesignation, the Class A Preference shares were convertible, until March 31, 2004, into Common shares on the basis of one Common share for each 5.7 Class A Preference shares. A total of 1,222,949 Class A Preference shares were converted into 214,577 Common shares as at March 31, 2004. Pursuant to the terms and conditions attaching to the CMI Class A Shares, the CMI Class A Shares may be redeemed by CMI at any time upon not less than thirty days’ notice in writing, at a price of $0.44 per share plus all declared but unpaid dividends thereon up to the date fixed for redemption. CMI has given such notice of redemption on @, 2009, and the date specified for redemption is @, 2009, after which date the holders of the CMI Class A Shares shall not be entitled to exercise any of the rights of shareholders in respect thereof.
On March 24, 2008, CMI announced that it had been advised by NASDAQ, pursuant to Marketplace Rule 4300 that, in view of CMI’s recent business dispositions, it no longer had an operating business and, consequently, NASDAQ suspended trading of CMI’s common stock at the opening of business on March 27, 2008. The Common Shares, beginning on March 27, 2008, is being quoted on pink sheets.
On April 8, 2008 the Common Shares were delisted from The Nasdaq Stock Market.
As at June 5, 2009, CMI's shareholder register indicates that there were 436 holders of record of Common Shares and 37 holders of record of Class A Preference Shares. Of these, 267 record holders of Common Shares holding an aggregate of 1,093,154 shares, representing approximately 21.53% of the Company's issued and outstanding Common Shares, 31 record holders of Class A Preference Shares holding an aggregate of 175,273 shares, representing 55.55% of Company's issued and outstanding Class A Preference Shares, were resident in the United States..
Except where noted, the above quotations represent prices between dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions.
The Company is a management holding company which effects its strategy through investment in, management of and merchant banking to its core strategic industries with the objective of creating added value to the Company and its shareholders. Up until December 2007 the Company retained a 50.3% equity interest in Distinctive Design Manufacturing Inc. (‘Distinctive”); and a 22.8% equity interest in Polyair Inter Pack Inc. (“Polyair”).
Distinctive, a manufacturer of upholstered furniture is a private Ontario corporation located in Toronto, Ontario. Distinctive focuses on the manufacture and import of leather and fabric upholstered furniture for sale to major Canadian department stores, mass merchants and independent furniture stores, as well as to a number of customers in the United States. Products are sold under its own brand names – Distinctive and Kroehler. The Furniture Division’s design department continually updates and modifies product lines to meet changing trends, expand product placement and enhance brand awareness. The Furniture Division produces and distributes its products from Canada.
Distinctive’s 2006 results were negatively impacted by the strengthening Canadian Dollar, higher costs, a difficult retail environment and by increased competition, primarily from offshore manufactures. Together with the assistance of CMI’s Management, Distinctive embarked on a profit improvement program designed to reduce material and labour costs and to increase sales. This included a substantial increase in its component import programs as well as the initiation of the import of certain finished products, the expansion of its product line to include motion furniture, the closure of its North Carolina plant and the consolidation of its three Toronto facilities. Distinctive continued to work on new sales programs and channels of distribution with both existing and prospective new customers and to develop its niche as a manufacturer of quality fabric and leather furniture in the industry. Distinctive’s largest competitors are offshore furniture manufacturers and local distributors of offshore manufactured goods.
Polyair was until 2009 a publicly traded holding company which owns 100% of Cantar/Polyair Corporation ("CPC"), a Delaware corporation which manufactures protective packaging and specialty pool products. In 2005, competitive factors, raw material cost increases and the continued strength of the Canadian dollar resulted in declining profit margins at Polyair’s Pool Products business segment. As a result, Polyair announced its formal plan to explore the disposal of this segment and reaffirmed Polyair’s business strategy in the protective packaging industry. Polyair initiated a process to dispose of the assets and business of its Pool Products business segment. The sale of this segment was concluded during 2006. Polyair’s packaging business operated as a stand-alone business through separate subsidiaries. Polyair’s Corporate office, which is located in Toronto, Ontario, oversees the operating activities of its subsidiaries. Polyair operated eight manufacturing and distribution facilities, seven of which were in the United States where it generates the majority of its sales.
Polyair’s products include Polyethylene bubble protective packaging, Polyethylene foam for surface protection and cushioning, plastic and paper mailers, packaging systems, insulation materials and foam-in-place packaging. Polyair also produces solar covers and pool wall foam and marketed its products through retailers and distributors located across North America. Polyair sells its products under its own brand names and it produces a variety of private label products for certain customers. Approximately 85% of Polyair’s sales were derived from customers in the United States. The most significant raw material used by Polyair in the production of its products is RESIN which is sourced from a number of suppliers. In addition to raw material costs, freight is major expense for Polyair due to the bulky nature of many of its products. Polyair competes with numerous manufacturers of similar products as well as alternative packaging products such as paper, cardboard and styrene chips.
During the past number of years, both Distinctive and Polyair incurred substantial operating losses. In 2007 CMI’s Management spent considerable time and effort in assisting these business units in restructuring their operations and enhancing their ability to be more competitive in their respective industries. These efforts provided the Company with the opportunity to maximize shareholder value, culminating in the December 2007 sale of both units.
Since the time of sale of both Polyair and Distinctive, CMI with its strengthened financial and management resources has sought out new long-term strategic acquisitions, targeting companies with synergistic product lines and technologies, management strength and a presence in markets with the potential for future growth with the objective of adding value to CMI and its shareholders. While CMI’s Management have analyzed a number of potential acquisition targets, to-date none have been consummated. CMI’s Management continue to seek out target acquisitions that they believe will offer future growth and added value to CMI and its shareholders. As part of this process, CMI’s Board of Directors have after review, decided that an amalgamation with Genterra will be in the best interests of CMI as it amongst other things, will enable CMI Shareholders to be part of a larger corporation with larger more varied assets, including Genterra’s substantial income producing real estate portfolio, a larger equity and income base, greater opportunities and reduced operating costs, all of which should assist in facilitating the financing of future growth and expansion. CMI’s Board believe that with the Amalgamation, GCI’s strengthened balance sheet will allow it to analyze larger potential real estate investments, to capitalize on favorable market conditions and to expand GCI’s real estate income producing portfolio. The tightening in the credit markets arising from the current economic conditions has created an environment where buyers, who were previously active acquirers, may no longer be able to participate and where sellers may view the disposition of real estate as a means of raising capital. This environment should create more opportunities to acquire real estate on an opportunistic basis. In the interim period, CMI has invested a portion of its working capital in a combination of relatively short-term income producing assets.
General
The following discussion sets forth items derived from the consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 prepared in accordance with Canadian GAAP. A summary of the differences between Canadian and US accounting principles for the fiscal years ended December 31, 2008, 2007 and 2006 are detailed in Note 12 to the Consolidated Financial Statements included herein.
(In thousands of dollars) | | Years Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | |
| Investment revenue (loss) | | $ | (684 | ) | | $ | 554 | | | $ | 8 | |
| Expenses | | | 1,062 | | | | (1,426 | ) | | | (506 | ) |
| Earnings (loss) on equity items | | | (27 | ) | | | 4,608 | | | | (1,775 | ) |
| Earnings before income taxes | | | 351 | | | | 3,736 | | | | (2,273 | ) |
| Income taxes | | | (4 | ) | | | 20 | | | | (700 | ) |
| Earnings (loss) from continuing operations | | | 347 | | | | 3,756 | | | | (2,973 | ) |
| Loss from discontinued operations | | | - | | | | (1,187 | ) | | | (1,344 | ) |
| Share of earnings (loss) from discontinued operations of equity investee | | | - | | | | 640 | | | | (4,812 | ) |
Net earnings (loss) | | $ | 347 | | | $ | 3,209 | | | $ | 9,129 | |
| | | | | | | | | | | | | |
Review of Year-End Results December 31, 2008 and 2007
Revenue. In August 2007 the Company announced its intention to initiate a process to sell its 50.33% investment interest in Distinctive and effective December 28, 2007 sold all of its shares to Distinctive’s other major shareholder. Accordingly the 2007 operating results of Distinctive have been classified as discontinued operations. Revenue Loss for the year ended December 31, 2008 was $684,417 compared to Revenue Income of $553,933 for the comparable 2007 period. Revenue Loss for 2008 includes interest income on cash and cash equivalents of $361,211 and share of loss from investments in Limited Partnerships of $1,045,628. Revenue for 2007 includes interest income on cash and cash equivalents of $194,304 and share of income from investments in Limited Partnerships of $359,629. The increase in interest income in 2008 is due to the substantial increase in the period in cash and cash equivalents resulting from the proceeds received by the Company from the December 2007 sale of Distinctive and Polyair. The 2008 Loss from investments was due to the poor performance of the global equity markets arising from the current economic conditions, particularly in the second half of the year, and the impact thereon on the Company’s investments in Limited Partnerships.
Administrative and General Expenses. Administrative and general expenses include fees for management and administrative services, legal and audit fees, and public company shareholder costs. Administrative and general expenses for the year ended December 31, 2008 were $536,873 compared to $1,083,445 in the comparable 2007 period. The decrease in administrative and general expenses for the year ended December 31, 2008 from the comparable period was as a result of the 2007 management compensation incurred upon the completion of the Company’s disposition of its investment interest in Polyair.
Gain (loss) on Foreign Exchange. The Company holds certain amounts of its cash in United States dollars. The Company experienced a foreign exchange gain of $1,657,741 during the year ended December 31, 2008. The gains were as a result of the strengthening of the United States Dollar. This compares to a foreign exchange loss of $342,732 for the year ended December 31, 2007.
Other expenses. Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009. This note is only due and payable in any given year if Distinctive continues its business. Over the past number of years Distinctive incurred substantial operating losses. Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes a reserve is appropriate. As a result, the deferred gain on the sale of this investment has been adjusted and the reduction has been set off against the impairment loss on note receivable resulting in the net loss of $58,675.
Equity Earnings (loss). Equity earnings for the year ended December 31, 2008 were $4,572 compared to an equity loss of $723,175 for the comparable 2007 period. On December 31, 2007, the Company completed a private sale of all of its remaining shareholdings in Polyair. The equity loss for the year ended December 31, 2007 includes the Company’s share of equity loss of Polyair The Company recorded adjustments to the carrying value of an investment in a significantly influenced company of $31,000 and $140,000 in 2008 and 2007 respectively.
Gain on Sale of Investments (2007). In December 2007 the Company sold its shares in Distinctive. The shares were paid for by the delivery to the Company of a $1 million promissory note payable in ten equal consecutive annual instalments. The promissory note was discounted to its present value resulting in a gain of approximately $550,000. Under Emerging Issue Committee Abstract #79, the gain on sale is only recognized in the Statement of Operations to the extent that it is realized. Accordingly, $420,953 of the gain was deferred and reflected in the liability section of the Balance Sheet. In December 2007 the Company also sold its remaining shareholdings in Polyair for $6.0 million, resulting in a gain of approximately $5.3 million.
Income Tax Provision. The effective tax rate for the year ended December 31, 2008 and 2007 was 1.1% and (0.5%) respectively. The difference between the Company’s statutory tax rate and its effective tax rate is primarily attributable to the permanent differences associated with the tax treatment of capital gain transactions and the valuation allowance provided against certain future tax benefits.
Discontinued Operations. In August 2007 the Company announced its intention to initiate a process to sell its 50.33% investment interest in Distinctive. Effective December 28, 2007 the Company sold its shares and the debt owed by Distinctive to Distinctive’s other major shareholder. Accordingly, the operating results of Distinctive for the year ended December 31, 2007, a loss of $1,186,997, has been classified by the Company as discontinued operations. The consolidated financial statements for the year ended December 31, 2007 also include the Company’s share of Polyair’s discontinued operations. On December 31, 2007, the Company completed a private sale of all of its remaining shareholdings in Polyair.
Net Earnings (loss). Net earnings for the year ended December 31, 2008 were $347,363 as compared to net earnings of $3,208,755 for the comparable 2007 period. The results for the year ended December 31, 2008 were impacted by the poor performance of the equity markets and the gain on foreign exchange. The 2007 earnings resulted from the gain on the sale of the Company’s investments in Distinctive and Polyair offset by the discontinued operation loss from Distinctive of $1,186,997.
Inflation. Inflation has not had a material impact on the results of the Company’s operations in its last quarter and is not anticipated to materially impact on the Company’s operations during its current fiscal year.
Review of Year-End Results December 31, 2007 and 2006
Revenue. In August 2007 the Company announced its intention to initiate a process to sell its 50.33% investment interest in Distinctive and effective December 28, 2007 sold all of its shares to Distinctive’s other major shareholder. Accordingly the 2007 and 2006 operating results of Distinctive have been classified as discontinued operations. Revenue for the year ended December 31, 2007 increased to $553,933 compared to $8,009 for the comparable 2006 period. Revenue for 2007 includes interest income on cash and cash equivalents of $194,304 and share of income from investments in Limited Partnerships of $359,629. Revenue for 2006 includes interest income on cash and cash equivalents of $225,617 and share of loss from investments in Limited Partnerships of $217,608. The increase in revenue from investments in 2007 was due to the improved results achieved from the Company’s Limited Partnership investments during the period.
Administrative and General Expenses. Administrative and general expenses include fees for management and administrative services, legal and audit fees, and public company shareholder costs. Administrative and general expenses for the year ended December 31, 2007 increased to $1,083,445 from $540,036 in the comparable 2006 period. The increase in administrative and general expenses for the year ended December 31, 2007 was as a result of the management compensation incurred upon the completion of the Company’s disposition of its investment interest in Polyair.
Loss on Foreign Exchange. The Company holds certain amounts of its cash in United States dollars. The substantial strengthening of the Canadian Dollar during 2007 resulted in the Company incurring a foreign exchange loss of $342,732 for the year ended December 31, 2007. This compares to a foreign exchange gain of $34,277 for the year ended December 31, 2006.
Equity Loss. Equity loss for the year ended December 31, 2007 was $723,175 as compared to an equity loss of $783,926 for the comparable 2006 period. Polyair’s performance for the year ended October 31, 2007 improved as a result of an improvement in gross margin. The improvement in gross margin was offset by the provision for fixed asset impairments and one-time professional fees related to the potential sale of the business. The Company recorded an adjustment of $140,000 to the carrying value of its investment in a significantly influenced company in 2007.
Gain on Sale of Investments. In December 2007 the Company sold its shares and the debt owed by Distinctive. The purchase price for the debt was paid for in cash. The shares were paid for by the delivery to the Company of a $1 million promissory note payable in ten equal consecutive annual instalments, with the first instalment due on January 15, 2009. The promissory note has been discounted to its present value. The promissory note is secured by a pledge of all of the shares of Distinctive owned by the Purchaser. The disposition resulted in a gain of approximately $550,000. Under Emerging Issue Committee Abstract #79, the gain on sale is only recognized in the Statement of Operations to the extent that it is realized. Accordingly, $420,953 of the gain has been deferred and is reflected in the liability section of the Balance Sheet. In December 2007 the Company sold its remaining shareholdings in Polyair for $6.0 million, resulting in a gain of approximately $5.3 million.
Income Tax Provision. The effective tax rate for the year ended December 31, 2007 and 2006 was (0.5%) and 30.8% respectively. The difference between the Company’s statutory tax rate and its effective tax rate is primarily attributable to certain non-deductible expenses, the permanent differences associated with the tax treatment of capital gain transactions, the re-valuation of future tax benefits previously not recognized and the reserve provided against certain future tax benefits. In 2006, a reserve was provided against the realization of the Company’s capital and non-capital losses carried forward.
Discontinued Operations. In August 2007 the Company announced its intention to initiate a process to sell its 50.33% investment interest in Distinctive. Effective December 28, 2007 the Company sold its shares and the debt owed by Distinctive to Distinctive’s other major shareholder. Accordingly, the operating results of Distinctive, a loss of $1,186,997, have been classified by the Company as discontinued operations. Distinctive’s performance for the year ended December 31, 2007 continued to be impacted by a difficult retail environment due, in part, to the rise of the Canadian dollar and by competitive market conditions, primarily from offshore manufacturers. In 2005 Polyair initiated a process to dispose of the assets and business of its Pool Products business segment. The sale of this segment was concluded during 2006. In 2006 Polyair’s management determined that its interests in Cross-Linked Foam and Expanded Polystyrene were not core to its Packaging business and disposed of these two operations. Polyair now operates with its packaging business as its principal business and accordingly, the operating results of its Pool, Cross-Linked Foam and Expanded Polystyrene businesses have been classified by Polyair as discontinued operations. Under an approved Plan of Arrangement during the first quarter of 2007, Polyair’s Pool Division Canadian Subsidiary’s liabilities were settled at a substantial discount and the resultant compromise was reported under Results from Discontinued Operations. Similar to the Canadian Subsidiary, Polyair’s Pool Division US Subsidiary’s liabilities were settled at considerably less than face value. In addition, Polyair realized a gain on the sale of its Cross-Linked Foam business which is included in the Company’s $639,964 share of earnings from discontinued operations of Polyair. Costs associated with the sale and wind down of these businesses by Polyair were also included in Discontinued Operations. There were no significant activities by Polyair’s discontinued operations in the remainder of its 2007 fiscal year.
Net Earnings (loss). Net earnings for the year ended December 31, 2007 were $3,208,755 as compared to a net loss of $9,129,136 for the comparable 2006 period. The increase in the year-to-date earnings was a result of the gain on the sale of the Company’s investments in Distinctive and Polyair. This gain was offset by the discontinued operation loss of $1,186,997 from Distinctive. The 2006 losses were due to the losses generated at both Distinctive and Polyair, the inclusion of the write-down of the Company’s investment in Polyair and the revaluation of the future income tax benefits on capital and non-capital losses carry forward.
Inflation. Inflation has not had a material impact on the results of the Company’s operations in its last quarter and is not anticipated to materially impact on the Company’s operations during its current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES 2008 and 2007
The Company’s principal sources of liquidity are cash on hand, short-term investments and cash flow from operations.
The Company's working capital amounted to $16.3 million at December 31, 2008 compared to $15.8 million at December 31, 2007. The ratio of current assets to current liabilities increased to 17.9:1 at December 31, 2008 from 11.2:1 at December 31, 2007.
During the twelve months ended December 31, 2008 the Company’s cash position increased by approximately $3.2 million to $14.2 million from $11.0 million at December 31, 2007. The net increase was due to the following:
| Ø | Operating Activities increased cash by $62,315. This was a result of $664,130 in cash generated from operations, including an unrealized gain of $8,136 on foreign exchange, offset by $601,815 of cash used for changes in non-cash components of work capital; |
| Ø | Financing Activities utilized $7,505 of cash for the purchase of common shares for cancellation; |
| Ø | Investing Activities increased cash by $3,162,177. This was due to the repayment of notes receivable of $752,459, proceeds of $59,891 received on the redemption of shares in a significantly influenced company and a decrease in short-term investments of $2,349,827. |
The Company’s ongoing expected costs include administrative expenses, fees for management and administrative services provided to the Company, legal and audit fees and public company shareholder costs. The Company expects to generate the revenue required in order to service these expenditures from interest and investment income.
LIQUIDITY AND CAPITAL RESOURCES 2007 AND 2006
The Company’s principal sources of liquidity are cash on hand, short-term investments and cash flow from operations.
The Company's working capital amounted to $15.8 million at December 31, 2007 compared to $12.3 million at December 31, 2006. The ratio of current assets to current liabilities increased to 11.2:1 at December 31, 2007 from 2.21:1 at December 31, 2006. The increase in working capital and the ratio of current assets to current liabilities resulted from the Company’s sale of its investment interests in Distinctive and Polyair and the proceeds received therefrom.
During the twelve months ended December 31, 2007 the Company’s cash position increased by approximately $7.4 million to $11.0 million from $3.6 million at December 31, 2006. The net increase was due to the following:
| Ø | Operating Activities decreased cash by $464,096. This was a result of $1,051,146 in cash utilized in operations, including an unrealized loss of $356,272 on foreign exchange, offset by $579,038 of cash provided by changes in non-cash components of work capital and $8,012 of funds provided by discontinued operations. |
| Ø | Investing Activities increased cash by approximately $7.8 million due to proceeds of $420,954 received from the sale of Distinctive and $6,003,795 received from the sale of Polyair, as well as a decrease in short-term investment of approximately of $1.6 million. These increases were offset by a net increase in notes receivable of approximately of $0.2 million. |
The Company’s ongoing expected costs include administrative expenses, fees for management and administrative services provided to the Company, legal and audit fees and public company shareholder costs. The Company expects to generate the revenue required in order to service these expenditures from interest and investment income.
QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK.
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market rates. The Company has reduced the exposure to interest rate risk over the cash flows through the use of fixed rate instruments on certain of its financial liabilities. The Company has not used derivative financial instruments to alter the exposure to interest rate risk.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAS 124-2 and FSP FAS 115-2 In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends FAS 115 and FAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security before recovery of its cost basis. This FSP requires increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold, as well as increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. FSP 115-2 and FSP 124-2 are effective for interim and annual periods ending after June 15, 2009. We are currently evaluating the impact of this FSP on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 In April 2009, FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amend FAS No. 107, Disclosures About Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1, are effective for interim periods ending after June 15, 2009 (our Fiscal 2010). We do not anticipate a material impact on our consolidated financial statements of this FSP as our current disclosures meet these requirements.
FAS No. 157-4 In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expand quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly. This pronouncement is effective beginning with the June 30, 2009 interim financial statements. We are currently assessing the impact of FSP FAS No. 157-4 on our consolidated financial position, cash flows and results of operations.
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The Company is currently assessing the affect of its adoption may have on its consolidated financial statements.
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
SFAS No. 161 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the quarterly disclosures requirements in SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company adopted these deferred provisions on October 1, 2008 which had no impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted these provisions on October 1, 2008 which had no impact on our consolidated financial statements.
SFAS No. 141(R) In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. The statement provides revised guidance for recognition and measuring assets acquired and liabilities assumed in a business combination. It also requires transaction costs for a business combination to be expensed as incurred. SFAS 141(R) will impact our accounting for and business combinations we complete after 2008.
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
| CONSOLIDATED MERCANTILE INCORPORATED |
DECEMBER 31, 2008
CONTENTS
| |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
| |
| CONSOLIDATED FINANCIAL STATEMENTS |
| Balance Sheets |
| Statements of Shareholders’ Equity |
| Statements of Operations and Other Comprehensive Income |
| Schedule to Consolidated Financial Statements |
| Statements of Cash Flows |
| Notes to Consolidated Financial Statements |
| SUPPLEMENTARY INFORMATION |
| Consolidated Valuation and Qualifying Accounts and Reserves |
Report of Independent Registered Public Accounting Firm
To the Shareholders of
Consolidated Mercantile Incorporated
We have audited the accompanying consolidated balance sheet of Consolidated Mercantile Incorporated as of December 31, 2008 and the related consolidated statements of shareholders’ equity, operations and other comprehensive income and cash flows the year ended December 31, 2008. In connection with our audit of the financial statements, we have also audited the financial statement schedule II. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Consolidated Mercantile Incorporated at December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2008, in conformity with Canadian generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
On March 23, 2009, we reported separately to the shareholders of Consolidated Mercantile Incorporated on the consolidated financial statements for the year ended December 31, 2008 prepared in accordance with Canadian generally accepted accounting principles without a note disclosing the summary of differences between Canadian and United States of America generally accepted accounting principles.
The financial statements for the year ended December 31, 2007 and the statements of shareholders’ equity, operations and cash flows for the year ended December 31, 2006 were audited by another firm of Chartered Accountants, who expressed an unqualified opinion in their report dated February 29, 2008 except as to the prior period adjustment described in Note 12 which is as of June 29, 2009.
(Signed) BDO Dunwoody LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
March 23, 2009, except for Note 12 which is as at August 14, 2009
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when changes in accounting policies, such as those described in Note 1, have a material effect on the consolidated financial statements. Our report to the shareholders dated March 23, 2009, except for Note 12 which is as at August 14, 2009 is expressed in accordance with Canadian reporting standards which do not require a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the consolidated financial statements.
(Signed) BDO Dunwoody LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
March 23, 2009, except for Note 12 which is as at August 14, 2009
BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
CONSOLIDATED MERCANTILE INCORPORATED
We have audited the consolidated balance sheet of CONSOLIDATED MERCANTILE INCORPORATED as at December 31, 2007 and the consolidated statements of operations and other comprehensive income, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Canada and standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2007 and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.
The audit referred to in the above report also included the related financial statement schedule listed in response to Item 19(a) of the Company's annual report on Form 20-F for each of the years in the two-year period ended December 31, 2007. In our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly the information set forth therein.
On February 29, 2008, we reported separately to the shareholders of Consolidated Mercantile Incorporated on the consolidated financial statements for the years ended December 31, 2007 and 2006 prepared in accordance with Canadian generally accepted accounting principles without a note disclosing the summary of differences between Canadian and United States of America generally accepted accounting principles.
The consolidated statements for the years ended December 31, 2007 and 2006, prepared in accordance with the United States generally accepted accounting principles as disclosed in Note 12, have been restated to reflect the changes described in Note 12 to the December 31, 2008 consolidated financial statements.
As discussed in Note 12 to the consolidated financial statements, the 2007 and 2006 consolidated financial statements have been restated to correct a misstatement.
KRAFT BERGER LLP
Chartered Accountants
Licensed Public Accountants
Toronto, Ontario
February 29, 2008, except as to the prior period adjustment described in Note 12 which is as of June 29, 2009
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(Expressed in Canadian Dollars)
| ASSETS | | 2008 | | | 2007 | |
| | | | | | | |
| Current | | | | | | |
| Cash and cash equivalents | | $ | 14,178,399 | | | $ | 10,961,412 | |
| Short-term investments | | | 2,880,094 | | | | 5,461,581 | |
| Accounts receivable | | | 20,797 | | | | 26,351 | |
| Prepaid expenses | | | 49,010 | | | | 23,446 | |
| Notes receivable (Note 3) | | | 99,935 | | | | 832,459 | |
| | | | 17,228,235 | | | | 17,305,249 | |
| Investments (Note 4) | | | 292,427 | | | | 378,746 | |
| Notes receivable (Note 3) | | | - | | | | 457,513 | |
| | | $ | 17,520,662 | | | $ | 18,141,508 | |
LIABILITIES
| Current | |
| Accounts payable and accrued liabilities | | $ | 121,181 | | | $ | 693,078 | |
| Income taxes payable | | | 839,565 | | | | 849,469 | |
| | | | 960,746 | | | | 1,542,547 | |
| Deferred gain (Note 5) | | | 42,050 | | | | 420,953 | |
| | | | 1,002,796 | | | | 1,963,500 | |
SHAREHOLDERS' EQUITY
| Capital stock (Note 6) | | | | | | |
Issued and outstanding | | | | | | |
315,544Class A Preference shares | | | 141,826 | | | | 141,826 | |
| 5,076,407 Common shares (2007 – 5,081,207) | | | 2,688,939 | | | | 2,691,481 | |
| | | | 2,830,765 | | | | 2,833,307 | |
| Contributed surplus | | | 59,411 | | | | 59,411 | |
| Retained earnings | | | 13,627,690 | | | | 13,285,290 | |
| | | | 16,517,866 | | | | 16,178,008 | |
| | | $ | 17,520,662 | | | $ | 18,141,508 | |
| | See accompanying notes to consolidated financial statements. |
| APPROVED ON BEHALF OF THE BOARD: | |
Director | Director |
Fred A. Litwin Stan Abramowitz
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31
(Expressed in Canadian Dollars)
| | | | | | | | | | | | | | | | | | | |
| | | Total Shareholders’ Equity $ | | | Common Shares (Note 6) | | | Class A Preference Shares (Note 6) | | | Contributed Surplus $ | | | Accumulated Other Comprehensive Loss $ | | | Retained Earnings $ | |
| | | Number of Shares | | | Value $ | | | Number of Shares | | | Value $ | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2005 | | | 20,830,461 | | | | 5,094,507 | | | | 2,698,527 | | | | 315,544 | | | | 141,826 | | | | 59,411 | | | | (1,048,467 | ) | | | 18,979,164 | |
| Repurchase for cancellation | | | (17,674 | ) | | | (13,300 | ) | | | (7,046 | ) | | | | | | | | | | | | | | | | | | | (10,628 | ) |
| Other comprehensive income | | | 291,379 | | | | | | | | | | | | | | | | | | | | | | | | 291,379 | | | | | |
| Net loss | | | (9,129,136 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (9,129,136 | ) |
December 31, 2006, as previously stated | | | 11,975,030 | | | | 5,081,207 | | | | 2,691,481 | | | | 315,544 | | | | 141,826 | | | | 59,411 | | | | (757,088 | ) | | | 9,839,400 | |
| Unrealized gain on short-term investments, net of taxes (Note 1) | | | 237,135 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 237,135 | |
| December 31, 2006, as restated | | | 12,212,165 | | | | 5,081,207 | | | | 2,691,481 | | | | 315,544 | | | | 141,826 | | | | 59,411 | | | | (757,088 | ) | | | 10,076,535 | |
| Other comprehensive income (Note 1) | | | 757,088 | | | | | | | | | | | | | | | | | | | | | | | | 757,088 | | | | | |
| Net earnings | | | 3,208,755 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,208,755 | |
December 31, 2007 | | | 16,178,008 | | | | 5,081,207 | | | | 2,691,481 | | | | 315,544 | | | | 141,826 | | | | 59,411 | | | | - | | | | 13,285,290 | |
| Repurchase for cancellation | | | (7,505 | ) | | | (4,800 | ) | | | (2,542 | ) | | | | | | | | | | | | | | | | | | | (4,963 | ) |
| Net earnings | | | 347,363 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 347,363 | |
December 31, 2008 | | | 16,517,866 | | | | 5,076,407 | | | | 2,688,939 | | | | 315,544 | | | | 141,826 | | | | 59,411 | | | | - | | | | 13,627,690 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
(Expressed in Canadian Dollars)
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| REVENUE | | | | | | | | | |
| Interest income | | $ | 361,211 | | | $ | 194,304 | | | $ | 225,617 | |
| Investment income (loss) | | | (1,045,628 | ) | | | 359,629 | | | | (217,608 | ) |
| | | | (684,417 | ) | | | 553,933 | | | | 8,009 | |
| | | | | | | | | | | | | |
EXPENSES (Schedule) | | | (1,062,193 | ) | | | 1,426,177 | | | | 505,759 | |
| EARNINGS (LOSS) FROM OPERATIONS BEFORE THE FOLLOWING | | | 377,776 | | | | (872,244 | ) | | | (497,750 | ) |
Equity earnings (loss) of significantly influenced companies | | | 4,572 | | | | (723,175 | ) | | | (783,926 | ) |
Gain on dilution of investment in former equity investee | | | - | | | | 67,881 | | | | - | |
| Gain on sale of investment in former consolidated subsidiary | | | - | | | | 130,850 | | | | - | |
| Gain on sale of investment in former equity investee | | | - | | | | 5,272,151 | | | | - | |
| Write-down of investment in significantly influenced company | | | (31,000 | ) | | | (140,000 | ) | | | - | |
| Write-down of investment in former equity investee | | | - | | | | - | | | | (991,732 | ) |
| | | | (24,428 | ) | | | 4,607,707 | | | | (1,775,658 | ) |
| EARNINGS (LOSS) BEFORE INCOME TAXES | | | 351,348 | | | | 3,735,463 | | | | (2,273,408 | ) |
| Income taxes (recovery) (Note 8) | | | 3,985 | | | | (20,325 | ) | | | 700,263 | |
| EARNINGS (LOSS) FROM CONTINUING OPERATIONS | | | 347,363 | | | | 3,755,788 | | | | (2,973,671 | ) |
Loss from discontinued operations, net of taxes (Note 11) | | | - | | | | (1,186,997 | ) | | | (1,343,646 | ) |
| Share of earnings (loss) from discontinued operations of former equity investee | | | - | | | | 639,964 | | | | (4,811,819 | ) |
| | | | - | | | | (547,033 | ) | | | (6,155,465 | ) |
| NET EARNINGS (LOSS) FOR THE YEAR | | | 347,363 | | | | 3,208,755 | | | | (9,129,136 | ) |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Share of unrealized exchange gain (loss) of former equity investee | | | - | | | | (321,100 | ) | | | 54,766 | |
| Reclassification of unrealized exchange gain of former equity investee to earnings | | | - | | | | 1,078,188 | | | | 236,613 | |
| Other comprehensive income | | | - | | | | 757,088 | | | | 291,379 | |
| COMPREHENSIVE INCOME (LOSS) FOR THE YEAR | | $ | 347,363 | | | $ | 3,965,843 | | | $ | (8,837,757 | ) |
EARNINGS (LOSS) PER SHARE (Note 7)
Earnings (loss) per share from continuing operations Basic and diluted | | $ | 0.07 | | | $ | 0.74 | | | $ | (0.59 | ) |
Loss per share from discontinued operations Basic and diluted | | $ | 0.00 | | | $ | (0.11 | ) | | $ | (1.21 | ) |
Earnings (loss) per share Basic and diluted | | $ | 0.07 | | | $ | 0.63 | | | $ | (1.80 | ) |
| | See accompanying notes to consolidated financial statements. |
CONSOLIDATED MERCANTILE INCORPORATED
SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in Canadian Dollars)
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
EXPENSES | | | | | | | | | |
Administrative and general | | $ | 536,873 | | | $ | 1,083,445 | | | $ | 540,036 | |
| (Gain) loss on foreign exchange | | | (1,657,741 | ) | | | 342,732 | | | | (34,277 | ) |
| Impairment loss on note receivable, net (Notes 3 & 5) | | | 58,675 | | | | - | | | | - | |
| | | $ | (1,062,193 | ) | | $ | 1,426,177 | | | $ | 505,759 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in Canadian Dollars)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES | | | | | | | | | |
| Earnings (loss) from continuing operations | | $ | 347,363 | | | $ | 3,755,788 | | | $ | (2,973,671 | ) |
| Items not affecting cash (Note 8(a)) | | | 308,631 | | | | (4,450,662 | ) | | | 2,551,569 | |
Change in non-cash components of working capital (Note 8(b)) | | | (601,815 | ) | | | 579,038 | | | | 19,722 | |
| | | | 54,179 | | | | (115,836 | ) | | | (402,380 | ) |
| Funds provided by discontinued operations | | | - | | | | 8,012 | | | | - | |
| | | | 54,179 | | | | (107,824 | ) | | | (402,380 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Purchase of common shares for cancellation | | | (7,505 | ) | | | - | | | | (17,674 | ) |
| | | | | | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Decrease (increase) in note receivable to former consolidated subsidiary | | | - | | | | 1,082,459 | | | | (250,000 | ) |
| Decrease (increase) in notes receivable | | | 752,459 | | | | (1,289,972 | ) | | | - | |
| Decrease (increase) in short-term investments | | | 2,349,827 | | | | 1,634,870 | | | | (2,802,839 | ) |
| Proceeds from disposal of investment in former consolidated subsidiary, net | | | - | | | | 420,954 | | | | - | |
| Proceeds from disposal of investment in former equity investee, net | | | - | | | | 6,003,795 | | | | - | |
| Proceeds from redemption of shares in significantly influenced company | | | 59,891 | | | | - | | | | - | |
| | | | 3,162,177 | | | | 7,852,106 | | | | (3,052,839 | ) |
| | | | | | | | | | | | | |
| UNREALIZED FOREIGN EXCHANGE GAIN (LOSS) ON CASH BALANCES | | | 8,136 | | | | (356,272 | ) | | | 11,306 | |
| | | | | | | | | | | | | |
| CHANGE IN CASH AND CASH EQUIVALENTS | | | 3,216,987 | | | | 7,388,010 | | | | (3,461,587 | ) |
| | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | | 10,961,412 | | | | 3,573,402 | | | | 7,034,989 | |
| | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 8(c)) | | $ | 14,178,399 | | | $ | 10,961,412 | | | $ | 3,573,402 | |
SUPPLEMENTARY CASH FLOW INFORMATION
FROM CONTINUING OPERATIONS:
| Income taxes paid | | | $ | 75,983 | | | $ | 24,241 | | | $ | 41,516 | |
| | NON-CASH TRANSACTIONS (Note 3) |
Non-cash consideration received on sale of former consolidated subsidiary | | | $ | - | | | $ | 457,513 | | | $ | - | |
| | See accompanying notes to consolidated financial statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
Consolidated Mercantile Incorporated (“the Company”) is a management holding company whose shares are traded on the Toronto Stock Exchange. The Company recently announced that the directors have approved a business combination by way of a proposed amalgamation with Genterra Inc., a company whose shares are traded on the Toronto Venture Exchange. The transaction is subject to the approval of shareholders of both companies and the approval of regulatory authorities. In the interim, the Company’s working capital is held in a combination of cash and liquid marketable securities with risk-adjusted returns.
These consolidated financial statements include the accounts of the Company and 2041804 Ontario Inc., a wholly- owned subsidiary. Inter-company balances and transactions have been eliminated on consolidation.
1. CHANGES IN ACCOUNTING POLICIES
Fiscal 2008
The Canadian Institute of Chartered Accountants (“CICA”) has issued Handbook Sections 3862 “Financial Instruments – Disclosures” and 3863 “Financial Instruments – Presentation”. These new standards replace Handbook Section 3861 “Financial Instruments – Disclosure and Presentation” and enhance the disclosure of the nature and extent of risks arising from financial instruments and how the entity manages these risks. These new standards have been adopted by the Company effective January 1, 2008.
The CICA has issued Handbook Section 1535 “Capital Disclosures”. This section establishes standards for disclosures of both qualitative and quantitative information that enable users to evaluate the company’s objectives, policies and processes for managing capital. These new standards have been adopted by the Company effective January 1, 2008.
Fiscal 2007
The Canadian Institute of Chartered Accountants (“CICA”) issued the following accounting standards: Handbook Section 1530: Comprehensive Income, Handbook Section 3251: Equity, Handbook Section 3855: Financial Instruments – Recognition and Measurement, Handbook Section 3861: Financial Instruments – Disclosure and Presentation, Handbook Section 3865: Hedges, and Handbook Section 1506: Accounting Changes. These new standards were adopted by the Company on January 1, 2007.
The impact of adoption of CICA Handbook Sections 1530, 3251, 3855, and 3861 in 2007 was as follows:
The Company recorded a transition adjustment effective January 1, 2007, attributable to the following: (i) an increase of $237,135, net of taxes, to the opening balance of Retained Earnings for financial instruments classified as held-for-trading that were not previously recorded at fair value; and (ii) the recognition of $757,088 (2006 - $1,048,467) to the opening balance of Accumulated Other Comprehensive Loss related to the Company’s share of unrealized exchange loss of significantly influenced company.
The adoption of Sections 1506 and 3865 had no impact on the Company’s 2007 consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | (a) | Principles of Consolidation |
These consolidated financial statements include the accounts of the Company and its subsidiary company. Inter-company balances and transactions have been eliminated on consolidation.
| (b) | Cash and cash equivalents |
The Company’s cash equivalents consist primarily of investments in short-term deposits, with maturity of three months or less from dates of placements.
(c) Short-term Investments
Short-term investments consist of managed funds which invest in marketable securities. These investments are classified as held-for-trading. Fair value of short-term investments is based on the net asset value of the underlying funds.
(d) Investments
Long-term investments in which the Company has significant influence are accounted for using the equity method. Whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable, the investment will be written down to its fair value. Any impairment in value is recorded in the consolidated statement of operations.
(e) Translation of Foreign Currency
(i) Assets, liabilities, revenue and expenses denominated in foreign currency are translated at the rate of exchange in effect on the date of the transaction.
Monetary assets and liabilities are translated at the rates of exchange in effect at the end of the fiscal year. The resulting gains and losses are included in the
consolidated statement of operations.
(ii) The Company’s former investment in its foreign operations (former equity investee) was of a self-sustaining nature. Accordingly, assets and liabilities of foreign operations were translated to Canadian dollars at the exchange rates in effect at the balance sheet date and revenues and expenses were translated at average rates for the year. Related foreign currency translation adjustments were recorded as a separate component of shareholders’ equity in accumulated other comprehensive income (loss).
(f) Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and tax basis of assets and liabilities.
Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that the rate changes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Accounting Estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Estimates made by management include impairment assessment of notes receivable and the basis for current and future income taxes. Actual results could differ from management's best estimates as additional information becomes available in the future.
(h) Revenue Recognition
Interest income is recognized on an accrual basis. Investment transactions are recorded on the transaction date and any realized gains and losses are recognized using the average cost of the investment.
(i) Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average number of common shares that are outstanding during the year. Diluted earnings (loss) per share is computed using the weighted average of common and potential common shares outstanding during the year. Potential common shares consist of the incremental number of common shares issuable upon the exercise of stock options and share purchase warrants using the treasury method.
(j) Stock based Compensation Plans
The Company has a stock-based compensation plan, which is described in Note 6 (c). The Plan is designed to secure for the Company and its shareholders the benefits of the incentive inherent in share ownership by those directors, officers and key employees responsible for the management and growth of the Company’s business. The Plan does not include any provision whereby the vesting of options granted thereunder is in any way limited or restricted. Options granted under the Plan may be exercised for such period as may be determined by the Board of Directors at the time such option is granted. The Company accounts for stock-based compensation and other stock-based payments using the fair value-based method. Under the fair value-based method, compensation costs attributable to awards to Company employees are measured at fair value at the date of the grant, amortized over the vesting period on a straight-line basis, and charged to earnings with a related credit to contributed surplus. Consideration paid by employees on exercise of stock options is recorded as share capital. The Company has not granted any new options since the adoption of these recommendations. As at December 31, 2008, the Company has no outstanding stock options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (k) Financial Instruments |
The following methods and assumptions are used by the Company in determining the recognition, measurement and disclosures for financial instruments.
Cash and cash equivalents: The Company’s cash equivalents consist primarily of investments in short-term deposits with maturities of three months or less from dates of placement. Cash and cash equivalents are classed as held-for-trading financial assets and are initially recognized at the fair value that is directly attributable to the acquisition or issue. They are carried in the consolidated balance sheet at fair value with changes in fair value recognized in the consolidated statement of operations in the same period as incurred.
Short-term investments: The Company’s short-term investments consist of portfolio investments and are classified as trading securities. Short-term investments are recorded at fair value with both realized and unrealized gains and losses recognized on the consolidated statement of operations in the same period as incurred.
Other financial assets: The Company’s other financial assets consist primarily of long-term investments and note receivable.
Note receivable is classified as loans and receivables. This is a non-derivative financial asset with fixed or determinable payments and is not quoted in an active market. This note is initially recognized at the fair value which is determined by discounting the cash flows using the current fair market value rate and subsequently carried at amortized cost using the effective interest rate method, less provision for impairment. Interest income and impairment write-downs are recognized on the consolidated statement of operations in the same period as incurred. All other gains or losses are recognized when the instrument is removed from the consolidated balance sheet.
Other financial liabilities: The Company’s other financial liabilities include accounts payable and accrued liabilities. Accounts payable and accrued liabilities consist primarily of trade payables. They are initially recognized at the fair value that is directly attributable to their acquisition or issue and subsequently carried at amortized cost using the effective interest rate method. The effect of discounting on these financial instruments is not considered to be material.
| (l) Management of Financial Risks |
The Company’s financial instruments that are subject to financial risks disclosures consist primarily of cash and cash equivalents, short-term investments, note receivable, and accounts payable and accrued liabilities. The Company is exposed to various risks as it relates to these financial instruments. There have not been any changes in the nature of risks or the process of managing these risks from previous periods. The risks and processes for managing the risks are set out below:
Liquidity Risk
Liquidity risk arises from the Company’s management of working capital. It is the risk that the Company will encounter difficulty in meeting it financial obligations as they fall due.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (l) Management of Financial Risks (continued) |
Liquidity Risk (continued)
The Company’s objective is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, the Company seeks to maintain cash balances to meet expected requirements for a period of twelve months. At the balance sheet date, the Company expected to have sufficient liquid resources to meet its obligations under all reasonable expected circumstances.
Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Company has not used derivative financial instruments to alter its exposure to interest rate risk.
The Company invests surplus cash in treasury bills, publicly traded corporate bonds and loans receivable. In doing so, the Company exposes itself to fluctuations in interest rates that are inherent in such a market. The net annualized effect for the year of a 0.5% decrease in the interest rate at the balance sheet date on these financial instruments would have resulted in a decrease in post-tax earnings of approximately $47,000 (2007 - - $37,000). A 0.5% increase in the interest rate would, on the same basis, have increased post-tax earnings by the same amount.
Currency Risk
Currency risk is the risk that a variation in exchange rates between the Canadian dollar and foreign currencies will affect the Company’s operating and financial results. Cash and cash equivalents as at December 31, 2008 includes US$35,892 (December 31, 2007 – US$8,773,972). Currency gains (losses) are reflected as a separate component of expenses. The effect for the year of a $0.01 strengthening of the US Dollar against the Canadian Dollar on the Company’s US Dollar denominated amounts carried at the balance sheet date (all other variables held constant) would have resulted in an increase in post-tax earnings of approximately $240 (2007 - $58,000). A $0.01 weakening in the exchange rate would, on the same basis, have decreased post-tax earnings by the same amount. At December 31, 2008, the Company had no outstanding foreign exchange commitments.
Other Price Risk
Other price risk is the risk that the market value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). The Company moderates this risk through a careful selection and diversification of securities and other financial instruments within the limits of the Company’s objectives and strategy. Price fluctuations of the global equity markets could impact the performance of the Company’s short-term investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| (l) Management of Financial Risks (continued) |
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments.
(i) Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.
(ii) Short-term investments held by reputable professional hedge fund managers can be withdrawn in any given month and therefore credit risk is considered minimal.
(m) Capital Management
The Company’s primary objective when managing capital is to create and maximize shareholder value through internal growth of investments and acquisitions of companies having synergistic product lines and technologies, management strength and a presence in markets with the potential for sales of complementary products. The Company’s investment strategy, which has been applied successfully in the past, is to assist operating units in taking advantage of their strengths by investment in and by the provision of management and merchant banking services, with the objective of creating added value to the Company and its shareholders.
The Company considers its total capitalization to consist of shareholders’ equity. There have been no changes in what the Company considers to be capital since the previous year. The Company does not have a formal policy in measuring any net debt to equity and net debt to total capitalization ratios as the Company does not currently have any debt obligations.
As at December 31, 2008, the Company has no externally imposed capital requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(n) Recent Accounting Pronouncements
Recent accounting pronouncements affecting the Company’s financial reporting under Canadian GAAP are summarized below:
In February 2008, the CICA issued amendments to Handbook Section 1000, “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company will apply the amendments to Handbook Section 1000 commencing January 1, 2009. The implementation of the amendments to Handbook Section 1000 are not expected to have a significant impact on the Company’s results of operations, financial position and disclosures.
In February 2008, the CICA issued a new accounting standard, Handbook Section 3064, concerning goodwill and intangible assets. The new section replaces the existing guidance on goodwill and other intangible assets and research and development costs. The new section provides additional guidance on measuring the cost of goodwill and intangible assets. The new standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company is currently assessing the impact of the new standard but does not believe it will have a significant impact on the Company’s results of operations, financial position and disclosures.
The Canadian Accounting Standards Board (“AcSB”) confirmed that the adoption of IFRS would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada’s current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards will be effective for the Company in the first quarter of 2011. The Company is currently in the process of evaluating the potential impact of IFRS to our consolidated financial statements. This will be an ongoing process as new standards and recommendations are issued by the International Accounting Standards Board and the AcSB. While the Company has begun assessing the adoption of IFRS, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
3. NOTES RECEIVABLE
| | | 2008 | | | 2007 | |
| | | | | | | |
| Note receivable, bearing interest at prime plus 2% per annum, due on demand, secured by a general security agreement. | | $ | - | | | $ | 216,409 | |
| Note receivable, bearing interest at 10% per annum, due on demand, secured by a general security agreement. | | | - | | | | 616,050 | |
Note receivable, non-interest bearing, discounted at 17.5%, repayable in ten equal consecutive annual installments of $100,000, with the first installment due on January 15, 2009 and each anniversary thereafter. The note is secured by the shares of a former consolidated subsidiary, Distinctive Designs Furniture Inc. (“Distinctive”). | | | 537,513 | | | | 457,513 | |
| | | | 537,513 | | | | 1,289,972 | |
| Allowance for doubtful accounts | | | (437,578 | ) | | | - | |
| | | | 99,935 | | | | 1,289,972 | |
| Less: Current portion | | | 99,935 | | | | 832,459 | |
| | | $ | - | | | $ | 457,513 | |
Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual installments of $100,000, with the first installment due on January 15, 2009. This note is only due and payable in any given year if Distinctive continues its business. Over the past number of years, Distinctive incurred substantial operating losses. Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes the above reserve is appropriate. As a result, the deferred gain on the sale of this investment has also been adjusted (Note 5).
4. INVESTMENTS
| | | 2008 | | | 2007 | |
| | | | | | | |
Genterra Inc., a significantly influenced company Common shares – at equity (1.5%) This is a public company with significant interest in real estate properties located in Ontario, Canada which shares are not actively traded. As a result, the market value does not reflect the underlying value of this investment. (market value 2008 - $62,805; 2007- $135,917) | | $ | 292,427 | | | $ | 378,746 | |
| | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
5. DEFERRED GAIN
Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009. The note is secured by shares of Distinctive. This note is only due and payable in any given year if Distinctive continues its business. Under Emerging Issues Committee Abstract 79, the gain on sale is only recognized in the statement of operations to the extent it is realized. Accordingly, $420,953 of the gain on the sale has been deferred at December 31, 2007.
Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes a reserve on the promissory note is appropriate. As a result, the deferred gain has been adjusted and the reduction of $378,903 has been set off against the impairment loss on note receivable and included in expenses on the consolidated statement of operations (Note 3).
6. CAPITAL STOCK
(a) Authorized
| | | Unlimited Class A Preference shares, $0.04 non-cumulative, non-voting, non-participating, $0.44 redeemable by the Company |
UnlimitedPreference shares, issuable in series
UnlimitedCommon shares
| | | Common Shares | | | Class A Preference Shares | | |
| | | # of Shares | | | $ Value | | | # of Shares | | | $ Value | |
Balance at December 31, 2005 | | | 5,094,507 | | | | 2,698,527 | | | | 315,544 | | | | 141,826 | |
Repurchase for cancellation | | | (13,300 | ) | | | (7,046 | ) | | | - | | | | - | |
Balance at December 31, 2006 and 2007 | | | 5,081,207 | | | | 2,691,481 | | | | 315,544 | | | | 141,826 | |
Repurchase for cancellation | | | (4,800 | ) | | | (2,542 | ) | | | - | | | | - | |
Balance at December 31, 2008 | | | 5,076,407 | | | | 2,688,939 | | | | 315,544 | | | | 141,826 | |
During the year, the Company repurchased 4,800 (2007 – Nil; 2006 - 13,300) Common shares for cancellation pursuant to a Normal Course Issuer Bid for a total consideration of $7,505 (2007 -$Nil; 2006 - $17,674). The excess cost of the purchase price over the book value of the shares was charged to retained earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
6. CAPITAL STOCK (continued)
The Company has a single Stock Option Plan. The Plan is designed to secure for the Company and its shareholders the benefits of the incentive inherent in share ownership by those directors, officers and key employees responsible for the management and growth of the Company’s business. The Plan does not include any provision whereby the vesting of options granted thereunder is in any way limited or restricted. Options granted under the Plan may be exercised for such period as may be determined by the Board of Directors at the time such option is granted. The maximum number of common shares which may be reserved for issuance to any one person under the Plan is 5% of the common shares outstanding at the time of the grant.
The number of shares reserved for issuance under the Stock Option Plan is currently limited to 500,000 common shares at an option price not to be less than the market price at the date of issuance.
As at December 31, 2008, the Company has no outstanding stock options.
| | | Number of Options | | | Average Exercise Price | |
| | | 2008 | | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | | | | |
Beginning of year | | | - | | | | - | | | | 190,000 | | | $ | - | | | $ | - | | | $ | 2.29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Expired | | | - | | | | - | | | | (190,000 | ) | | $ | - | | | $ | - | | | $ | 2.29 | |
End of year | | | - | | | | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
(d) Share Purchase Warrants
Pursuant to long-term debt repayment options, the Company issued share purchase warrants entitling the holders to purchase Common shares at an exercise price of $3.00 per Common share. These share purchase warrants expired on September 7, 2006.
| | | Number of Warrants | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Beginning of year | | | - | | | | - | | | | 226,665 | |
| | | | | | | | | | | | | |
Expired | | | - | | | | - | | | | (226,665 | ) | | | |
End of year | | | - | | | | - | | | | - | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
7. EARNINGS (LOSS) PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Numerator: | | | | | | | | | |
| Earnings (loss) from continuing operations | | $ | 347,363 | | | $ | 3,755,788 | | | $ | (2,973,671 | ) |
| Loss from discontinued operations, net of taxes | | | - | | | | (1,186,997 | ) | | | (1,343,646 | ) |
Share of earnings (loss) from discontinued operations of significantly influenced company | | | - | | | | 639,964 | | | | (4,811,819 | ) |
| Loss from discontinued operations | | | - | | | | (547,033 | ) | | | (6,155,465 | ) |
| Numerator for basic and diluted earnings per share available to Common shareholders | | $ | 347,363 | | | $ | 3,208,755 | | | $ | (9,129,136 | ) |
Denominator: | | | | | | | | | | | | |
| Weighted average number of participating shares outstanding and denominator for basic and diluted earnings (loss) per share | | | 5,077,717 | | | | 5,081,207 | | | | 5,089,964 | |
Earnings (loss) per share | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings (loss) per share from continuing operations | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.07 | | | $ | 0.74 | | | $ | (0.59 | ) |
| | | | | | | | | | | | | |
Loss per share from discontinued operations | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.00 | | | $ | (0.11 | ) | | $ | (1.21 | ) |
| | | | | | | | | | | | | |
Earnings (loss) per share | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.07 | | | $ | 0.63 | | | $ | (1.80 | ) |
| | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
8. CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
(a) Items not affecting cash: | | | | | | | | | |
| | | | | | | | | | |
| Unrealized (gain) loss on short-term investments | | $ | 231,664 | | | $ | (179,984 | ) | | $ | - | |
| Unrealized (gain) loss on foreign exchange | | | (8,136 | ) | | | 356,272 | | | | (11,306 | ) |
| Reserve on contingent gain on sale of investment in former consolidated subsidiary | | | 58,675 | | | | - | | | | - | |
| Write-down of short-term investments | | | - | | | | - | | | | 91,799 | |
| Equity (earnings) loss of significantly influenced companies | | | (4,572 | ) | | | 723,175 | | | | 783,926 | |
| Gain (loss) on dilution of investment in former equity investee | | | - | | | | (67,881 | ) | | | - | |
| Gain (loss) on sale of investment in former consolidated subsidiary | | | - | | | | (130,850 | ) | | | - | |
| Gain (loss) on sale of investment in former equity investee | | | - | | | | (5,272,151 | ) | | | - | |
| Write-down of investment in significantly influenced company | | | 31,000 | | | | 140,000 | | | | - | |
| Write-down of investment in former equity investee | | | - | | | | - | | | | 991,732 | |
| Future income taxes (recovery) | | | - | | | | (19,243 | ) | | | 695,418 | |
| | | $ | 308,631 | | | $ | (4,450,662 | ) | | $ | 2,551,569 | |
(b) Change in non-cash components of working capital: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Decrease (increase) in accounts receivable | | $ | 5,554 | | | $ | (4,706 | ) | | $ | 26,526 | |
| (Increase) decrease in prepaid expenses | | | (25,564 | ) | | | 395 | | | | 46,789 | |
| (Decrease) increase in accounts payable and accrued liabilities | | | (571,901 | ) | | | 587,587 | | | | (39,297 | ) |
| Decrease in income taxes payable | | | (9,904 | ) | | | (4,238 | ) | | | (14,296 | ) |
| | | $ | (601,815 | ) | | $ | 579,038 | | | $ | 19,722 | |
| (c) Cash and cash equivalents: | |
| Cash and cash equivalents consist of cash balances with banks and investments in money market instruments. Cash and cash equivalents included in the statement of cash flows are comprised of the following balance sheet amounts: | |
| Cash balances with banks | | $ | 48,606 | | | $ | 38,209 | | | $ | 63,807 | |
| Money market instruments | | | 14,129,793 | | | | 10,923,203 | | | | 3,509,595 | |
| Total cash and cash equivalents | | $ | 14,178,399 | | | $ | 10,961,412 | | | $ | 3,573,402 | |
Money market instruments consist primarily of investments in short term deposits with reputable Canadian financial institutions bearing interest at approximately 1% per annum with maturities of three months or less.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
9. INCOME TAXES
The Company’s income tax expense differs from the amount that would have resulted by applying Canadian statutory tax rate of approximately 33.5% (2007 – 36.1%; 2006 – 36.1%) to income as described below:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Income tax computed at statutory combined basic income tax rates | | $ | 117,701 | | | $ | 1,348,503 | | | $ | (820,700 | ) |
| Increase (decrease) in income tax resulting from: | | | | | | | | | | | | |
| Non-deductible items | | | 19,683 | | | | (1,708 | ) | | | 78 | |
| Non-taxable equity items | | | 8,853 | | | | 287,101 | | | | 641,012 | |
| Non-taxable portion of capital (gain) loss | | | (167,643 | ) | | | (1,347,181 | ) | | | 67,209 | |
| Re-valuation of future tax benefits previously recognized (not recognized) | | | - | | | | (289,000 | ) | | | 602,000 | |
| Future tax benefits not recognized | | | 26,500 | | | | - | | | | 220,000 | |
| Other | | | (1,109 | ) | | | (18,040 | ) | | | (9,336 | ) |
| Effective income tax provision (recovery) | | $ | 3,985 | | | $ | (20,325 | ) | | $ | 700,263 | |
| | The components of income taxes are as follows: |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Current (recovery) | | $ | 3,985 | | | $ | (1,082 | ) | | $ | 4,845 | |
| Future (recovery) | | | - | | | | (19,243 | ) | | | 695,418 | |
| | | $ | 3,985 | | | $ | (20,325 | ) | | $ | 700,263 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
9. INCOME TAXES (continued)
A summary of the principal components of future tax assets and liabilities calculated in accordance with Canadian accounting principles as at December 31 is noted below:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Non-current future income tax assets | | | | | | |
| Non-capital loss carry-forwards | | $ | 511,000 | | | $ | 526,500 | |
| Marketable securities | | | 26,500 | | | | - | |
| Valuation allowance | | | (537,500 | ) | | | (526,500 | ) |
Total future income tax assets | | $ | - | | | $ | - | |
The Company has non-capital loss carry-forwards of approximately $1,548,000 of which $468,000 expires in 2014, $493,000 expires in 2015, $585,000 expires in 2026 and $2,000 expires in 2027. No future income tax assets have been recognized in respect of these non-capital losses carry-forward.
10. RELATED PARTY TRANSACTIONS
The Company entered into transactions and had outstanding balances with various companies related by virtue of common ownership and management. The transactions with related parties are in the normal course of business and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.
Significant related party transactions and outstanding balances not disclosed elsewhere in these consolidated financial statements are summarized as follows:
Administration and management fees of $240,000 (2007 - $240,000; 2006 - $240,000) were paid to a company of which directors, officers and/or shareholder are also directors and officers of the Company.
On December 31, 2007, upon the completion of the Company’s disposition of its investment interest in Polyair Inter Pack Inc., a bonus payment of $500,000 (2006 - $Nil) became payable to officers of the Company. The amount was included in accounts payable and accrued liabilities as at December 31, 2007 and was paid during 2008.
The Company’s former consolidated subsidiary (Note 11) made furniture sales of $Nil (2007 - $Nil; 2006 - $131,903) to its former fifty percent owned equity investee company.
The Company’s former consolidated subsidiary (Note 11) paid rent of $Nil (2007 - $211,598; 2006 - $355,206) to a company of which directors and officers are also directors and/or officers of the Company.
The Company’s former consolidated subsidiary (Note 11) paid management fees of $Nil (2007 - $26,000; 2006 - $72,000) to a company of which directors, officers and/or shareholder are also directors and/or officers of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
11. DISCONTINUED OPERATIONS (2007)
Effective December 28, 2007, the Company sold all of its shares and all of the debt owed by Distinctive, a consolidated subsidiary, to Distinctive’s other major shareholder. Accordingly, the operating results of Distinctive have been classified by the Company as discontinued operations and comparative figures have been restated.
The following table provides information with respect to the amounts included in the results of discontinued operations for Distinctive:
| | | 2007 | | | 2006 | |
| | | | | | | |
Sales | | $ | 18,990,737 | | | $ | 30,262,368 | |
| | | | | | | | | |
Loss before income taxes | | $ | (2,473,725 | ) | | $ | (2,431,725 | ) |
Income tax (recovery) | | | (55,000 | ) | | | 267,218 | |
Loss before non-controlling interest | | | (2,418,725 | ) | | | (2,698,943 | ) |
Non-controlling interest | | | 1,231,728 | | | | 1,355,297 | |
Loss from discontinued operations | | $ | (1,186,997 | ) | | $ | (1,343,646 | ) |
| | | | | | | | | |
| Supplementary cash flow information from discontinued operations: | | | | | | | | |
| Interest paid | | $ | 674,673 | | | $ | 406,030 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES |
The Company follows accounting principles generally accepted in Canada. Differences between generally accepted accounting principles in Canada and those generally accepted in the United States of America (United States) are summarized below:
The Company's acquisitions of Distinctive Designs Furniture Inc., previously a significantly influenced company, and Kroehler Furniture Group Inc., a formerly consolidated subsidiary, were accounted for by the purchase method under Canadian generally accepted accounting principles. Under United States generally accepted accounting principles, these acquisitions were accounted for as a reorganizations of entities under common control using historical carrying values.
| (b) | Comprehensive income: |
For U.S. GAAP the Company has recorded the short term investments in quoted securities as available for sale securities which are recorded at fair market value with all unrealized holding gain and losses reflected in shareholders’ equity. Additionally, for U.S. GAAP, the Company has certain instruments for which readily determinable fair values are not available which are carried at cost, unless the investments are determined to be impaired in which case they are written down to estimated fair value, if less than cost. Unquoted investments were incorrectly recorded in 2006 and 2007 at fair market value. This has been corrected by a restatement of the 2006 and 2007 financial statements. Under Canadian GAAP for 2006, short term investments were carried at historical cost with losses in value being recognized in income only when the loss in value is other than temporary and increases in value being recognized only when realized. During 2007 and 2008 under Canadian GAAP the short term investments are carried at fair market value with all gains and losses reflected in the statement of operations.
| (c) | Stock-based compensation plans: |
Commencing in 2002, the Company’s accounting policy to record compensation costs for stock options at fair value is comparable to the U.S. pronouncement under FASB No. 123. No stock options were granted in 2008, 2007 and 2006.
Certain investees of the company have differences between U.S. GAAP and Cdn GAAP accounting and disclosures. These differences affect the company’s equity share of their earnings.
| (e) | Financial statement presentation |
Certain financial statement presentation is required by US GAAP that is not required for Cdn. GAAP as follows:
| · | The deferred gain has been reclassified to reduce the corresponding note receivable |
| · | Disclosure of trade accounts payable separate from accrued liabilities |
| · | The statement of cash flows is prepared starting from net income rather than net income from continuing operations |
| · | Interest and investment income should be disclosed as other non-operating |
Income
| · | Equity in discontinued operations of an equity investee should be included with equity in continuing operations of the equity investee. |
| · | Provisions under Fin 48 should be shown as long-term liability |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
The effect on the consolidated balance sheet of the difference between accounting principles generally accepted in Canada and those generally accepted in the United States is summarized as follows:
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2008 | | | | | | | | | |
| Short term investments (b) | | | 2,880,094 | | | | 350,459 | | | | 3,230,553 | |
| Notes receivable (e) | | | 99,935 | | | | (42,050 | ) | | | 57,885 | |
| Income taxes recoverable (e) | | | - | | | | 10,435 | | | | 10,435 | |
| Current assets | | | 17,228,235 | | | | 318,844 | | | | 17,547,079 | |
| | | | | | | | | | | | | |
| Investments (d) | | | 292,427 | | | 249 | | | | 292,676 | |
| Total assets | | | 17,520,662 | | | | 319,093 | | | | 17,839,755 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (e) | | | 121,181 | | | | (25,164 | ) | | | 96,017 | |
| Trade accounts payable (e) | | | - | | | | 25,164 | | | | 25,164 | |
| Income taxes payable (e) | | | 839,565 | | | (839,565 | ) | | | - | |
| Current liabilities | | | 960,746 | | | | (839,565 | ) | | | 121,181 | |
| | | | | | | | | | | | | |
| Deferred gain (e) | | | 42,050 | | | | (42,050 | ) | | | - | |
| Income taxes payable (e) | | | - | | | | 850,000 | | | | 850,000 | |
| | | | | | | | | | | | | |
| Total liabilities | | | 1,002,796 | | | | (31,615 | ) | | | 971,181 | |
| | | | | | | | | | | | | |
| Common stock (a) | | | 2,688,939 | | | | (226,420 | ) | | | 2,462,519 | |
| Retained earnings (a) | | | 13,627,690 | | | | 788,259 | | | | 14,415,949 | |
| Accumulated comprehensive income | | | - | | | | (211,131 | ) | | | (211,131 | ) |
| Total shareholders’ equity | | | 16,517,866 | | | | 350,708 | | | | 16,868,574 | |
| Total liabilities and shareholders’ equity | | | 17,520,662 | | | | 319,093 | | | | 17,839,755 | |
| | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2007 | | | | | | | | | |
| Short term investments (b) | | | 5,461,581 | | | | (244,294 | ) | | | 5,217,287 | |
| Income taxes recoverable (e) | | | - | | | | 531 | | | | 531 | |
| Current assets | | | 17,305,249 | | | | (243,763 | ) | | | 17,061,486 | |
| Notes receivable (e) | | | 457,513 | | | | (420,953 | ) | | | 36,560 | |
| Total assets | | | 18,141,508 | | | | (664,716 | ) | | | 17,476,792 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (e) | | | 693,078 | | | | (11,404 | ) | | | 681,674 | |
| Trade accounts payable (e) | | | - | | | | 11,404 | | | | 11,404 | |
| Income taxes payable (e) | | | 849,469 | | | | (849,469 | ) | | | - | |
| Current liabilities | | | 1,542,547 | | | | (849,469 | ) | | | 693,078 | |
| | | | | | | | | | | | | |
| Deferred gain (e) | | | 420,953 | | | | (420,953 | ) | | | - | |
| Income taxes payable (e) | | | - | | | | 850,000 | | | | 850,000 | |
| | | | | | | | | | | | | |
| Total liabilities | | | 1,963,500 | | | | (420,422 | ) | | | 1,543,078 | |
| | | | | | | | | | | | | |
| Common stock (a) | | | 2,691,481 | | | | (226,420 | ) | | | 2,465,061 | |
| Retained earnings (a) | | | 13,285,290 | | | | 119,865 | | | | 13,405,155 | |
| Accumulated comprehensive income | | | - | | | | (137,739 | ) | | | (137,739 | ) |
| Total shareholders’ equity | | | 16,178,008 | | | | (244,294 | ) | | | 15,933,714 | |
| Total liabilities and shareholders’ equity | | | 18,141,508 | | | | (664,716 | ) | | | 17,476,792 | |
| | | | | | | | | | | | | |
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) requires disclosure of comprehensive income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The following table presents comprehensive income and its components.
The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The CICA requires mandatory implementation of these standards for interim and annual financial statements relating to years commencing on or after January 1, 2007.
The effect on earnings for the above differences between accounting principles generally accepted in Canada and those generally accepted in the United States are summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2008 | | | | | | | | | |
| Interest income (e) | | | 361,211 | | | | (361,211 | ) | | | - | |
| Investment income (loss) (e) | | | (1,045,628 | ) | | | 1,045,628 | | | | - | |
| | | | (684,417 | ) | | | 684,417 | | | | - | |
| | | | | | | | | | | | | |
| Expenses | | | (1,062,193 | ) | | | - | | | | (1,062,193 | ) |
| Earnings from operations before the following | | | 377,776 | | | | - | | | | 1,062,193 | |
| | | | | | | | | | | | | |
| Equity earnings of significantly influenced companies (d) | | | 4,572 | | | | 249 | | | | 4,821 | |
| Write-down of investment in significantly influenced Company | | | (31,000 | ) | | | - | | | | (31,000 | ) |
| | | | (24,428 | ) | | | 249 | | | | (26,179 | ) |
| Earnings from operations | | | 351,348 | | | | 684,666 | | | | 1,036,014 | |
| Other income | | | | | | | | | | | | |
| Interest income (e) | | | - | | | | 361,211 | | | | 361,211 | |
| Investment income (loss) (e) | | | - | | | | (377,483 | ) | | | (377,483 | ) |
| | | | - | | | | (16,272 | ) | | | (16,272 | ) |
| Earnings before income taxes | | | 351,348 | | | | 668,394 | | | | 1,019,742 | |
| Income taxes | | | 3,985 | | | | - | | | | 3,985 | |
| Earnings for the year | | | 347,363 | | | | 668,394 | | | | 1,015,757 | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Unrealized gain(loss) on available for sale securities (b) | | | - | | | | (73,392 | ) | | | (73,392 | ) |
| Comprehensive income for the year | | | 347,363 | | | | 595,002 | | | | 942,365 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Prior period adjustment
The previously issued financial statements have been restated to correct an error in the accounting for short term investments. Previously, the Company improperly accounted for its investments in investment funds as available for sale securities in accordance with FAS 115. Under U.S. GAAP, as those investments do not have readily determinable fair values, they should be reported at cost, unless the investments are determined to be impaired in which case they are written down to estimated fair value, if less than cost. The following schedules disclose the impact of correcting this error on the previously reported 2007 and 2006 U.S. GAAP amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) | | | | | | | | | |
| | | Originally Stated U.S. Accounting Principles | | | Change | | | As Restated U.S. Accounting Principles | |
| December 31, 2006 | | | | | | | | | |
| | | | | | | | | | |
| Balance Sheet | | | | | | | | | |
| Short term investments | | | 6,916,467 | | | | (444,590 | ) | | | 6,471,877 | |
| Current assets | | | 22,258,857 | | | | (444,490 | ) | | | 21,814,267 | |
| Total assets | | | 24,672,377 | | | | (444,590 | ) | | | 24,227,787 | |
| Future income taxes (current liability) | | | (52,231 | ) | | | 52,231 | | | | - | |
| Current liabilities | | | 9,738,351 | | | | (52,231 | ) | | | 9,686,120 | |
| Total liabilities | | | 11,763,759 | | | | (52,231 | ) | | | 11,711,528 | |
| Retained earnings | | | 10,624,883 | | | | 314,457 | | | | 10,939,340 | |
| Accumulated other comprehensive income (loss) | | | (382,563 | ) | | | 392,359 | | | | 774,922 | |
| Total shareholders’ equity | | | 12,908,618 | | | | (77,902 | ) | | | 12,830,716 | |
| Total liability and shareholders’ equity | | | 24,672,377 | | | | (444,590 | ) | | | 24,227,787 | |
| | | | | | | | | | | | | |
| Consolidated Statement of Operations and Other Comprehensive Income | | | | | | | | | | | | |
| Earnings (loss) from operations | | | (497,750 | ) | | | (8,009 | ) | | | (505,759 | ) |
| Equity loss of former equity investee | | | - | | | | (4,811,819 | ) | | | (4,811,819 | ) |
Share of loss from discontinued operations of former equity investee | | | (4,811,819 | ) | | | 4,811,819 | | | | - | |
| Investment income | | | (217,608 | ) | | | 314,458 | | | | 96,850 | |
| Earnings (loss) from continuing operations | | | (2,973,671 | ) | | | (4,048,917 | ) | | | (7,022,588 | ) |
| Net earnings (loss) for the year | | | (8,680,692 | ) | | | 314,458 | | | | (8,366,234 | ) |
| Unrealized gain (loss) on available for sale securities | | | 275,876 | | | | (367,675 | ) | | | (91,799 | ) |
| Related tax impact | | | 69,593 | | | | (52,231 | ) | | | 17,362 | |
| Comprehensive income (loss) for the year | | | (8,431,014 | ) | | | (986 | ) | | | (8,432,000 | ) |
| Earnings (loss) per share from continuing operations | | | (0.50 | ) | | | (0.88 | ) | | | (1.38 | ) |
| Earnings (loss) per share from discontinued operations | | | (1.21 | ) | | | 0.95 | | | | (0.26 | ) |
| Earnings (loss) per share | | | (1.71 | ) | | | 0.07 | | | | (1.64 | ) |
Diluted earnings (loss) per share from continuing operations | | | (0.50 | ) | | | (0.88 | ) | | | (1.38 | ) |
Diluted earnings (loss) per share from discontinued operations | | | (1.21 | ) | | | 0.95 | | | | (0.26 | ) |
| Diluted earnings (loss) per share | | | (1.71 | ) | | | 0.07 | | | | (1.64 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
| | | Originally Stated U.S. Accounting Principles | | | Change | | | As Restated U.S. Accounting Principles | |
| December 31, 2007 | | | | | | | | | |
| | | | | | | | | | |
| Balance Sheet | | | | | | | | | |
| Short term investments | | | 5,461,581 | | | | (244,294 | ) | | | 5,217,287 | |
| Current assets | | | 17,305,249 | | | | (244,294 | ) | | | 17,060,955 | |
| Total assets | | | 18,141,508 | | | | (244,294 | ) | | | 17,897,214 | |
| Retained earnings | | | 13,511,710 | | | | (106,555 | ) | | | 13,405,155 | |
| Accumulated other comprehensive income | | | - | | | | (137,739 | ) | | | (137,739 | ) |
| Total shareholders’ equity | | | 16,178,008 | | | | (244,294 | ) | | | 15,933,714 | |
| Total liabilities and shareholders’ equity | | | 18,141,508 | | | | (244,294 | ) | | | 17,897,214 | |
| | | | | | | | | | | | | |
| Consolidated Statement of Operations and Other Comprehensive Income | | | | | | | | | | | | |
| Earnings (loss) from operations | | | (872,244 | ) | | | (553,933 | ) | | | (1,426,177 | ) |
| Investment income (loss) | | | 359,629 | | | | (106,555 | ) | | | 253,074 | |
| Equity earnings of former equity investee | | | - | | | | 639,964 | | | | 639,964 | |
Share of loss from discontinued operations of former equity investee | | | 639,964 | | | | (639,964 | ) | | | - | |
| Unrealized gain (loss) on available for sale securities | | | (289,366 | ) | | | 306,851 | | | | 17,485 | |
| Earnings from continuing operations | | | 3,755,788 | | | | 211,481 | | | | 3,967,269 | |
| Net earnings for the year | | | 2,886,827 | | | | (106,555 | ) | | | 2,780,272 | |
| Comprehensive income for the year | | | 3,269,390 | | | | (148,065 | ) | | | 3,417,455 | |
| Earnings (loss) per share from continuing operations | | | 0.68 | | | | 0.10 | | | | 0.78 | |
| Earnings (loss) per share from discontinued operations | | | (0.11 | ) | | | (0.12 | ) | | | (0.23 | ) |
| Earnings (loss) per share | | | 0.57 | | | | (0.02 | ) | | | 0.55 | |
Diluted earnings (loss) per share from continuing operations | | | 0.68 | | | | 0.10 | | | | 0.78 | |
Diluted earnings (loss) per share from discontinued operations | | | (0.11 | ) | | | (0.12 | ) | | | (0.23 | ) |
| Diluted earnings (loss) per share | | | 0.57 | | | | (0.02 | ) | | | 0.55 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) | | | | | | | |
| | | | | | | | |
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2007 | | | | | | | | | |
| Interest income (e) | | | 194,304 | | | | (194,304 | ) | | | - | |
| Investment income (loss) (e) | | | 359,629 | | | | (359,629 | ) | | | - | |
| | | | 553,933 | | | | (553,933 | ) | | | - | |
| | | | | | | | | | | | | |
| Expenses | | | 1,426,177 | | | | - | | | | 1,426,177 | |
| Loss from operations before the following | | | (872,244 | ) | | | (553,933 | ) | | | (1,426,177 | ) |
| | | | | | | | | | | | | |
| Equity earnings of significantly influenced companies (d) | | | (723,175 | ) | | | 25,236 | | | | (697,939 | ) |
| Gain on dilution of investment in former equity investee (d) | | | 67,881 | | | | 2,686 | | | | 70,567 | |
| Equity in earnings of former equity investee (d) | | | - | | | | 639,964 | | | | 639,964 | |
| Gain on sale of investment in former consolidated subsidiary | | | 130,850 | | | | - | | | | 130,850 | |
| Gain on sale of former equity investee (d) | | | 5,272,151 | | | | (294 | ) | | | 5,271,857 | |
| Write-down of investment in significantly influenced company (d) | | | (140,000 | ) | | | (349,556 | ) | | | (489,556 | ) |
| | | | 4,607,707 | | | | 318,036 | | | | 4,925,743 | |
| Earnings from continuing operations | | | 3,735,463 | | | | (235,897 | ) | | | 3,499,566 | |
| Other income | | | | | | | | | | | | |
| Interest income (e) | | | - | | | | 194,304 | | | | 194,304 | |
| Investment income (loss) (e) | | | - | | | | 253,074 | | | | 253,074 | |
| | | | - | | | | 447,378 | | | | 447,378 | |
| Earnings from operation before income taxes | | | 3,735,463 | | | | 211,481 | | | | 3,946,944 | |
| Income taxes | | | (20,325 | ) | | | | | | | (20,325 | ) |
| Earnings from operations for the year | | | 3,755,788 | | | | 211,481 | | | | 3,967,269 | |
| Loss from discontinued operations, net of taxes | | | (1,186,997 | ) | | | - | | | | (1,186,997 | ) |
Share of earnings from discontinued operation of former equity investee (e) | | | 639,964 | | | | (639,964 | ) | | | - | |
| | | | (547,033 | ) | | | (639,964 | ) | | | (1,186,997 | ) |
| Net earnings for the year | | | 3,208,755 | | | | (428,483 | ) | | | 2,780,272 | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Share of unrealized exchange loss of former equity investee | | | (321,100 | ) | | | (90,303 | ) | | | (411,403 | ) |
| Reclassification of unrealized exchange gain of former equity investee to earnings | | | 1,078,188 | | | | 303,220 | | | | 1,381,408 | |
| Equity in comprehensive loss of significantly influenced company (d) | | | - | | | | (135 | ) | | | (135 | ) |
| Unrealized gain(loss) on available for sale securities (b) | | | - | | | | 17,485 | | | | 17,485 | |
| Related tax impact | | | - | | | | (350,172 | ) | | | (350,172 | ) |
| | | | 757,088 | | | | (119,905 | ) | | | 637,183 | |
| Comprehensive income for the year | | | 3,965,843 | | | | (548,388 | ) | | | 3,417,455 | |
| | | | | | | | | | | | | |
On December 31, 2007 the Company completed the sale of its 22.15% shareholding in Polyair Inter Pack Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
12. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2006 | | | | | | | | | |
| Interest income (e) | | | 225,617 | | | | (225,617 | ) | | | - | |
| Investment income (loss) (e) | | | (217,608 | ) | | | 217,608 | | | | - | |
| | | | 8,009 | | | | (8,009 | ) | | | - | |
| | | | | | | | | | | | | |
| Expenses | | | 505,759 | | | | - | | | | 505,759 | |
| Loss from operations before the following | | | (497,750 | ) | | | (8,009 | ) | | | (505,759 | ) |
| | | | | | | | | | | | | |
| Equity earnings of significantly influenced companies (d) | | | (783,926 | ) | | | 224,725 | | | | (559,201 | ) |
| Equity loss of former equity investee (e) | | | - | | | | (4,811,819 | ) | | | (4,811,819 | ) |
| Gain on dilution of investment in former equity investee (e) | | | - | | | | (190 | ) | | | (190 | ) |
| Write-down of investment in former equity investee | | | (991,732 | ) | | | 223,909 | | | | (767,823 | ) |
| | | | (1,775,658 | ) | | | (4,363,375 | ) | | | (6,139,033 | ) |
| Earnings from continuing operations | | | (2,273,408 | ) | | | (4,371,384 | ) | | | (6,644,792 | ) |
| Other income | | | | | | | | | | | | |
| Interest income (e) | | | - | | | | 225,617 | | | | 225,617 | |
| Investment income (loss) (e) | | | - | | | | 96,850 | | | | 96,850 | |
| | | | - | | | | 322,467 | | | | 322,467 | |
| Earnings from operation before income taxes | | | (2,273,408 | ) | | | (4,048,917 | ) | | | (6,322,325 | ) |
| Income taxes | | | 700,263 | | | | - | | | | 700,263 | |
| Earnings from operations for the year | | | (2,973,671 | ) | | | (4,048,917 | ) | | | (7,022,588 | ) |
| Loss from discontinued operations, net of taxes | | | (1,343,646 | ) | | | - | | | | (1,343,646 | ) |
Share of earnings from discontinued operation of Former equity investee (e) | | | (4,811,819 | ) | | | 4,811,819 | | | | - | |
| | | | (6,155,465 | ) | | | 4,811,819 | | | | (1,343,646 | ) |
| Net earnings for the year | | | (9,129,136 | ) | | | 762,902 | | | | (8,366,234 | ) |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Share of unrealized exchange loss of former equity investee | | | 54,766 | | | | (44,459 | ) | | | 10,307 | |
| Reclassification of unrealized exchange gain of former equity investee to earnings | | | 236,613 | | | | (192,080 | ) | | | 44,533 | |
| Equity in comprehensive loss of significantly influenced company (d) | | | - | | | | (11,445 | ) | | | (11,445 | ) |
| Unrealized gain(loss) on available for sale securities (b) | | | - | | | | (91,799 | ) | | | (91,799 | ) |
| Related tax impact | | | - | | | | (17,362 | ) | | | (17,362 | ) |
| | | | 291,613 | | | | (357,145 | ) | | | (65,766 | ) |
| Comprehensive income for the year | | | (8,837,757 | ) | | | 405,757 | | | | (8,432,000 | ) |
| | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
12. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Earnings (loss) from continuing operations - U.S. GAAP | | | 1,015,757 | | | | 3,967,269 | | | | (7,022,588 | ) |
| Earnings (loss) per share from continuing operations – U.S. GAAP | | | | | | | | | | | | |
| Basic | | | 0.20 | | | | 0.78 | | | | (1.38 | ) |
| Diluted | | | 0.20 | | | | 0.78 | | | | (1.38 | ) |
| | | | | | | | | | | | | |
Loss from discontinued operations - U.S. GAAP | | | - | | | | (1,186,997 | ) | | | (1,343,646 | ) |
| Loss per share from discontinued operations - U.S. GAAP | | | | | | | | | | | | |
| Basic | | | 0.00 | | | | (0.23 | ) | | | (0.26 | ) |
| Diluted | | | 0.00 | | | | (0.23 | ) | | | (0.26 | ) |
| | | | | | | | | | | | | |
| Net earnings (loss) - U.S. GAAP | | | 1,015,757 | | | | 2,780,272 | | | | (8,366,234 | ) |
| Earnings (loss) per share - U.S. GAAP | | | | | | | | | | | | |
| Basic | | | 0.20 | | | | 0.55 | | | | (1.64 | ) |
| Diluted | | | 0.20 | | | | 0.55 | | | | (1.64 | ) |
| | Reconciliation of U.S. GAAP Effective Income Tax Provision (Recovery): |
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | |
| Income tax computed at statutory combined income tax rates | | | 341,614 | | | | 1,424,847 | | | | (2,282,359 | ) |
| Increase (decrease) in tax resulting from | | | | | | | | | | | | |
| Non-deductible expenses | | | 19,683 | | | | (1,708 | ) | | | 78 | |
| Non-taxable equity items | | | 8,769 | | | | 172,290 | | | | 2,216,191 | |
| Non-taxable portion of capital (gain) loss | | | (279,558 | ) | | | (1,327,947 | ) | | | 10,449 | |
| Re-valuation of future tax benefits previously recognized (not recognized) | | | - | | | | (289,000 | ) | | | 602,000 | |
| Future tax benefits not recognized | | | 14,207 | | | | - | | | | 220,000 | |
| Other | | | (100,730 | ) | | | (1,193 | ) | | | (163,240 | ) |
| | | | | | | | | | | | | |
| Effective income tax provision (recovery) | | | 3,985 | | | | (20,325 | ) | | | 700,263 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Reconciliation of U.S. GAAP Effective Income Tax Provision (Recovery) on discontinued operations:
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | |
| Income tax computed at statutory combined income tax rates | | | - | | | | (893,015 | ) | | | (888,523 | ) |
| Increase (decrease) in tax resulting from | | | | | | | | | | | | |
| Non-deductible expenses | | | - | | | | 4,422 | | | | 151,030 | |
| Non-taxable equity items | | | - | | | | - | | | | (30,170 | ) |
| Re-valuation of future tax benefits previously recognized (not recognized) | | | - | | | | 833,593 | | | | 926,521 | |
| Future tax benefits not recognized | | | - | | | | - | | | | | |
| Other | | - | | | - | | | | 108,360 | |
| | | | | | | | | | | | | |
| Effective income tax provision (recovery) | | | - | | | | (55,000 | ) | | | 267,218 | |
Reconciliation of Shareholders’ Equity:
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | |
| Shareholders’ equity based on Canadian GAAP | | | 16,517,866 | | | | 16,178,008 | | | | 11,975,030 | |
| Correction of accounting error on valuation of short term investments | | | - | | | | (244,294 | ) | | | (444,357 | ) |
| Purchase of non-arm’s length companies (Note 12(a)) | | | - | | | | - | | | | (226,420 | ) |
| Effect of GAAP differences in former subsidiary on accounting gain on sale of shares | | | - | | | | - | | | | 221,580 | |
| Effect of GAAP difference on impairment of goodwill | | | - | | | | - | | | | 118,720 | |
| Adjustment of short term investments to cost basis | | | 350,459 | | | | - | | | | 314,458 | |
| Effect of GAAP differences in subsidiaries and effectively controlled companies on equity investment transactions | | | 249 | | | | - | | | | 468,879 | |
Comprehensive income adjustments: Effect of GAAP difference in accounting for accumulated translation loss | | | - | | | | - | | | | (236,613 | ) |
| Future tax effect on accumulated translation loss | | | - | | | | - | | | | 350,172 | |
Unrealized gain on available for sale securities, net of income taxes | | | - | | | | - | | | | (25,325 | ) |
| Equity in comprehensive income of significantly influenced company | | | - | | | | - | | | | 135 | |
| Shareholders’ equity based on U.S. GAAP | | | 16,868,574 | | | | 15,933,714 | | | | 12,516,259 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Accounting policy
Accounts and notes receivable
Notes and accounts receivable are recorded under the terms of the agreement or at the invoiced amount, are periodically assessed for recoverability and an allowance for doubtful accounts established. A note or account receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest. Interest income is not recognized when a note or account receivable becomes uncollectible.
Notes receivable
For Canadian GAAP purposes the Company discloses the non-interest bearing note receivable as part of Notes Receivable and the deferred gain related thereto as a long-term liability. In these financial statement the net amount has been disclosed as an asset or liability as appropriate.
| | | 2008 | | | 2007 | |
Note receivable, bearing interest at prim plus 2% per annum, due on demand, secured by a general security agreement | | $ | - | | | $ | 216,409 | |
| | | | | | | | | |
Note receivable, bearing interest at 10% per annum, due on demand, secured by a general security agreement | | | - | | | | 616,050 | |
| | | | | | | | | |
Note receivable, non-interest bearing discounted at 17.5%, repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009 and each anniversary thereafter. The note is secured by the shares of a former consolidated subsidiary, Distinctive Designs Furniture Inc. (“Distinctive”) | | | 537,513 | | | | 457,513 | |
| | | | | | | | | |
Deferred gain on discounted note receivable (Note 5) | | | (420,953 | ) | | | (420,953 | ) |
| | | | | | | | | |
| | | | 116,560 | | | | 869,019 | |
| | | | | | | | | |
Allowance for doubtful accounts | | | (58,675 | ) | | | - | |
| | | | | | | | | |
| | | | 57,885 | | | | 869,019 | |
| | | | | | | | | |
Less: current portion | | | 57,885 | | | | 832,459 | |
| | | $ | - | | | $ | 36,560 | |
Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009. This note is only due and payable in any given year if Distinctive continues its business. Over the past number of years, Distinctive incurred substantial operating losses. Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes the above reserve is appropriate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Investment income
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Distributions from limited partnerships | | $ | 28,528 | | | $ | 28,528 | | | $ | 29,909 | |
Management fees | | | 13,734 | | | | 35,987 | | | | 41,443 | |
Gain (loss) on investments | | | (419,745 | ) | | | 188,559 | | | | 25,498 | |
| | | | | | | | | | | | | |
Investment income | | $ | (377,483 | ) | | $ | 253,074 | | | $ | 96,850 | |
| | | | | | | | | | | | | |
| | Related Party Transactions |
The Company has outstanding balances and transactions with its consolidated subsidiary and former subsidiary, which have been eliminated on consolidation.
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | $ | | | $ | |
2041804 Ontario Inc. (consolidated subsidiary) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-interest bearing loan payable denominated in U.S. Dollars | | | 16,658,086 | | | | 13,542,681 | | | | 15,920,703 | |
Foreign exchange gains (losses) | | | 3,100,746 | | | | (2,377,648 | ) | | | (60,485 | ) |
| | | | | | | | | | | | | |
Distinctive Designs Furniture Inc. (former consolidated subsidiary) (Note 11) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loans receivable | | | - | | | | - | | | | 998,068 | |
Interest receivable | | | - | | | | - | | | | 15,855 | |
Interest revenue | | | - | | | | 76,473 | | | | 29,557 | |
Income Taxes
In accordance with FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), the Company classified interest and penalties associated with income tax positions in income tax expenses. The Company did not incur any interest and penalties with income tax positions for the years 2008, 2007 and 2006.
In accordance with FIN 48, the Company has unrecognized tax benefits of approximately $850,000 that, if recognized, would affect the effective tax rate. Tax position for fiscal years 2004 and on still remain opened for examination by major tax authorities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Fair Value Measurements
The Company’s consolidated balance sheets include the following financial instruments: cash, short-term investments, accounts receivable, notes receivable and accounts payable. The carrying amounts of current assets and liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
The Company adopted FAS 157 for its financial assets and liabilities as of January 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value instruments. The fair value hierarchy is as follows:
Level 1 – Quoted (unadjusted) prices for identical assets and liabilities in active markets
Level 2 – inputs other than quoted prices, included with Level 1 that are observable for the asset or liability, either directly or indirectly, including:
| · | Quoted prices for similar assets/liabilities in active markets; |
| · | Quoted prices for identical or similar assets in non-active markets (few transactions, limited information, non-current prices, high variable over time); |
| · | Inputs other than quoted prices that are observable for the asset/liability (e.g. interest rates, yield curves, volatilities, default rates, etc); and; |
| · | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 – Unobservable inputs that cannot be corroborated by other observable market data.
The Company’s assets are measured as follows:
Cash – the carrying value of cash approximates fair value as maturities are less than three months. Cash has been valued using the market value technique.
Short-term investments – The estimated fair values of the short term investments are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the price. Short-term investments are valued using the market value technique.
Notes receivable – The estimated fair value of the note receivable is based on unobservable inputs that cannot be corroborated by observed market data. Notes receivable are valued using the income approach technique.
.
| | | | | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | | | | | | | | |
| Assets: | | December 31, 2008 | | | Quoted Prices in Active Markets for Identical Level Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | | |
| Cash | | | 14,178,399 | | | $ | 14,178,399 | | | | - | | | | - | |
| Short-term investments | | | 2,880,094 | | | | 302,540 | | | | - | | | | 2,577,554 | |
| Notes receivable | | | 57,885 | | | | - | | | | - | | | | 57,885 | |
| Investments | | | 292,427 | | | | - | | | | 292,427 | | | | - | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | |
| | | Short Term Investments | |
| | | | |
Balance at beginning of period | | $ | 5,085,648 | |
| | | | | |
Additional investments | | | 2,250,000 | |
| | | | | |
Redemption of investments | | | (3,743,600 | ) |
| | | | | |
Unrealized loss on investments not included in earnings | | | (158,269 | ) |
| | | | | |
Loss on investments included in earnings | | | (856,225 | ) |
| | | | | |
Balance at end of period | | $ | 2,577,554 | |
| | | | | |
Investments
Long-term investments in which the Company has significant influence are accounted for using the equity method. Whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable, the investment will be written down to its fair value. Any impairment in value is recorded in the consolidated statement of operations.
| | | 2007 | | | 2006 | |
Polyair Inter Pack Inc. Common shares – at equity (Nil; 2006 - 22.8%) | | | | | | |
Proportionate share of net book value | | $ | - | | | $ | 1 | |
Unamortized goodwill | | - | | | - | |
(market value – 2006 - $3,332,167) | | $ | - | | | $ | 1 | |
The potential conversion of outstanding options and the conversion of a convertible note receivable could reduce the Company’s ownership to 20.6%
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 12. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Recent United States Accounting Pronouncements:
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
SFAS No. 161 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the quarterly disclosures requirements in SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain non-financial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, non-financial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company will adopt these deferred provisions on January 1, 2009 and does not expect them to have a material impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company will adopt these provisions on January 1, 2009 and does not expect them to have a material impact on our consolidated financial statements.
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The Company is currently assessing the affect of its adoption may have on its consolidated financial statements.
SFAS No. 141(R) In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. The statement provides revised guidance for recognition and measuring assets acquired and liabilities assumed in a business combination. It also requires transaction costs for a business combination to be expensed as incurred. SFAS 141(R) will impact our accounting for and business combinations we complete after 2008.
| CONSOLIDATED MERCANTILE INCORPORATED - SCHEDULE 2 |
DECEMBER 31, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| Column A | | Column B | | | Column C | | | Column D | | | Column E | | | Column F | |
Description | | Balance Beginning of Period | | | Charged to Costs and Expenses | | | Additions Charged to Other Accounts – Describe | | | Other (2) | | | Deductions- Describe (3) | | | Balance End of Period | |
| | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
| Allowance for doubtful accounts | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2008 | | | - | | | | 58,675 | (1) | | | - | | | | - | | | | - | | | | 58,675 | |
| December 31, 2007 | | | 92,080 | | | | - | | | | - | | | | (92,080 | ) | | | - | | | | - | |
| December 31, 2006 | | | 386,745 | | | | (53,428 | ) | | | - | | | | - | | | | (241,237 | ) | | | 92,080 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Reserve on note receivable, net of deferred gain (see Notes 3 & 5 to 2008 Annual Consolidated Financial Statements)
(2) Disposal of former consolidated subsidiary.
(3) Deductions represent bad debts written off against accounts receivable and reversals of over accruals.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
RESULTS OF OPERATIONS
General
The following table sets forth items derived from the consolidated statements of operations for the six-month periods ended June 30, 2009 and 2008 prepared in accordance with Canadian GAAP. A summary of the differences between Canadian and US accounting principles for the fiscal years ended December 31, 2008 and 2007, are detailed in Note 12 to the Consolidated Financial Statements included herein.
RESULTS OF OPERATIONS
The following table sets forth items derived from the unaudited interim consolidated statements of operations for each of the eight most recently completed quarters:
(In thousands of dollars, except per share amounts)
| | | 2009 | | | | | | 2008 | | | | | | 2007 | |
| | | Second Quarter | | | First Quarter | | | Fourth Quarter | | | Third Quarter | | | Second Quarter | | | First Quarter | | | Fourth Quarter | | | Third Quarter | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 168 | | | $ | 121 | | | $ | (491 | ) | | $ | (307 | ) | | $ | 180 | | | $ | (66 | ) | | $ | 135 | | | $ | (228 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | (207 | ) | | | (29 | ) | | | 338 | | | | (68 | ) | | | (40 | ) | | | 117 | | | | 4,313 | | | | (418 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (402 | ) | | | (353 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (207 | ) | | | (29 | ) | | | 338 | | | | (68 | ) | | | (40 | ) | | | 117 | | | | 3,911 | | | | (771 | ) |
Earnings (loss) per share from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.07 | | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.85 | | | $ | (0.08 | ) |
Loss per share From discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | (0.08 | ) | | $ | (0.07 | ) |
Earnings (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.07 | | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.77 | | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General
The following table sets forth items derived from the unaudited interim consolidated statements of operations for the six-month periods ended June 30, 2009 and 2008 :
(In thousands of dollars) | | Six Months Ended June 30 | |
| | | 2009 | | | 2008 | |
| Investment revenue (loss) | | $ | 289 | | | $ | 114 | |
| Expenses | | | (561 | ) | | | (38 | ) |
| Earnings on equity items | | | 43 | | | | 3 | |
| Earnings (loss) before income taxes | | | (229 | ) | | | 79 | |
| Income taxes | | | 7 | | | | (2 | ) |
| | $ | (236 | ) | | $ | 77 | |
Review of the Second Quarter Results ended June 30, 2009 and 2008
Revenue. Revenue for the six months ended June 30, 2009 increased to $289,553 compared to $114,002 for the comparable 2008 period. Revenue for 2009 includes interest income on cash and cash equivalents of $63,400 and share of income from investments in Limited Partnerships of $226,553. Revenue for 2008 includes interest income on cash and cash equivalents of $183,478 and share of loss from investments in Limited Partnerships of $69,476. The decrease in interest income in 2009 is due to the substantial decrease in interest rates following the current economic conditions and the resulting tightening in the credit markets. Investment income increased in 2009 due to the improved results achieved from the Company’s Limited Partnership investments during the period.
Administrative and General Expenses Administrative and general expenses for the six months ended June 30, 2009 and 2008 were $522,485 and $296,300 respectively. Administrative and general expenses normally include fees for management and administrative services, legal and audit fees, and public company shareholder costs. The expense for the six month period ended June 30, 2009 includes a provision for non-deductible interest expenses of approximately $250,000 which may arise from the potential reassessment of prior year taxes.
Gain (loss) on Foreign Exchange. Loss on foreign exchange for the six months ended June 30, 2009 was $989 compared to gain on foreign exchange of $257,973 for the comparable 2008 period. During the period under review, the Company held minimal funds denominated in United States dollars. The gain for the 2008 period resulted from the effect of the strengthening of the United States Dollar on the Company’s U.S. dollar holdings on hand at that time.
Other expenses. Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009. The first instalment was received in April 2009. This note is only due and payable in any given year if Distinctive continues its business. Over the past number of years Distinctive incurred substantial operating losses. Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes a reserve is appropriate. As a result, the Company has reserved $38,000 against the accretion interest on this discounted note for the six months ended June 30, 2009.
Equity items. Equity earnings for the six months ended June 30, 2009 were $1,172 compared to equity earnings of $2,864 for the comparable 2008 period. During the period under review the Company recognized a deferred gain of $42,050 from the 2007 sale of its investment interest in Distinctive.
Income Tax Provision. The effective tax rate for the six months ended June 30, 2009 and 2008 was (3.4%) and (2.0%) respectively. The difference between the Company’s statutory tax rate and its effective tax rate is primarily attributable to the permanent differences associated with non-deductible items, the tax treatment of capital gain transactions and the valuation allowance provided against certain future tax benefits.
Net Earnings (loss). Net loss for the six months ended June 30, 2009 was $236,418 as compared to net earnings of $76,942 in the comparable 2008 period. Net loss for the six months ended June 30, 2009 was impacted by the provision for interest on a potential reassessment of prior year taxes. Net earnings for the six months ended June 30, 2008 were impacted by the poor performance of the equity markets. This was offset by the foreign exchange gain resulting from the strengthening of the United States Dollar during the period.
Inflation. Inflation has not had a material impact on the results of the Company’s operations in its last quarter and is not anticipated to materially impact on the Company’s operations during its current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s principal sources of liquidity are cash on hand, short-term investments and cash flow from operations.
The Company's working capital amounted to $16.0 million at June 30, 2009 compared to $16.3 million at December 31, 2008. The ratio of current assets to current liabilities was 14.2:1 at June 30, 2009 and 17.9: 1 at December 31, 2008.
During the six months ended June 30, 2009 the Company’s cash position increased by approximately $534,000 to $14.7 million from $14.2 million at December 31, 2008. The net increase was due to the following:
| Ø | Operating Activities decreased cash by $173,207. This was a result of $253,198 in cash utilized for operations and $79,991 of cash generated from changes in non-cash components of work capital; |
| Ø | Investing Activities increased cash by $708,041 as a result of the decrease in the Company’s short-term investments of $608,106 and the collection of $99,935 from the note receivable. |
The Company’s ongoing expected costs include administrative expenses, fees for management and administrative services provided to the Company, legal and audit fees and public company shareholder costs. The Company expects to generate the revenue required in order to service these expenditures from interest and investment income.
QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk.
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market rates. The Company has reduced the exposure to interest rate risk over the cash flows through the use of fixed rate instruments on certain of its financial liabilities. The Company has not used derivative financial instruments to alter the exposure to interest rate risk.
CONSOLIDATED MERCANTILE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
JUNE 30, 2009
(UNAUDITED)
| CONSOLIDATED MERCANTILE INCORPORATED |
| | | | | | | | | | |
| CONSOLIDATED BALANCE SHEET |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | (Unaudited) | | |
| | | | | | | | June 30 | | December 31 |
| | | | | | | | 2009 | | 2008 |
| | | | | | | | | |
| CURRENT | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 14,712,880 | $ | 14,178,399 |
| Short-term investments | | | | | | 2,245,899 | | 2,880,094 |
| Accounts receivable | | | | | | 10,527 | | 20,797 |
| Prepaid expenses | | | | | | | 228,979 | | 49,010 |
| Note receivable | | | | | | | - | | 99,935 |
| | | | | | | | | | |
| | | | | | | | 17,198,285 | | 17,228,235 |
| | | | | | | | | | |
| INVESTMENTS | (see Note) | | | | | 293,599 | | 292,427 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | $ | 17,491,884 | $ | 17,520,662 |
| | | | | | | | | | |
| | | | | | | | |
| CURRENT | | | | | | | | | |
| Accounts payable and accrued liabilities | | | $ | 120,593 | $ | 121,181 |
| Income taxes payable | | | | | | 1,089,843 | | 839,565 |
| | | | | | | | | | |
| | | | | | | | 1,210,436 | | 960,746 |
| | | | | | | | | | |
| DEFERRED GAIN | | | | | | | - | | 42,050 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | 1,210,436 | | 1,002,796 |
| | | | | | | | | | |
| | | | S H A R E H O L D E R S' E Q U I T Y | | |
| | | | | | | | | | |
| CAPITAL STOCK | | | | | | | 2,830,765 | | 2,830,765 |
| | | | | | | | | | |
| CONTRIBUTED SURPLUS | | | | | 59,411 | | 59,411 |
| | | | | | | | | | |
| RETAINED EARNINGS | | | | | | 13,391,272 | | 13,627,690 |
| | | | | | | | | | |
| | | | | | | | 16,281,448 | | 16,517,866 |
| | | | | | | | | | |
| | | | | | | $ | 17,491,884 | $ | 17,520,662 |
| CONSOLIDATED MERCANTILE INCORPORATED | |
| | | | | | | |
| CONSOLIDATED STATEMENT OF RETAINED EARNINGS | |
| | | | | | | |
| SIX MONTHS ENDED JUNE 30 | |
| | | | | | | |
| | | | | | | |
| | | (Unaudited) | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | | $ | 13,627,690 | | | $ | 13,285,290 | |
| | | | | | | | | |
| Excess of cost of shares purchased for cancellation over stated value | | | - | | | | (4,963 | ) |
| | | | | | | | | |
| | | | 13,627,690 | | | | 13,280,327 | |
| | | | | | | | | |
| Net earnings (loss) for the period | | | (236,418 | ) | | | 76,942 | |
| | | | | | | | | |
| Balance, end of period | | $ | 13,391,272 | | | $ | 13,357,269 | |
| | | | | | | | | |
| CONSOLIDATED MERCANTILE INCORPORATED | |
| | | | | | | |
| CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME | |
| | | | | | | |
| SIX MONTHS ENDED JUNE 30 | |
| | | | | | | |
| | | (Unaudited) | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| REVENUE | | | | | | |
| Interest income | | $ | 63,400 | | | $ | 183,478 | |
| Investment income (loss) | | | 226,153 | | | | (69,476 | ) |
| | | | 289,553 | | | | 114,002 | |
| | | | | | | | | |
| | | | | | | | | |
| EXPENSES | | | | | | | | |
| Administrative and general | | | 522,485 | | | | 296,300 | |
| Loss (gain) on foreign exchange | | | 989 | | | | (257,973 | ) |
| Impairment loss on note receivable | | | 38,000 | | | | - | |
| | | | 561,474 | | | | 38,327 | |
| | | | | | | | | |
| EARNINGS (LOSS) FROM OPERATIONS | | | | | | | | |
| BEFORE THE FOLLOWING | | | (271,921 | ) | | | 75,675 | |
| | | | | | | | | |
| Equity earnings (loss) of significantly influenced company | | | 1,172 | | | | 2,864 | |
| Deferred gain recognized on sale of former consolidated subsidiary | | | 42,050 | | | | - | |
| | | | 43,222 | | | | 2,864 | |
| | | | | | | | | |
| | | | | | | | | |
| EARNINGS (LOSS) BEFORE INCOME TAXES | | | (228,699 | ) | | | 78,539 | |
| | | | | | | | | |
| Income taxes - current | | | 7,719 | | | | 1,597 | |
| | | | | | | | | |
| NET EARNINGS (LOSS) FOR THE PERIOD, | | | | | | | | |
| ALSO BEING COMPREHENSIVE INCOME (LOSS) | | | | | | | | |
| FOR THE PERIOD | | $ | (236,418 | ) | | $ | 76,942 | |
| | | | | | | | | |
| EARNINGS (LOSS) PER SHARE | | | | | | | | |
| | | | | | | | | |
| Earnings (loss) per share | | | | | | | | |
| Basic and diluted | | $ | (0.05 | ) | | $ | 0.02 | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average number of common shares | | | | | | | | |
| Basic and diluted | | | 5,076,407 | | | | 5,079,041 | |
| CONSOLIDATED MERCANTILE INCORPORATED | |
| | | | | | | |
| CONSOLIDATED STATEMENT OF CASH FLOWS | |
| | | | | | | |
| SIX MONTHS ENDED JUNE 30 | |
| | | | | | | |
| | | | | | | |
| | | | | (Unaudited) | |
| | | 2009 | | | 2008 | |
| CASH PROVIDED BY (USED FOR): | | | | | | |
| OPERATING ACTIVITIES | | | | | | |
| Net earnings (loss) for the period | | $ | (236,418 | ) | | $ | 76,942 | |
| Unrealized (gain) loss on marketable securities | | | 26,089 | | | | (38,762 | ) |
| Unrealized (gain) loss on foreign exchange | | | 353 | | | | (246,315 | ) |
| Equity (earnings) loss of significantly influenced company | | | (1,172 | ) | | | (2,864 | ) |
| Deferred gain recognized on sale of former consolidated subsidiary | | | (42,050 | ) | | | - | |
| Accretion interest on discounted note receivable | | | (38,000 | ) | | | (40,000 | ) |
| Impairment loss on note receivable | | | 38,000 | | | | - | |
| | | | (253,198 | ) | | | (250,999 | ) |
| Change in non-cash components of working capital | | | | | | | | |
| Decrease (increase) in accounts receivable | | | 10,270 | | | | (8,198 | ) |
| (Increase) decrease in prepaid expenses | | | (179,969 | ) | | | (32,822 | ) |
| Decrease in accounts payable and accrued liabilities | | | (588 | ) | | | (568,344 | ) |
| Increase in income taxes payable | | | 250,278 | | | | 4,448 | |
| | | | (173,207 | ) | | | (855,915 | ) |
| | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | |
| Purchase of common shares for cancellation | | | - | | | | (7,505 | ) |
| | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | |
| Decrease (increase) in short-term investments | | | 608,106 | | | | (1,117,383 | ) |
| Decrease in notes receivable | | | 99,935 | | | | 832,459 | |
| Proceeds on redemption of shares in significantly influenced company | | | - | | | | 59,891 | |
| | | | 708,041 | | | | (225,033 | ) |
| | | | | | | | | |
| UNREALIZED FOREIGN EXCHANGE GAIN (LOSS) IN CASH BALANCES | | | (353 | ) | | | 246,315 | |
| | | | | | | | | |
| CHANGE IN CASH POSITION | | | 534,481 | | | | (842,138 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 14,178,399 | | | | 10,961,412 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 14,712,880 | | | $ | 10,119,274 | |
| | | | | | | | | |
| Cash and cash equivalents consist of cash balances with banks, and investments in money market instruments. | |
| Cash and cash equivalents included in the cash flow statement are comprised of the following balance sheet amounts: | |
| | | | | | | | | |
| Cash balances with banks | | $ | 49,071 | | | $ | 104,426 | |
| Money market instruments | | | 14,663,809 | | | | 10,014,848 | |
| Total cash and cash equivalents | | $ | 14,712,880 | | | $ | 10,119,274 | |
| | | | | | | | | |
| Money market instruments consist primarily of investments in short term deposits with maturities of three months or less. | |
| | | | | | | | | |
| Supplementary cash flow information: | | | | | | | | |
| | | | | | | | | |
| Income taxes paid | | $ | 24,824 | | | $ | 35,500 | |
| CONSOLIDATED MERCANTILE INCORPORATED |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in Canada on a basis consistent with those followed in the most recent audited consolidated financial statements except as noted below. These unaudited interim consolidated financial statements do not include all the information and footnotes required by the generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report for the year ended December 31, 2008 included in this prospectus. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.
In February 2008, the CICA issued amendments to Handbook Section 1000, “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company applied the amendments to Handbook Section 1000 commencing January 1, 2009. The implementation of the amendments to Handbook Section 1000 does not have any impact on the Company’s results of operations, financial position and disclosures as these amendments are clarifications on the application of Handbook Section 1000.
In February 2008, the CICA issued a new accounting standard, Handbook Section 3064, concerning goodwill and intangible assets. The new section replaces the existing guidance on goodwill and other intangible assets and research and development costs. The new section provides additional guidance on measuring the cost of goodwill and intangible assets. The new standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The implementation of this new standard does not have any impact on the Company’s results of operations, financial position and disclosures.
The Emerging Issues Committee (“EIC”) issued a new abstract on January 20, 2009, concerning the measurement of financial assets and financial liabilities (“EIC-173 – Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”) (the “Abstract”). The Abstract was issued to consider the diversity in practice as to whether an entity’s own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial instruments. The Committee reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. The Abstract is effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of the Abstract with retrospective application without restatement of prior periods. The Company applied the new Abstract at the beginning of its current fiscal year. The implementation does not have a significant impact on the Company’s results of operations, financial position and disclosures.
Recent Accounting Pronouncements
In January 2009, the CICA issued new accounting standards, Handbook Section 1582 “Business Combinations”, Handbook Section 1602 “Non-Controlling Interests”, and Handbook Section 1601 “Consolidated Financial Statements”, which are based on the International Accounting Standards Board’s (“IASB”) International Financial Reporting Standard 3, “Business Combinations”. The new standards replace the existing guidance on business combinations and consolidated financial statements. The objective of the new standards is to harmonize Canadian accounting for business combinations with the international and U.S. accounting standards. The new standards are to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier application permitted. Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the new standards shall not be adjusted upon application of these new standards. Section 1602 should be applied retrospectively except for certain items. The Company is currently assessing the impact these new standards may have on its results of operations, financial position and disclosures .
On April 29, 2009, the CICA amended Section 3855, “Financial Instruments – Recognition and Measurement”, adding/amending paragraphs regarding the application of effective interest method to previously impaired financial assets and embedded prepayment options. The amendments are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011 with early adoption permitted. These amendments are not expected to have a significant impact on the Company’s accounting for its financial instruments.
In June 2009, the CICA amended Section 3862, “Financial Instruments – Disclosures”, to adopt the amendments recently issued by the IASB to International Financial Reporting Standard 7, “Financial Instruments” Disclosures” (“IFRS 7”), in March 2009. These amendments are applicable to publicly accountable enterprises and those private enterprises, co-operative business enterprises, rate-regulated enterprises and not-for-profit organizations that choose to apply Section 3862. The amendments were made to enhance disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. The amendments are effective for annual financial statements for fiscal years ended after September 30, 2009, with early adoption permitted. To provide relief for preparers, and consistent with IFRS 7, the CICA decided that an entity need not provide comparative information for the disclosures required by the amendments in the first year of application. The Company will apply these amendments for its 2009 annual consolidated financial statements. The impact of the amendments to the fair value measurement and liquidity risk disclosure requirements of the Company are not expected to be significant.
Transition to International Financial Reporting Standards
The Canadian Accounting Standards Board (“AcSB”) confirmed that the adoption of IFRS would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada’s current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards will be effective for the Company in the first quarter of 2011. The Company continues the process of evaluating the potential impact of IFRS to our consolidated financial statements. This will be an ongoing process as new standards and recommendations are issued by the ISAB and the AcSB. While the Company continues its work on the initial planning and assessment stage, including involvement in various training programs, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.
Investments
Long-term investments in which the Company has significant influence are accounted for using the equity method. Whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable, the investment will be written down to its fair value. Any impairment in value is recorded in the consolidated statement of operations.
Investments as at June 30, 2009 and December 31, 2008 consist of the following:
| | | June 30, 2009 | | | December 31, 2008 | |
| | | | | | | |
| Investment in significantly influenced company – at equity (1.5%) | | | $293,599 | | | | $292,427 | |
Comparative Figures
Certain 2008 figures have been reclassifed from statements previously presented to conform to the presentation of the 2009 unaudited interim financial statements.
Proposed Amalgamation
The Company recently announced that its directors have approved a business combination by way of a proposed amalgamation with Genterra Inc., a company whose shares are traded on the TSX Venture Exchange. The transaction is subject to the approval of the shareholders of both companies and the approval of the regulatory authorities.
| SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING |
The Company follows accounting principles generally accepted in Canada. Differences between generally accepted accounting principles in Canada and those generally accepted in the United States of America (United States) are summarized below:
| (a) | The Company's acquisitions of Distinctive Designs Furniture Inc., previously a significantly influenced company, and Kroehler Furniture Group Inc., a formerly consolidated subsidiary, were accounted for by the purchase method under Canadian generally accepted accounting principles. Under United States generally accepted accounting principles, these non-arm’s length acquisitions must be accounted for by the reorganization of entities under common control method. The accounting has been adjusted accordingly. |
| (b) | Comprehensive income: |
U.S. GAAP requires investments in available for sale securities and trading securities to be recorded at fair market value and all unrealized holding gain and losses reflected in the shareholders’ equity. Under Canadian GAAP, long-term investments (available for sale securities) were carried at historical cost with losses in value being recognized in income only when the loss in value is other than temporary and increase in value being recognized only when realized. Marketable securities (trading securities) were carried at cost with realized gains and losses recognized in the statement of operations. The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The Company has adopted the Canadian standard for interim and annual financial statements effective January 1, 2007.
| (c) | Stock-based compensation plans: |
Commencing in 2002, the Company’s accounting policy to record compensation costs for stock options at fair value is comparable to the U.S. pronouncement under FASB No. 123. No stock options were granted in 2008, 2007 and 2006.
Certain investees of the company have differences between U.S. GAAP and Cdn GAAP accounting and disclosures. These differences affect the company’s equity share of their earnings.
| (e) | Financial statement presentation |
Certain financial statement presentation is required by US GAAP that is not required for Cdn. GAAP as follows:
| · | The deferred gain has been reclassified to reduce the corresponding note receivable |
| · | Disclosure of trade accounts payable separate from accrued liabilities |
| · | The statement of cash flows is prepared starting from net income rather than net income from continuing operations |
| (f) | There are no new material items to reconcile Canadian GAAP to U.S. GAAP that need to be quantified. |
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
The effect on the consolidated balance sheet of the difference between accounting principles generally accepted in Canada and those generally accepted in the United States is summarized as follows:
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| June 30, 2009 | | | | | | | | | |
| | | | | | | | | | |
| Short term investments (b) | | | 2,245,899 | | | | 403,410 | | | | 2,649,309 | |
| Income taxes recoverable (e) | | | - | | | | 10,157 | | | | 10,157 | |
| Current assets | | | 17,198,285 | | | | 413,567 | | | | 17,611,852 | |
| | | | | | | | | | | | | |
| Investments (d) | | | 293,599 | | | | 2,798 | | | | 296,397 | |
| Total assets | | | 17,491,884 | | | | 416,365 | | | | 17,908,249 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (e) | | | 120,593 | | | | (61,500 | ) | | | 59,093 | |
| Trade accounts payable (e) | | | - | | | | 61,500 | | | | 61,500 | |
| Income taxes payable (e) | | | 1,089,843 | | | | (1,089,843 | ) | | | - | |
| Current liabilities | | | 1,210,436 | | | | (1,089,843 | ) | | | 120,593 | |
| | | | | | | | | | | | | |
| Income taxes payable (e) | | | - | | | | 1,100,000 | | | | 1,100,000 | |
| | | | | | | | | | | | | |
| Total liabilities | | | 1,210,436 | | | | 10,157 | | | | 1,220,593 | |
| | | | | | | | | | | | | |
| Common stock (a) | | | 2,688,939 | | | | (226,420 | ) | | | 2,462,519 | |
| Retained earnings (a) | | | 13,391,272 | | | | 226,420 | | | | | |
| (b) | | | | | | | 573,818 | | | | | |
| (d) | | | | | | | 2,798 | | | | 14,194,308 | |
| Accumulated comprehensive income (b) | | | - | | | | (170,408 | ) | | | (170,408 | ) |
| Total shareholders’ equity | | | 16,281,448 | | | | 406,208 | | | | 16,687,656 | |
| Total liabilities and shareholders’ equity | | | 17,491,884 | | | | 416,365 | | | | 17,908,249 | |
| | | | | | | | | | | | | |
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
| | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued) |
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| December 31, 2008 | | | | | | | | | |
| Short term investments (b) | | | 2,880,094 | | | | 350,459 | | | | 3,230,553 | |
| Notes receivable (e) | | | 99,935 | | | | (42,050 | ) | | | 57,885 | |
| Income taxes recoverable (e) | | | - | | | | 10,435 | | | | 10,435 | |
| Current assets | | | 17,228,235 | | | | 318,844 | | | | 17,547,079 | |
| | | | | | | | | | | | | |
| Investments (d) | | | 292,427 | | | | 249 | | | | 292,676 | |
| Total assets | | | 17,520,662 | | | | 319,093 | | | | 17,839,755 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (e) | | | 121,181 | | | | (25,164 | ) | | | 96,017 | |
| Trade accounts payable (e) | | | - | | | | 25,164 | | | | 25,164 | |
| Income taxes payable (e) | | | 839,565 | | | | (839,565 | ) | | | - | |
| Current liabilities | | | 960,746 | | | | (839,565 | ) | | | 121,181 | |
| | | | | | | | | | | | | |
| Deferred gain (e) | | | 42,050 | | | | (42,050 | ) | | | - | |
| Income taxes payable (e) | | | - | | | | 850,000 | | | | 850,000 | |
| | | | | | | | | | | | | |
| Total liabilities | | | 1,002,796 | | | | (31,615 | ) | | | 971,181 | |
| | | | | | | | | | | | | |
| Common stock (a) | | | 2,688,939 | | | | (226,420 | ) | | | 2,462,519 | |
| Retained earnings (a) | | | 13,627,690 | | | | 226,420 | | | | | |
| (b) | | | | | | | 561,590 | | | | | |
| (d) | | | | | | | 249 | | | | 14,415,949 | |
| Accumulated comprehensive income | | | - | | | | (211,131 | ) | | | (211,131 | ) |
| Total shareholders’ equity | | | 16,517,866 | | | | 350,708 | | | | 16,868,574 | |
| Total liabilities and shareholders’ equity | | | 17,520,662 | | | | 319,093 | | | | 17,839,755 | |
| | | | | | | | | | | | | |
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) requires disclosure of comprehensive income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The following table presents comprehensive income and its components.
The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The CICA requires mandatory implementation of these standards for interim and annual financial statements relating to years commencing on or after January 1, 2007.
The effect on earnings for the above differences between accounting principles generally accepted in Canada and those generally accepted in the United States are summarized as follows:
CONSOLIDATED MERCANTILE INCORPORATED
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| Six month period ended June 30, 2009 | | | | | | | | | |
| Interest income (e) | | | 63,400 | | | | (63,400 | ) | | | - | |
| Investment income (loss) (e) | | | 226,153 | | | | (226,153 | ) | | | - | |
| | | | 289,553 | | | | (289,553 | ) | | | - | |
| | | | | | | | | | | | | |
| Expenses | | | (561,474 | ) | | | 250,000 | | | | (311,474 | ) |
| Earnings (loss) from operations before the following | | | (271,921 | ) | | | (39,553 | ) | | | (311,474 | ) |
| | | | | | | | | | | | | |
| Equity earnings of significantly influenced companies (d) | | | 1,172 | | | | 2,549 | | | | 3,721 | |
| Deferred gain recognized on sale of former consolidated subsidiary | | | 42,050 | | | | (42,050 | ) | | | - | |
| | | | 43,222 | | | | (39,501 | ) | | | 3,721 | |
| Earnings (loss) from operations | | | (228,699 | ) | | | (79,054 | ) | | | (307,753 | ) |
| Other income | | | | | | | | | | | | |
| Interest income (e) | | | - | | | | 63,400 | | | | 63,400 | |
| Investment income (loss) (e) | | | - | | | | 238,382 | | | | 238,382 | |
| | | | - | | | | 301,782 | | | | 301,782 | |
| Earnings (loss) before income taxes | | | (228,699 | ) | | | 222,728 | | | | (5,971 | ) |
| Income taxes | | | (7,719 | ) | | | (250,000 | ) | | | (257,719 | ) |
| Earnings (loss) for the period from continuing operations | | | (236,418 | ) | | | (27,272 | ) | | | (263,690 | ) |
| | | | | | | | | | | | | |
| Discontinued operations | | | | | | | | | | | | |
| Deferred gain recognized on sale of former consolidated subsidiary | | | - | | | | 42,050 | | | | 42,050 | |
| Net earnings (loss) for the period | | | (236,418 | ) | | | 14,778 | | | | (221,640 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Unrealized gain(loss) on available for sale securities (b) | | | - | | | | 40,723 | | | | 40,723 | |
| Comprehensive income (loss) for the period | | | (236,418 | ) | | | 55,501 | | | | (180,917 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | Canadian Accounting Principles $ | | | Increase (Decrease) $ | | | U.S. Accounting Principles $ | |
| Six month period ended June 30, 2008 | | | | | | | | | |
| Interest income (e) | | | 183,478 | | | | (183,478 | ) | | | - | |
| Investment income (loss) (e) | | | (69,476 | ) | | | 69,476 | | | | - | |
| | | | 114,002 | | | | (114,002 | ) | | | - | |
| | | | | | | | | | | | | |
| Expenses | | | (38,327 | ) | | | - | | | | (38,327 | ) |
| Earnings (loss) from operations before the following | | | 75,675 | | | | (114,002 | ) | | | (38,327 | ) |
| | | | | | | | | | | | | |
| Equity earnings of significantly influenced companies (d) | | | 2,864 | | | | 928 | | | | 3,792 | |
| | | | 2,864 | | | | 928 | | | | 3,792 | |
| Earnings (loss) from operations | | | 78,539 | | | | (113,074 | ) | | | (34,535 | ) |
| Other income | | | | | | | | | | | | |
| Interest income (e) | | | - | | | | 183,478 | | | | 183,478 | |
| Investment income (loss) (b) | | | - | | | | (69,476 | ) | | | | |
| (e) | | | | | | | 209,588 | | | | 140,112 | |
| | | | - | | | | 323,590 | | | | 323,590 | |
| Earnings (loss) before income taxes | | | 78,539 | | | | 210,516 | | | | 289,055 | |
| Income taxes | | | (1,597 | ) | | | - | | | | (1,597 | ) |
| Earnings (loss) for the period | | | 76,942 | | | | 210,516 | | | | 287,458 | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Unrealized gain(loss) on available for sale securities (b) | | | - | | | | (26,458 | ) | | | (26,458 | ) |
| Comprehensive income (loss) for the period | | | 76,942 | | | | 184,058 | | | | 261,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | June 30, 2009 | | | June 30, 2008 | |
| | | | | | | |
| Net earnings (loss) - U.S. GAAP | | $ | (221,641 | ) | | $ | 287,458 | |
| Earnings (loss) per share - U.S. GAAP | | | | | | | | |
| Basic | | $ | (0.044 | ) | | $ | 0.057 | |
| Diluted | | $ | (0.044 | ) | | $ | 0.057 | |
Reconciliation of U.S. GAAP Effective Income Tax Provision (Recovery):
| | | June 30, 2009 | | | June 30, 2008 | |
| | | $ | | | | $ | | |
| | | | | | | | | |
| Income tax computed at statutory combined income tax rates | | | (69,500 | ) | | | 26,310 | |
| Increase (decrease) in tax resulting from | | | | | | | | |
| Non-taxable equity items | | | (3,410 | ) | | | (1,270 | ) |
| Non-taxable portion of capital (gain) loss | | | (7,043 | ) | | | (23,469 | ) |
| Future tax benefits not recognized | | | 82,953 | | | | (1,571 | ) |
| Provision for additional tax liability on fiscal periods open for examination by major tax authorities | | | 250,000 | | | | - | |
| Other | | | 4,719 | | | | 1,597 | |
| Effective income tax provision (recovery) | | | 257,719 | | | | 1,597 | |
Reconciliation of Shareholders’ Equity:
| | | June 30, 2009 | |
| | | $ | | |
| | | | | |
| Shareholders’ equity based on Canadian GAAP | | | 16,281,448 | |
| Adjustment of short-term investments to cost basis | | | 403,410 | |
| Effect of GAAP differences in subsidiaries and effectively controlled companies on equity investment transactions | | | 2,798 | |
| Shareholders’ equity based on U.S. GAAP | | | 16,687,656 | |
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
Accounting policy
Accounts and notes receivable
Notes and accounts receivable are recorded under the terms of the agreement or at the invoiced amount, are periodically assessed for recoverability and an allowance for doubtful accounts established. A note or account receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest. Interest income is not recognized when a note or account receivable becomes uncollectible.
Notes receivable
For Canadian GAAP purposes the Company discloses the non-interest bearing note receivable as part of Notes Receivable and the deferred gain related thereto as a long-term liability. Under SAB 5 US GAAAP requires that the net amount be disclosed as an asset or liability as appropriate.
| | | June 30, 2009 | |
| | | | |
| Note receivable, non-interest bearing discounted at 17.5%, repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009 and each anniversary thereafter. The note is secured by the shares of a former consolidated subsidiary, Distinctive Designs Furniture Inc. (“Distinctive”) | | | 475,578 | |
| | | | | |
| Deferred gain on discounted note receivable (Note 5) | | | (378,903 | ) |
| | | | | |
| | | | 96,675 | |
| | | | | |
| Allowance for doubtful accounts | | | (96,675 | ) |
| | | | | |
| | | | - | |
Effective December 28, 2007, the Company sold all of its investment interest in Distinctive to Distinctive’s other major shareholder. The proceeds from the sale of the shares was satisfied by a promissory note issued by the purchaser. The note which is non-interest bearing has been discounted and is repayable in ten equal consecutive annual instalments of $100,000, with the first instalment due on January 15, 2009. This note is only due and payable in any given year if Distinctive continues its business. Over the past number of years, Distinctive incurred substantial operating losses. Distinctive continues to be impacted by a difficult retail environment as a result of competitive market conditions and the poor global economy and accordingly, management of the Company believes the above reserve is appropriate.
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | June 30, 2009 | | | June 30, 2008 | |
| | | | | | | |
| Distributions from limited partnerships | | $ | 14,264 | | | $ | 14,264 | |
| Gain on investments | | | 224,117 | | | | 125,848 | |
| | | | | | | | | |
| Investment income | | $ | 238,381 | | | $ | 140,112 | |
| | | | | | | | | |
| | Related Party Transactions |
The Company has outstanding balances and transactions with its consolidated subsidiary and former subsidiary, which have been eliminated on consolidation.
| | | June 30, 2009 | |
| | | $ | | |
2041804 Ontario Inc. (consolidated subsidiary) | | | | |
| | | | | |
| Non-interest bearing loan payable - denominated in U.S. Dollars | | | 15,909,270 | |
| Foreign exchange gains (losses) | | | (753,081 | ) |
Income Taxes
In accordance with FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), the Company classified interest and penalties associated with income tax positions in income tax expenses. The Company did not incur any interest and penalties with income tax positions for the years 2008, 2007 and 2006.
During the period ended June 30, 2009, the Company has had further communications with tax authorities regarding taxation years under review. Based on new information available, the Company believes that, more likely than not, its liability will increase by $250,000 and has provided for it in the statement of operations for the six month period ended June 30, 2009.
| Tax positions taken during prior periods | | $ | 850,000 | |
| | | | | |
| Changes during the period: | | | | |
| Increases in tax positions taken during the period | | | 250,000 | |
| Decreases in tax positions relating to settlements with tax authorities | | | - | |
| Reductions of tax positions as a result of a lapse of the statute of limitations | | | - | |
| Tax positions outstanding at the end of the period | | $ | 1,100,000 | |
In accordance with FIN 48, the Company has unrecognized tax benefits of approximately $1,100,000, including interest of $250,000 recognized in the consolidated statement of operations for the period ended June 30, 2009, that, if recognized, would affect the effective tax rate. Tax position for fiscal years 2004 and on still remain opened for examination by major tax authorities.
| | CONSOLIDATED MERCANTILE INCORPORATED |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
The Company’s consolidated balance sheets include the following financial instruments: cash, short-term investments, accounts receivable, notes receivable and accounts payable. The carrying amounts of current assets and liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
The Company adopted FAS 157 for its financial assets and liabilities as of January 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value instruments. The fair value hierarchy is as follows:
Level 1 – Quoted (unadjusted) prices for identical assets and liabilities in active markets
Level 2 – inputs other than quoted prices, included with Level 1 that are observable for the asset or liability, either directly or indirectly, including:
| · | Quoted prices for similar assets/liabilities in active markets; |
| · | Quoted prices for identical or similar assets in non-active markets (few transactions, limited information, non-current prices, high variable over time); |
| · | Inputs other than quoted prices that are observable for the asset/liability (e.g. interest rates, yield curves, volatilities, default rates, etc); and; |
| · | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 – Unobservable inputs that cannot be corroborated by other observable market data.
The Company’s assets are measured as follows:
Cash – the carrying value of cash approximates fair value as maturities are less than three months. Cash has been valued using the market value technique.
Short-term investments – The estimated fair values of the short term investments are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the price. Short-term investments are valued using the market value technique.
Notes receivable – The estimated fair value of the note receivable is based on unobservable inputs that cannot be corroborated by observed market data. Notes receivable are valued using the income approach technique.
| | | | | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | | | | | | | | |
| Assets: | | June 30, 2009 | | | Quoted Prices in Active Markets for Identical Level Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | | |
| Cash | | | 14,712,880 | | | $ | 14,712,880 | | | | - | | | | - | |
| Short-term investments | | | 2,245,899 | | | | 343,264 | | | | - | | | | 1,902,635 | |
| Investments | | | 293,599 | | | | - | | | | 293,599 | | | | - | |
| | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | |
| | | Short Term Investments | |
| | | | |
| Balance at beginning of period | | $ | 2,577,554 | |
| | | | | |
| Additional investments | | | - | |
| | | | | |
| Redemption of investments | | | (846,086 | ) |
| | | | | |
| Unrealized earnings from investments not included in earnings | | | 118,215 | |
| | | | | |
| Earnings from investments included in earnings | | | 52,952 | |
| | | | | |
| Balance at end of period | | $ | 1,902,635 | |
| | | | | |
Subsequent Events
Management has reviewed events subsequent to the balance sheet date through to August 14, 2009 and have concluded that there are no material reportable events.
Recent United States Accounting Pronouncements:
SFAS 168 The FASB has issued FASB Statement No. 168, The “FASB Accounting Standards CodificationTM” and the Hierarchy of Generally Accepted Accounting Principles. Statement 168 establishes the FASB Accounting Standards CodificationTM(Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Statement 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently evaluating the impact of this FSP on our consolidated financial statements.
SFAS No. 167 The FASB has issued the following two standards which change the way entities account for securitizations and special-purpose entities:
FASB Statement No. 166, Accounting for Transfers of Financial Assets;
FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Statements 166 and 167 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. We are currently evaluating the impact of this FSP on our consolidated financial statements.
SFAS No. 165 The FASB has issued FASB Statement No. 165, Subsequent Events. Statement 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Statement 165 provides:
The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;
CONSOLIDATED MERCANTILE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (continued)
The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively and has no material effect on our financial statements.
FSP FAS 107-1 and APB 28-1 In April 2009, FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amend FAS No. 107, Disclosures About Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1, are effective for interim periods ending after June 15, 2009 (our Fiscal 2010). We have had no material impact on our consolidated financial statements of this FSP as our current disclosures meet these requirements.
FAS No. 157-4 In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expand quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly. This pronouncement is effective beginning with the June 30, 2009 interim financial statements. The impact of FSP FAS No. 157-4 on our consolidated financial position, cash flows and results of operations will not be material
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The adoption of EITF 03-6-1 has had no material effect on our consolidated financial statements.
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company adopted these deferred provisions on January 1, 2009 which had no impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted these provisions on January 1, 2009 which had no impact on our consolidated financial statements .
Name and Incorporation
Genterra was amalgamated on December 31, 2003 pursuant to the OBCA under the name “Genterra Inc. ” The head office and registered office of Genterra is located at 106 Avenue Road, Toronto, Ontario, M5R 2H3.
Intercorporate Relationships
Genterra has four wholly-owned subsidiaries through which it hold its portfolio of real estate investments: Rallets Realty Inc., 127627 Ontario Limited, 767705 Ontario Limited and Ninety Ontario Street Inc., each of which was incorporated pursuant to the laws of the Province of Ontario, Canada. Genterra also has one wholly-owned subsidiary which is completely inactive, First Ontario Properties Inc., which was incorporated pursuant to the laws of the Province of Ontario, Canada.
General Development of the Business
History
Genterra is a real estate holding and management company which was created by the amalgamation of Mirtronics Inc. (“Mirtronics”) and Genterra Investment Corporation (“Genterra Investment”) by Articles of Amalgamation filed December 31, 2003. Mirtronics was incorporated under the Business Corporations Act (Ontario) by Articles of Incorporation dated March 20, 1985. By Articles of Amendment dated April 30, 1985, the name was changed to Mirtone International Inc. By Articles of Amendment dated February 2, 1988, the name was changed to International Mirtone Inc., and the company was recapitalized whereby each two issued shares, whether Common Shares or Class A Shares, was exchanged for one new Common Share and one Non-Voting, Non-Participating, Cumulative, Redeemable Preference Shares, Series 1 ("New Preference Shares").
By Articles of Amendment dated February 21, 1990, the name was changed to Mirtronics Inc.
By Articles of Amendment dated May 15, 1997, Mirtronics recapitalized whereby each New Preference Share was exchanged for one Non-Voting, Non-Participating, Non- Cumulative, Redeemable Convertible (until December 31, 1997) Class B Preference Share. Mirtronics was a holding company whose principal holding at the time of the aforementioned amalgamation was a 20.5% (31.1% fully diluted) equity interest in Synergx Systems Inc. (“Synergx”), a public company whose shares trade on NASDAQ. Synergx produces and services control systems for fire, life safety, commercial security and other purposes in the Metropolitan areas of New York City and Dallas, Texas.
Until September 30, 2002, Mirtronics effectively controlled Synergx through ownership of 31.3% of its issued shares (41% on a fully diluted basis). On September 30 2002, Synergx completed a private placement of shares and warrants to third parties, and on October 17, 2002, Mirtronics sold 140,000 Synergx shares to third parties. In May 2003 Mirtronics sold a further 30,000 shares of Synergx to a third party. As a result, Mirtronics holdings in Synergx were reduced to 20.5% (31.1% fully diluted), and Mirtronics no longer effectively controlled Synergx.
In December 2003, Mirtronics exercised a previously granted warrant to purchase an additional 620,000 common shares of Synergx. Genterra Investment held 161,668 common shares of Synergx at the date of the amalgamation which became the property of Genterra. In September 2004, Genterra sold 25,000 common shares of Synergx to third parties. During the fourth quarter ended September 30, 2005 Genterra sold 684,750 common shares of Synergx. As a result, at September 30, 2005, Genterra's percentage holding in Synergx was reduced to 17.13%, fully diluted. Accordingly, Genterra no longer exercised significant influence over the operations of Synergx and effective June 30, 2005 ceased recording its share of earnings of Synergx and accounted for this investment on the cost basis.
In January 2007, Genterra sold its entire remaining position in Synergx to an unrelated third party.
Genterra Investment was formed under the laws of the Province of Ontario by Articles of Amalgamation dated April 30, 1999, amalgamating Genterra Capital Incorporated and Unavest Capital Corp. under the name Genterra Investment Corporation. Genterra Capital Incorporated was formed by Articles of Amalgamation dated February 28, 1997, amalgamating Genterra Capital Corporation, First Corporate Capital Inc. and Mutec Equities Ltd. Genterra Capital Corporation was formed by Articles of Amalgamation dated September 1, 1995, amalgamating Equican Capital Corporation, Wendellco Realty Inc. and Glendale Realty Holdings Inc. Equican Capital Corporation was incorporated in Ontario by Articles of Amalgamation dated December 4, 1987.
In June 2008, Genterra completed the reorganization of its share capital and its acquisition of all of the outstanding shares of Ninety Ontario Street Inc. (“Ontario Street”). Both the reorganization and the acquisition were approved by shareholders at Genterra’s annual and special meeting held on March 4, 2008. As a result of the reorganization, Genterra’s Class A Subordinate Voting shares, Class B Multiple voting shares and the six classes of non-voting preferred shares were reclassified into one class of voting common shares and two classes of non-voting convertible Preference shares – the Class A Series 1 Preference shares and the Class B Preference shares. The new common shares were listed and began trading on the TSXV under the symbol “GIC” on June 10, 2008.
Description of the Business
Reference to Genterra includes the operations of its subsidiaries except where the context otherwise requires.
a) Real Estate:
| | Genterra's real estate investments are in Canada within the Southern Ontario region. Investments are primarily in industrial commercial real estate and financed through equity and commercial/institutional first mortgages. The properties are managed by Genterra in conjunction with third party property managers. Properties are acquired for both income and capital gain appreciation. Genterra primarily acquires property that provides cash flow coverage for financing purposes that may or may not provide a return on equity in the short term and with possible long term capital gain. The properties located at 140 Wendell Avenue and 90 Ontario Street are managed by Aristocrat Property Mangement Inc., as a third party property manager. |
| | There is no specific policy as to the amount or percentage of assets which are invested in any specific property. The real estate properties consist of the following: |
| Property | Character | Ownership | Occupancy | Number of tenants occupying more than 10% of the building | Business carried on from the building | Average effective annual rental per square foot |
140 Wendell Avenue Toronto, Ontario | Commercial | 100% owned - Mortgage of $2,736,570 @ Sept 30, 2009 | 89% | One | Warehousing and Insurance Agency | $7.16 |
200 Glendale Avenue N., Hamilton, Ontario | Commercial | 100% owned - Mortgage of $182,587 @ Sept 30, 2009 | 100% | One | Warehousing | $0.70 |
450 Dobbie Drive, Cambridge, Ontario | Commercial | 100 % owned - Clear Title | 100% | One | Manufacturer of Towels | $2.25 |
1095 Stellar Drive, Newmarket, Ontario | Commercial | 100% owned Mortgage of $743,782 @ Sept 30, 2009 | 100% | One | Health Club and Chiropracter | $12.92 |
90 Ontario Street, Toronto, Ontario | Commercial | 100% owned -Clear Title | 96% | None | Artistic Studios and Small Businesses | $14.02 |
| Leases expire before | Number of Tenants ** | Square Footage | Annual Basic Rental | Percentage of Annual Rental |
| | | | | |
| September 30, 2009 | 3 | 31,426 | 159,153 | 7.25% |
| September 30, 2010 | 57 | 56,605 | 729,536 | 33.21% |
| September 30, 2011 | 2 | 422,300 | 640,175 | 29.14% |
| September 30, 2012 | - | - | - | - |
| September 30, 2013 | - | - | - | - |
| September 30, 2014 | - | - | - | - |
| September 30, 2015 | - | - | - | - |
| September 30, 2016 | 1 | 113432 | 667,847 | 30.40% |
| September 30, 2017 | - | - | - | - |
| September 30, 2018 | - | - | - | - |
** 2009 represents 1 tenant at 90 Ontario Street, 1 tenant at 1095 Stellar Drive and 1 tenant at 140 Wendell Avenue
2010 represents 55 Tenants at 90 Ontario Street, 1 tenant at 1095 Stellar Drive and 1 tenant at 140 Wendell Avenue.
2011 represent 1 tenant at 200 Glendale Avenue and 1 tenant at 450 Debbie Drive
2016 represents 1 tenant at 140 Wendell Avenue
b) Investment in Real Estate Mortgages:
| | Genterra may invest in first or second mortgages and there is no requirement for such mortgages to be insured. As well there is no restriction on the proportion or amount of assets invested in any type of mortgage or any single mortgage. Mortgaging activities, if any, are committed to on a property by property one off basis. There is no program for actively creating, servicing and warehousing of mortgages or any requirement of portfolio turnover. Investments in mortgages are geared toward industrial and commercial properties. Genterra is a participant (together with other non-related parties) in a first mortgage construction loan with interest bearing at a floating rate of the greater of 9% or The Toronto Dominion Bank Posted Bank Rate of Prime plus 3%. The loan has a one year term. Genterra’s original participation in the mortgage was $477,250, $263,000 of which was outstanding as at September 30, 2009. |
c) Securities of or Interests in Persons Primarily Engaged in Real Estate Activities:
| | There is no restriction or requirement on the types of securities or interests in persons engaged in real estate activities in which Genterra may invest or in the amount or proportion of its assets which may be invested in each such type of security or interest. |
| | Primary investment activities do not include the investment in mortgage sales or in persons engaged in real estate activities and therefore there are no specific criteria for this category of investment. |
d) Investment in Other Securities:
| | Genterra may purchase bonds, common stock, or preferred stock. There is no restriction on industry groups or the percentage of its assets which it may invest. |
| | The purchases in securities may include but are not limited to those listed on national securities exchanges. There are no specific criteria or limitations on the investment in other securities. Genterra holds 97,500 Firm Capital Mortgage Trust Units, a Unit Trust listed on the Toronto Stock Exchange (TSX symbol: FC.UN). |
Legal Proceedings
In the opinion of management, Genterra is not currently involved in any litigation or proceedings which are material either individually or in the aggregate and to Genterra’s knowledge, no legal proceedings of a material nature involving Genterra are currently contemplated by any individuals, entities or governmental authorities.
In the normal course of its operations, subsidiaries and/or equity investees of Genterra have been or, from time to time, may be named in legal actions seeking monetary damages.
Exchange Controls
The Investment Canada Act (the "ICA"), which became effective on June 30, 1985, prohibits the acquisition of control of a Canadian business enterprise in Canada by non-Canadians without prior consent of the Investment Canada Agency (with ultimate appeal to the Federal Cabinet), unless such acquisition is exempt under the provisions of the ICA. Both acquisition of natural resource properties and acquisition of producing properties may be considered to be the acquisition of control of a Canadian business enterprise for ICA purposes. The ICA also covers acquisition of control of Canadian corporate enterprises, whether by purchase of assets or shares. As at December 31, 2008, all of the directors of the Company are, and 96.1% of its voting shares were owned by Canadians. Genterra is satisfied that it complies with ICA at present and accordingly is not a non-Canadian person as defined in ICA.
The ICA will substantially reduce the regulatory requirements for acquisition of interests in Canadian businesses under prior legislation, most importantly, (i) by providing that foreign investments below specified threshold sizes (generally, direct acquisitions of Canadian business with gross assets less than $5 million, or "indirect acquisitions" of businesses with gross assets less than $50 million) have only a notification, as opposed to a substantive review, requirement, and (ii) by liberalizing the review standards for approval.
Apart from the ICA, there are no other limitations on the right of non-resident or foreign owners to hold or vote securities imposed by Canadian law or the Articles of Incorporation of Genterra. There are no other decrees or regulations in Canada which restrict the export or import of Capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of Genterra’s securities except as discussed at Paragraph E, "Taxation."
Taxation
The following is a general discussion of the income tax aspects under Canadian law relating to ownership of Genterra’s Common Shares, Genterra Class A Shares and Genterra Class B Shares. These income tax aspects will vary according to the circumstances of each shareholder, including his place of residence and the place in which he carries on business or has a permanent establishment, as the case may be, so that a shareholder must investigate the tax consequences of his personal situation by obtaining advice from his own tax advisor. This summary does not consider U.S. federal or state income tax provisions or Canadian Provincial income tax provisions, which may be at variance with the provisions contained in the Income Tax Act (Canada) and is not intended to be, nor should it be construed as, legal or tax advice.
Dividends paid to a non-resident of Canada, including distributions or redemptions which are treated as dividends and certain stock dividends, are subject to Canadian income tax. The Canadian non-resident withholding tax would be withheld by the Company who would remit only the net amount to the shareholder. By virtue of Article X of the Canada United States Tax Convention, which came into force on August 16, 1984 (and was amended by the Protocol signed on September 21, 2007), the rate of tax for dividends paid to a resident of the U.S. is limited to 15%. The withholding tax rate is reduced to 5% for a corporate shareholder owning at lease 10% of the voting stock of the Company, either directly or through an entity that is considered fiscally transparent under the laws of the United States and is not a resident of Canada. In the absence of any treaty provisions, the rate of tax imposed would be 25% of the applicable amounts.
Stock dividends received by non-residents from Genterra would be subject to Canadian non-resident withholding tax as noted above, to the extent that the paid-up capital of Genterra has been increased as a result of the stock dividend.
Gain from the sale of Common Shares and Preference Shares of Genterra by a non-resident of Canada will not be subject to Canadian tax provided the shareholder has not held a "substantial interest" (25% or more of the shares of any class of Company stock) in the Company, at any time in the five preceding years. By virtue of Article XIII of the Canada-United States Tax Convention, shareholders who are resident in the United States and hold a substantial interest in Genterra’s Common Shares or Preference Shares will not be subject to Canadian tax on gain from sale of the shares of Genterra provided that the value of the shares does not derive principally from real property situated in Canada.
Nature Of Trading Markets
Effective March 5, 2004, Genterra's Class A shares were listed for trading on the TSX Venture Exchange until June 9, 2008 when, pursuant to a reorganization they were converted into Common shares which began trading on June 10, 2008.
The following details (i) for the five most recent full financial years: the high and low market prices; (ii) for the two most recent full financial years: the high and low market prices for each full financial quarter; and (iii) for the most recent six months.
TSX Venture Exchange (symbol: GIC.V)
Annual Information
| | Class A/Common Shares |
| | HIGH | LOW |
| 2004 | $0.30 | $0.05 |
| 2005 | $0.35 | $0.09 |
| 2006 | $0.43 | $0.23 |
| 2007 | $0.55 | $0.25 |
| 2008 | $0.50 | $0.26 |
Quarterly Information
| | HIGH | LOW |
| December 31, 2007 | $0.375 | $0.26 |
| March 31, 2008 | $0.50 | $0.30 |
| June 30, 2008 | $0.36 | $0.34 |
| September 30, 2008 | $0.365 | $0.30 |
| December 31, 2008 | $0.30 | $0.20 |
| March 31, 2009 | $0.75 | $0.23 |
| June 30, 2009 | $0.74 | $0.50 |
| September 30, 2009 | $0.70 | $0.60 |
| | | |
Monthly Information
| | HIGH | LOW |
| January 2009 | $0.25 | $0.23 |
| February 2009 | $0.23 | $0.23 |
| March 2009 | $0.75 | $0.235 |
| April 2009 | $0.74 | $0.60 |
| May 2009 | $0.65 | $0.55 |
| June 2009 | $0.74 | $0.50 |
| July 31, 2009 | $0.65 | $0.60 |
| August 31, 2009 | $0.70 | $0.60 |
| September 30, 2009 | $0.65 | $0.60 |
Non-NASDAQ Over the Counter (symbol: GICJF.PK)
Genterra's Class A shares were quoted in the United States on the OTC Bulletin Board until June 9, 2008 when, pursuant to a reorganization they were converted into Common shares which began trading on June 10, 2008.
Genterra Inc. currently has 19,339,211 common shares outstanding of which 754,913 (3.9%) are held by U.S. residents.
The following details (i) for the five most recent full financial years: the high and low market prices; (ii) for the two most recent full financial years: the high and low market prices for each full financial quarter; and (iii) for the most recent six months.
Annual Information
| | Class A Shares |
| | HIGH | LOW |
| 2004 | $0.12 | $0.0823 |
| 2005 | $0.29 | $0.088 |
| 2006 | $0.31 | $0.191 |
| 2007 | $0.43 | $0.2685 |
| 2008 | $0.361 | $0.16 |
Quarterly Information
| | HIGH | LOW |
| December 31, 2007 | $0.371 | $0.2825 |
| March 31, 2008 | $0.361 | $0.3245 |
| June 30, 2008 | $0.3395 | $0.3265 |
| September 30, 2008 | $0.331 | $0.2742 |
| December 31, 2008 | $0.1865 | $0.16 |
| March 31, 2009 | $0.44 | $0.16 |
| June 30, 2009 | $0.53 | $0.44 |
| September 30, 2009 | $0.55 | $0.51 |
Monthly Information
| | HIGH | LOW |
| January 2009 | $0.19 | $0.18 |
| February 2009 | $0.18 | $0.16 |
| March 2009 | $0.44 | $0.16 |
| April 2009 | $0.47 | $0.44 |
| May 2009 | $0.53 | $0.47 |
| June 2009 | $0.52 | $0.51 |
| July 31, 2009 | $0.55 | $0.51 |
| August 31, 2009 | $0.55 | $0.54 |
| Deptember 30, 2009 | $0.55 | $0.55 |
| Selected Financial Information |
The following unaudited financial information was derived directly and indirectly from Genterra’s financial statements which are included herein, beginning on page 139.
| | (All figures in Canadian Dollars) |
| | (Prepared in accordance with Canadian G.A.A.P.) |
| Selected Financial Data | | | | | | | | | | | | | | | | | | | | | |
| | | 6 Months ended March 31, | | | Year ended December 31, | |
| | | 2009 | | | 2008 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Sales | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Sales | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit* | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rental and investment revenue | | | 1,324,491 | | | | 1,396,340 | | | | 2,783,158 | | | | 3,067,405 | | | | 3,564,344 | | | | 3,155,003 | | | | 2,276,247 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | (1,268,914 | ) | | | (1,185,441 | ) | | | (2,634,487 | ) | | | (3,069,357 | ) | | | (2,332,423 | ) | | | (2,613,495 | ) | | | (1,806,566 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) before the undernoted | | | 55,577 | | | | 210,899 | | | | 148,671 | | | | (1,952 | ) | | | 1,231,921 | | | | 541,508 | | | | 469,681 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in earnings (loss) of former investee | | | - | | | | - | | | | - | | | | - | | | | - | | | | (22,437 | ) | | | 214,691 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss on issuance of shares by former equity investee | | | - | | | | - | | | | - | | | | - | | | | - | | | | (21,681 | ) | | | (87,646 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain on sale of shares of former equity investee | | | - | | | | - | | | | - | | | | 1,158,950 | | | | - | | | | 1,044,942 | | | | 44,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax recovery (expense) | | | (77,975 | ) | | | 23,868 | | | | 153,988 | | | | (277,414 | ) | | | (346,808 | ) | | | (467,477 | ) | | | 148,489 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Earnings (loss) for the year | | $ | (22,398 | ) | | $ | 234,767 | | | $ | 302,659 | | | $ | 879,584 | | | $ | 885,113 | | | $ | 1,074,855 | | | $ | 789,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) per share for the year | | $ | (0.001 | ) | | $ | 0.012 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.05 | | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fully diluted earnings (loss) per share for the year | | $ | (0.001 | ) | | $ | 0.012 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.05 | | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding during the year | | | 19,339,211 | | | | 18,798,557 | | | | 18,922,155 | | | | 18,793,385 | | | | 18,793,385 | | | | 18,793,385 | | | | 17,320,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* Gross profit is not a recognized measure under Canadian Generally Accepted Accounting Principles and readers are cautioned that Gross Profit should not be considered as an alternative to net earnings (loss) or cash from operating activities as an indicator of the Company's performance or cash flows. The Company's method for calculating Gross Profit may differ from other companies and may not be comparable to measures used by other companies. Gross Profit is net earnings (loss) before other rental and investment income, expenses, equity in earnings (loss) of former investee, loss on issue of shares by former equity investee, gain on sale of shares of former equity investee and income taxes (recovery).
Five year historical data
Years ended September 30
| Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | |
| | | As at March 31, | | | As at September 30, | |
| | | 2009 | | | 2008 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| Working capital | | $ | 9,820,149 | | | $ | 10,369,120 | | | $ | 9,545,491 | | | $ | 10,102,541 | | | $ | 7,346,719 | | | $ | 6,546,348 | | | $ | 1,255,633 | |
| Total assets | | | 27,333,806 | | | | 22,310,502 | | | | 27,313,656 | | | | 22,283,263 | | | | 22,558,071 | | | | 21,608,140 | | | | 20,437,124 | |
| Long-term debt | | | 3,516,799 | | | | 3,807,085 | | | | 3,662,939 | | | | 4,004,987 | | | | 4,480,556 | | | | 4,932,970 | | | | 5,128,698 | |
Retractable preference shares | | | 5,186,883 | | | Nil | | | | 4,991,819 | | | Nil | | | Nil | | | Nil | | | Nil | |
| Shareholders' equity | | | 15,915,976 | | | | 17,026,301 | | | | 15,938,374 | | | | 16,791,534 | | | | 15,904,900 | | | | 15,019,787 | | | | 13,625,916 | |
Cash dividends per Common share | | Nil | | | Nil | | | Nil | | | Nil | | | Nil | | | Nil | | | Nil | |
The effect of the differences between accounting principles generally accepted in Canada and those accepted in the United States on working capital, total assets, long-term debt, shareholders’ equity, and cash dividend per share as described in Note 15 to the Audited Consolidated Financial Statements for six months ended March 31, 2009 and 2008 and the five years ended September 30, 2008, 2007, 2006, 2005 and 2004 are summarized as follows :
| | | Canadian Accounting | | | Increase | | | U.S. Accounting | |
| Six months ended March 31, 2009 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | |
| Working capital | | $ | 9,820,149 | | | $ | 166,299 | | | $ | 9,986,448 | |
| | | | | | | | | | | | | |
| Total assets | | | 27,333,806 | | | | (5,243,886 | ) | | | 22,089,920 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 3,516,799 | | | | - | | | | 3,516,799 | |
| | | | | | | | | | | | | |
| Retractable preference shares | | | 5,186,883 | | | | - | | | | 5,186,883 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 15,915,976 | | | | (4,232,277 | ) | | | 11,683,699 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | Canadian Accounting | | | Increase | | | U.S. Accounting | |
| Six months ended March 31, 2008 | | Principles | | | (Decrease) | | | Principles | |
| Working capital | | $ | 10,369,120 | | | $ | 281,565 | | | $ | 10,650,685 | |
| | | | | | | | | | | | | |
| Total assets | | | 22,310,502 | | | | 730,525 | | | | 23,041,027 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 3,807,085 | | | | - | | | | 3,807,085 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 17,026,301 | | | | 513,084 | | | | 17,539,385 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | Canadian | | | | | | U.S. | |
| | | Accounting | | | Increase | | | Accounting | |
| Year ended September 30, 2008 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | |
| Working capital | | $ | 9,545,491 | | | $ | 50,714 | | | $ | 9,596,205 | |
| | | | | | | | | | | | | |
| Total assets | | | 27,313,656 | | | | (5,406,020 | ) | | | 21,907,636 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 3,662,939 | | | | - | | | | 3,662,939 | |
| | | | | | | | | | | | | |
| Retractable preference shares | | | 4,991,819 | | | | - | | | | 4,991,819 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 15,938,374 | | | | (4,361,198 | ) | | | 11,577,176 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | | | | | | | | | | | |
| | | Canadian | | | | | | U.S. | |
| | | Accounting | | | Increase | | | Accounting | |
| Year ended September 30, 2007 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | |
| Working capital | | $ | 10,102,541 | | | $ | 221,771 | | | $ | 10,324,312 | |
| | | | | | | | | | | | | |
| Total assets | | | 22,283,263 | | | | 911,748 | | | | 23,195,011 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 4,004,987 | | | | - | | | | 4,004,987 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 16,791,534 | | | | 454,488 | | | | 17,246,022 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Canadian | | | | | | | U.S. |
| | | Accounting | | | Increase | | | Accounting | |
| Year ended September 30, 2006 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | | | | |
| Working capital | | $ | 7,346,719 | | | $ | 177,608 | | | $ | 7,524,327 | |
| | | | | | | | | | | | | |
| Total assets | | | 22,558,071 | | | | 1,238,514 | | | | 23,796,585 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 4,480,556 | | | | - | | | | 4,480,556 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 15,904,900 | | | | 365,827 | | | | 16,270,727 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Canadian | | | | | | | U.S. | |
| | | Accounting | | | Increase | | | Accounting | |
| Year ended September 30, 2005 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | | | | |
| Working capital | | $ | 6,546,348 | | | $ | 109,156 | | | $ | 6,655,504 | |
| | | | | | | | | | | | | |
| Total assets | | | 21,608,140 | | | | 1,629,479 | | | | 23,237,619 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 4,932,970 | | | | - | | | | 4,932,970 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 15,019,787 | | | | 1,099,604 | | | | 16,119,391 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | | | | | | | | | | | |
| | | Canadian | | | | | | U.S. | |
| | | Accounting | | | Increase | | | Accounting | |
| Year ended September 30, 2004 | | Principles | | | (Decrease) | | | Principles | |
| | | | | | | | | | | |
| Working capital | | $ | 1,255,633 | | | $ | 59,257 | | | $ | 1,314,890 | |
| | | | | | | | | | | | | |
| Total assets | | | 20,437,124 | | | | 578,512 | | | | 21,015,636 | |
| | | | | | | | | | | | | |
| Long-term debt | | | 5,128,698 | | | | - | | | | 5,128,698 | |
| | | | | | | | | | | | | |
| Shareholders' equity | | | 13,625,916 | | | | 294,950 | | | | 13,920,866 | |
| | | | | | | | | | | | | |
| Cash dividends per Common share | | Nil | | | | | | | Nil | |
| | | | | | | | | | | | | |
| | | Six Months ended March 31, | | | Fiscal Year Ended September 30 | |
| | | (Reconciled to U.S. GAAP) | |
| | | 2009 | | | 2008 | | | 2008 | | | 2007 | | | 2006 (Restated*) | | | 2005 (Restated*) | | | 2004 (Restated*) | |
| Revenue | | $ | 1,539,205 | | | $ | 1,589,028 | | | $ | 3,164,545 | | | $ | 3,334,158 | | | $ | 3,873,935 | | | $ | 3,723,741 | | | $ | 2,865,578 | |
| Earnings (loss) from operations | | $ | 597,265 | | | $ | 112,757 | | | $ | 302,518 | | | $ | (139,753 | ) | | $ | 1,161,245 | | | $ | 1,486,401 | | | $ | 761,598 | |
| Earnings (loss) from continuing Operations | | $ | 301,587 | | | $ | 293,363 | | | $ | 604,389 | | | $ | 943,953 | | | $ | 949,372 | | | $ | 1,197,781 | | | $ | 850,624 | |
| Earnings (loss) per share from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.006 | | | $ | 0.016 | | | $ | 0.03 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.06 | | | $ | 0.04 | |
| Diluted | | $ | 0.006 | | | $ | 0.016 | | | $ | 0.03 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.06 | | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
*Refer to Note 15 to the Audited Consolidated Financial Statements for the year ended September 30, 2008.
Property, Plants And Equipment
Rental Real Estate (All figures disclosed using Canadian GAAP)
| | | | Land | | | Building | | | Accumulated | | | Net | |
| Address | City | | Cost | | | Cost | | | Depreciation | | | Book Value | |
| 450 Dobbie Dr | Cambridge | | | 585,000 | | | | 4,649,000 | | | | (979,091 | ) | | | 4,254,909 | |
| 200 Glendale Ave | Hamilton | | | 305,000 | | | | 1,468,000 | | | | (291,210 | ) | | | 1,481,790 | |
| 140 Wendell Ave | Toronto | | | 560,000 | | | | 4,756,589 | | | | (1,075,320 | ) | | | 4,241,269 | |
| 1095 Stellar Dr | Newmarket | | | 209,462 | | | | 1,730,857 | | | | (1,036,979 | ) | | | 903,340 | |
| 90 Ontario St | Toronto | | | 3,703,000 | | | | 2,016,744 | | | | (37,128 | ) | | | 5,682,616 | |
| | | | | 5,362,462 | | | | 14,621,190 | | | | (3,419,728 | ) | | | 16,563,924 | |
Fair Market Values of Real Estate (All figures disclosed using Canadian GAAP)
| | | | Appraisal | | Fair Market | | | Increase | |
| Address | City | Appraiser | Date | | Value | | | Over NBV | |
| 450 Dobbie | Cambridge | Integris | 15 July 08 | | | 5,800,000 | | | | 1,545,091 | |
| 200 Glendale | Hamilton | Real | 1 Aug 08 | | | 1,650,000 | | | | 168,210 | |
| 140 Wendell | Toronto | Estate | 1 Aug 08 | | | 9,700,000 | | | | 5,458,731 | |
| 1095 Stellar | Newmarket | Counsellors | 1 Aug 08 | | | 2,350,000 | | | | 1,446,660 | |
| 90 Ontario | Toronto | MacKenzie | 21 Nov 07 | | | 5,600,000 | | | | (82,616 | ) |
| | | | | | | 25,100,000 | | | | 8,536,076 | |
First Mortgages Payable
| | | | | Current | | | Term | | | | |
| Address | City | Lender | | Portion | | | Portion | | | Total | |
| 200 Glendale | Hamilton | Laurentian | | | 62,602 | | | | 119,985 | | | | 182,587 | |
| 140 Wendell | Toronto | CIBC | | | 178,292 | | | | 2,558,278 | | | | 2,736,570 | |
| 1095 Stellar | Newmarket | BDC | | | 53,436 | | | | 690,346 | | | | 743,782 | |
| | | | | | 294,330 | | | | 3,368,609 | | | | 3,662,939 | |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Genterra is a real estate holding firm that owns and manages a portfolio of five buildings in Ontario, consisting of a total of 743,000 Square Feet ("SF"), 430,000 SF of which is industrial and the remaining 313,000 SF is commercial. The purpose is to deliver a reliable and growing cash flow with the potential for future capital appreciation over the longer term. The Company accomplishes this by following a strategy of focusing on owning, developing and operating commercial and industrial real estate. Genterra has grown its business by using prudent strategies, core competencies, conservative financial leverage and by adapting to changing trends in commercial and industrial real estate. Genterra’s investment strategy is to focus on stable, lower risk real estate properties in order to create stable cash flows and over time capital appreciation.
The tightening in the credit markets arising from the current economic conditions has created an environment where buyers, who were previously active acquirers, may no longer be able to participate and where sellers may view the disposition of real estate as a means of raising capital. This environment should create more opportunities to acquire real estate on an opportunistic basis. As part of this process, Genterra’s Board of Directors have after review, decided that an amalgamation with CMI will be in the best interests of Genterra as it amongst other things, will enable Genterra Shareholders to be part of a larger corporation with larger more varied assets, a larger equity and income base, greater opportunities and reduced operating costs, all of which should assist in facilitating the financing of future growth and expansion. Genterra’s Board believe that with the Amalgamation, GCI’s strengthened balance sheet will allow it to analyze larger potential real estate investments and to capitalize on favourable market conditions and to expand GCI’s real estate income producing portfolio.
The following discussion sets forth items derived from the consolidated statements of operations for the years ended September 30, 2008, 2007 and 2006 prepared in accordance with Canadian GAAP. A summary of the differences between Canadian and US accounting principles for the fiscal year ended September 30, 2008 is detailed in Note 15 to the Consolidated Financial Statements included herein.
| | | Year Ended September 30 | |
| | | 2008 | | | 2007 | | | 2006 | |
| Revenue | | $ | 2,783,158 | | | $ | 3,067,405 | | | $ | 3,564,344 | |
| Administrative and general expenses | | | (782,709 | ) | | | (533,952 | ) | | | (504,343 | ) |
| Bad debt recovery | | | - | | | | - | | | | 228,472 | |
| Gain (loss) on foreign exchange | | | 264,872 | | | | (625,215 | ) | | | (85,396 | ) |
| Rental real estate expenses | | | (1,266,062 | ) | | | (1,107,517 | ) | | | (1,095,808 | ) |
| Other expenses | | | (850,588 | ) | | | (802,673 | ) | | | (875,348 | ) |
| Gain on sale of investment | | | - | | | | 1,158,950 | | | | - | |
| Earnings (loss) before income taxes | | | 148,671 | | | | 1,156,998 | | | | 1,231,921 | |
| Income taxes | | | 153,988 | | | | (277,414 | ) | | | (346,808 | ) |
Net earnings (loss) | | $ | 302,659 | | | $ | 879,584 | | | $ | 885,113 | |
Review of Year-End Results September 30, 2008 and 2007
Revenue. Rental revenue for the year ended September 30, 2008 was $2,613,587, an increase of $38,384 as compared to $2,575,203 for the comparable 2007 period. The increase in rental revenue was attributable to the acquisition of Ontario Street and the increase in rent resulting from the finalization of lease negotiations with a tenant at Genterra’s Wendell Avenue property. This increase was offset by the 2007 renegotiation of leases with Genterra’s large single purpose tenant on its properties located in Cambridge and Hamilton at rates lower than the pre-existing lease and the short term vacancies at the Wendell Avenue property. Investment income for the year ended September 30, 2008 was $169,571 compared to $492,202 for the comparable 2007 period. The decrease in investment income was due to the poor performance of the equity markets during the period.
Administrative Expenses. Administrative expenses include fees for management and administrative services, legal and audit fees, financing expenses and public company shareholder costs. Administrative expenses for the year ended September 30, 2008 were $782,709 compared to $533,952 in the comparable 2007 period. The increase for the year ended September 30, 2008 is due to the inclusion of a bonus paid to an officer of Genterra, additional expenses associated with the purchase of Ontario Street and increased costs associated with public company regulatory compliance requirements.
Gain on Foreign Exchange. Genterra holds certain amounts of its cash in United States dollars. Genterra experienced a foreign exchange gain of $264,872 during the year ended September 30, 2008. This compares to a foreign exchange loss of $625,215 for the comparable 2007 period. The gain for the year ended September 30, 2008 resulted from the strengthening of the United States Dollar.
Rental Real Estate Operating Expenses. Rental real estate operating expenses for the year ended September 30, 2008 were $1,266,062 compared to $1,107,517 for the comparable 2007 period. The increase in rental real estate operating expenses was primarily due to the acquisition of Ontario Street during the year.
Other Expenses. Interest expense for the year ended September 30, 2008 was $204,136 compared to $230,698 for the comparable 2007 period. Amortization for the year ended September 30, 2008 was $544,633 compared to $571,975 for the comparable 2007 period. On June 27, 2008 Genterra issued retractable preference shares for the purchase of Ontario Street. These shares are classified as debt and the cumulative dividends are recorded as an expense of operations. During the year ended September 30, 2008 Genterra recorded cumulative dividends of $101,819 on these preference shares.
Income Tax Provision. During the twelve month period ended September 30, 2008 Genterra recorded an income tax recovery of $153,988. This compares to an income tax expense of $277,414 for the comparable 2007 period. The year ended September 30, 2008 includes a future income tax recovery of approximately $194,000 to reflect the January 1, 2008 reduction of
statutory income tax rates from 36.1% to the substantively enacted tax rate of 29%. The effective tax rates were (103.6)% and 24.0% for the years ended September 30, 2008 and 2007 respectively. The difference between Genterra’s statutory tax rate and its effective tax rate is due to permanent differences primarily associated with the tax treatment of dividends on retractable preference shares and capital gain transactions and the above noted tax recovery.
Net Earnings. Net earnings for the year ended September 30, 2008 was $302,659 compared to net earnings of $879,584 for the comparable 2007 period. The 2008 results were impacted by the poor performance of equity markets during the period, increased administrative expenses, the dividends on the cumulative retractable preference shares, a gain on foreign exchange and a future tax recovery due to tax rate adjustments. The 2007 net earnings included approximately $950,000 (net of taxes) from a gain on the sale of Genterra’s investment in Synergx Systems Inc (“Synergx”).
Inflation. Inflation has not had a material impact on the results of Genterra’s operations during the periods under review and it is not anticipated to materially impact Genterra’s operations during the current fiscal year.
Review of Year-End Results September 30, 2007 and 2006
Revenue. Rental revenue for the year ended September 30, 2007 was $2,575,203, a decrease of $579,618 as compared to $3,154,821 for the comparable 2006 period. The decrease in rental revenue compared to the 2006 period was attributable to the renegotiation of leases with the Company’s large single purpose tenant on its properties located in Cambridge and Hamilton at rates lower than the pre-existing lease and the short term vacancies at its Wendell Avenue property. Investment income for the year ended September 30, 2007 was $492,202 as compared to $409,523 for the comparable 2006 period. The increase in annual investment income is due to the increase in the cash and marketable securities and the results achieved from the investment portfolio.
Administrative Expenses. Administrative expenses include fees for management and administrative services, legal and audit fees, financing expenses and public company shareholder costs. Administrative expenses for the year ended September 30, 2007 increased to $533,952 from $504,343 in the comparable 2006 period. Administrative expenses for the 2007 period were impacted by increased costs associated with environmental and public company regulatory compliance requirements.
Bad Debt Recovery. The Company was the holder of a second mortgage on a parcel of vacant land. Due to the inability of the mortgagee to service the mortgage, the Company recorded a reserve in prior years against the collectability of the accrued interest on the mortgage. During the period the Company agreed to release the mortgagee from any further obligation in exchange for full payment of the principal amount of this mortgage along with the accrued interest. Accordingly, in 2006 the Company reversed its reserve of $228,472 against the collectability of the interest on this mortgage.
Loss on Foreign Exchange. The Company holds certain amounts of its cash in United States dollars. Due to the substantial strengthening of the Canadian Dollar during the current period, the Company incurred a foreign exchange loss of $625,215 for the year ended September 30, 2007. This compares to a foreign exchange loss of $85,396 for the year ended September 30, 2006.
Rental Real Estate Operating Expenses. Rental real estate operating expenses for the year ended September 30, 2007 were $1,107,517 as compared to $1,095,808 for the comparable 2006 period. The increase in rental real estate operating expenses was primarily due to the increased cost of utilities during the year.
Other Expenses. Interest expense for the year ended September 30, 2007 was $230,698 and $256,741 for the comparable 2006 period. Amortization for the year ended September 30, 2007 was $571,975 and $618,607 for the comparable 2006 period.
Income Tax Provision. During the twelve month period ended September 30, 2007 the Company recorded income taxes of $277,414. This compares to an expense of $346,808 for the comparative 2006 period. The effective tax rates were 24.0% and 28.2% for the year ended September 30, 2007 and 2006 respectively. The difference between the Company’s statutory tax rate and its effective tax rate is due to permanent differences primarily associated with the tax treatment of capital gain transactions.
Net Earnings. Net earnings for the year ended September 30, 2007 was $879,584 as compared to net earnings of $885,113 for the comparable 2006 period. The 2007 results were impacted by approximately $950,000 (net of taxes) from a gain on the sale of the Company’s investment in Synergx and the increased performance of the Company’s investment portfolio. This was offset by the foreign exchange loss and increased costs resulting from regulatory compliance requirements. The 2006 net earnings were positively impacted by the bad debt recovery.
Inflation. Inflation has not had a material impact on the results of the Company’s operations during the periods under review and it is not anticipated to materially impact the Company’s operations during the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES 2008 and 2007
Genterra's principal sources of liquidity are cash on hand, marketable securities and cash flow from rental, finance and investment operations.
Genterra's working capital amounted to $9,545,491 at September 30, 2008, compared to $10,102,541 at September 30, 2007. The ratio of current assets to current liabilities was 13.1:1 at September 30, 2008 and 16.1:1 at September 30, 2007. The decrease in working capital and the current ratio is primarily due to the cash utilized to redeem the shares of shareholders dissenting to Genterra’s recent reorganization, the costs associated with the reorganization and the acquisition of Ontario Street.
During the year ended September 30, 2008, Genterra’s cash position decreased by $1,111,339 to $6,824,707. The change was due to the net result of the following increases and utilizations:
| Ø | Operating Activities increased cash by $391,151. This was as a result of $678,402 in cash generated from operations and $287,251 of cash utilized for the changes in non-cash components of working capital. |
| Ø | Financing Activities utilized $1,470,268 of cash. Genterra utilized $342,048 to make scheduled repayments of mortgage obligations, $295,240 for reorganization costs and $934,799 for the purchase of shares from shareholders dissenting to the reorganization. Genterra incurred dividends on its newly issued retractable preferred shares of $101,819. |
| Ø | Investing Activities decreased cash by $32,222. Genterra utilized $365,125 in cash for investment in a mortgage receivable and $13,375 in cash for additions to rental real estate properties. Genterra realized $274,343 from a decrease in marketable securities and acquired cash of $71,935 on the acquisition of Ontario Street. |
| Ø | Cash and cash equivalents were positively impacted by a $264,845 unrealized foreign exchange gain. |
The following table provides a summary of certain information with respect to Genterra’s capital structure and financial position:
| | September 30, 2008 | | September 30, 2007 |
Net debt : Shareholders’ equity | 0.54 : 1 | | 0.24 : 1 |
Net debt : Total capitalization | 0.35 : 1 | | 0.19 : 1 |
Genterra anticipates that it will require approximately $3,000,000 in order to meet its ongoing expected costs for the next twelve months. These costs include real estate operating expenses, fees for management and administrative services provided to Genterra, legal and audit fees, financing expenses, public company shareholder costs and income taxes. Genterra expects to generate the revenue required in order to service these expenditures from rental revenue from existing leased real estate, finance and investment income. Genterra also has scheduled long-term debt repayments of approximately $295,000 in the next twelve months. Cash flow from operations will be used to finance these regularly scheduled debt repayments.
LIQUIDITY AND CAPITAL RESOURCES 2007 AND 2006
The Company's principal sources of liquidity are cash on hand, marketable securities and cash flow from rental, finance and investment operations.
The Company's working capital amounted to $10,102,541 at September 30, 2007, compared to $7,346,719 at September 30, 2006. The ratio of current assets to current liabilities was 16.0:1 at September 30, 2007 and 5.9:1 at September 30, 2006. The increase in working capital is primarily due to the cash generated from rental operations, investment income and the proceeds from the sale of the Company’s investment in Synergx Systems Inc. (“Synergx”). The working capital ratio was positively impacted by the reduction in income taxes payable and trade accounts payable during the period and the cash proceeds realized on the sale of Synergx.
During the year ended September 30, 2007, the Company’s cash position increased by $2,433,491 to $7,936,046. The change was due to the net result of the following increases and utilizations:
| Ø | Operating Activities increased cash by $57,434. This was as a result of $642,534 in cash generated from operations and $585,100 of cash utilized for the changes in non-cash components of working capital. |
| Ø | Financing Activities utilized $475,569 in cash to make scheduled repayments on mortgage obligations. |
| Ø | Investing Activities increased cash by $3,445,238. During the year, the Company realized $1,620,707 in cash as a result of the repayment of outstanding notes and mortgages receivable and $2,805,428 from the sale of its investment in Synergx. The Company utilized $47,000 in cash for additions to rental real estate properties and $933,897 to increase its holdings of marketable securities. |
| Ø | Cash and cash equivalents were negatively impacted by a $593,612 unrealized foreign exchange loss. |
QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK.
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. We currently maintain an investment portfolio primarily of Canadian Bond obligations and Equity Investments. The average duration of all of our investments in 2008 was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is required.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAS 124-2 and FSP FAS 115-2 In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends FAS 115 and FAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets, to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security before recovery of its cost basis. This FSP requires increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold, as well as increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. FSP 115-2 and FSP 124-2 are effective for interim and annual periods ending after June 15, 2009. We are currently evaluating the impact of this FSP on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 In April 2009, FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amend FAS No. 107, Disclosures About Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1, are effective for interim periods ending after June 15, 2009 (our Fiscal 2010). We do not anticipate a material impact on our consolidated financial statements of this FSP as our current disclosures meet these requirements.
FAS No. 157-4 In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expand quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly. This pronouncement is effective beginning with the June 30, 2009 interim financial statements. We are currently assessing the impact of FSP FAS No. 157-4 on our consolidated financial position, cash flows and results of operations.
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The Company is currently assessing the affect of its adoption may have on its consolidated financial statements.
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
SFAS No. 161 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the quarterly disclosures requirements in SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company adopted these deferred provisions on October 1, 2008 which had no impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted these provisions on October 1, 2008 which had no impact on our consolidated financial statements.
SFAS No. 141(R) In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. The statement provides revised guidance for recognition and measuring assets acquired and liabilities assumed in a business combination. It also requires transaction costs for a business combination to be expensed as incurred. SFAS 141(R) will impact our accounting for and business combinations we complete after 2008.
GENTERRA INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
SEPTEMBER 30, 2008
BDO Dunwoody LLP
Chartered Accountants
And Advisors
Royal Bank Plaza
P.O. Box 32
Toronto Ontario Canada M5J 2J8
Telephone: (416) 865-0200
Telefax: (416) 865-0887
[Missing Graphic Reference]
Auditors’ Report
To the Shareholders of Genterra Inc.
We have audited the accompanying consolidated balance sheet of Genterra Inc. as of September 30, 2008 and the related consolidated statements of shareholders’ equity, operations and cash flows the year ended September 30, 2008. In connection with our audit of the financial statements, we have also audited the financial statement schedule XXVIII. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genterra Inc. at September 30, 2008, and the results of its operations and its cash flows for the year ended September 30, 2008, in conformity with Canadian generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
On January 23, 2009, we reported separately to the shareholders of Genterra Inc. on the consolidated financial statements for the year ended September 30, 2008 prepared in accordance with Canadian generally accepted accounting principles without a note disclosing the summary of differences between Canadian and United States of America generally accepted accounting principles.
The financial statements for the year ended September 30, 2007 and the statements of shareholders’ equity, operations and cash flows for the year ended September 30, 2006 were audited by another firm of Chartered Accountants, who expressed an unqualified opinion in their report dated December 14, 2007 except as to the prior period adjustment described in Note 15 which is as of July 22, 2009.
(Signed) BDO Dunwoody LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
January 23, 2009, except for Note 15 which is as at August 14, 2009
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when changes in accounting policies, such as those described in Note 1, that have a material effect on the consolidated financial statements. Our report to the shareholders dated January 23, 2009, except for Note 15 which is as at August 14, 2009 is expressed in accordance with Canadian reporting standards which do not require a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the consolidated financial statements.
(Signed) BDO Dunwoody LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
January 23, 2009, except for Note 15 which is as at August 14, 2009
BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
GENTERRA INC.
We have audited the consolidated balance sheets of GENTERRA INC. as at September 30, 2007 and 2006 and the consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended September 30, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2007 in conformity with accounting principles generally accepted in Canada.
The examination referred to in the above report also included the related financial statement schedules listed in response to Item 19(a) of the Company's annual report on Form 20-F for each of the years in the three-year period ended September 30, 2007. In our opinion, the related financial statement schedules, when considered in relation to the consolidated financial statements taken as a whole, present fairly the information set forth therein.
On December 14, 2007, we reported separately to the shareholders of GENTERRA INC. on the consolidated balance sheets as at September 30, 2007 and 2006 and the consolidated statements of retained earnings, operations and cash flows for each of the years in the three-year period ended September 30, 2007 prepared in accordance with Canadian generally accepted accounting principles without a note disclosing the summary of differences between Canadian and United States accounting principles.
The consolidated financial statements for the years ended September 30, 2006 and 2005, prepared in accordance with the United States generally accepted accounting principles as disclosed in Note 15, have been restated to reflect the changes described in Note 15 to the September 30, 2007 consolidated financial statements.
KRAFT BERGER LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
December 14, 2007, except as to the prior period adjustment described in Note 15 which is as of July 22, 2009
GENTERRA INC.
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30
(Expressed in Canadian Dollars)
| | | | | | | | 2007 | | | |
| ASSETS | | | | | | | | | | |
| | | | | | | | | | | |
| CURRENT | | | | | | | | | | |
| Cash and cash equivalents | | $ | 6,824,707 | | | $ | 7,936,046 | | | |
| Marketable securities | | | 1,917,693 | | | | 2,162,025 | | | |
| Accounts receivable (Note 4) | | | 932,036 | | | | 407,846 | | | |
| Prepaid expenses and deposits | | | 191,529 | | | | 154,204 | | | |
| Current portion of note and mortgages receivable (Note 5) | | | 365,125 | | | | - | | | |
| Future income taxes (Note 10) | | | 104,940 | | | | 113,358 | | | |
| | | | 10,336,030 | | | | 10,773,479 | | | |
| | | | | | | | | | | |
| NOTE AND MORTGAGE RECEIVABLE (Note 5) | | | 249,000 | | | | 249,000 | | | |
| | | | | | | | | | | |
| RENTAL REAL ESTATE PROPERTIES (Note 6) | | | 16,563,924 | | | | 11,119,393 | | | |
| | | | | | | | | | | |
| FUTURE INCOME TAXES (Note 10) | | | 164,702 | | | | 141,391 | | | |
| | | $ | 27,313,656 | | | $ | 22,283,263 | | | |
| LIABILITIES | | | | | | | | | | |
CURRENT | | | | | | | | | | |
| Accounts payable and accrued liabilities (Note 7) | | $ | 475,224 | | | $ | 279,998 | | | |
| Income taxes payable | | | 20,985 | | | | 22,950 | | | |
| Current portion of long-term debt (Note 8) | | | 294,330 | | | | 326,565 | | | |
| Future income taxes (Note 10) | | | - | | | | 41,425 | | | |
| | | | 790,539 | | | | 670,938 | | | |
| | | | | | | | | | | |
| LONG-TERM DEBT (Note 8) | | | 3,368,609 | | | | 3,678,422 | | | |
| FUTURE INCOME TAXES (Note 10) | | | 2,224,315 | | | | 1,142,369 | | | |
| RETRACTABLE PREFERENCE SHARES (Note 9(b)(i)) | | | 4,991,819 | | | | - | | | |
| | | | 11,375,282 | | | | 5,491,729 | | | |
| | | | | | | | | | | |
SHAREHOLDERS' EQUITY | | | | | | | | | | |
| | | | | | | | | | | |
| CAPITAL STOCK (Note 9(b)(ii)) | | | 12,134,546 | | | | 13,133,945 | | | |
| | | | | | | | | | | |
| RETAINED EARNINGS | | | 3,803,828 | | | | 3,657,589 | | | |
| | | | 15,938,374 | | | | 16,791,534 | | | |
| | | | | | | | | | | |
| | | $ | 27,313,656 | | | $ | 22,283,263 | | | |
| | See accompanying notes to consolidated financial statements. |
APPROVED ON BEHALF OF THE BOARD: | |
__________[signed]_________________ Mark I. Litwin, Director | ____________[signed]_________________ Stan Abramowitz, Director |
GENTERRA INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31
(Expressed in Canadian Dollars)
| | | | | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | | | | | | | | | | | | | | Preference Shares | | Retained | | Other | | Total |
| | Common | | | | Class B Preference | | Class A Shares | | | | Class B Shares | | (All Classes) | | | | Earnings | | Comprehensive | Shareholders' |
| | (Note 9) | | | | (Note 9) | | | | (Note 9) | | | | (Note 9) | | | | (Note 9) | | | | (Deficit) | | Income | | Equity |
| | Number of | | Value | | Number of | | Value | | Number of | | Value | | Number of | | Value | | Number of | | Value | | | | | | |
| | Shares | | $ | | Shares | | $ | | Shares | | $ | | Shares | | $ | | Shares | | $ | | $ | | $ | | $ |
| September 30, 2005 | - | | - | | - | | - | | 18,309,373 | | 7,844,347 | | 484,102 | | 1,846,910 | | 7,672,190 | | 3,442,688 | | 1,885,842 | | - | | 15,019,787 |
| Net earnings for the year | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 885,113 | | - | | 885,113 |
| September 30, 2006 as previously stated | - | | - | | - | | - | | 18,309,373 | | 7,844,347 | | 484,102 | | 1,846,910 | | 7,672,190 | | 3,442,688 | | 2,770,955 | | - | | 15,904,900 |
| Unrealized loss on investments, net of taxes | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | (61,749) | | (61,749) |
| Unrealized gain on marketable securities, net of taxes | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 7,050 | | - | | 7,050 |
| September 30, 2006 as restated | - | | - | | - | | - | | 18,309,373 | | 7,844,347 | | 484,102 | | 1,846,910 | | 7,672,190 | | 3,442,688 | | 2,778,005 | | (61,749) | | 15,850,201 |
| Change in other comprehensive income, net of taxes | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 61,749 | | 61,749 |
| Net earnings for the year | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 879,584 | | - | | 879,584 |
| September 30, 2007 | - | | - | | - | | - | | 18,309,373 | | 7,844,347 | | 484,102 | | 1,846,910 | | 7,672,190 | | 3,442,688 | | 3,657,589 | | - | | 16,791,534 |
| Adjustment per transfer agent | - | | - | | - | | - | | 8 | | - | | 5,074 | | - | | (8,946) | | - | | - | | - | | - |
| Shares repurchased for cancellation from shareholders dissenting to reorganization | - | | - | | - | | - | | - | | - | | - | | - | | (1,193,752) | | (778,379) | | (156,420) | | - | | (934,799) |
| Shares Exchanged on reorganization | 18,920,879 | | 9,691,258 | | 32,549,880 | | 2,664,309 | | (18,309,381) | | (7,844,347) | | (489,176) | | (1,846,910) | | (6,469,492) | | (2,664,309) | | - | | - | | 1 |
| Reorganization costs | - | | (221,021) | | - | | - | | �� - | | - | | - | | - | | - | | - | | - | | - | | (221,021) |
| Shares issued on conversion of Class B Preference Shares | 418,332 | | 513,625 | | (6,274,962) | | (513,625) | | - | | - | | - | | - | | - | | - | | - | | - | | - |
| Net earnings for the year | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 302,659 | | - | | 302,659 |
| September 30, 2008 | 19,339,211 | | 9,983,862 | | 26,274,918 | | 2,150,684 | | - | | - | | - | | - | | - | | - | | 3,803,828 | | - | | 15,938,374 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
GENTERRA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
(Expressed in Canadian Dollars)
| | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| REVENUE | | | | | | | | | |
| Rent (Note 13) | | $ | 2,613,587 | | | $ | 2,575,203 | | | $ | 3,154,821 | |
| Investment income (Note 13) | | | 169,571 | | | | 492,202 | | | | 409,523 | |
| | | | 2,783,158 | | | | 3,067,405 | | | | 3,564,344 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (Note 13) | | | 782,709 | | | | 533,952 | | | | 504,343 | |
| Bad debt recovery | | | - | | | | - | | | | (228,472 | ) |
| (Gain) loss on foreign exchange | | | (264,872 | ) | | | 625,215 | | | | 85,396 | |
| Rental real estate operating expenses (Note 13) | | | 1,266,062 | | | | 1,107,517 | | | | 1,095,808 | |
| | | | 1,783,899 | | | | 2,266,684 | | | | 1,457,075 | |
| EARNINGS BEFORE THE FOLLOWING | | | 999,259 | | | | 800,721 | | | | 2,107,269 | |
| Amortization | | | 544,633 | | | | 571,975 | | | | 618,607 | |
| Dividends on retractable preference shares | | | 101,819 | | | | - | | | | - | |
| Interest on long-term debt | | | 204,136 | | | | 230,698 | | | | 256,741 | |
| | | | 850,588 | | | | 802,673 | | | | 875,348 | |
| EARNINGS (LOSS) BEFORE THE FOLLOWING | | | 148,671 | | | | (1,952 | ) | | | 1,231,921 | |
| Gain on sale of investment | | | - | | | | 1,158,950 | | | | - | |
| EARNINGS BEFORE INCOME TAXES | | | 148,671 | | | | 1,156,998 | | | | 1,231,921 | |
| Income taxes (recovery) (Note 10) | | | (153,988 | ) | | | 277,414 | | | | 346,808 | |
| NET EARNINGS FOR THE YEAR | | | 302,659 | | | | 879,584 | | | | 885,113 | |
| Other comprehensive income (loss) net of taxes | | | | | | | | | | | | |
| Unrealized gains and losses on available-for-sale financial assets arising during the year | | | - | | | | 247,225 | | | | - | |
| Reclassification adjustment for gains and losses included in net earnings | | | - | | | | (185,476 | ) | | | - | |
| Other comprehensive income | | | - | | | | 61,749 | | | | - | |
| COMPREHENSIVE INCOME FOR THE YEAR | | $ | 302,659 | | | $ | 941,333 | | | $ | 885,113 | |
EARNINGS PER SHARE (Note 11)
| Basic | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | |
| Fully diluted | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | |
| See accompanying notes to consolidated financial statements. |
GENTERRA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30
(Expressed in Canadian Dollars)
| | | 2008 | | | 2007 | | | 2006 | |
OPERATING ACTIVITIES | | | | | | | | | |
| Net earnings for the year | | $ | 302,659 | | | $ | 879,584 | | | $ | 885,113 | |
| Unrealized (gain) loss on marketable securities | | | 64,417 | | | | (165,025 | ) | | | - | |
| Unrealized (gain) loss on foreign exchange | | | (264,845 | ) | | | 593,612 | | | | 64,486 | |
| Amortization | | | 544,633 | | | | 571,975 | | | | 618,607 | |
| Gain on sale of investment | | | - | | | | (1,158,950 | ) | | | - | |
| Future income taxes (Note 10) | | | (233,307 | ) | | | (78,662 | ) | | | (118,555 | ) |
| | | | 413,557 | | | | 642,534 | | | | 1,449,651 | |
| Change in non-cash components of working capital | | | | | | | | | |
| Accounts receivable | | | (186,653 | ) | | | 88,929 | | | | (259,834 | ) |
| Income taxes recoverable | | | 12,282 | | | | - | | | | - | |
| Prepaid expenses and deposits | | | (18 | ) | | | 22,370 | | | | (26,077 | ) |
| Accounts payable and accrued liabilities | | | (104,521 | ) | | | (242,777 | ) | | | 160,443 | |
| Income taxes payable | | | (8,341 | ) | | | (453,622 | ) | | | 468,292 | |
| | | | 126,306 | | | | 57,434 | | | | 1,792,475 | |
| | | | | | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Dividends on retractable preference shares | | | 101,819 | | | | - | | | | - | |
| Purchase of shares from dissenting shareholders | | | (934,799 | ) | | | - | | | | - | |
| Reorganization costs incurred | | | (295,240 | ) | | | - | | | | - | |
| Repayment of long-term debt | | | (342,048 | ) | | | (475,569 | ) | | | (452,414 | ) |
| | | | (1,470,268 | ) | | | (475,569 | ) | | | (452,414 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
INVESTING ACTIVITIES
| Cash acquired on acquisition of subsidiary (Note 3) | | | 71,935 | | | | - | | | | - | |
| Change in marketable securities | | | 274,343 | | | | (933,897 | ) | | | (308,236 | ) |
| (Increase) decrease in investment in note and mortgage receivable | | | (365,125 | ) | | | 1,620,707 | | | | 241,000 | |
| Expenditures on rental real estate properties | | | (13,375 | ) | | | (47,000 | ) | | | (79,425 | ) |
| Proceeds from sale investment | | | - . | | | | 2,805,428 | | | | - . | |
| | | | (32,222 | ) | | | 3,445,238 | | | | (146,661 | ) |
| UNREALIZED FOREIGN EXCHANGE GAIN (LOSS) ON CASH BALANCES | | | 264,845 | | | | (593,612 | ) | | | (64,486 | ) |
| | | | | | | | | | | | | |
| CHANGE IN CASH AND CASH EQUIVALENTS | | | (1,111,339 | ) | | | 2,433,491 | | | | 1,128,914 | |
CASH AND CASH EQUIVALENTS, beginning of year | | | 7,936,046 | | | | 5,502,555 | | | | 4,373,641 | |
CASH AND CASH EQUIVALENTS, end of year (Note 12) | | $ | 6,824,707 | | | $ | 7,936,046 | | | $ | 5,502,555 | |
| SUPPLEMENTARY CASH FLOW INFORMATION | | | | | | | | | |
| Income taxes paid | | $ | 138,358 | | | $ | 843,708 | | | $ | 70,710 | |
| Interest paid | | $ | 206,599 | | | $ | 233,251 | | | $ | 258,544 | |
NON-CASH TRANSACTIONS (Note 3) | | | | | | | | | |
| Non-cash consideration paid on acquisition of subsidiary | | | | | | | | | |
| Issuance of retractable preference shares | | $ | 4,890,000 | | | $ | - | | | $ | - | |
| See accompanying notes to consolidated financial statements. |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 1. | CHANGES IN ACCOUNTING POLICIES |
The Canadian Institute of Chartered Accountants (“CICA”) has issued Handbook Sections 3862 “Financial Instruments – Disclosures” and 3863 “Financial Instruments – Presentation”. These new standards replace Handbook Section 3861 “Financial Instruments – Disclosure and Presentation” and enhance the disclosure of the nature and extent of risks arising from financial instruments and how the entity manages these risks. These new standards have been adopted by the Company effective October 1, 2007.
| | The CICA has issued Handbook Section 1535 “Capital Disclosures”. This section establishes standards for disclosures of both qualitative and quantitative information that enable users to evaluate the company’s objectives, policies and processes for managing capital. These new standards have been adopted by the Company effective October 1, 2007 |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) General
The Company is incorporated under the Ontario Business Corporations Act, 1982. The Company is a Canadian management holding company operating in Canada with significant interests in real estate properties located in Ontario, Canada. The Company also invests in marketable securities with a portion of its surplus cash on hand.
| | (b) | Principles of Consolidation |
These consolidated financial statements include the accounts of the Company and its subsidiary companies. Inter-company balances and transactions have been eliminated on consolidation.
| (c) | Cash and Cash Equivalents |
The Company’s cash equivalents consist primarily of investments in short-term deposits, with maturity of three months or less from dates of placements. The carrying amount approximates fair value because of the short maturity of those instruments.
(d) Marketable Securities
Marketable securities are carried at fair value with both realized and unrealized gains and losses recognized during the year. At September 30, 2008, the Company had marketable securities of $1,917,693 with a cost of $1,982,110 At September 30, 2007, the Company had marketable securities of $2,162,025 with a cost of $1,996,999.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Rental Real Estate Properties
Rental real estate properties are stated at the lower of cost, net of accumulated amortization, and fair value. Long Lived Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The fair value is determined using the current market values of the properties. Current market values are determined based on the traditional present value method, in which a single set of estimated cash flows and a single interest rate are used. If it is determined that the net recoverable amount of a rental real estate property is less than its carrying value, the rental real estate property is written down to its fair value. Any impairment in value is recorded in the consolidated statement of operations.
Amortization of the rental real estate buildings is being provided for over the estimated useful life on a declining balance basis at 5% per annum.
(f) Translation of Foreign Currency
| | Monetary assets and liabilities are translated at the rates of exchange in effect at the end of the fiscal year. Revenue and expenses are translated at the rate of exchange in effect on the date of the transaction. The resulting gains and losses are included in the consolidated statement of operations. |
| (g) | Financial Instruments |
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.
Cash and cash equivalents: The Company’s cash equivalents consist primarily of investments in short-term deposits with maturities of three months or less from dates of placement. Cash and cash equivalents are classed as held-for-trading financial assets and are initially recognized at the fair value that is directly attributable to the acquisition or issue. They are carried in the consolidated balance sheet at fair value with changes in fair value recognized in the consolidated statement of operations in the same period as incurred.
Marketable securities: The Company’s marketable securities consist of portfolio investments and are classified as trading securities. Marketable securities are recorded at fair value with both realized and unrealized gains and losses recognized on the consolidated statements of operations in the same period as incurred.
Other financial assets: The Company’s accounts receivable consists primarily of rental receivables. Accounts, note and mortgage receivables are classified as loans and receivables. These are non-derivative financial assets with fixed or determinable payments and are not quoted in an active market. They are initially recognized at the fair value that is directly attributable to their acquisition or issue and subsequently carried at amortized cost using the effective interest rate method. The effect of discounting on these financial instruments is not considered to be material. All other gains or losses are recognized when the instrument is removed from the consolidated balance sheet.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Financial Instruments (Continued)
Other financial liabilities: The Company’s other financial liabilities include accounts payable and accrued liabilities, long-term debt and retractable preference shares.
(i) Accounts payable and accrued liabilities: Accounts payable and accrued liabilities consist primarily of trade payables. They are initially recognized at the fair value that is directly attributable to their acquisition or issue and subsequently carried at amortized cost using the effective interest rate method. The effect of discounting on these financial instruments is not considered to be material.
(ii) Long-term debts consist of mortgages payable and are initially recognized at the fair value directly attributable to the issue of the instrument. They are carried at amortized cost using the effective interest rate method. Interest expense is recognized in the consolidated statement of operation in the same period as incurred. All other gains or losses are recognized when the instrument is removed from the consolidated balance sheet.
(iii) Financial instruments issued by the Company are treated as equity only to the extent that they do not meet the definition of a financial liability. The Company’s retractable and redeemable Class A preference shares are redeemable for cash at the option of the holder, but also contain a conversion feature into Common shares of the Company. Accordingly, the Company accounts for these shares as financial instruments with both elements of debt and equity on initial recognition. The Company determined that the value attributable to the equity component was nominal.
The holder of the Class A preference shares has indicated that they will not exercise the retraction option within the next twelve months. The Company’s Common shares and Class B preference shares are classified as equity instruments.
| (h) Management of Financial Risks |
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, note and mortgage receivable, accounts payable and accrued liabilities, long-term debt and retractable preference shares. The Company is exposed to various risks as it relates to these financial instruments. There have not been any changes in the nature of risks or the process of managing these risks from previous periods. The risks and processes for managing the risks are set out below:
Liquidity Risk
Liquidity risk arises from the Company’s management of working capital and principal repayments on its debt obligations. It is the risk that the Company will encounter difficulty in meeting it financial obligations as they fall due.
The Company’s objective is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, the Company seeks to maintain cash balances to meet expected requirements for a period of twelve months. The Company also seeks to reduce liquidity risk by fixing interest rates on its long-term borrowings. At the balance sheet date, the Company expected to have sufficient liquid resources to meet its obligations under all reasonable expected circumstances.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (h) Management of Financial Risks (Continued) |
Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Company has reduced its exposure to interest rate risk over the cash flows through the use of fixed rate instruments on certain of its financial liabilities. The Company has not used derivative financial instruments to alter its exposure to interest rate risk.
The Company invests surplus cash in treasury bills and publicly traded corporate bonds, loans and mortgages receivable. Certain long-term borrowings of the Company bear interest on a prime plus basis. In doing so, the Company exposes itself to fluctuations in interest rates that are inherent in such a market. The net annualized effect for the year of a 0.5% decrease in the interest rate at the balance sheet date on these financial instruments would have resulted in a decrease in post-tax earnings of approximately $21,600 (2007 - - $23,700). A 0.5% increase in the interest rate would, on the same basis, have increased post-tax earnings by the same amount.
Currency Risk
Currency risk is the risk that a variation in exchange rates between the Canadian dollar and foreign currencies will affect the Company’s operating and financial results. Cash and cash equivalents as at September 30, 2008 includes US$3,831,601 (September 30, 2007 – US$3,713,565). Currency gains (losses) are reflected as a separate component of expenses. The effect for the year of a $0.01 strengthening of the US Dollar against the Canadian Dollar on the Company’s US Dollar denominated money market instruments carried at the balance sheet date (all other variables held constant) would have resulted in an increase in post-tax earnings of approximately $25,500 (2007 - $24,700). A $0.01 weakening in the exchange rate would, on the same basis, have decreased post-tax earnings by the same amount. At September 30, 2008, the Company had no outstanding foreign exchange commitments.
Other Price Risk
Other price risk is the risk that the market value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). The Company moderates this risk through a careful selection and diversification of securities and other financial instruments within the limits of the Company’s objectives and strategy.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, rental receivables and investments.
(i) Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.
(ii) Marketable securities held by reputable professional hedge fund managers can be withdrawn in any given month and therefore credit risk is considered minimal.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (h) Management of Financial Risks (Continued) |
Concentration of Credit Risk (continued)
(iii) Credit risk on rental, note and mortgage receivables is minimized as a result of the collateral security held pursuant to legal agreements and leases.
(iv) The Company leases two of its properties to a single tenant accounting for approximately 24.5% of its current rental revenue which constitutes a significant credit concentration. Both leases expire in 2011.
In 2008, the Company had two major leases that accounted for 43.7% and 19.1% respectively of total rent. These leases expire between 2011 and 2016.
(i) Capital Management
The Company’s primary objective when managing capital is to create and maximize shareholder value through the expansion of its portfolio of income producing real estate and the growth of its investments. The Company’s investment strategy is to capitalize on favourable real estate market conditions by acquiring properties that provide the Company with substantial rental income and the potential for future development and capital gain appreciation, with the objective of creating added value to the Company and its shareholders.
The Company considers its total capitalization to consist of long-term debt, Common and Class B preference share capital and accumulated retained earnings as well as its retractable and redeemable Class A preference shares which are classified as a financial liability. There have been no changes in what the Company considers to be capital since the previous year. The Company does not currently have a formal policy in governing any net debt to equity and net debt to total capitalization ratios.
As at September 30, the Company has complied with all externally imposed capital requirements.
(j) Accounting Estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from management's best estimates as additional information becomes available in the future.
(k) Revenue Recognition
The Company adopted the straight-line method of recognizing rental revenue whereby the total amount of rental revenue to be received from such leases is accounted for on a straight-line basis over the term of lease. Accordingly, an accrued rent receivable or payable is recorded from the tenants for the current difference between the straight line rent recorded as rental revenue and the rent that is contractually due from the tenants.
Revenue from a real estate sale is recognized once all material conditions have been satisfied.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and tax basis of assets and liabilities.
Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future assets and liabilities of a change in tax rates is recognized in income in the year that the rate changes.
(m) Stock-based Compensation and Other Stock-based Payments
The Company has a single Stock Option Plan (“The Plan”). The Plan is designed to secure for the Company and its shareholders the benefits of the incentive inherent in share ownership by those directors, officers and key employees responsible for the management and growth of the Company’s business. The Plan does not include any provision whereby the vesting of options granted thereunder is in any way limited or restricted. Options granted under the Plan may be exercised for such period as may be determined by the Board of Directors at the time such option is granted. The Company accounts for stock-based compensation and other stock-based payments using the fair value-based method. Under the fair value-based method, compensation costs attributable to awards to Company employees are measured at fair value at the date of the grant, amortized over the vesting period on a straight-line basis, and charged to earnings with a related credit to Contributed Surplus. Consideration paid by employees on exercise of stock options is recorded as share capital. The Company has not granted any new options since the adoption of these recommendations. As at September 30, 2008, the Company has no outstanding stock options.
(n) Recent Accounting Pronouncements
Recent accounting pronouncements affecting the Company’s financial reporting under Canadian GAAP are summarized below:
In February 2008, the CICA issued amendments to Handbook Section 1000, “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company will apply the amendments to Handbook Section 1000 commencing October 1, 2008. The implementation of the amendments to Handbook Section 1000 will not have any impact on the Company’s results of operations, financial position and disclosures as these amendments are clarifications on the application of Handbook Section 1000.
In February 2008, the CICA issued a new accounting standard, Handbook Section 3064, concerning goodwill and intangible assets. The new section replaces the existing guidance on goodwill and other intangible assets and research and development costs. The new section provides additional guidance on measuring the cost of goodwill and intangible assets. The new standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company is currently assessing the impact of the new standard but does not believe it will have any impact on the Company’s results of operations, financial position and disclosures.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) Recent Accounting Pronouncements (Continued)
The Canadian Accounting Standards Board (“AcSB”) confirmed that the adoption of IFRS would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada’s current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards will be effective for the Company in the first quarter of 2011. The Company is currently in the process of evaluating the potential impact of IFRS to our consolidated financial statements. This will be an ongoing process as new standards and recommendations are issued by the International Accounting Standards Board and the AcSB. While the Company has begun assessing the adoption of IFRS, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.
3. ACQUISITON OF WHOLLY-OWNED SUBSIDIARY
On June 27, 2008 the Company acquired 100% of Ninety Ontario Street Inc., a Toronto based real estate company, from First Ontario Investments Inc. (“First”), a related company, for a total consideration of $4,890,000 paid by the issuance of Class A retractable, redeemable preference shares. Two of the directors of the Company are also officers/and or directors of First. The acquisition has been accounted for using the purchase method. Accordingly, the assets, liabilities, revenues and expenses of Ninety Ontario Street Inc. are consolidated with those of the Company from June 27, 2008.
The purchase was measured based on an independent valuation of the shares acquired, supported by an independent valuation of the underlying property owned by Ninety Ontario Street Inc.
Pursuant to Section 3863 of the CICA Handbook, a preferred share that gives the holder the right to require the issuer to redeem the share at or after a particular date for a fixed amount meets the definition of a financial liability and is classified as such.
The effect of the above transaction on these consolidated financial statements is as follows:
Current assets | | $ | 479,076 | |
Rental real estate properties | | | 5,708,788 | |
| | | | 6,187,864 | |
| | | | | |
Current liabilities | | | 309,893 | |
Future income taxes | | | 1,059,906 | |
| | | | 1,369,799 | |
| | | | | |
Assets acquired, net of cash of $71,935 | | $ | 4,818,065 | |
| | | | | |
4. ACCOUNTS RECEIVABLE
| | | 2008 | | | 2007 | |
| | | | | | | |
Accounts receivable, trade | | $ | 736,281 | | | $ | 337,381 | |
| Due from companies related by common management, trade | | | 195,755 | | | | 70,465 | |
| | | $ | 932,036 | | | $ | 407,846 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 5. | NOTE AND MORTGAGE RECEIVABLE |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Note receivable from a company under common control, bearing interest at prime plus 1% per annum, due on demand, secured by a general security agreement. Management currently has no intention of demanding payment within the next twelve months. | | $ | 249,000 | | | $ | 249,000 | |
| First mortgage receivable, with interest at floating rate at the greater of 9% or Toronto Dominion Bank Posted Bank Prime plus 3% per annum, due September 1, 2009. | | | 365,125 | | | | - | |
| | | | 614,125 | | | | 249,000 | |
| Less: Current portion | | | 365,125 | | | | - | |
| | | $ | 249,000 | | | $ | 249,000 | |
6. RENTAL REAL ESTATE PROPERTIES
| | | | | | 2008 | | | | | | | | | 2007 | | | | |
| | | Cost | | | Accumulated Amortization | | | Net | | | Cost | | | Accumulated Amortization | | | Net | |
| Land | | $ | 5,316,027 | | | $ | - | | | $ | 5,316,027 | | | $ | 1,568,027 | | | $ | - | | | $ | 1,568,027 | |
| Building | | | 13,872,141 | | | | 2,624,244 | | | | 11,247,897 | | | | 11,730,886 | | | | 2,179,520 | | | | 9,551,366 | |
| | | $ | 19,188,168 | | | $ | 2,624,244 | | | $ | 16,563,924 | | | $ | 13,298,913 | | | $ | 2,179,520 | | | $ | 11,119,393 | |
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | | 2008 | | | 2007 | |
| | | | | | | |
| Accounts payable, trade | | $ | 466,809 | | | $ | 279,998 | |
| Due to a company under common control, trade | | | 8,415 | | | | - | |
| | | $ | 475,224 | | | $ | 279,998 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
8. LONG-TERM DEBT
| | | 2008 | | | 2007 | |
| | | | | | | |
| First mortgage bearing interest at prime plus 1.75% per annum, repayable in monthly payments of $5,217 plus interest with the balance due August 1, 2011. | | $ | 182,587 | | | $ | 245,187 | |
| First mortgage bearing interest at 6.52% per annum, repayable in blended monthly payments of $19,535 with the balance due December 1, 2007. | | | - | | | | 57,982 | |
| First mortgage bearing interest at 4.63% per annum, repayable in blended monthly payments of $25,005 with the balance due July 1, 2010. | | | 2,736,570 | | | | 2,906,671 | |
| First mortgage bearing interest at lender’s based rate plus 0.2% per annum, repayable in monthly payments of $4,453 plus interest with the balance due September 1, 2022. | | | 743,782 | | | | 795,147 | |
| | | | 3,662,939 | | | | 4,004,987 | |
| Less: Current portion | | | 294,330 | | | | 326,565 | |
| | | $ | 3,368,609 | | | $ | 3,678,422 | |
| | The mortgages are collateralized by the specific security on the related land and buildings. The carrying value of the mortgages approximate their fair values. |
The aggregate amount of payments on long-term debt required in the subsequent twelve-month periods to meet retirement provisions are as follows:
| 2009 | | $ | 294,330 | |
| 2010 | | | 2,674,326 | |
| 2011 | | | 110,819 | |
| 2012 | | | 53,436 | |
| 2013 | | | 53,436 | |
| Thereafter | | | 476,592 | |
| | | $ | 3,662,939 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
9. CAPITAL STOCK
On April 24, 2008 the Company filed Articles of Amendment to give effect to a reorganization of its share capital which was approved by shareholders at its annual and special meeting held on March 4, 2008. The share capital reorganization resulted in the reclassification of the Company’s Subordinate Voting Shares, Class B Multiple Voting Shares and six classes of non-voting preferred shares into one class of voting Common Shares and non-voting convertible Class B Preference shares. The transaction was accounted for at the carrying amount of the shares exchanged.
In addition, as part of the articles of Amendment filed on April 24, 2008, the Company authorized the issuance of Class A preference shares, issuable in series.
Unlimited Common Shares
Unlimited Class A preference shares, issuable in series:
Series 1 – non-voting, non-participating, redeemable and retractable at $15.00
per share, 8% cumulative, convertible into either Common shares at the rate of 20 Common shares or 300 Class B Preference shares for each Class A Preference share
Unlimited Class B preference shares
non-voting, non-participating, redeemable at $0.05, $0.0024 non-cumulative,
convertible until July 15, 2008 into Common shares at the rate of 1 Common
share for each 15 Class B Preference shares
i) Retractable Preference Shares
| | | 2008 | | | 2007 | |
| | | | | | | |
| 326,000 Class A preference shares, Series 1 | | $ | 4,890,000 | | | $ | - | |
| | | | | | | | | |
| Cumulative dividends in arrears | | | 101,819 | | | | - | |
| | | $ | 4,991,819 | | | $ | - | |
ii) Capital Stock
| | | 2008 | | | 2007 | |
| | | | | | | |
| Post Reorganization | | | | | | |
| 19,339,211 Common shares | | $ | 9,983,862 | | | $ | - | |
| 26,274,918 Class B preference shares | | | 2,150,684 | | | | - | |
| | | | | | | | | |
| Pre Reorganization | | | | | | | | |
| 18,309,381 Class A shares | | | - | | | | 7,844,347 | |
| 489,176 Class B shares | | | - | | | | 1,846,910 | |
| 1,688,221 Class C preferred shares, Series 1 | | | - | | | | 1,304,248 | |
| 2,475,009 Class D preferred shares, Series 1 | | | - | | | | 247,400 | |
810,059Class D preferred shares, Series 2 | | | - | | | | 217,501 | |
119,252Class E preferred shares | | | - | | | | 487,900 | |
632,493Class F preferred shares, Series 1 | | | - | | | | 632,493 | |
| 1,938,210 Series 1 preference shares | | | - | | | | 553,146 | |
| | | $ | 12,134,546 | | | $ | 13,133,945 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007AND 2006
(Expressed in Canadian Dollars)
9. CAPITAL STOCK (Continued)
| | Common | | | Class A preference, Series 1 | |
| | Number | | | Amount | | | Number | | | Amount | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | - | | | $ | - | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
| Shares issued on reorganization | | 18,920,879 | | | | 9,691,258 | | | | - | | | | - | |
| | | | | | | | | | | | |
| Reorganization costs, net of future taxes | | - | | | | (221,021 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Shares issued on acquisition of Subsidiary (Note 3) | | - | | | | - | | | | 326,000 | | | | 4,890,000 | |
Shares issued on conversion of Class B preference shares | | 418,332 | | | | 513,625 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
| Balance at September 30, 2008 | | 19,339,211 | | | $ | 9,983,862 | | | | 326,000 | | | $ | 4,890,000 | |
| | Class B preference | | | Class A | |
| | Number | | | Amount | | | Number | | | Amount | |
| | | | | | | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | - | | | $ | - | | | | 18,309,373 | | | $ | 7,844,347 | |
| Adjustment per transfer agent* | | - | | | | - | | | | 8 | | | | - | |
| | | | | | | | | | | | | | | | |
| Shares issued on reorganization | | 32,549,880 | | | | 2,664,309 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Shares exchanged on reorganization | | - | | | | - | | | | (18,309,381 | ) | | | (7,844 347 | ) |
Shares surrendered on conversion into Common shares | | (6,274,962 | ) | | | (513,625 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
| Balance at September 30, 2008 | | 26,274,918 | | | $ | 2,150,684 | | | | - | | | $ | - | |
| | Class B | | | Class C, Series 1 | |
| | Number | | | Amount | | | Number | | | Amount | |
| | | | | | | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | 484,102 | | | $ | 1,846,910 | | | | 1,704,115 | | | $ | 1,304,248 | |
| Adjustment per transfer agent* | | 5,074 | | | | - | | | | (15,894 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Shares exchanged on reorganization | | (489,176 | ) | | | (1,846,910 | ) | | | (1,688,221 | ) | | | (1,304,248 | ) |
| | | | | | | | | | | | | | | | |
| Balance at September 30, 2008 | | - | | | $ | - | | | | - | | | $ | - | |
| | Class D, Series 1 | | | Class D, Series 2 | |
| | Number | | | Amount | | | Number | | | Amount | |
| | | | | | | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | 2,475,009 | | | $ | 247,400 | | | | 810,059 | | | $ | 217 501 | |
| | | | | | | | | | | | | | | | |
Shares exchanged on reorganization | | (2,475,009 | ) | | | (247,400 | ) | | | (810,059 | ) | | | (217,501 | ) |
| | | | | | | | | | | | | | | | |
| Balance at September 30, 2008 | | - | | | $ | - | | | | - | | | $ | - | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
9. CAPITAL STOCK (Continued)
(c) Transactions (Continued)
| | | Class E | | | Class F | |
| | | Number | | | Amount | | | Number | | | Amount | |
| | | | | | | | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | | 115,258 | | | $ | 487,900 | | | | 632,493 | | | $ | 632,493 | |
Adjustment per transfer agent* | | | 3,994 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Shares purchased for cancellation from shareholders dissenting to reorganization | | | - | | | | - | | | | (612,493 | ) | | | (612,493 | ) |
| | | | | | | | | | | | | | | | | |
Shares exchanged on reorganization | | | (119,252 | ) | | | (487,900 | ) | | | (20,000 | ) | | | (20,000 | ) |
| | | | | | | | | | | | | | | | | |
Balance at September 30, 2008 | | | - | | | $ | - | | | | - | | | $ | - | |
| | | Series 1 preference | |
| | | Number | | | Amount | |
| | | | | | | |
Balance at September 30, 2005, 2006 and 2007 | | | 1,935,256 | | | $ | 553,146 | |
Adjustment per transfer agent* | | | 2,954 | | | | - | |
| | | | | | | | | |
Shares purchased for cancellation from shareholders dissenting to reorganization | | | (581,259 | ) | | | (165,886 | ) |
| | | | | | | | | |
Shares exchanged on reorganization | | | (1,356,951 | ) | | | (387,260 | ) |
| | | | | | | | | |
Balance at September 30, 2008 | | | - | | | $ | - | |
*This adjustment represents the difference in the Pre-Reorganization Share Capital as set forth in the opening balance from that recorded by the Transfer Agent. The difference is due to a change in the method used by the Transfer Agent in calculating the number of shares to be issued with respect to shares not yet exchanged from prior merger transactions.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
10. INCOME TAXES | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Current | | $ | 79,319 | | | $ | 356,076 | | | $ | 465,363 | |
Future (recovery) | | | (233,307 | ) | | | (78,662 | ) | | | (118,555 | ) |
| | | $ | (153,988 | ) | | $ | 277,414 | | | $ | 346,808 | |
| | |
The difference between the effective tax rate for continuing operations and the combined basic federal and provincial tax rate is explained as follows: | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | |
| | | % | | | % | | | % | |
Income taxes computed at statutory combined basic income tax rates | | | 34.1 | | | | 36.1 | | | | 36.1 | |
Non-deductible items | | | 26.3 | | | | 0.2 | | | | 3.8 | |
Non-taxable portion of capital gains | | | (25.7 | ) | | | (17.4 | ) | | | (0.2 | ) |
Revaluation of benefits of future taxes | | | (130.4 | ) | | | (4.1 | ) | | | (11.5 | ) |
Other | | | (7.9 | ) | | | 9.2 | | | | - | |
Effective income tax provision | | | (103.6 | ) | | | 24.0 | | | | 28.2 | |
A summary of the principal components of future tax assets and liabilities calculated in accordance with Canadian accounting principles is noted as follows: | |
| | | | | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Future tax assets: | | | | | | | | | |
Capital and non-capital loss carry-forwards | | | $ | - | | | $ | 8,076 | |
Cumulative eligible capital | | | | 142,308 | | | | 84,200 | |
Unrealized loss on foreign exchange | | | | 74,000 | | | | 112,000 | |
Marketable securities | | | | 29,129 | | | | - | |
Other | | | | 24,205 | | | | 50,473 | |
| | | | | | | | 269,642 | | | | 254,749 | |
Less: Current portion | | | | 104,940 | | | | 113,358 | |
| | | | | | | $ | 164,702 | | | $ | 141,391 | |
Future tax liabilities: | | | | | | | | | |
Rental real estate properties | | | $ | 2,148,598 | | | $ | 1,062,111 | |
Unrealized gain on marketable securities | | | | - | | | | 41,425 | |
Other | | | | 75,717 | | | | 80,258 | |
| | | | | | | | 2,224,315 | | | | 1,183,794 | |
Less: Current portion | | | | - . | | | | 41,425 | |
| | | | | | | $ | 2,224,315 | | | $ | 1,142,369 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 11. | EARNINGS PER SHARE CALCULATION |
Earnings per share have been calculated based on the following:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Net earnings for the year | | $ | 302,659 | | | $ | 879,584 | | | $ | 885,113 | |
| Dividends to preferred shareholders | | | - . | | | | (70,342 | ) | | | (70,342 | ) |
| Numerator for basic earnings per share (available to common shareholders) | | $ | 302,659 | | | $ | 809,242 | | | $ | 814,771 | |
| Denominator: | | | | | | | | | | | | |
| Weighted average number shares outstanding | | | 18,922,155 | | | | 18,793,385 | | | | 18,793,385 | |
| Effect of dilutive securities | | | | | | | | | | | | |
| Potential conversion of Class B preference shares | | | 231,862 | | | | - . | | | | - . | |
| Weighted average number shares outstanding | | | 19,154,017 | | | | 18,793,385 | | | | 18,793,385 | |
| Earnings per share | | | | | | | | | | | | |
| Basic | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | |
| Fully diluted | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.04 | |
The effect on the 2008 earnings per share of the conversion of Class A preference shares is anti-dilutive and therefore not disclosed.
The effect on the 2007 and 2006 earnings per share of the conversion of Class F preferred shares is anti-dilutive and therefore not disclosed.
| 12. | CONSOLIDATED STATEMENTS OF CASH FLOWS |
Cash and cash equivalents |
Cash and cash equivalents consist of cash balances with banks and investments in money market instruments. Cash and cash equivalents included in the statement of cash flows are comprised of the following balance sheet amounts: |
| | 2008 | | | 2007 | | | 2006 |
| | | | | | | | |
| Cash balances with banks | $ | 246,864 | | | $ | 171,434 | | | $ | 166,515 |
| Money market instruments | | 6,577,843 | | | | 7,764,612 | | | | 5,336,040 |
| Total cash and cash equivalents | $ | 6,824,707 | | | $ | 7,936,046 | | | $ | 5,502,555 |
Money market instruments consist primarily of investments in short term deposits with maturities of three months or less.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 13. | RELATED PARTY TRANSACTIONS |
The Company entered into transactions and had outstanding balances with various companies related by virtue of common ownership and management.
The transactions with related parties are in the normal course of business and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.
Significant related party transactions not disclosed elsewhere in these consolidated financial statements are as follows:
The Company received rents of $1,027,954 (2007 - $ 1,385,414; 2006 - $1,874,865) from companies of which directors and officers are also directors and/or officers of the Company.
The Company received interest of $19,584 (2007 - $24,273; 2006 - $24,434) from a company of which the President is also a director, officer and majority shareholder.
Administration and management fees of $200,000 (2007 - $200,000; 2006 - $172,333) were paid to a company a director and officer of which is also a director and officer of the Company.
Property management fees of $136,800 (2007 - $110,000; 2006 - $110,000) were paid to a company of which a director and officer is also directors and/or officers of the Company.
Consulting fees of $36,000 (2007 - $36,000; 2006 - $36,000) were paid to the President of the Company for services rendered.
A bonus of $150,000 (2007 - $Nil; 2006 - $Nil) was paid to an officer of the Company for services rendered.
The Company currently operates in one reportable industry segment, real estate rentals, with all properties located in Ontario, Canada.
Segmented information for the fiscal years ended September 30, 2008, 2007 and 2006 respectively, is as follows:
(In thousands of dollars) | | Canada | | | United States | | | Eliminations | | | Consolidated | |
2008 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Revenue | | $ | 2,783 | | | $ | - | | | $ | - | | | $ | $2,783 | |
Net earnings | | $ | 303 | | | $ | - | | | $ | - | | | $ | $303 | |
Total assets | | $ | 27,314 | | | $ | - | | | $ | - | | | $ | $27,314 | |
| | | | | | | | | | | | | | | | | |
2007 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenue | | $ | 3,067 | | | $ | - | | | $ | - | | | $ | 3,067 | |
Net earnings | | $ | 880 | | | $ | - | | | $ | - | | | $ | 880 | |
Total assets | | $ | 22,283 | | | $ | - | | | $ | - | | | $ | 22,283 | |
| | | | | | | | | | | | | | | | | |
2006 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenue | | $ | 3,564 | | | $ | - | | | $ | - | | | $ | 3,564 | |
Net earnings | | $ | 885 | | | $ | - | | | $ | - | | | $ | 885 | |
Total assets | | $ | 20,912 | | | $ | 1,646 | | | $ | - | | | $ | 22,558 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES |
The Company follows accounting principles generally accepted in Canada. Differences between generally accepted accounting principles in Canada and those generally accepted in the United States of America (United States) are summarized below:
| a) | Acquisition of Subsidiary |
During 2008 the Company acquired a subsidiary containing a rental real estate property from a non-arms length party. The Company and the vendor in this transaction are under common control. Under Canadian GAAP the purchase was recorded using the appraised value of the property and company with the total purchase price satisfied by the issuance of retractable preference shares by the Company. As common control exists in this transaction, under U.S. GAAP the purchase must be recorded as a reorganization of entities under common control using the historical carrying values.
U.S. GAAP requires investments in available for sale securities and trading securities to be recorded at fair market value and all unrealized holding gain and losses reflected in other comprehensive income. Investments in trading securities are to be recorded at fair value and all unrealized holding gains and losses reflected in income. Under Canadian GAAP, investments were carried at historical cost with losses in value being recognized in income only when the loss in value is other than temporary and increase in value being recognized only when realized. The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The Company has adopted the Canadian standard for interim and annual financial statements effective October 1, 2006. In the Canadian financial statements the investments are designated as held for trading which records these investments at fair value with changes in fair value being recorded in income.
The redeemable preference shares are considered mezzanine equity for the purposes of U.S. GAAP. Under this standard, the retractable preferred shares should be disclosed outside of total liabilities and before shareholders equity on the balance sheet. Annual dividends are shown as a reduction to retrained earnings and not as an expense to the statement of operations.
| d) | Financial statement presentation |
Certain financial statement presentation is required by US GAAP that is not required for Cdn. GAAP as follows:
| · | Disclosure of unearned rental revenue receivable separate from accounts receivable |
| · | Disclosure of trade accounts payable separate from accrued liabilities |
| · | Disclosure of investment income as other revenue and expense rather than part of revenue |
| · | Inclusion of amortization expense as part of expenses |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
The effect on the consolidated balance sheet of the difference between accounting principles generally accepted in Canada and those generally accepted in the United States is summarized as follows:
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | $ | | | $ | | | $ | |
| | | | | | | | | | |
September 30, 2008 | | | | | | | | | |
| | | | | | | | | | |
| Marketable securities (b) | | | 1,917,693 | | | | 50,714 | | | | 1,968,407 | |
| Accounts receivable (c) | | | 932,036 | | | | (235,081 | ) | | | 696,955 | |
| Unearned revenue (c) | | | - | | | | 235,081 | | | | 235,081 | |
| Current assets | | | 10,336,030 | | | | 50,714 | | | | 10,386,744 | |
Rental Real Estate Properties (a) | | | 16,563,924 | | | | (5,456,734 | ) | | | 11,107,190 | |
Total assets | | | 27,313,656 | | | | (5,406,020 | ) | | | 21,907,636 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (c) | | | 475,224 | | | | (137,784 | ) | | | 337,440 | |
| Accrued liabilities (c) | | | - | | | | 137,784 | | | | 137,784 | |
| Current liabilities | | | 790,539 | | | | - | | | | 790,539 | |
Future income taxes (a) | | | 2,224,315 | | | | (1,044,822 | ) | | | 1,179,493 | |
| Retractable preferred shares (a, c) | | | 4,991,819 | | | | (4,991,819 | ) | | | - | |
Total liabilities | | | 11,375,282 | | | | (6,036,641 | ) | | | 5,338,641 | |
| Retractable preferred shares (a, c) | | | - | | | | 4,991,819 | | | | 4,991,819 | |
| Capital stock | | | 12,134,546 | | | | (101,819 | ) | | | 12,032,727 | |
| Retained earnings (deficit) | | | 3,803,828 | | | | (4,235,241 | ) | | | (431,413 | ) |
| Accumulated comprehensive income | | | - | | | | (24,138 | ) | | | (24,138 | ) |
Total shareholders’ equity | | | 15,938,374 | | | | (4,361,198 | ) | | | 11,577,176 | |
Total liabilities and shareholders’ equity | | | 27,313,656 | | | | (5,406,020 | ) | | | 21,907,636 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | | $ | | | | $ | | | | $ | |
September 30, 2007 | | | | | | | | | | | | |
| Cash and cash equivalents (a) | | | 7,936,046 | | | | 563 | | | | 7,936,609 | |
| Marketable securities (a) (b) | | | 2,162,025 | | | | 58,133 | | | | 2,220,158 | |
| Accounts and notes receivable (a) (d) | | | 407,846 | | | | 357,170 | | | | 765,016 | |
| Unearned rental revenue receivable (d) | | | - | | | | 219,284 | | | | 219,284 | |
| Income taxes recoverable (a) (d) | | | - | | | | 25,162 | | | | 25,162 | |
| Prepaid expenses (a) | | | 154,204 | | | | 8,113 | | | | 162,317 | |
| Current assets | | | 10,773,479 | | | | 668,425 | | | | 11,441,904 | |
| Rental real estate properties (a) | | | 11,119,393 | | | | 238,092 | | | | 11,357,485 | |
| Investment (a) | | | - | | | | 304 | | | | 304 | |
| Future income taxes (b) | | | 141,391 | | | | 4,927 | | | | 146,318 | |
| Total assets | | | 22,283,263 | | | | 911,748 | | | | 23,195,011 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (d) | | | 279,998 | | | | 335,022 | | | | 615,020 | |
| Accrued liabilities (a) (d) | | | - | | | | 138,562 | | | | 138,562 | |
| Income taxes payable (d) | | | 22,950 | | | | (22,950 | ) | | | - | |
| Future income taxes (a) | | | 41,425 | | | | (3,980 | ) | | | 37,445 | |
| Current liabilities | | | 670,938 | | | | 446,654 | | | | 1,117,592 | |
| Future income taxes (a) | | | 1,142,369 | | | | 10,606 | | | | 1,152,975 | |
| Total Liabilities | | | 5,491,729 | | | | 457,260 | | | | 5,948,989 | |
| Capital stock (a) | | | 13,133,945 | | | | 2 | | | | 13,133,947 | |
| Accumulated comprehensive income (b) | | | - | | | | (24,138 | ) | | | (24,138 | ) |
| Retained earnings (a) | | | 3,657,589 | | | | 478,624 | | | | 4,136,213 | |
| Total shareholders equity | | | 16,791,534 | | | | 454,488 | | | | 17,246,022 | |
| Total liabilities and shareholders equity | | | 22,283,263 | | | | 911,748 | | | | 23,195,011 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
Comprehensive income
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) requires disclosure of comprehensive income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The CICA requires mandatory implementation of these standards for interim and annual financial statements relating to years commencing on or after October 1, 2006.
Prior period adjustment
The previously issued financial statements have been restated to correct an error in the accounting for short term investments. Previously, the Company improperly accounted for its investments in investment funds as available for sale securities in accordance with FAS 115. Under U.S. GAAP, as these investments do not have readily determinable fair values, they should be reported at cost, unless the investments are determined to be impaired in which case they are written down to estimated fair value, if less than cost. The change in accounting resulted in a decrease to retained earnings at September 30, 2006 of $9,040, net of future income taxes of $1,991.
| | | Originally Stated U.S. Accounting Principles | | | Change | | | As Restated U.S. Accounting Principles | |
| September 30, 2006 | | | | | | | | | |
| Balance Sheet | | | | | | | | | |
| Short term investments | | | 1,062,942 | | | | (11,031 | ) | | | 1,051,911 | |
| Future income taxes (current liability) | | | 28,878 | | | | (1,991 | ) | | | 26,887 | |
| Retained earnings | | | 2,779,995 | | | | (9,040 | ) | | | 2,770,955 | |
| Consolidated Statement of Operations and Other Comprehensive Income | | | | | | | | | | | | |
| Investment income | | | 342,766 | | | | 66,767 | | | | 409,533 | |
| Income taxes | | | 334,758 | | | | 12,050 | | | | 346,808 | |
| Net income | | | 885,113 | | | | 54,717 | | | | 939,830 | |
| | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.04 | | | $ | 0.01 | | | $ | 0.05 | |
| Diluted earnings per share | | $ | 0.04 | | | $ | 0.01 | | | $ | 0.05 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
The effect on earnings for the above differences between accounting principles generally accepted in Canada and those accepted in the United States are summarized below:
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | | $ | | | | $ | | | | $ | |
| Year Ended September 30, 2008 | | | | | | | | | | | | |
| REVENUE | | | | | | | | | | | | |
| Rent (a) | | | 2,613,587 | | | | 550,958 | | | | 3,164,545 | |
| Investment income (d) | | | 169,571 | | | | (169,571 | ) | | | - | |
| | | | 2,783,158 | | | | 381,387 | | | | 3,164,545 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (a) | | | 782,709 | | | | 156,878 | | | | 939,587 | |
| Amortization (d) | | | - | | | | 544,633 | | | | | |
| Amortization (a) | | | | | | | (9,002 | ) | | | 535,631 | |
| (Gain) loss on foreign exchange | | | (264,872 | ) | | | - | | | | (264,872 | ) |
| Rental real estate operating expenses (a) | | | 1,266,062 | | | | 385,619 | | | | 1,651,681 | |
| | | | 1,783,899 | | | | 1,078,128 | | | | 2,862,027 | |
| EARNINGS BEFORE THE FOLLOWING | | | 999,259 | | | | (696,741 | ) | | | 302,518 | |
| | | | | | | | | | | | | |
| Amortization (d) | | | (544,633 | ) | | | 544,633 | | | | - | |
Dividends on retractable preference shares (c) | | | (101.819 | ) | | | 101,819 | | | | - | |
| Interest on long-term debt | | | (204,136 | ) | | | - | | | | (204,136 | ) |
| Investment income (d) | | | - | | | | 169,571 | | | | | |
| Investment income (a) | | | | | | | (657 | ) | | | | |
| Investment income (b) | | | | | | | 235,885 | | | | 404,799 | |
| | | | (850,588 | ) | | | 1,051,251 | | | | 200,663 | |
| EARNINGS BEFORE INCOME TAXES | | | 148,671 | | | | 354,510 | | | | 503,181 | |
| Income taxes (recovery) (a) | | | (153,988 | ) | | | 52,780 | | | | (101,208 | ) |
| NET EARNINGS FOR THE YEAR | | | 302,659 | | | | 301,730 | | | | 604,389 | |
| | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | |
| Earnings available to common shreholders | | $ | 302,659 | | | | | | | $ | 502,570 | |
| | | | | | | | | | | | | |
| Basic | | | $0.02 | | | | | | | | $0.03 | |
| Diluted | | | $0.02 | | | | | | | | $0.03 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | | $ | | | | $ | | | | $ | |
| Year Ended September 30, 2007 | | | | | | | | | | | | |
| REVENUE | | | | | | | | | | | | |
| Rent | | | 2,575,203 | | | | 758,955 | | | | 3,334,158 | |
| Investment income (b) | | | 492,202 | | | | (492,202 | ) | | | - | |
| | | | 3,067,405 | | | | 266,753 | | | | 3,334,158 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (a) | | | 533,952 | | | | 155,991 | | | | 689,943 | |
| Amortization (a) | | | - | | | | 12,782 | | | | | |
| Amortization (d) | | | | | | | 571,975 | | | | 584,757 | |
| (Gain) loss on foreign exchange | | | 625,215 | | | | - | | | | 625,215 | |
| Rental real estate operating expenses (a) | | | 1,107,517 | | | | 466,479 | | | | 1,573,996 | |
| | | | 2,266,684 | | | | 1,207,227 | | | | 3,473,911 | |
| EARNINGS BEFORE THE FOLLOWING | | | 800,721 | | | | (940,474 | ) | | | (139,753 | ) |
| | | | | | | | | | | | | |
| Amortization (b) | | | (571,975 | ) | | | 571,975 | | | | - | |
| Interest on long-term debt | | | (230,698 | ) | | | - | | | | (230,698 | ) |
| | | | (802,673 | ) | | | 571,975 | | | | (230,698 | ) |
| EARNINGS (LOSS) BEFORE THE FOLLOWING | | | (1,952 | ) | | | (368,499 | ) | | | (370,451 | ) |
| OTHER INCOME AND EXPENSE | | | | | | | | | | | | |
Investment income (d) | | | - | | | | 492,202 | | | | | |
| Investment income (a) | | | | | | | 3,727 | | | | 495,929 | |
Gain on sale of investment | | | 1,158,950 | | | | - | | | | 1,158,950 | |
| | | | 1,158,950 | | | | 495,929 | | | | 1,654,879 | |
| EARNINGS BEFORE INCOME TAXES | | | 1,156,998 | | | | 127,430 | | | | 1,284,428 | |
| Income taxes (recovery) (a) | | | 277,414 | | | | 63,061 | | | | 340,475 | |
| | | | | | | | | | | | | |
| NET EARNINGS FOR THE YEAR | | | 879,584 | | | | 64,369 | | | | 943,953 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
Unrealized gain (loss) on available for sale Financial assets during the year (b) | | | 247,225 | | | | (24,138 | ) | | | 223,087 | |
Reclassification adjustment for gains and losses Included in net earnings | | | (185,476 | ) | | | - | | | | (185,476 | ) |
| | | | 61,749 | | | | (24,138 | ) | | | 37,611 | |
COMPREHENSIVE INCOME FOR THE YEAR | | | 941,333 | | | | 40,231 | | | | 981,564 | |
| | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | |
| Earnings available to common shareholders | | $ | 879,584 | | | | | | | $ | 943,953 | |
| | | | | | | | | | | | | |
| Basic | | | $0.04 | | | | | | | | $0.05 | |
| Diluted | | | $0.04 | | | | | | | | $0.05 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | | $ | | | | $ | | | | $ | |
| Year Ended September 30, 2006 (Restated) | | | | | | | | | | | | |
| REVENUE | | | | | | | | | | | | |
| Rent (a) | | | 3,154,821 | | | | 719,114 | | | | 3,873,935 | |
| Investment income (b) | | | 409,523 | | | | (409,523 | ) | | | - | |
| | | | 3,564,344 | | | | 309,591 | | | | 3,873,935 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (a) | | | 504,343 | | | | 158,452 | | | | 662,795 | |
| Amortization (d) | | | - | | | | 618,607 | | | | | |
| Amortization (a) | | | | | | | 12,798 | | | | 631,405 | |
| Bad debt (recovery) | | | (228,472 | ) | | | - | | | | (228,472 | ) |
| (Gain) loss on foreign exchange | | | 85,396 | | | | - | | | | 85,396 | |
| Rental real estate operating expenses (a) | | | 1,095,808 | | | | 465,758 | | | | 1,561,566 | |
| | | | 1,457,075 | | | | 1,255,615 | | | | 2,712,690 | |
| EARNINGS BEFORE THE FOLLOWING | | | 2,107,269 | | | | (946,024 | ) | | | 1,161,245 | |
| | | | | | | | | | | | | |
| Amortization (b) | | | (618,607 | ) | | | 618,607 | | | | - | |
| Interest on long-term debt | | | (256,741 | ) | | | - | | | | (256,741 | ) |
| | | | (875,348 | ) | | | 618,607 | | | | (256,741 | ) |
| EARNINGS (LOSS) BEFORE THE FOLLOWING | | | 1,231,921 | | | | (327,417 | ) | | | 904,504 | |
| OTHER INCOME AND EXPENSE | | | | | | | | | | | | |
Investment income (d) | | | - | | | | 409,523 | | | | | |
| Investment income (a) | | | | | | | 13,844 | | | | | |
| Investment income (b) | | | | | | | 15,116 | | | | 438,483 | |
| | | | - | | | | 438,483 | | | | 438,483 | |
| EARNINGS BEFORE INCOME TAXES | | | 1,231,921 | | | | 111,066 | | | | 1,342,987 | |
| Income taxes (recovery) (a) | | | 346,808 | | | | 46,807 | | | | 393,615 | |
| NET EARNINGS FOR THE YEAR | | | 885,113 | | | | 64,259 | | | | 949,372 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
Unrealized gain (loss) on available for sale financial assets during the year (b) | | | - | | | | (797,708 | ) | | | (797,708 | ) |
| | | | - | | | | (797,708 | ) | | | (797,708 | ) |
COMPREHENSIVE INCOME FOR THE YEAR | | | 885,113 | | | | (733,449 | ) | | | 151,664 | |
| | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | |
| Earnings available to common shareholders | | $ | 885,113 | | | | | | | $ | 949,372 | |
| | | | | | | | | | | | | |
| Basic | | | $0.04 | | | | | | | | $0.05 | |
| Diluted | | | $0.04 | | | | | | | | $0.05 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
RECONCILIATION OF U.S. GAAP EFFECTIVE INCOME TAX PROVISION (RECOVERY)
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | (Restated) | |
| | | % | | | % | | | % | |
Income taxes computed at statutory combined basic income tax rates | | | 34.1 | | | | 36.1 | | | | 36.1 | |
Non-deductible items | | | 1.0 | | | | 0.2 | | | | 3.8 | |
Non-taxable portion of capital gains | | | (15.7 | ) | | | (17.4 | ) | | | (0.2 | ) |
Revaluation of benefits of future taxes | | | (38.5 | ) | | | (4.1 | ) | | | (11.5 | ) |
Other | | | (1.0 | ) | | | 11.7 | | | | 1.1 | |
Effective income tax provision | | | (20.1 | ) | | | 26.5 | | | | 29.3 | |
RECONCILIATION OF SHAREHOLDERS’ EQUITY:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | (Restated) | |
Shareholders’ equity based on Canadian GAAP | | | 15,938,374 | | | | 16,791,534 | | | | 15,904,900 | |
Increase stated value of retractable shares to fair value | | | (4,553,036 | ) | | | - | | | | - | |
Unrealized gain (loss) on available for sale financial assets | | | (24,138 | ) | | | (24,138 | ) | | | (55,674 | ) |
| Unrealized gain on trading security financial assets | | | 74,852 | | | | - | | | | - | |
Effect on future taxes of unrealized gain on available for sale financial assets | | | (8,405 | ) | | | - | | | | - | |
Shareholders’ equity of Ninety Ontario Street Inc. accounted for as a reorganization of entities under common control | | | 132,958 | | | | 485,676 | | | | 421,501 | |
Prior period adjustment on accounting for short-term investments | | | - | | | | (11,030 | ) | | | - | |
Effect on future taxes of short-term investment prior period adjustment | | | - | | | | 3,980 | | | | - | |
Effect of depreciation recorded on appraised value of fixed assets instead of cost | | | 23,340 | | | | - | | | | - | |
Effect on future taxes of depreciation differences | | | (6,769 | ) | | | - | | | | - | |
Shareholder’s equity based on U.S. GAAP | | | 11,577,176 | | | | 17,246,022 | | | | 16,270,727 | |
ACCOUNTING POLICY
Accounts and Notes receivable
Notes and accounts receivable are recorded under the terms of the agreement or at the invoiced amount, are periodically assessed for recoverability and an allowance for doubtful accounts established. A note or account receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest. Interest income is not recognized when a note or account receivable becomes uncollectible.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
LONG-TERM DEBT
| | | 2008 | | | 2007 | |
First mortgage bearing interest at prime (4.75%; 2007 – 6.25%) plus 1.75% per annum, repayable in monthly payments of $5,217plus interest with the balance due August 1, 2011 | | $ | 182,587 | | | $ | 245,187 | |
| | | | | | | | | |
First mortgage bearing interest at 6.52% per annum, blended monthly payments of $19,535 with the balance due December 1, 2007 | | | - | | | | 57,982 | |
| | | | | | | | | |
First mortgage bearing interest at 4.63% per annum, repayable in blended monthly payments of $25,005 with the balance due July 1, 2010 | | | 2,736,570 | | | | 2,906,671 | |
| | | | | | | | | |
First mortgage bearing interest at lender’s base rate (6.75% ) plus 0.2% (2007 – 7.7%) per annum, repayable in monthly payments of $4,453 plus interest with the balance due September 1, 2022 | | | 743,782 | | | | 795,147 | |
| | | | 3,662,939 | | | | 4,004,987 | |
Current portion | | | 294,330 | | | | 326,565 | |
| | | $ | 3,368,609 | | | $ | 3,678,422 | |
| | | | | | | | | |
| | RETRACTABLE PREFERRED SHARES |
The Class A, series 1 shares have the following attributes: |
non-voting, non-participating, redeemable and retractable at $15.00 |
per share, 8% cumulative, convertible into either Common shares at the rate of 20 Common |
shares or 300 Class B Preference shares for each Class A Preference share |
| | The Class A, series 1 shares carry liquidation rights ahead of the Class B preferred shares an the common shares |
| | The aggregate redemption value at September 30, 2008 is $4,991,819. |
| | The shares are accounted for as mezzanine equity because they are redeemable at a fixed price at the option of the holder. |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | (Restated) | |
Interest income | | $ | 290,985 | | | $ | 388,297 | | | $ | 296,585 | |
Management fees | | | 4,650 | | | | 4,983 | | | | - | |
Realized gain on investments | | | 109,164 | | | | 102,649 | | | | 141,898 | |
| | | | | | | | | | | | | |
Investment income | | $ | 404,799 | | | $ | 495,929 | | | $ | 438,483 | |
| | | | | | | | | | | | | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
| | Related Party Transactions |
The Company has outstanding balances and transactions with its consolidated subsidiary and former subsidiary, which have been eliminated on consolidation.
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | (Restated) | |
| | | | $ | | | | $ | | | | $ | |
Rallets Realty Inc. (consolidated subsidiary) | | | | | | | | | | | | |
| Non-interest bearing loan payable | | | 860,000 | | | | 900,000 | | | | 920,000 | |
| | | | | | | | | | | | | |
127627 Ontario Limited (consolidated subsidiary) | | | | | | | | | | | | |
| Non-interest bearing loan receivable | | | 2,222,000 | | | | 2,222,000 | | | | 2,222,000 | |
| | | | | | | | | | | | | |
767705 Ontario Limited (consolidated subsidiary) | | | | | | | | | | | | |
| Interest bearing loan receivable | | | 3,000,000 | | | | 3,000,000 | | | | 3,000,000 | |
| Accrued interest receivable | | | 630,691 | | | | 641,820 | | | | 803,171 | |
| Loan payable | | | (63,000 | ) | | | (218,000 | ) | | | (245,000 | ) |
| Interest revenue | | | (222,173 | ) | | | (241,676 | ) | | | (223,521 | ) |
| Interest expense | | | (222,173 | ) | | | (241,676 | ) | | | (223,521 | ) |
Significant related party transactions not disclosed elsewhere in these consolidated financial statements are as follows:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | (Restated) | |
| | | | $ | | | | $ | | | | $ | |
| Rental Revenue | | | | | | | | | | | | |
| The Company received rents from companies of which directors and officers are also directors and/or officers of the Company | | | 1,027,954 | | | | 1,385,414 | | | | 1,874,865 | |
| Investment Income | | | | | | | | | | | | |
| The Company received interest from a company of which the President is also a director, officer and majority shareholder | | | 19,584 | | | | 24,273 | | | | 24,434 | |
| Administrative and General Expenses | | | | | | | | | | | | |
| Administration and management fees were paid to a company a director and officer of which is also a director and officer of the Company | | | 200,000 | | | | 200,000 | | | | 172,333 | |
Property management fees were paid to a company of which a director and officer is also directors and/or officers of the Company. | | | 206,000 | | | | 206,000 | | | | 206,000 | |
| Consulting fees were paid to the President of the Company for services rendered | | | 36,000 | | | | 36,000 | | | | 36,000 | |
| A bonus was paid to an officer of the Company for services rendered. | | | 150,000 | | | | - | | | | - | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
Fair Value Measurements
The Company’s consolidated balance sheets include the following financial instruments: cash, marketable securities, accounts receivable, note and mortgages receivable and accounts payable. The carrying amounts of current assets and liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
The Company adopted FAS 157 for its financial assets and liabilities as of October 1, 2007. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value instruments. The fair value hierarchy is as follows:
Level 1 – Quoted (unadjusted) prices for identical assets and liabilities in active markets
Level 2 – inputs other than quoted prices, included with Level 1 that are observable for the asset or liability, either directly or indirectly, including:
| · | Quoted prices for similar assets/liabilities in active markets; |
| · | Quoted prices for identical or similar assets in non-active markets (few transactions, limited information, non-current prices, high variable over time); |
| · | Inputs other than quoted prices that are observable for the asset/liability (e.g. interest rates, yield curves, volatilities, default rates, etc); and; |
| · | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 – Unobservable inputs that cannot be corroborated by other observable market data.
The Company’s assets are measured as follows:
Cash – the carrying value of cash approximates fair value as maturities are less than three months
Marketable Securities – The estimated fair values of the marketable securities are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the price.
Note receivable – The estimated fair value of the note receivable is based on unobservable inputs that cannot be corroborated by observed market data.
Mortgage receivable – The estimated fair value of the mortgage receivable is based on inputs that are derived principally from or corroborated by other observable market data.
Long-term debt – The estimated fair value of the mortgages is based on inputs that are derived principally from or corroborated by other observable market data.
| | | | | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | | | | | | | | |
Assets: | | September 30, 2008 | | | Quoted Prices in Active Markets for Identical Level Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | | |
Cash | | | 6,824,707 | | | $ | 6,824,707 | | | $ | - | | | $ | - | |
Marketable securities | | | 1,917,693 | | | | 990,759 | | | | 926 934 | | | | - | |
Note receivable | | | 249,000 | | | | - | | | | - | | | | 249,000 | |
Mortgage receivable | | | 365,125 | | | | - | | | | 365,125 | | | | - | |
Mortgages payable | | | 3,662,939 | | | | - | | | | 3,662,939 | | | | - | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008, 2007 AND 2006
(Expressed in Canadian Dollars)
| 15. | SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | |
| | | Note Receivable | |
| | | | |
Balance at beginning of period | | | $249,000 | |
| | | | | |
Interest earned | | | 19,584 | |
| | | | | |
Included in earnings | | | (19,584 | ) |
| | | | | |
Balance at end of period | | | $249,000 | |
| | | | | |
Impact of recent United States accounting pronouncements
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
SFAS No. 161 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the quarterly disclosures requirements in SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company will adopt these deferred provisions on October 1, 2008 and does not expect them to have a material impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company will adopt these provisions on October 1, 2008 and does not expect them to have a material impact on our consolidated financial statements.
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The Company is currently assessing the affect of its adoption may have on its consolidated financial statements.
SFAS No. 141(R) in December 2007, the FASB issued SFAS No. 141(R) Business Combinations. The statement provides revised guidance for recognition and measuring assets acquired and liabilities assumed in a business combination. It also requires transaction costs for a business combination to be expensed as incurred. SFAS 141(R) will impact our accounting for and business combinations we complete after 2008.*
| GENTERRA INC. | | | | | | | | | | | | | | | | | | | | | | | | | |
| SCHEDULE XXVIII | | | | | | | | | | | | | | | | | | | | | | | | | |
| REAL ESTATE AND ACCUMULATED DEPRECIATION | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Expressed in Canadian Dollars) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIFE ON WHICH |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | DEPRECIATION |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | IN LATEST |
| | | | | | | | | | COSTS CAPITALIZED | | | GROSS AMOUNT | | | | | | | INCOME |
| | | | INITIAL COST | | | SUBSEQUENT TO | | | AT WHICH CARRIED | | | ACCUMULATED | | DATE OF | DATE | STATEMENT |
| DESCRIPTION | ENCUMBERANCES | | TO THE COMPANY | | | ACQUISITION | | | AT CLOSE OF PERIOD | | | DEPRECIATION | | CONSTRUCTION | ACQUIRED | IS COMPUTED |
| | | | LAND | | | | | | IMPROVEMENTS | | | | | | TOTAL | | | LAND | | | | | | TOTAL | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial Building | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Toronto, Ontario | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | $ | 2,736,570 | | $ | 560,000 | | | $ | 4,702,714 | | | $ | 53,875 | | | $ | - | | | $ | 53,875 | | | $ | 560,000 | | | $ | 4,756,589 | | | $ | 5,316,589 | | | $ | 1,075,319 | | 1953 | January 1, 2004 | 40 Years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial Building | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Toronto, Ontario | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | - | | | 50,000 | | | | 586,614 | | | | - | | | | - | | | | - | | | | 50,000 | | | | 586,614 | | | | 636,614 | | | | 410,732 | | 1909 & 1911 | June 27, 2008 | 40 Years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial Building | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hamilton, Ontario | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | 182,587 | | | 305,000 | | | | 1,418,000 | | | | 50,000 | | | | - | | | | 50,000 | | | | 305,000 | | | | 1,468,000 | | | | 1,773,000 | | | | 291,210 | | 1918 | January 1, 2004 | 40 Years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial Building | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cambridge, Ontario | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | - | | | 750,000 | | | | 4,649,000 | | | | - | | | | - | | | | - | | | | 585,000 | | | | 4,649,000 | | | | 5,234,000 | | | | 979,091 | | 1966 | January 1, 2004 | 40 Years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Building | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Newmarket, Ontario | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | 743,782 | | | 163,027 | | | | 786,973 | | | | 205,790 | | | | - | | | | 205,790 | | | | 163,027 | | | | 992,763 | | | | 1,155,790 | | | | 252,451 | | 1986 | January 1, 2004 | 40 Years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 3,662,939 | | $ | 1,828,027 | | | $ | 12,143,301 | | | $ | 309,665 | | | $ | - | | | $ | 309,665 | | | $ | 1,663,027 | | | $ | 12,452,966 | | | $ | 14,115,993 | | | $ | 3,008,803 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RECONCILIATION | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Cost | | | | | | | | Accumulated Depreciation | | | | | | | Notes | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2008 | | | 2007 | | | 2006 | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 13,930,566 | | | $ | 13,922,751 | | | $ | 13,246,438 | | | | | | | $ | 2,573,081 | | | $ | 2,032,798 | | | $ | 1,062,888 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Additions during the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other additions represent an adjustment of the carrying value to account for the future income tax liabilities on certain properties. |
| Acquisitions through forclosure | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | |
| Other acquisitions | | | - | | | | - | | | | 626,364 | | | | | | | | - | | | | - | | | | 367,981 | | | | | | | Aggregate cost for Federal income tax purposes is $1,689,377 for land and $14,380,840) for buildings and improvements |
| Improvements, etc. | | | 18,336 | | | | 52,289 | | | | 79,425 | | | | | | | | - | | | | - | | | | - | | | | | | | |
| Depreciation for the period | | | - | | | | - | | | | - | | | | | | | | 535,631 | | | | 584,757 | | | | 631,405 | | | | | | | The acquisition of property during the year was from an non-arms length party under common control with the company. The acquisition has been accounted for as a reorganization of entities under common control with the property recorded at historical cost. |
| Other | | | | | 267,000 | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | |
| | | | | | 285,336 | | | | 52,289 | | | | 705,789 | | | | | | | | 535,631 | | | | 584,757 | | | | 999,386 | | | | | | | |
| Deductions during the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of real estate sold | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | | | | | | |
| Other (fully depreciated) | | | 99,909 | | | | 44,474 | | | | 29,476 | | | | | | | | 99,909 | | | | 44,474 | | | | 29,476 | | | | | | | | | | | | |
| | | | | | 99,909 | | | | 44,474 | | | | 29,476 | | | | | | | | 99,909 | | | | 44,474 | | | | 29,476 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at end of period | | $ | 14,115,993 | | | $ | 13,930,566 | | | $ | 13,922,751 | | | | | | | $ | 3,008,803 | | | $ | 2,573,081 | | | $ | 2,032,798 | | | | | | | | | | | | |
The following discussion of "Liquidity and Capital Resources" and "Results of Operations" sets forth items derived from the consolidated statements of operations for the six month periods ended March 31, 2009 and 2008, prepared in accordance with Canadian GAAP. A summary of the differences between Canadian and US accounting principles are detailed in the note to the Consolidated Financial Statements included herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, marketable securities and cash flow from rental, finance and investment operations.
The Company's working capital amounted to $9,820,149 at March 31, 2009, compared to $9,545,491 at September 30, 2008. The ratio of current assets to current liabilities was 12.9:1 at March 31, 2009 and 13.1:1 at September 30, 2008. The increase in working capital is primarily due to the cash generated from operations during the period.
During the six month period ended March 31, 2009, the Company’s cash position increased by $728,022 to $7,552,729. The change was due to the net result of the following increases and utilizations:
- - Operating Activities increased cash by $910,746. This was as a result of $752,333 in cash generated from operations, net of an unrealized gain of $16,969 on foreign exchange, and $158,413 of cash realized due to the changes in non-cash components of working capital.
- - Financing Activities decreased cash by $146,141. The Company utilized $146,141 to make scheduled repayments of mortgage obligations.
- - Investing Activities decreased cash by $36,583. The Company utilized $51,750 in cash for investment in a note and mortgage receivable, $27,850 for expenditures on rental real estate properties and realized $43,017 from a change in the Company’s holdings in marketable securities.
The following table provides a summary of certain information with respect to the Company’s capital structure and financial position:
| | March 31, 2009 | | September 30, 2008 |
Net debt : Shareholders’ equity | 0.55 : 1 | | 0.54 : 1 |
Net debt : Total capitalization | 0.35 : 1 | | 0.35 : 1 |
The Company anticipates that it will require approximately $2,700,000 in order to meet its ongoing expected costs for the next twelve months. These costs include real estate operating expenses, fees for management and administrative services provided to the Company, legal and audit fees, financing expenses, public company shareholder costs and income taxes. The Company expects to generate the revenue required in order to service these expenditures from rental revenue from existing leased real estate, finance and investment income. The Company also has scheduled long-term debt repayments of approximately $298,000 in the next twelve months. Cash flow from operations will be used to finance these regularly scheduled debt repayments.
RESULTS OF OPERATIONS
The following table sets forth items derived from the consolidated statements of operations (expressed in thousands of dollars except for earnings per share) for each of the eight most recently completed quarters.
| | | 2009 | | | 2008 | | | 2007 | |
| | | Second Quarter | | | First Quarter | | | Fourth Quarter | | | Third Quarter | | | Second Quarter | | | First Quarter | | | Fourth Quarter | | | Third Quarter | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 733 | | | $ | 592 | | | $ | 810 | | | $ | 576 | | | $ | 627 | | | $ | 770 | | | $ | 676 | | | $ | 655 | |
Net earnings (loss) | | | (218 | ) | | | 196 | | | | 87 | | | | (19 | ) | | | 156 | | | | 79 | | | | (159 | ) | | | (224 | ) |
| Earnings (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.011 | ) | | $ | 0.010 | | | $ | 0.005 | | | $ | (0.001 | ) | | $ | 0.007 | | | $ | 0.003 | | | $ | (0.012 | ) | | $ | (0.013 | ) |
| Fully Diluted | | $ | (0.011 | ) | | $ | 0.010 | | | $ | 0.005 | | | $ | (0.001 | ) | | $ | 0.007 | | | $ | 0.003 | | | $ | (0.012 | ) | | $ | (0.013 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Periods ended March 31, 2009 and 2008
The following table sets forth items derived from the consolidated statements of operations for the three and six month periods ended March 31, 2009 and 2008.
| | | Three Months Ended March 31 (Unaudited) | | | Six Months Ended March 31 (Unaudited) | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| Revenue | | $ | 732,985 | | | $ | 626,702 | | | $ | 1,324,491 | | | $ | 1,396,340 | |
| Administrative expenses | | | (160,026 | ) | | | (166,730 | ) | | | (269,584 | ) | | | (296,715 | ) |
| Gain on foreign exchange | | | 3,803 | | | | 129,963 | | | | 468,248 | | | | 117,223 | |
| Rental real estate operating expenses | | | (464,646 | ) | | | (348,789 | ) | | | (887,580 | ) | | | (634,617 | ) |
| Other expenses | | | (286,356 | ) | | | (179,238 | ) | | | (579,998 | ) | | | (371,332 | ) |
| Earnings (loss) before the undernoted | | | (174,240 | ) | | | 61,908 | | | | 55,577 | | | | 210,899 | |
| Income taxes | | | (43,817 | ) | | | 93,675 | | | | (77,975 | ) | | | 23,868 | |
Net earnings (loss) | | $ | (218,057 | ) | | $ | 155,583 | | | $ | (22,398 | ) | | $ | 234,767 | |
| | | | | | | | | | | | | | | | | |
Revenue. Rental revenue for the second quarter ended March 31, 2009 was $782,367, an increase of $174,859 as compared to $607,508 for the comparable 2008 period. Rental revenue for the six months ended March 31, 2009 was $1,539,205, an increase of $315,099, as compared to $1,224,106 for the comparable 2008 period. The increase in rental revenue compared to the 2008 period was attributable to the inclusion of rental revenue from the June 2008 acquisition of the Ontario Street property (“Ontario Street”). Investment loss for the three months ended March 31, 2009 was $49,382 as compared to investment income of $19,194 for the comparable 2008 period. Investment loss for the six months ended March 31, 2009 was $214,714 as compared to investment income of $172,234 for the comparable 2008 period. The decrease in investment income was due to the poor performance of the global equity markets during the period.
Administrative Expenses. Administrative expenses include fees for management and administrative services, legal and audit fees, financing expenses and public company shareholder costs. Administrative expenses for the three months ended March 31, 2009 were $160,026 as compared to $166,730 for the comparable 2008 period. Administrative expenses for the six months ended March 31, 2009 were $269,584 as compared to $296,715 for the comparable 2008 period.
Gain on Foreign Exchange. The Company holds certain amounts of its cash in United States dollars. The Company incurred foreign exchange gains of $3,803 and $468,248 during the three and six month periods ended March 31, 2009. This compares to foreign exchange gains of $129,963 and $117,223 for the comparable 2008 periods. The gains for three and six month periods ended March 31, 2009 resulted from the strengthening of the United States Dollar. The Company disposed of the majority of its United States Dollars during the first quarter of fiscal 2009.
Rental Real Estate Operating Expenses. Rental real estate operating expenses for the three months ended March 31, 2009 were $464,646 as compared to $348,789 for the comparable 2008 period. Rental real estate operating expenses for the six months ended March 31, 2009 were $887,580 as compared to $634,617 for the comparable 2008 period. The increase in rental real estate operating expenses is primarily due to the inclusion of expenses relating to the Ontario Street property.
Other Expenses. The Company incurred interest expense of $40,947 and $ 52,137 for the three months ended March 31, 2009 and 2008 respectively. Interest expense for the six month periods ended March 31, 2009 and 2008 were $85,943 and $107,488 respectively. Amortization for the three months ended March 31, 2009 and 2008 were $148,949 and $127,101 respectively. Amortization for the six month periods ended March 31, 2009 and 2008 was $298,991 and $263,844 respectively. During the three and six month periods ended March 31, 2009 the Company recorded cumulative dividends of $96,460 and $195,064 respectively on its retractable preference shares respectively. These shares are classified as debt and the cumulative dividends are recorded as an expense of operations.
Income Tax Provision. During the three and six month periods ended March 31, 2009 the Company recorded income taxes of $43,817 and $77,975 respectively. This compares to income tax recoveries of $93,675 and $23,868 respectively for the comparative 2008 periods. The effective tax rates were 25.1% and (151.3)% for the three month periods ended March 31, 2009 and 2008 respectively. The effective tax rates were 140.3% and (11.3%) for the six month periods ended March 31, 2009 and 2008. The difference between the Company’s statutory tax rate and its effective tax rate is due to permanent differences primarily associated with the tax treatment of dividends on retractable preference shares and the tax treatment of capital transactions.
Net Earnings (loss). The Company reported net loss of $218,057 for the three months ended March 31, 2009 compared with net earnings of $155,583 for the comparable 2008 period. Net loss for the six months ended March 31, 2009 was $22,398 as compared to net earnings of $234,676 for the comparable 2008 period. The 2009 results were impacted by the poor performance of global equity markets, the dividends on the cumulative retractable preference shares and the foreign exchange gain resulting from the strengthening of the U.S. Dollar.
Inflation. Inflation has not had a material impact on the results of the Company’s operations during the periods under review and it is not anticipated to materially impact the Company’s operations during the current fiscal year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve capital while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment could decline. We currently maintain an investment portfolio consisting of short-term deposits, Canadian bond obligations and equity investments. Due to the relative short-term nature of these investments, we believe that we have no material exposure to interest rate risk arising from our investments.
GENTERRA INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
MARCH 31, 2009
(UNAUDITED)
| | | | | | |
| GENTERRA INC. | | | |
| | | | | | |
| | | | | | |
| CONSOLIDATED BALANCE SHEET |
| | | | | | |
| | | | | | |
| | | | | | |
| | (Unaudited) | | | | |
| | March 31 | | | September 30 | |
| | 2009 | | | 2008 | |
| A S S E T S | | | |
| | | | | | |
| CURRENT | | | | | |
| Cash and short-term investments | $ | $7,552,729 | | | $ | $6,824,707 | |
| Marketable securities | | 1,568,965 | | | | 1,917,693 | |
| Accounts receivable | | 694,025 | | | | 932,036 | |
| Prepaid expenses and deposits | | 301,137 | | | | 191,529 | |
| Current portion of note and mortgage receivable | | 416,875 | | | | 365,125 | |
| Future income taxes | | 111,084 | | | | 104,940 | |
| | | | | | | | |
| | | 10,644,815 | | | | 10,336,030 | |
| | | | | | | | |
| NOTE AND MORTGAGE RECEIVABLE | | 249,000 | | | | 249,000 | |
| | | | | | | | |
| RENTAL REAL ESTATE PROPERTIES | | 16,292,784 | | | | 16,563,924 | |
| | | | | | | | |
| FUTURE INCOME TAXES | | 147,207 | | | | 164,702 | |
| | | | | | | | |
| | | | | | | | |
| | $ | 27,333,806 | | | $ | 27,313,656 | |
| | | | | | | | |
| L I A B I L I T I E S | | | | |
| | | | | | | | |
| CURRENT | | | | | | | |
| Accounts payable and accrued liabilities | $ | 489,950 | | | $ | 475,224 | |
| Income taxes payable | | 36,269 | | | | 20,985 | |
| Current portion of long-term debt | | 298,447 | | | | 294,330 | |
| | | | | | | | |
| | | 824,666 | | | | 790,539 | |
| | | | | | | | |
| LONG-TERM DEBT | | 3,218,352 | | | | 3,368,609 | |
| | | | | | | | |
| FUTURE INCOME TAXES | | 2,187,929 | | | | 2,224,315 | |
| | | | | | | | |
| RETRACTABLE PREFERENCE SHARES | | 5,186,883 | | | | 4,991,819 | |
| | | | | | | | |
| | | 11,417,830 | | | | 11,375,282 | |
| | | | | | | | |
| S H A R E H O L D E R S' E Q U I T Y |
| | | | | | | | |
| CAPITAL STOCK | | 12,134,546 | | | | 12,134,546 | |
| | | | | | | | |
| RETAINED EARNINGS | | 3,781,430 | | | | 3,803,828 | |
| | | | | | | | |
| | | | | | | | |
| | | 15,915,976 | | | | 15,938,374 | |
| | | | | | | | |
| | | | | | | | |
| | $ | 27,333,806 | | | $ | 27,313,656 | |
| GENTERRA INC. | |
| | | | | | |
| | | | | | |
| CONSOLIDATED STATEMENT OF RETAINED EARNINGS | |
| | | | | | |
| (Unaudited) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | Six Months ended March 31 | |
| | 2009 | | | 2008 | |
| | | | | | |
| Balance, beginning of period | $ | 3,803,828 | | | $ | 3,657,589 | |
| | | | | | | | |
| | | | | | | | |
| Net earnings (loss) for the period | | (22,398 | ) | | | 234,767 | |
| | | | | | | | |
| Balance, end of period | $ | 3,781,430 | | | $ | 3,892,356 | |
| | |
| GENTERRA INC. | |
| | | | | | |
| | | | | | |
| CONSOLIDATED STATEMENT OF OPERATIONS AND | |
| COMPREHENSIVE LOSS | |
| | | | | | |
| (Unaudited) | |
| | | | | | |
| | | | | | |
| | Six Months ended March 31 | |
| | 2009 | | | 2008 | |
| | | | | | |
| REVENUE | | | | | |
| Rent | $ | 1,539,205 | | | $ | 1,224,106 | |
| Investment income (loss) | | (214,714 | ) | | | 172,234 | |
| | | 1,324,491 | | | | 1,396,340 | |
| | | | | | | | |
| EXPENSES | | | | | | | |
| Administrative and general | | 269,584 | | | | 296,715 | |
| Gain on foreign exchange | | (468,248 | ) | | | (117,223 | ) |
| Rental real estate operating expenses | | 887,580 | | | | 634,617 | |
| | | 688,916 | | | | 814,109 | |
| | | | | | | | |
| Earnings before the following | | 635,575 | | | | 582,231 | |
| | | | | | | | |
| Amortization | | 298,991 | | | | 263,844 | |
| Dividends on retractable preference shares | | 195,064 | | | | - | |
| Interest on long-term debt | | 85,943 | | | | 107,488 | |
| | | 579,998 | | | | 371,332 | |
| | | | | | | | |
| Earnings (loss) before income taxes | | 55,577 | | | | 210,899 | |
| | | | | | | | |
| Income taxes (recovered) Current | | 103,010 | | | | 58,372 | |
| Future | | (25,035 | ) | | | (82,240 | ) |
| | | 77,975 | | | | (23,868 | ) |
| | | | | | | | |
| NET EARNINGS (LOSS) FOR THE PERIOD | | | | | |
| ALSO BEING COMPREHENSIVE INCOME | | | | | |
| (LOSS) FOR THE PERIOD | $ | (22,398 | ) | | $ | 234,767 | |
| | | | | | | | |
| EARNINGS (LOSS) PER SHARE | | | | | | | |
| | | | | | | | |
| Basic and fully diluted | $ | (0.001 | ) | | $ | 0.011 | |
| | | | | | | | |
| | | | | | | | |
| Weighted average number of shares | | | | | | | |
| | | | | | | | |
| Basic and fully diluted | | 19,339,211 | | | | 18,798,557 | |
| | | | | | | | |
| The effect on the 2009 Fiscal year-to-date and second quarter loss per share of the conversion of the | |
| Class A preference shares is anti-dilutive and therefore not disclosed. | |
| | | | | | | | |
| The effect on the 2008 Fiscal year-to-date and second quarter earnings per share of the conversion of | |
| the Class F preference shares is anti-dilutive and therefore not disclosed. | |
| GENTERRA INC. | |
| | | | | | |
| | | | | | |
| CONSOLIDATED STATEMENT OF CASH FLOWS | |
| | | | | | |
| (Unaudited) | |
| | | | | | |
| | | | | | |
| | | | Six Months ended March 31 | |
| | 2009 | | | 2008 | |
| | | | | | |
| OPERATING ACTIVITIES | | | | | |
| Net earnings (loss) for the period | $ | (22,398 | ) | | $ | 234,767 | |
| Unrealized loss (gain) on marketable securities | | 305,711 | | | | (11,753 | ) |
| Unrealized gain on foreign exchange | | (16,969 | ) | | | (117,223 | ) |
| Amortization | | 298,991 | | | | 263,844 | |
| Dividends on retractable preference shares | | 195,064 | | | | - | |
| Future income taxes recovered | | (25,035 | ) | | | (82,240 | ) |
| | | 735,364 | | | | 287,395 | |
| Change in non-cash components of working capital | | | | | |
| Accounts receivable | | 238,011 | | | | (101,922 | ) |
| Income taxes recoverable | | - | | | | - | |
| Prepaid expenses and deposits | | (109,608 | ) | | | (48,170 | ) |
| Accounts payable and accrued liabilities | | 14,726 | | | | 133,356 | |
| Income taxes payable | | 15,284 | | | | (9,544 | ) |
| | | 893,777 | | | | 261,115 | |
| | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | |
| Repayment of long-term debt | | (146,141 | ) | | | (197,903 | ) |
| | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | |
| Change in marketable securities | | 43,017 | | | | 25,805 | |
| Expenditures on rental real estate properties | | (27,850 | ) | | | - | |
| Increase in investment in note and mortgage receivable | | (51,750 | ) | | | - | |
| | | (36,583 | ) | | | 25,805 | |
| | | | | | | | |
| UNREALIZED FOREIGN EXCHANGE GAIN | | | | | |
| ON CASH BALANCES | | 16,969 | | | | 117,223 | |
| | | | | | | | |
| CHANGE IN CASH AND CASH EQUIVALENTS | | 728,022 | | | | 206,240 | |
| | | | | | | | |
| Cash and cash equivalents at beginning of period | | 6,824,707 | | | | 7,936,046 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS AT END | | | | | |
| OF PERIOD | $ | 7,552,729 | | | $ | 8,142,286 | |
| | | | | | | | |
| Cash and cash equivalents consist of cash balances with banks, and investments in money | |
| market instruments. | | | | | | | |
| Cash and cash equivalents included in the cash flow statement are comprised of the following | |
| balance sheet amounts: | | | | | | | |
| | | | | | | | |
| Cash balances with banks | $ | 298,943 | | | $ | 436,830 | |
| Money market instruments | | 7,253,786 | | | | 7,705,456 | |
| | | | | | | | |
| Total cash and cash equivalents | $ | 7,552,729 | | | $ | 8,142,286 | |
| | | | | | | | |
| Money market instruments consist primarily of investments in short term deposits with | |
| maturities of three months or less. | | | | | | | |
| | | | | | | | |
| Supplementary cash flow information: | | | | | | | |
| | | | | | | | |
| Income taxes paid | $ | 103,760 | | | $ | 78,927 | |
| Interest paid | $ | 88,202 | | | $ | 104,213 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in Canada on a basis consistent with those followed in the most recent audited consolidated financial statements except as noted below. These unaudited interim consolidated financial statements do not include all the information and footnotes required by the generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes for the year ended September 30, 2008 included in this prospectus. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
In February 2008, the CICA issued amendments to Handbook Section 1000, “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company applied the amendments to Handbook Section 1000 commencing October 1, 2008. The implementation of the amendments to Handbook Section 1000 does not have any impact on the Company’s results of operations, financial position and disclosures as these amendments are clarifications on the application of Handbook Section 1000.
In February 2008, the CICA issued a new accounting standard, Handbook Section 3064, concerning goodwill and intangible assets. The new section replaces the existing guidance on goodwill and other intangible assets and research and development costs. The new section provides additional guidance on measuring the cost of goodwill and intangible assets. The new standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The implementation of this new standard does not have any impact on the Company’s results of operations, financial position and disclosures.
The Emerging Issues Committee (“EIC”) issued a new abstract on January 20, 2009, concerning the measurement of financial assets and financial liabilities (“EIC-173 – Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”) (the “Abstract”). The Abstract was issued to consider the diversity in practice as to whether an entity’s own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial instruments. The Committee reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. The Abstract is effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of the Abstract with retrospective application without restatement of prior periods. The Company applied the new Abstract at the beginning of its current fiscal year. The implementation does not have a significant impact on the Company’s results of operations, financial position and disclosures.
Recent Accounting Pronouncements
In January 2009, the CICA issued new accounting standards, Handbook Section 1582 “Business Combinations”, Handbook Section 1602 “Non-Controlling Interests”, and Handbook Section 1601 “Consolidated Financial Statements”, which are based on the International Accounting Standards Board’s (“IASB”) International Financial Reporting Standard 3, “Business Combinations”. The new standards replace the existing guidance on business combinations and consolidated financial statements. The objective of the new standards is to harmonize Canadian accounting for business combinations with the international and U.S. accounting standards. The new standards are to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier application permitted. Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the new standards shall not be adjusted upon application of these new standards. Section 1602 should be applied retrospectively except for certain items. The Company is currently assessing the impact these new standards may have on its results of operations, financial position and disclosures.
Transition to International Financial Reporting Standards
The Canadian Accounting Standards Board (“AcSB”) confirmed that the adoption of IFRS would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada’s current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards will be effective for the Company in the first quarter of 2011. The Company continues the process of evaluating the potential impact of IFRS to our consolidated financial statements. This will be an ongoing process as new standards and recommendations are issued by the ISAB and the AcSB. While the Company continues its work on the initial planning and assessment stage, including involvement in various training programs, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.
Financial Instruments – Risks and Risk Management
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, note and mortgage receivable, accounts payable and accrued liabilities, long-term debt and retractable preference shares. The Company is exposed to various risks as it relates to these financial instruments. There have not been any changes in the nature of risks or the process of managing these risks from previous periods. The risks and processes for managing the risks are set out below:
Liquidity Risk
Liquidity risk arises from the Company’s management of working capital and principal repayments on its debt obligations. It is the risk that the Company will encounter difficulty in meeting its financial obligations as they fall due.
The Company’s objective is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, the Company seeks to maintain cash balances to meet expected requirements for a period of twelve months. The Company also seeks to reduce liquidity risk by fixing interest rates on its long-term borrowings. At the balance sheet date, the Company expected to have sufficient liquid resources to meet its obligations under all reasonable expected circumstances.
Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Company has reduced its exposure to interest rate risk over the cash flows through the use of fixed rate instruments on certain of its financial liabilities. The Company has not used derivative financial instruments to alter its exposure to interest rate risk.
The Company invests surplus cash in treasury bills and publicly traded corporate bonds, loans and mortgages receivable. Certain long-term borrowings of the Company bear interest on a prime plus basis. In doing so, the Company exposes itself to fluctuations in interest rates that are inherent in such a market. The net annualized effect for the year of a 0.5% decrease in the interest rate at the balance sheet date on these financial instruments would have resulted in a decrease in post-tax earnings of approximately $24,500 (September 30, 2008 - $21,600). A 0.5% increase in the interest rate would, on the same basis, have increased post-tax earnings by the same amount.
Currency Risk
Currency risk is the risk that a variation in exchange rates between the Canadian dollar and foreign currencies will affect the Company’s operating and financial results. Cash and cash equivalents as at March 31, 2009 includes US$86,094 (September 30, 2008 – US$3,831,601). Currency gains (losses) are reflected as a separate component of expenses. The net annualized effect for the year of a $0.01 strengthening of the US Dollar against the Canadian Dollar on the Company’s US Dollar denominated money market instruments carried at the balance sheet date (all other variables held constant) would have resulted in an increase in post-tax earnings of approximately $1,000 (September 30, 2008 - $25,500). A $0.01 weakening in the exchange rate would, on the same basis, have decreased post-tax earnings by the same amount. At March 31, 2009, the Company had no outstanding foreign exchange commitments.
Other Price Risk
Other price risk is the risk that the market value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). The Company moderates this risk through a careful selection and diversification of securities and other financial instruments within the limits of the Company’s objectives and strategy.
Capital Management
The Company’s primary objective when managing capital is to create and maximize shareholder value through the expansion of its portfolio of income producing real estate and the growth of its investments. The Company’s investment strategy is to capitalize on favourable real estate market conditions by acquiring properties that provide the Company with substantial rental income and the potential for future development and capital gain appreciation, with the objective of creating added value to the Company and its shareholders.
The Company considers its total capitalization to consist of long-term debt, Common and Class B preference share capital and accumulated retained earnings as well as its retractable and redeemable Class A preference shares which are classified as a financial liability. There have been no changes in what the Company considers to be capital since the end of the previous fiscal year. The Company does not currently have a formal policy in governing any net debt to equity and net debt to total capitalization ratios.
As at March 31, 2009, the Company has complied with all externally imposed capital requirements.
Proposed Amalgamation
The Company recently announced that its directors have approved a business combination by way of a proposed amalgamation with Consolidated Mercantile Incorporated, a company whose shares are traded on the Toronto Stock Exchange. The transaction is subject to the approval of the shareholders of both companies and the approval of the regulatory authorities.
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES
The Company follows accounting principles generally accepted in Canada. Differences between generally accepted accounting principles in Canada and those generally accepted in the United States of America (United States) are summarized below:
| a) | Acquisition of Subsidiary |
During 2008 the Company acquired a subsidiary containing a rental real estate property from a non-arms length party. The Company and the vendor in this transaction are under common control. Under Canadian GAAP the purchase was recorded using the appraised value of the property and company with the total purchase price satisfied by the issuance of retractable preference shares by the Company. As common control exists in this transaction, under U.S. GAAP the purchase must be recorded as a reorganization of entities under common control using historical carrying values.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
For U.S. GAAP the Company has recorded the short term investments in quoted securities as available for sale securities which are recorded at fair market value with all unrealized holding gain and losses reflected in shareholders’ equity. Unquoted investments were incorrectly recorded in 2006 and 2007 at fair market value. This has been corrected by a restatement of the 2006 and 2007 financial statements. Under Canadian GAAP for 2006, short term investments were carried at historical cost with losses in value being recognized in income only when the loss in value is other than temporary and increases in value being recognized only when realized. During 2007 and 2008 under Canadian GAAP the short term investments are carried at fair market value with all gains and losses reflected in the statement of operations.
The redeemable preference shares are considered mezzanine equity for the purposes of U.S. GAAP. Under this standard, the retractable preferred shares should be disclosed outside of total liabilities and before shareholders equity on the balance sheet. Annual dividends are shown as a reduction to retained earnings and not as an expense to the statement of operations.
| d) | Financial statement presentation |
Certain financial statement presentation is required by US GAAP that is not required for Cdn. GAAP as follows:
| · | Disclosure of unearned rental revenue receivable separate from accounts receivable |
| · | Disclosure of trade accounts payable separate from accrued liabilities |
| · | Disclosure of investment income as other revenue and expense rather than part of revenue |
| · | Inclusion of amortization expense as part of expenses |
| e) | There are no new material items to reconcile Canadian GAAP to U.S. GAAP that need to be quantified. |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
The effect on the consolidated balance sheet of the difference between accounting principles generally accepted in Canada and those generally accepted in the United States is summarized as follows:
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | $ | | | $ | | | $ | |
| March 31, 2009 | | | | | | | | | |
| | | | | | | | | | |
| Marketable securities (b) | | | 1,568,965 | | | | 166,299 | | | | 1,735,264 | |
| Accounts receivable (c) | | | 694,025 | | | | (266,943 | ) | | | 427,082 | |
| Unearned revenue (c) | | | - | | | | 266,943 | | | | 266,943 | |
| Current assets | | | 10,644,815 | | | | 166,299 | | | | 10,811,114 | |
Rental Real Estate Properties (a) | | | 16,292,784 | | | | (5,410,185 | ) | | | 10,882,599 | |
Total assets | | | 27,333,806 | | | | (5,243,886 | ) | | | 22,089,920 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued liabilities (c) | | | 489,950 | | | | (164,209 | ) | | | 325,741 | |
| Trade accounts payable (c) | | | - | | | | 164,209 | | | | 164,209 | |
| Current liabilities | | | 824,666 | | | | - | | | | 824,666 | |
Future income taxes (a) | | | 2,187,929 | | | | (1,011,609 | ) | | | 1,176,320 | |
| Retractable preferred shares (a, c) | | | 5,186,883 | | | | (5,186,883 | ) | | | - | |
Total liabilities | | | 11,417,830 | | | | (6,198,492 | ) | | | 5,219,338 | |
| Retractable preferred shares (a, c) | | | - | | | | 5,186,883 | | | | 5,186,883 | |
| Capital stock | | | 12,134,546 | | | | (296,883 | ) | | | 11,837,663 | |
| Retained earnings (deficit) | | | 3,781,430 | | | | (3,911,256 | ) | | | (129,826 | ) |
| Accumulated comprehensive income | | | - | | | | (24,138 | ) | | | (24,138 | ) |
Total shareholders’ equity | | | 15,915,976 | | | | (4,232,277 | ) | | | 11,683,699 | |
Total liabilities and shareholders’ equity | | | 27,333,806 | | | | (5,243,886 | ) | | | 22,089,920 | |
Comprehensive income
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) requires disclosure of comprehensive income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
The CICA has adopted changes to Handbook Section 1530 Comprehensive Income which harmonizes Canadian GAAP with U.S. GAAP. The CICA requires mandatory implementation of these standards for interim and annual financial statements relating to years commencing on or after October 1, 2006.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
The effect on earnings for the above differences between accounting principles generally accepted in Canada and those accepted in the United States are summarized below:
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | | $ | | | | $ | | | | $ | |
| Six Month Period Ended March 31, 2009 | | | | | | | | | | | | |
| REVENUE | | | | | | | | | | | | |
| Rent (a) | | | 1,539,205 | | | | - | | | | 1,539,205 | |
| Investment income (d) | | | (214,714 | ) | | | 214,714 | | | | - | |
| | | | 1,324,491 | | | | 214,714 | | | | 1,539,205 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (a) | | | 269,584 | | | | - | | | | 269,584 | |
| Amortization (d) | | | - | | | | 298,991 | | | | - | |
| Amortization (a) | | | | | | | (45,967 | ) | | | 253,024 | |
| (Gain) loss on foreign exchange | | | (468,248 | ) | | | - | | | | (468,248 | ) |
| Rental real estate operating expenses (a) | | | 887,580 | | | | - | | | | 887,580 | |
| | | | 688,916 | | | | 253,024 | | | | 941,940 | |
EARNINGS BEFORE THE FOLLOWING | | | 635,575 | | | | (38,310 | ) | | | 597,265 | |
| | | | | | | | | | | | | |
| Amortization (d) | | | (298,991 | ) | | | 298,991 | | | | - | |
| Dividends on retractable preference shares (c) | | | (195,064 | ) | | | 195,064 | | | | - | |
| Interest on long-term debt | | | (85,943 | ) | | | - | | | | (85,943 | ) |
| Investment income (d) | | | - | | | | (214,714 | ) | | | | |
| Investment income (b) | | | | | | | 115,585 | | | | (99,129 | ) |
| | | | (579,998 | ) | | | 394,926 | | | | (185,072 | ) |
| EARNINGS BEFORE INCOME TAXES | | | 55,577 | | | | 356,616 | | | | 412,193 | |
| Income taxes (recovery) (a) | | | 77,975 | | | | 32,631 | | | | 110,606 | |
NET EARNINGS FOR THE YEAR | | | (22,398 | ) | | | 323,985 | | | | 301,587 | |
| | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | |
| Earnings available to common shareholders | | $ | (22,398 | ) | | | | | | $ | 106,522 | |
| | | | | | | | | | | | | |
| Basic | | $ | (0.001 | ) | | | | | | $ | 0.006 | |
| Diluted | | $ | (0.001 | ) | | | | | | $ | 0.006 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
| | | Canadian Accounting Principles | | | Increase (Decrease) | | | U.S. Accounting Principles | |
| | | $ | | | | $ | | | | $ | | |
| Six Month Period Ended March 31, 2008 | | | | | | | | | | | | |
| REVENUE | | | | | | | | | | | | |
| Rent (a) | | | 1,224,106 | | | | 364,922 | | | | 1,589,028 | |
| Investment income (d) | | | 172,234 | | | | (172.234 | ) | | | - | |
| | | | 1,396,340 | | | | 192,688 | | | | 1,589,028 | |
| EXPENSES | | | | | | | | | | | | |
| Administrative and general (a) | | | 296,715 | | | | 127,119 | | | | 423,834 | |
| Amortization (d) | | | - | | | | 298,991 | | | | | |
| Amortization (a) | | | | | | | (29,033 | ) | | | 269,958 | |
| (Gain) loss on foreign exchange | | | (117,223 | ) | | | - | | | | (117,223 | ) |
| Rental real estate operating expenses (a) | | | 634,617 | | | | 265,085 | | | | 899,702 | |
| | | | 814,109 | | | | 662,162 | | | | 1,476,271 | |
| EARNINGS BEFORE THE FOLLOWING | | | 582,231 | | | | (469,474 | ) | | | 112,757 | |
| | | | | | | | | | | | | |
| Amortization (d) | | | (263,844 | ) | | | 263,844 | | | | - | |
| Interest on long-term debt | | | (107,488 | ) | | | - | | | | (107,488 | ) |
| Investment income (d) | | | - | | | | 172,234 | | | | | |
| Investment income (b) | | | | | | | 101,669 | | | | 273,903 | |
| | | | (371,332 | ) | | | 537,747 | | | | 166,415 | |
| EARNINGS BEFORE INCOME TAXES | | | 210,899 | | | | 68,273 | | | | 279,172 | |
| Income taxes (recovery) (a) | | | (23,868 | ) | | | 9,677 | | | | (14,191 | ) |
| NET EARNINGS FOR THE YEAR | | | 234,767 | | | | 58,596 | | | | 293,363 | |
| | | | | | | | | | | | | |
| Earnings per share | | | | | | | | | | | | |
| Earnings available to common shareholders | | $ | 234,767 | | | | | | | $ | 293,363 | |
| | | | | | | | | | | | | |
| Basic | | $ | 0.012 | | | | | | | $ | 0.016 | |
| Diluted | | $ | 0.012 | | | | | | | $ | 0.016 | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
RECONCILIATION OF SHAREHOLDERS’ EQUITY:
| | 2009 | |
| | $ | |
| Shareholders’ equity based on Canadian GAAP | 15,915,976 | |
| Increase stated value of retractable preference shares to fair value | (4,553,036 | ) |
| Retained earning of Ninety Ontario Street Inc. at June 27, 2008 | 132,958 | |
| Effect of accounting for short term investments at lower of cost of fair market value | 166,299 | |
| Effect on future income taxes of short term investment GAAP differences | (25,165 | ) |
| Effect of depreciation recorded on appraised value of fixed assets instead of cost | 69,307 | |
| Effect on future income taxes of fixed asset GAAP differences | (22,640 | ) |
Shareholders’ equity based on U.S. GAAP | 11,683,699 | |
ACCOUNTING POLICY
Accounts and Notes receivable
Notes and accounts receivable are recorded under the terms of the agreement or at the invoiced amount, are periodically assessed for recoverability and an allowance for doubtful accounts established. A note or account receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest. Interest income is not recognized when a note or account receivable becomes uncollectible.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
LONG-TERM DEBT
| | | 2009 | |
First mortgage bearing interest at prime (4.75%; 2007 – 6.25%) plus 1.75% per annum, repayable in monthly payments of $5,217 plus interest with the balance due August 1, 2011 | | $ | 151,286 | |
| | | | | |
First mortgage bearing interest at 4.63% per annum, repayable in blended monthly payments of $25,005 with the balance due July 1, 2010 | | | 2,648,449 | |
| | | | | |
First mortgage bearing interest at lender’s base rate (6.75% ) plus 0.2% (2007 – 7.7%) per annum, repayable in monthly payments of $4,453 plus interest with the balance due September 1, 2022 | | | 717,064 | |
| | | | 3,516,799 | |
Current portion | | | 298,447 | |
| | | $ | 3,218,352 | |
| | | | | |
| | RETRACTABLE PREFERRED SHARES |
| | The Class A, series 1 shares have the following attributes: |
| | non-voting, non-participating, redeemable and retractable at $15.00 |
| | per share, 8% cumulative, convertible into either Common shares at the rate of 20 Common |
| | shares or 300 Class B Preference shares for each Class A Preference share |
| | The Class A, series 1 shares carry liquidation rights ahead of the Class B preferred shares an the common shares |
| | The aggregate redemption value at March 31, 2009 is $5,186,883. |
| | The shares are accounted for as mezzanine equity because they are redeemable at a fixed price at the option of the holder. |
| | | 2009 | |
| | | | |
Interest income | | $ | 64,203 | |
Realized gain (loss) on investments | | | (163,332 | ) |
| | | | | |
Investment income | | $ | (99,129 | ) |
| | | | | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
| | Related Party Transactions |
The Company has outstanding balances and transactions with its consolidated subsidiary and former subsidiary, which have been eliminated on consolidation.
| | 2009 | |
| | $ | |
Rallets Realty Inc. (consolidated subsidiary) | | |
Non-interest bearing loan payable | 860,000 | |
| | | |
127627 Ontario Limited (consolidated subsidiary) | | |
Non-interest bearing loan receivable | 2,216,000 | |
| | | |
767705 Ontario Limited (consolidated subsidiary) | | |
Interest bearing loan receivable | 3,000,000 | |
Accrued interest receivable | 615,657 | |
Interest revenue | (81,904 | ) |
Interest expense | (81,904 | ) |
Significant related party transactions not disclosed elsewhere in these consolidated financial statements are as follows:
Rental Revenue
The Company received rents of $449,111 from companies of which directors and officers are also directors and/or officers of the Company.
Investment Income
The Company received interest of $6,416 from a company of which the President is also a director, officer and majority shareholder.
Administrative and general expenses
Administration and management fees of $100,000 were paid to a company a director and officer of which is also a director and officer of the Company.
Property management fees of $106,800 were paid to a company of which a director and officer is also directors and/or officers of the Company.
Consulting fees of $18,000 were paid to the President of the Company for services rendered.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
Fair Value Measurements
The Company’s consolidated balance sheets include the following financial instruments: cash, marketable securities, accounts receivable, note and mortgages receivable and accounts payable. The carrying amounts of current assets and liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
The Company adopted FAS 157 for its financial assets and liabilities as of October 1, 2007. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value instruments. The fair value hierarchy is as follows:
Level 1 – Quoted (unadjusted) prices for identical assets and liabilities in active markets
Level 2 – inputs other than quoted prices, included with Level 1 that are observable for the asset or liability, either directly or indirectly, including:
| · | Quoted prices for similar assets/liabilities in active markets; |
| · | Quoted prices for identical or similar assets in non-active markets (few transactions, limited information, non-current prices, high variable over time); |
| · | Inputs other than quoted prices that are observable for the asset/liability (e.g. interest rates, yield curves, volatilities, default rates, etc); and; |
| · | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 – Unobservable inputs that cannot be corroborated by other observable market data.
The Company’s assets are measured as follows:
Cash – the carrying value of cash approximates fair value as maturities are less than three months. Cash has been valued using the market value technique.
Marketable Securities – The estimated fair values of the marketable securities are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the price. Marketable securities have been valued using the market value technique
Note receivable – The estimated fair value of the note receivable is based on unobservable inputs that cannot be corroborated by observed market data. The note receivable has been valued using the cost approach.
Mortgage receivable – The estimated fair value of the mortgage receivable is based on inputs that are derived principally from or corroborated by other observable market data. The mortgage receivable has been valued using the income approach.
Long-term debt – The estimated fair value of the mortgages is based on inputs that are derived principally from or corroborated by other observable market data. The long-term debt has been valued using the cost approach.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
| | | | | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | | | | | | | | |
| Assets: | | March 31, 2009 | | | Quoted Prices in Active Markets for Identical Level Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | | |
| Cash | | | 7,552,729 | | | $ | 7,552,729 | | | $ | - | | | $ | - | |
| Marketable securities | | | 1,568,965 | | | | 800,634 | | | | 768 331 | | | | - | |
| Note receivable | | | 249,000 | | | | - | | | | - | | | | 249,000 | |
| Mortgage receivable | | | 416,875 | | | | - | | | | 416,875 | | | | - | |
| Mortgages payable | | | 3,516,799 | | | | - | | | | 3,516,799 | | | | - | |
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | |
| | | Note Receivable | |
| | | | |
| Balance at beginning of period | | $ | 249,000 | |
| | | | | |
| Interest earned | | | 6,416 | |
| | | | | |
| Included in earnings | | | (6,416 | ) |
| | | | | |
| Balance at end of period | | $ | 249,000 | |
| | | | | |
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
Impact of recent United States accounting pronouncements
Adoption of New Pronouncements During the period, the Company adopted the recommendations of new U.S. GAAP standards EITF 07-1 and SFAS 160. The adoption of these new standards had no material effect on the Company’s consolidated financial statements.
FAS 124-2 and FSP FAS 115-2 In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends FAS 115 and FAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security before recovery of its cost basis. This FSP requires increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold, as well as increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. FSP 115-2 and FSP 124-2 are effective for interim and annual periods ending after June 15, 2009. We are currently evaluating the impact of this FSP on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 In April 2009, FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amend FAS No. 107, Disclosures About Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1, are effective for interim periods ending after June 15, 2009 (our Fiscal 2010). We do not anticipate a material impact on our consolidated financial statements of this FSP as our current disclosures meet these requirements.
FAS No. 157-4 In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expand quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly. This pronouncement is effective beginning with the June 30, 2009 interim financial statements. We are currently assessing the impact of FSP FAS No. 157-4 on our consolidated financial position, cash flows and results of operations.
EITF 03-6-1 In June 2008 the FASB issued FASB Staff Position (FSP) EITF 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for years commencing after December 15, 2008. The Company is currently assessing the affect of its adoption may have on its consolidated financial statements.
GENTERRA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Expressed in Canadian Dollars) (UNAUDITED)
SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (Continued)
Impact of recent United States accounting pronouncements (continued)
SFAS No 162 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with U.S. GAAP. The statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have an effect on our consolidated financial statements.
SFAS No. 161 In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the quarterly disclosures requirements in SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have an effect on our consolidated financial statements.
FAS No. 157-2 In February 2008, the FASB issued FSP No. 157-2 Effective Date of FASB Statement No. 157, which defers the effective date of FASB 157 for certain nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The deferred provisions of FASB 157 affect assets measured at fair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations initially measured at fair value. The Company adopted these deferred provisions on October 1, 2008 which had no impact on our consolidated financial statements.
FAS No. 157-3 The FASB issued FASB Staff Position FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB No. 157, Fair Value Measurement, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted these provisions on October 1, 2008 which had no impact on our consolidated financial statements.
SFAS No. 141(R) In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. The statement provides revised guidance for recognition and measuring assets acquired and liabilities assumed in a business combination. It also requires transaction costs for a business combination to be expensed as incurred. SFAS 141(R) will impact our accounting for and business combinations we complete after 2008.
VOTING AND MANAGEMENT INFORMATION
The Genterra Meeting
The Genterra Meeting will be held on @, 2009, at @ at 10:00 a.m. (Toronto time). At the Genterra Meeting, the Genterra Shareholders will be asked to approve the Amalgamation of Genterra and CMI and related matters. The Genterra Amalgamation Resolution approving the Amalgamation and the Amalgamation Agreement must be passed, with or without variation, by: (i) two thirds of all votes cast with respect to the Genterra Amalgamation Resolution by each class of Genterra Shareholders, voting separately as a class, who are present in person or by proxy at the Genterra Meeting; and (ii) Majority of the Minority Approval in accordance with MI 61-101. In calculating the votes to determine the required level of Genterra Shareholder approval for the Majority of the Minority Approval, all votes attaching to Genterra Shares owned or over which control or direction is exercised, directly or indirectly, by Excluded Shareholders will be excluded from voting. To the knowledge of Genterra’s management, a total of 9,949,247 Genterra Common Shares, 326,000 Genterra Class A Shares, and 77,592 Genterra Class B Shares are anticipated to be excluded from voting on the approval of the Amalgamation pursuant to MI 61-101. See “Part II - THE AMALGAMATION - Shareholder Approval - Majority of the Minority Approval”. Pursuant to the provisions of the OBCA, those Genterra Shareholders who dissent with respect to the Amalgamation have the right to be paid the fair value of their Genterra Shares.
Genterra Meeting Record Date
Genterra has fixed @, 2009 as the record date for the Genterra Meeting for determining the Genterra Shareholders entitled to receive notice of and to vote at the Genterra Meeting.
Approval of the Amalgamation
The Genterra Shareholders will be asked to pass a Special Resolution, the text of which is set forth below, in respect of approval of the Amalgamation (the “Genterra Amalgamation Resolution”). In order to be effective, a Special Resolution requires the approval by not less than two-thirds of the votes cast by each class of Genterra Shareholders, voting separately as a class, who vote in respect of the resolution. The Genterra Amalgamation Resolution must also be approved by Majority of the Minority Approval of the Genterra Shareholders in accordance with MI 61-101. To the knowledge of Genterra’s management, a total of 9,949,247 Genterra Common Shares, 326,000 Genterra Class A Shares and 77,592 Genterra Class B Shares is anticipated to be excluded from voting on the approval of the Genterra Amalgamation Resolution in respect of Majority of the Minority Approval. See “PART II - THE AMALGAMATION Shareholder Approval - Majority of the Minority Approval”. In the absence of contrary directions, the Genterra Management Designees intend to vote proxies in the accompanying form in favour of the Genterra Amalgamation Resolution. The text of the Genterra Amalgamation Resolution will be presented as follows, with or without modification:
“BE IT RESOLVED that:
| 1. | the amalgamation (the “Amalgamation”) of Genterra Inc. (“Genterra”) and Consolidated Mercantile Incorporated (“CMI”) as provided for in and subject to the terms and conditions set forth in the amalgamation agreement (the “Amalgamation Agreement”) dated as of @, 2009 between Genterra and CMI, is hereby approved and authorized, with such restrictions or conditions as may be imposed by the Toronto Stock Exchange (the “Exchange”) and with discretion to modify the terms of the transaction provided that such terms are not material at any time prior to the completion thereof, subject to the approval of the Exchange, all as more particularly described in the joint management information circular of Genterra dated @, 2009 (the “Circular”); |
| 2. | the Amalgamation Agreement, substantially in the form attached to the Circular as Schedule 1, be and is hereby approved and ratified; |
| 3. | notwithstanding that this resolution has been passed (and the Amalgamation Agreement and the Amalgamation adopted) by the Genterra Shareholders, the directors of Genterra are hereby authorized and empowered without further notice to or approval of the Genterra Shareholders (i) to amend the Amalgamation Agreement to the extent permitted by the Amalgamation Agreement, and (ii) subject to the terms and conditions of the Amalgamation Agreement, not to proceed with the Amalgamation; and |
| 4. | any director or officer of Genterra be, and such director or officer of Genterra hereby is, authorized, instructed and empowered, acting for, in the name of and on behalf of Genterra, to do or to cause to be done all such other acts and things in the opinion of such director or officer of Genterra as may be necessary or desirable in order to fulfill the intent of this resolution and the matters authorized hereby.” |
Approval of the GCI Option Plan
The Genterra Shareholders will be asked to pass an Ordinary Resolution, the text of which is set forth below, in respect of approval of the Amalco Option Plan (the “Genterra Option Resolution”). In order to be effective, an Ordinary Resolution requires the approval by not less than a majority of the votes cast by the Genterra Shareholders who vote in respect of the resolution. In the absence of contrary directions, the Genterra Management Designees intend to vote proxies in the accompanying form in favour of the Genterra Option Resolution. The text of the Genterra Option Resolution will be presented as follows, with or without modification:
“BE IT RESOLVED that:
| 1. | the stock option plan, a copy of which is attached as Schedule 1A to the joint management information circular of Genterra dated @, 2009, is hereby authorized and approved; and |
| 2. | any director or officer of Amalco is hereby authorized and directed to execute and deliver such agreements, documents and instruments and take all such other actions as such director or officer may determine to be necessary or advisable to implement this resolution and the matters authorized hereby, and the approval by such director or officer of the text and form of such documents or instruments and the taking of such actions shall be conclusive proof of the approval thereof by the Genterra Shareholders. |
Genterra’s management is not aware of any other matters to come before the Genterra Meeting other than those set out in the Notice of Genterra Meeting. If other matters come before the Genterra Meeting, it is the intention of the Genterra Management Designees to vote the same in accordance with their best judgment in such matters
The CMI Meeting
The CMI Meeting will be held on @, 2009, at @ at 10:00 a.m. (Toronto time). At the CMI Meeting, the CMI Shareholders will be asked to approve the Amalgamation of CMI and Genterra. The CMI Amalgamation Resolution approving the Amalgamation and the Amalgamation Agreement must be passed, with or without variation, by: (i) two-thirds of all votes cast with respect to the CMI Amalgamation Resolution by CMI Shareholders present in person or by proxy at the CMI Meeting; and (ii) Majority of the Minority Approval in accordance with MI 61-101. In calculating the votes to determine the required level of CMI Shareholder approval for the Majority of the Minority approval, all votes attaching to CMI Shares owned or over which control or direction is exercised, directly or indirectly, by Excluded Shareholders will be excluded from voting. To the knowledge of CMI’s management, a total of 2,946,832 CMI Shares are anticipated to be excluded from voting on the approval of the Amalgamation pursuant to MI 61-101. See “Part II - THE AMALGAMATION – Shareholder Approval – Majority of the Minority Approval”. Pursuant to the provisions of the OBCA, those CMI Shareholders who dissent with respect to the Amalgamation have the right to be paid the fair value of their CMI Shares.
CMI Meeting Record Date
CMI has fixed @, 2009 as the record date for the CMI Meeting for determining the CMI Shareholders entitled to receive notice of and to vote at the CMI Meeting.
Approval of the Amalgamation
The CMI Shareholders will be asked to pass a Special Resolution, the text of which is set forth below, in respect of approval of the Amalgamation (the “CMI Amalgamation Resolution”). In order to be effective, a Special Resolution requires the approval by not less than two-thirds of the votes cast by shareholders who vote in respect of the resolution. The CMI Amalgamation Resolution must also be approved by Majority of the Minority Approval of the CMI Shareholders in accordance with MI 61-101. To the knowledge of CMI’s management, a total of 2,946,860 CMI Shares is anticipated to be excluded from voting on the approval of the CMI Amalgamation Resolution in respect of Majority of the Minority Approval. See “PART II - THE AMALGAMATION Shareholder Approval - Majority of the Minority Approval”. In the absence of contrary directions, the CMI Management Designees intend to vote proxies in the accompanying form in favour of the CMI Amalgamation Resolution. The text of the CMI Amalgamation Resolution will be presented as follows, with or without modification:
“BE IT RESOLVED that:
| 1. | the amalgamation (the “Amalgamation”) of Consolidated Mercantile Incorporated (“CMI”) and Genterra Inc. (“Genterra”) as provided for in and subject to the terms and conditions set forth in the amalgamation agreement (the “Amalgamation Agreement”) dated as of @, 2009 between CMI and Genterra, is hereby approved and authorized, with such restrictions or conditions as may be imposed by the Toronto Stock Exchange (the “Exchange”) and with discretion to modify the terms of the transaction provided that such terms are not material at any time prior to the completion thereof, subject to the approval of the Exchange, all as more particularly described in the joint management information circular of Genterra and CMI dated @, 2009 (the “Circular”); |
| 2. | the Amalgamation Agreement, substantially in the form attached to the Circular as Schedule 1, be and is hereby approved and ratified; |
| 3. | notwithstanding that this resolution has been passed (and the Amalgamation Agreement and the Amalgamation adopted) by the CMI Shareholders, the directors of CMI are hereby authorized and empowered without further notice to or approval of the CMI Shareholders (i) to amend the Amalgamation Agreement to the extent permitted by the Amalgamation Agreement, and (ii) subject to the terms and conditions of the Amalgamation Agreement, not to proceed with the Amalgamation; and |
| 4. | any director or officer of CMI be, and such director or officer of CMI hereby is, authorized, instructed and empowered, acting for, in the name of and on behalf of CMI, to do or to cause to be done all such other acts and things in the opinion of such director or officer of CMI as may be necessary or desirable in order to fulfill the intent of this resolution and the matters authorized hereby.” |
Approval of the GCI Option Plan
The CMI Shareholders will be asked to pass an Ordinary Resolution, the text of which is set forth below, in respect of approval of the GCI Option Plan (the “CMI Option Resolution”). In order to be effective, an Ordinary Resolution requires the approval by not less than a majority of the votes cast by the CMI Shareholders who vote in respect of the resolution. In the absence of contrary directions, the CMI Management Designees intend to vote proxies in the accompanying form in favour of the CMI Option Resolution. The text of the CMI Option Resolution will be presented as follows, with or without modification:
“BE IT RESOLVED that:
| 1. | the stock option plan, a copy of which is attached as Schedule 1A to the joint management information circular of CMI dated @, 2009, is hereby authorized and approved; and |
| 2. | any director or officer of Amalco is hereby authorized and directed to execute and deliver such agreements, documents and instruments and take all such other actions as such director or officer may determine to be necessary or advisable to implement this resolution and the matters authorized hereby, and the approval by such director or officer of the text and form of such documents or instruments and the taking of such actions shall be conclusive proof of the approval thereof by the CMI Shareholders. |
Other Business
CMI’s management is not aware of any other matters to come before the CMI Meeting other than those set out in the Notice of CMI Meeting. If other matters come before the CMI Meeting, it is the intention of the CMI Management Designees to vote the same in accordance with their best judgment in such matters.
Revocation of Proxies
A shareholder has the right to revoke a proxy at any time before it is exercised. A proxy may be revoked by a written revocation signed by the shareholder or the shareholder’s authorized attorney or, where the shareholder is a corporation, by a duly authorized officer or attorney of the corporation. This revocation must be delivered, in the case of Genterra or CMI, to Computershare, Genterra and CMI’s Transfer Agent, at 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1 (fax: 416-981-9800), at any time up to and including the last Business Day preceding the Genterra Meeting or the CMI Meeting, as the case may be, or to the chairman at the Genterra Meeting or the CMI Meeting, as the case may be, or any adjournment of any such meeting. A proxy may also be revoked in any other manner provided by law.
Dissent Rights
The following description of the rights of Dissenting Shareholders to dissent in respect of the Amalgamation is not a comprehensive statement of the procedures to be followed by a Dissenting Shareholder who seeks payment of the fair value of such holder’s shares and is qualified in its entirety by the reference to the full text of section 185 of the OBCA, in respect of the Amalgamation, which is attached to this Prospectus as Schedule 5. A registered shareholder who intends to exercise the right of dissent and appraisal should carefully consider and comply with the provisions of that section. Failure to strictly comply with the provisions of that section and to adhere to the procedures established therein may result in the loss of all rights thereunder.
Genterra Dissent Rights
A Genterra Shareholder is entitled, in addition to any other right such holder may have, to dissent and, if the Amalgamation becomes effective, to be paid by Genterra the fair value of the Genterra Shares held by such holder in respect of which such holder dissents, determined as of the close of business on the last Business Day before the day on which the resolution from which such holder dissents was adopted. A Genterra Shareholder may dissent only with respect to all of the Genterra Shares held by such holder or on behalf of any one beneficial owner and registered in the Dissenting Shareholder’s name. Only registered holders of Genterra Shares may dissent. Persons who are beneficial owners of Genterra Shares registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that they may only do so through the registered owner of such Genterra Shares. A registered holder, such as a broker, who holds Genterra Shares as nominee for beneficial holders, some of whom wish to dissent, must exercise dissent rights on behalf of such beneficial owners with respect to the Genterra Shares held for such beneficial owners. In such case, the demand for dissent should set forth the number of Genterra Shares covered by it.
A Dissenting Shareholder must send to Genterra a written objection to the Special Resolution, which written objection must be received at the head office of Genterra before the Genterra Meeting, or by the chairman of the Genterra Meeting at or before the Genterra Meeting. A Genterra Shareholder wishing to exercise the right to dissent with respect to such holder’s Genterra Shares shall not vote the holder’s Genterra Shares at the Genterra Meeting, either by the submission of a proxy or by personally voting in favour of the Special Resolution. An application may be made to the Court by Genterra or by a Dissenting Shareholder to fix the fair value of the Dissenting Shareholder’s Genterra Shares. If such an application to the Court is made by Genterra or a Dissenting Shareholder, Genterra must, unless the Court otherwise orders, send to each Dissenting Shareholder a written offer to pay the Dissenting Shareholder an amount considered by the board of directors to be the fair value of the Genterra Shares. The offer, unless the Court otherwise orders, will be sent to each Dissenting Shareholder at least ten days before the date on which the application is returnable, if Genterra is the applicant, or within ten days after Genterra is served with notice of the application, if a shareholder is the applicant. The offer will be made on the same terms to each Dissenting Shareholder and will be accompanied by a statement showing how the fair value was determined. A Dissenting Shareholder may make an agreement with Genterra for the purchase of such holder’s Genterra Shares in the amount of the offer made by Genterra (or otherwise) at any time before the Court pronounces an order fixing the fair value of the Genterra Shares.
A Dissenting Shareholder is not required to give security for costs in respect of an application and, except in special circumstances, will not be required to pay the costs of the application and appraisal. On the application, the Court will make an order fixing the fair value of the Genterra Shares of all Dissenting Shareholders who are parties to the application, giving judgement in that amount against Genterra and in favour of each of those Dissenting Shareholders, and fixing the time within which Genterra must pay that amount payable to the Dissenting Shareholders. The Court may in its discretion allow a reasonable rate of interest on the amount payable to each Dissenting Shareholder calculated from the date on which the Genterra Shareholder ceases to have any rights as a Genterra Shareholder, until the date of payment.
Upon the Amalgamation becoming effective, or upon the making of an agreement between Genterra and the Dissenting Shareholder as to the payment to be made by Genterra to the Dissenting Shareholder, or upon the pronouncement of a Court order, whichever first occurs, the Genterra Shareholder will cease to have any rights as a Genterra Shareholder other than the right to be paid the fair value of such holder’s Genterra Shares, in the amount agreed to between Genterra and the Genterra Shareholder or in the amount of the judgement, as the case may be. Until one of these events occurs, the Genterra Shareholder may withdraw its dissent, or Genterra may rescind the Special Resolution, and in either event the dissent and appraisal proceedings in respect of that Genterra Shareholder will be discontinued.
Genterra shall not make a payment to a Dissenting Shareholder under section 185 of the OBCA: (a) if there are reasonable grounds for believing (i) that Genterra is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) that the realizable value of the assets of Genterra would thereby be less than the aggregate of its liabilities; or (b) if on the Effective Date the Dissenting Shareholder is not the owner of the subject Genterra Shares. In such event, Genterra shall notify each Dissenting Shareholder that is unable lawfully to pay Dissenting Shareholders for their Genterra Shares, in which case the Dissenting Shareholder may, by written notice to Genterra within 30 days after receipt of such notice, withdraw such holder’s written objection, in which case Genterra shall be deemed to consent to the withdrawal and such Genterra Shareholder shall be reinstated with full rights as a Genterra Shareholder, failing which such Dissenting Shareholder retains a status as a claimant against Genterra to be paid as soon as Genterra is lawfully entitled to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of Genterra but prior to its shareholders.
CMI Dissent Rights
A CMI Shareholder is entitled, in addition to any other right such holder may have, to dissent and, if the Amalgamation becomes effective, to be paid by CMI the fair value of the CMI Shares held by such holder in respect of which such holder dissents, determined as of the close of business on the last Business Day before the day on which the resolution from which such holder dissents was adopted. A CMI Shareholder may dissent only with respect to all of the CMI Shares held by such holder or on behalf of any one beneficial owner and registered in the Dissenting Shareholder’s name. Only registered holders of CMI Shares may dissent. Persons who are beneficial owners of CMI Shares registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that they may only do so through the registered owner of such CMI Shares. A registered holder, such as a broker, who holds CMI Shares as nominee for beneficial holders, some of whom wish to dissent, must exercise dissent rights on behalf of such beneficial owners with respect to the CMI Shares held for such beneficial owners. In such case, the demand for dissent should set forth the number of CMI Shares covered by it.
A Dissenting Shareholder must send to CMI a written objection to the Special Resolution, which written objection must be received at the head office of CMI before the CMI Meeting, or by the chairman of the CMI Meeting at or before the CMI Meeting. A CMI Shareholder wishing to exercise the right to dissent with respect to such holder’s CMI Shares shall not vote the holder’s shares at the CMI Meeting, either by the submission of a proxy or by personally voting in favour of the Special Resolution. An application may be made to the court by CMI or by a Dissenting Shareholder to fix the fair value of the Dissenting Shareholder’s CMI Shares. If such an application to the Court is made by CMI or a Dissenting Shareholder, CMI must, unless the Court otherwise orders, send to each Dissenting Shareholder a written offer to pay the Dissenting Shareholder an amount considered by the board of directors to be the fair value of the CMI Shares. The offer, unless the Court otherwise orders, will be sent to each Dissenting Shareholder at least ten days before the date on which the application is returnable, if CMI is the applicant, or within ten days after CMI is served with notice of the application, if a shareholder is the applicant. The offer will be made on the same terms to each Dissenting Shareholder and will be accompanied by a statement showing how the fair value was determined. A Dissenting Shareholder may make an agreement with CMI for the purchase of such holder’s CMI Shares in the amount of the offer made by CMI (or otherwise) at any time before the Court pronounces an order fixing the fair value of the CMI Shares.
A Dissenting Shareholder is not required to give security for costs in respect of an application and, except in special circumstances, will not be required to pay the costs of the application and appraisal. On the application, the Court will make an order fixing the fair value of the CMI Shares of all Dissenting Shareholders who are parties to the application, giving judgement in that amount against CMI and in favour of each of those Dissenting Shareholders, and fixing the time within which CMI must pay that amount payable to the Dissenting Shareholders. The Court may in its discretion allow a reasonable rate of interest on the amount payable to each Dissenting Shareholder calculated from the date on which the shareholder ceases to have any rights as a shareholder, until the date of payment.
Upon the Amalgamation becoming effective, or upon the making of an agreement between CMI and the Dissenting Shareholder as to the payment to be made by CMI to the Dissenting Shareholder, or upon the pronouncement of a court order, whichever first occurs, the CMI Shareholder will cease to have any rights as a CMI Shareholder other than the right to be paid the fair value of such holder’s shares, in the amount agreed to between CMI and the CMI Shareholder or in the amount of the judgement, as the case may be. Until one of these events occurs, the CMI Shareholder may withdraw its dissent, or CMI may rescind the Special Resolution, and in either event the dissent and appraisal proceedings in respect of that CMI Shareholder will be discontinued.
CMI shall not make a payment to a Dissenting Shareholder under section 185 of the OBCA: (a) if there are reasonable grounds for believing (i) that CMI is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) that the realizable value of the assets of CMI would thereby be less than the aggregate of its liabilities; or (b) if on the Effective Date the Dissenting Shareholder is not the owner of the subject shares. In such event, CMI shall notify each Dissenting Shareholder that is unable lawfully to pay Dissenting Shareholders for their shares, in which case the Dissenting Shareholder may, by written notice to CMI within 30 days after receipt of such notice, withdraw such holder’s written objection, in which case CMI shall be deemed to consent to the withdrawal and such CMI Shareholder shall be reinstated with full rights as a CMI Shareholder, failing which such Dissenting Shareholder retains a status as a claimant against CMI to be paid as soon as CMI is lawfully entitled to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of CMI but prior to its shareholders.
Solicitation of Proxies
This Prospectus is furnished in connection with the solicitation of proxies by the management of each of Genterra Inc. and Consolidated Mercantile Incorporated for use at the Genterra Meeting and the CMI Meeting, each of which is to be held on @, 2009, at the times and places and for the purposes set forth in the Notices of Meetings. The cost of the solicitation of proxies by each of Genterra and CMI in connection with the Genterra Meeting and the CMI Meeting has been and will be borne by Genterra and CMI, respectively. Either Genterra or CMI may retain other persons, entities or companies to solicit proxies on its behalf. Solicitation may be by mail, phone, email or fax.
Securities Entitled To Vote
Holders of Genterra’s common shares, Class A Preference Shares and Class B Preference Shares are entitled to vote at the Genterra meeting, each voting separately as a class with one vote per share, on the special resolution to approve the Amalgamation Agreement (the “Amalgamation Resolution”). As at @, 2009, there are 19,339,211 Genterra Common Shares , 326,000 Genterra Class A Preference Series 1 Shares and there are 26,274,918 Genterra Class B Preference Shares issued and outstanding as fully paid and non-assessable shares. To the knowledge of Genterra’s management, a total of 9,949,247 Genterra Common Shares, 326,000 Genterra Class A Shares and 77,592 Genterra Class B Shares is anticipated to be excluded from voting on the approval of the Genterra Amalgamation Resolution in respect of Majority of the Minority Approval
The CMI Shares are the only class of shares entitled to vote. As at November 12, 2008, 5,076,407 CMI Shares are issued and outstanding, each having the right to one vote per share. To the knowledge of CMI’s management, a total of 2,946,860 CMI Shares is anticipated to be excluded from voting on the approval of the CMI Amalgamation Resolution in respect of Majority of the Minority Approval.
Principal Security Holders of GCI
After giving effect to the Amalgamation, to the knowledge of the management of Genterra and CMI no person will beneficially own, directly or indirectly, or exercise control or direction over, more than 10% of the issued and outstanding GCI Shares other than as set forth in the following table:
| Name and Municipality of Residence | Type of Ownership | Number of GCI Shares | Percentage of GCI Shares |
Fred A. Litwin Toronto, Ontario | Indirect | 3,611,920 Common 326,000 Class A 77,592 Class B | 34.8% of Common 100% of Class A 0.3% of Class B |
Sutton Management Limited Toronto, Ontario | Direct | 2,017,450 Common | 19.5% of Common |
Principal Security Holders of Genterra
To the knowledge of Genterra's directors and officers, no person or company beneficially owns, directly or indirectly, or exercises control or direction over securities carrying more than 5% of the voting rights attached to any class of outstanding voting securities of Genterra entitled to be voted at the Genterra Meeting other than Fred A. Litwin who indirectly controls 3,289,929 Genterra Common Shares (17.01%) and 77,592 Genterra Class B Shares (0.30%), Sutton Management Limited (“Sutton”) which controls 6,659,312 Genterra Common Shares (34.43%) and 4,060,541 Genterra Common Shares (21%) held by CDS & Co. The shares controlled by Fred A. Litwin and by Sutton, none of which will be counted in determining approval or disapproval of the Amalgamation Resolution, are comprised of the following:
| (a) | 2,254,298 Genterra Common Shares (11.66%) and 75,915 Genterra Class B Shares (0.29%) beneficially owned by Forum Financial Corporation (“Forum”), which corporation is directly controlled by Fred A. Litwin. |
| (b) | 292,117 Genterra Common Shares (1.51%) beneficially owned by CMI; Fred A. Litwin, beneficially owns or exercises control and direction over approximately 54.74% of the issued and outstanding shares of CMI. |
| (c) | 55,602 Genterra Common Shares (0.29%) beneficially owned by Ianjoy Investments Corp. (“Ianjoy”), which corporation is indirectly controlled by Fred A. Litwin. |
| (d) | 412 Genterra Common Shares (0.002%) and 1,677 Genterra Class B Shares (0.006%) beneficially owned by First Ontario Investments Inc. which corporation is indirectly controlled by Fred A. Litwin. |
| (e) | 687,500 Genterra Common Shares (3.55%) beneficially owned by Mar-Risa Holdings Inc. (“Mar-Risa”), which corporation is indirectly controlled by Fred A. Litwin. |
| (f) | 6,659,312 Genterra Common Shares (34.43%) beneficially owned by Sutton, which corporation is beneficially owned by the children of Fred A. Litwin, being Mark I. Litwin, President and a Director of Genterra and his sister, Risa Shearer. |
Principal Security Holders of CMI
To the knowledge of CMI’s directors and officers, no person or company beneficially owns, directly or indirectly, or exercises control or direction over securities carrying more than 5% of the voting rights attached to any class of outstanding voting securities of CMI entitled to be voted at the CMI Meeting other than Fred A. Litwin who indirectly controls 2,779,219 CMI Shares (54.74%), Sutton which controls 167,641 CMI Shares (3.3%), 1,009,643 CMI Shares (19.89%) held by Cede & Co. and 930,655 CMI Shares (18.33%) held by CDS & Co. The shares controlled by Fred A. Litwin and by Sutton, none of which will be counted in determining approval or disapproval of the Amalgamation Resolution, are comprised of the following:
| (a) | Mar-Risa holds an aggregate of 2,612,894 CMI Shares . 1,475,394 of these CMI Shares owned by Mar-Risa are held through a wholly owned subsidiary of Mar-Risa, DG Acquisition Corp. (“DG”), an Ontario corporation. Mar-Risa is indirectly controlled by Fred A. Litwin. |
| (b) | Forum holds an aggregate of 73,885 CMI Shares which corporation is directly controlled by Fred A. Litwin. |
| (c) | Fred A. Litwin owns 92,416 CMI Shares |
| (d) | 167,641 CMI Shares beneficially owned by Sutton, which corporation is beneficially owned by the children of Fred A. Litwin, being Mark I. Litwin, President and a Director of Genterra and his sister, Risa Shearer. |
We are not aware of any other person or company that beneficially owns, directly or indirectly, or exercises control or direction over securities carrying more than 5% of the voting rights attached to any class of outstanding voting shares of CMI.
Shareholder Approval
Corporate Law Shareholder Approval
The Amalgamation must be approved by (i) a Special Resolution of the Genterra Shareholders and CMI Shareholders in accordance with the OBCA; and (ii) Majority of the Minority Approval of the Genterra Shareholders and the CMI Shareholders in accordance with MI 61-101 (see below “VOTING AND MANAGEMENT INFORMATION - Majority of the Minority Approval”).
Pursuant to Section 185 of the OBCA with respect to the Amalgamation, Genterra Shareholders and CMI Shareholders are entitled to exercise rights of dissent in respect of the Amalgamation and, if the Amalgamation becomes effective, to be paid the fair value for their shares. Genterra Shareholders wishing to dissent with respect to the Amalgamation must send written objection to Genterra at or prior to the Genterra Meeting to the head office of Genterra at 106 Avenue Road, Toronto, Ontario, M5R 2H3, Attention: President. CMI Shareholders wishing to dissent with respect to the Amalgamation must send written objection to CMI at or prior to the CMI Meeting to the head office of CMI at 106 Avenue Road, Toronto, Ontario, M5R 2H3, Attention: President. A vote against the Special Resolution regarding the Amalgamation or a withholding of a vote does not constitute such a written objection. See “VOTING AND MANAGEMENT INFORMATION - Dissent Rights” beginning on page 199 above.
Majority of the Minority Approval
The Amalgamation is a “Related Party Transaction” and a “Business Combination” in relation to both CMI and Genterra under MI 61-101 because both CMI and Genterra are directly or indirectly controlled by Fred Litwin, Mark Litwin, and Risa Litwin-Shearer. See “INFORMATION CONCERNING GENTERRA – Principal Security Holders”, and “INFORMATION CONCERNING CMI – Principal Security Holders”.
MI 61-101 requires that, in addition to approval of two-thirds of the votes cast by the CMI Shareholders and two-thirds of the votes cast by Genterra Shareholders, in order to complete the Amalgamation, Majority of the Minority Approval of the Genterra Shareholders and Majority of the Minority Approval of the CMI Shareholders must be obtained. In calculating the votes to determine the required level of approval for the Majority of the Minority Approval, all Excluded Shareholders will be excluded from voting. To the knowledge of the management of Genterra and CMI, a total of 2,946,860 CMI Shares, 9,949,247 Genterra Shares, 326,000 Genterra Class A Shares, and 77,592 Genterra Class B Shares are anticipated to be excluded from voting on the approval of the Amalgamation pursuant to MI 61-101. The following table sets out the shareholdings of those persons anticipated to be excluded from voting on the Genterra Amalgamation Resolution and the CMI Amalgamation Resolution for the Majority of the Minority Approval.
| | CMI SHARES | GENTERRA SHARES | GENTERRA CLASS A SHARES | GENTERRA CLASS B SHARES |
CMI | | 292,117 Cancelled | | |
DG Acquisition Corp. | 1,475,394 | | | |
First Ontario Investments Inc. | | 412 | 326,000 | 1,677 |
Forum Financial Corporation | 73,885 | 2,254,298 | | 75,915 |
Genterra Inc. | 24 Cancelled | | | |
Ianjoy Investments Corp. | | 55,602 | | |
Mar-Risa Holdings Inc. | 1,137,500 | 687,500 | | |
Sutton Management Ltd. | 167,641 | 6,659,312 | | |
Fred A. Litwin | 92,416 | | | |
Mark I. Litwin | | 2 | | |
Stan Abramowitz | | 2 | | |
Alan Kornblum | | 2 | | |
| TOTAL | 2,946,860 | 9,949,247 | 326,000 | 77,592 |
Directors and Officers of GCI
The number of directors of GCI shall be not less than three and not more than fifteen as the shareholders of GCI may from time to time determine.
The directors of GCI may, between annual meetings, appoint one or more additional directors of GCI to serve until the next annual meeting of GCI but the number of additional directors is not at any time to exceed 1/3 of the number of directors who held office at the expiration of the last annual general meeting of GCI.
Name, Address, Occupation and Security Holdings
The following table sets forth the name of each of the persons proposed as a director or officer of GCI, all positions and offices in GCI to be held, municipality of residence, their principal occupation at the present and during the preceding five years, the period served as a director or officer of Genterra or CMI, and the number and percentage of GCI Shares that the proposed director or officer will own, or over which control or direction will be exercised following the Amalgamation:
Name, Expected Positions, and Municipality of Residence | Age | Date Appointed a Director or Officer of Genterra or CMI | Principal Occupations for the Previous Five Years | Number and Percentage of GCI Shares Held or Controlled Upon Completion of the Amalgamation |
Fred Litwin President and Director Toronto, Ontario | 73 | October 31, 1968 | Executive, Forum Financial Corporation | 3,611,920 (34.8%) |
Stan Abramowitz Chief Financial Officer, Secretary and Director Toronto, Ontario | 50 | March 16, 1999 | Executive, Forum Financial Corporation | 2 (0%) |
Mark Dawber Director Toronto, Ontario | 70 | October 23, 2006 | Chartered Accountant & Consultant | 0 (0%) |
Sol Nayman Director Toronto, Ontario | 73 | February 23, 2006 | President, S.D. Nayman Management Inc. | 0 (0%) |
Alan Kornblum Director Toronto, Ontario | 58 | June 4, 1991 | President, Distinctive Designs Furniture Inc. | 2 (0%) |
Mark Litwin Vice-President Toronto, Ontario | 47 | February 21 1990 | President, Sutton Management Limited | 2,017,451 (19.5%) |
Management of GCI
Upon completion of the Amalgamation the following individuals are anticipated to be the management and key personnel of GCI.
Fred Litwin - President and Director
Fred Litwin is the founder and chief executive officer of Forum Financial Corporation, a Toronto based Merchant Banking Group. The companies encompass textile, homecare, real estate and finance related entities. Fred has sat on the board of a number of public companies and is a member of the Mount Sinai Hospital Board of Directors. Mr. Litwin is the father of Mark Litwin, the proposed vice president and proposed director of GCI.
Stanley Abramowitz - Chief Financial Officer, Secretary and Director
Mr. Abramowitz has held the position of Chief Financial Officer of both Genterra and CMI (or their predecessor corporations) since 1989. Mr. Abramowitz is also the Secretary and Chief Financial Officer of Forum Financial Corporation, a position he has held since 1989. Prior to 1989, Mr. Abramowitz worked in the accounting profession. Mr. Abramowitz has B.Acc and B.Comm degrees from the University of Witwatersrand, South Africa and is a Chartered Accountant.
Mark Dawber - Director
Mark E. Dawber is a Chartered Accountant and Consultant. Prior to that, Mr. Dawber was a Client Service Partner at BDO Dunwoody, LLP from 1999 to 2000 and was a Partner at Moore Stephens Hyde Houghton (“MSHH”) from 1970 to 1998 and Managing Partner of the Toronto Office of MSHH from 1990 to 1998 until the merger with BDO Dunwoody, LLP. Mr. Dawber has over 35 years of experience in the accounting industry and is a Fellow of the Institute of Chartered Accountants of Ontario.
Sol Nayman - Director
Sol Nayman is a member of the Board of Polyair Inter Pack Inc. and has previously served as a member of other public companies. Until 2000, Mr. Nayman was for many years Executive Vice President of Club Monaco Inc. From 2000 to 2005, Mr. Nayman has been a partner at Hill, Gertner, Mimran & Nayman, a merchant banking and consulting entity. Mr. Nayman is also President of S.D. Nayman Management Inc.
Alan Kornblum - Director
Alan Kornblum has held the position of President of Distinctive Designs Furniture Inc., a Toronto based manufacturer and importer of upholstered furniture, a position he has held since 1976. Mr. Kornblum has a BBA degree from York University.
Mark Litwin - Vice-President
Mark Litwin has held the position of President of Genterra (or its predecessor corporations) since 1990. Mr. Litwin is also President of Sutton Management Limited, an investment and management holding company. Mr. Litwin has significant experience in the real estate industry. Mr. Litwin has B.Econ (Hons) and MBA degrees from York University. Mr. Litwin is the son of Fred Litwin, the proposed President and a proposed director of GCI.
Related Party Transactions:
Genterra
Genterra entered into transactions and had outstanding balances with various companies related by common ownership and management.
The transactions with related parties are in the normal course of business and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.
Related party transactions for the year ended September 30, 2008 are summarized as follows:
* In June 2008, Genterra completed the acquisition of Ontario Street from FirstOnt. In consideration of the acquisition, Genterra issued 326,000 Class A Preference shares, Series 1 to FirstOnt. The Class A Preference shares are redeemable and retractable at $15 per share, carry a cumulative dividend of 8% per annum and represent the purchase price of $4,890,000. Genterra incurred a 2008 cumulative dividend of $101,819 on theses shares. Mark Litwin and Stan Abramowitz are officers and/or directors of Genterra and FirstOnt.
* Genterra leases its property situated at 450 Dobbie Drive, Cambridge, Ontario to The Cambridge Towel Corporation ("Cambridge"). The lease term commenced March 1, 2008 and ends January 31, 2011, at an annual net, net rental of $500,175. The results of operations include rental revenue of $500,175 (FY 2007 - $677,746; FY 2006 - 926,345) pertaining to this lease for the period from October 1, 2007 to September 30, 2008. Mark I. Litwin and Stan Abramowitz are officers and/or directors of Genterra and Cambridge.
* Genterra leases its property situated at 200 Glendale Avenue North, Hamilton, Ontario to Cambridge. The lease term commenced March 1, 2008 and ends January 31, 2011, at an annual net, net rental of $140,000. The results of operations include rental revenue of $140,000 (FY 2007 - $253,917; FY 2006 - 413,400) pertaining to this lease for the period from October 1, 2007 to September 30, 2008. Mark I. Litwin and Stan Abramowitz are officers and/or directors of Genterra and Cambridge.
* Until March 31, 2008, Genterra leased one of its units located at 140 Wendell Avenue, Toronto, Ontario to Distinctive Designs Furniture Inc. (“Distinctive”) for $5,241 per month. The results of operations include rental revenue, inclusive of expense recoveries, of $125,076 (FY 2007 - $210,481; FY 2006 - 304,763) pertaining to this rental arrangement. Alan Kornblum is a director of Genterra and an officer, director and the indirect majority shareholder of Distinctive.
* Genterra leases one of its units located at 1095 Stellar Drive, Newmarket, Ontario to Fitcity Health Centre Inc. ("Fitcity"). The lease term commenced January 1, 2003 and ended December 31, 2008 at an annual net, net rental of $111,240 per year (FY 2007 - $111,240; FY 2006 - $111,240). The results of operations include rental revenue, inclusive of expense recoveries, of $262,704 (FY 2007 - $243,270; FY 2006 - $230,357)) pertaining to this lease for the period from October 1, 2007 to September 30, 2008. The lease is currently on a month-to-month basis. The parties are currently negotiating a long-term extension thereof. A wholly owned subsidiary of Genterra is a party to a loan agreement with Fitcity bearing interest at prime plus 1% per annum and repayable on demand. During the year ended September 30, 2008 Genterra received $19,584 (FY 2007 - $24,273; FY 2006 - $24,434) of interest on this loan. As of the date hereof, Fitcity owes an aggregate amount of $298,514 of secured debt under this facility. In 2005 Genterra and Fitcity agreed that annual repayments on this debt will be based on fifty percent (50%) of Fitcity’s annual free cash flow beginning with its 2006/2008 fiscal year. Since the inception of this agreement, Fitcity has repaid Genterra $109,019 of this debt. Mark I. Litwin is a director and/or officer of Genterra and Fitcity and is the majority shareholder of Fitcity.
* Until March 31, 2008, Genterra leased one of its units located at 140 Wendell Avenue, Toronto, Ontario to Distinctive Designs Furniture Inc. (“Distinctive”) for $5,241 per month. The results of operations include rental revenue, inclusive of expense recoveries, of $125,076 (FY 2007 - $210,481; FY 2006 - 304,763) pertaining to this rental arrangement. Alan Kornblum is a director of Genterra and an officer, director and the indirect majority shareholder of Distinctive.
* Genterra leases one of its units located at 1095 Stellar Drive, Newmarket, Ontario to Fitcity Health Centre Inc. ("Fitcity"). The lease term commenced January 1, 2003 and ended December 31, 2008 at an annual net, net rental of $111,240 per year (FY 2007 - $111,240; FY 2006 - $111,240). The results of operations include rental revenue, inclusive of expense recoveries, of $262,704 (FY 2007 - $243,270; FY 2006 - $230,357)) pertaining to this lease for the period from October 1, 2007 to September 30, 2008. The lease is currently on a month-to-month basis. The parties are currently negotiating a long-term extension thereof. A wholly owned subsidiary of Genterra is a party to a loan agreement with Fitcity bearing interest at prime plus 1% per annum and repayable on demand. During the year ended September 30, 2008 Genterra received $19,584 (FY 2007 - $24,273; FY 2006 - $24,434) of interest on this loan. As of the date hereof, Fitcity owes an aggregate amount of $298,514 of secured debt under this facility. In 2005 Genterra and Fitcity agreed that annual repayments on this debt will be based on fifty percent (50%) of Fitcity’s annual free cash flow beginning with its 2006/2008 fiscal year. Since the inception of this agreement, Fitcity has repaid Genterra $109,019 of this debt. Mark I. Litwin is a director and/or officer of Genterra and Fitcity and is the majority shareholder of Fitcity.
* Management Contracts
o During the year ended September 30, 2008, Forum Financial Corporation (“Forum”) provided administrative services to Genterra for fees of $200,000 (FY 2007 - $200,000; FY 2006 - $172,333). These services include office facilities and clerical services, including bookkeeping, accounting and shareholder related services. Forum also assists in the decision making process relating to Genterra’s various investment interests. When requested, additional services are also provided on a fee-for-service basis. Stan Abramowitz is an officer and director of Forum and of Genterra. Fred A. Litwin owns or exercises control and direction over Forum and 17.0% of Genterra.
o During the year ended September 30, 2008, FirstOnt provided property management services to Genterra for fees of $134,800 (FY 2007 - $110,000; FY 2006 - $110,000). Stan Abramowitz and Mark I. Litwin are directors and/or officers of FirstOnt and Genterra. Fred A. Litwin owns or exercises control and direction over FirstOnt and 17.0% of Genterra.
o During the year ended September 30, 2008 Lowa Realties Limited (“Lowa”) provided property management services to Genterra for fees of $2,000 (FY 2007 - $Nil; FY 2006 - $Nil). Mark I. Litwin is a director and officer of Lowa and Genterra. Fred A. Litwin owns or exercises control and direction over Lowa and 17.0% of Genterra.
o During the year ended September 30, 2008 consulting services were provided to Genterra by Mark I. Litwin for fees of $36,000 (FY 2007 - $36,000; FY 2006 - $36,000). Mark I. Litwin is president of Genterra.
o During the year ended September 30, 2008 Genterra paid to Stan Abramowitz, the Chief Financial Officer of Genterra, a bonus of $150,000 (FY 2007 - $Nil; FY 2006 - $Nil) for services rendered to Genterra over the past number of years.
CMI entered into transactions and had outstanding balances with various companies related by common ownership and management.
The transactions with related parties are in the normal course of business and are measured at the transfer amount which is the amount of consideration established and agreed to by the related parties.
CMI paid to Forum an agreed upon fee of $240,000 (FY 2007 - $240,000; FY 2006 - $240,000) for administrative, management and consulting services rendered for the year ended December 31, 2008. These services include office, administrative and clerical services, including bookkeeping and accounting. Forum also assists in the decision making process relating to CMI’s and its subsidiaries’ various investment interests. Fred A. Litwin, the President, a director and indirect controlling shareholder of CMI, is an officer, director and controlling shareholder of Forum. Stan Abramowitz is an officer and director of both the Company and Forum.
Effective December 28, 2007, pursuant to a purchase and sale agreement, CMI sold its shares and debt owed by Distinctive to 337572 Ontario Limited, Distinctive’s other major shareholder. CMI received $834,010.80 in cash representing 100% of the price attributable to the debt and the delivery of a $1 million promissory note payable in ten equal consecutive installments of $100,000 with the first installment due on January 15, 2009 and each anniversary thereafter. There is no interest on the note unless a default occurs and the note only remains payable if Distinctive remains in business. There is provision to accelerate the payment of the note in certain circumstances. The security for the note is a pledge of all of the shares owned by the purchaser in the capital of Distinctive, representing a majority of the issued and outstanding shares of Distinctive.
Prior to December 28, 2007, Distinctive paid to Forum an agreed upon fee of $26,000 (FY 2007 - $26,000; FY 2006 - $72,000) for administrative, management and consulting services rendered. Fred A. Litwin, the President, a director and indirect controlling shareholder of CMI, is an officer, director and controlling shareholder of Forum. Stan Abramowitz is an officer and director of both CMI and Forum.
On December 31, 2007, upon the completion of CMI’s disposition of its investment interest in Polyair, a bonus payment of $500,000 became payable to Forum and officers of CMI..
During 2007, Distinctive paid rent of $211,598 (FY 2006 - $275,000) to Genterra for warehouse space located at 140 Wendell Avenue, Toronto, Ontario. Alan Kornblum is an officer and/or director of Distinctive and Genterra. Stan Abramowitz is an officer and/or director of CMI and Genterra. Effective December 28, 2007, CMI sold its investment interest in Distinctive.
The following table provides a summary of compensation earned during each of CMI's and Genterra's last three fiscal years by their directors and members of their administrative, supervisory or management bodies and former subsidiaries for services in all capacities to the companies and subsidiaries
| | | | | Annual Compensation | | | Long Term |
Name and Principal Position | Year | | | Salary | | Bonus | | | Other Annual Compensation | | | Compensation Number of Common Shares Under Options | | | All Other Compensation |
| Consolidated Mercantile | | | | | | | | | | | | | | | | | | |
| Fred A. Litwin | 2008 | | $ | Nil | | | - | | | $ | 240,000 | (1) | | | - | | | |
| President & Chief | 2007 | | $ | Nil | | | - | (2) | | $ | 266,000 | (1) | | | - | | | |
| Executive Officer | 2006 | | $ | Nil | | | - | | | $ | 312,000 | (1) | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Daniel S. Tamkin | 2008 | | $ | Nil | | | - | | | | - | | | | - | | | |
| Vice President | 2007 | | $ | Nil | | | - | (2) | | | - | | | | - | | | |
| | 2006 | | $ | Nil | | | - | | | | - | | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Stan Abramowitz | 2008 | | $ | Nil | | | - | (2) | | | - | | | | - | | | |
| Secretary & Chief | 2007 | | $ | Nil | | | - | | | | - | | | | - | | | |
| Financial Officer | 2006 | | $ | Nil | | | - | | | | - | | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Alan Kornblum | 2008 | | $ | N/A | | | N/A | | | | N/A | | | | N/A | | | |
| Distinctive Designs Furniture Inc. | 2007 | | $ | 273,044 | | | - | | | | - | | | | - | | | |
| Chief Executive Officer | 2006 | | $ | 271,548 | | | - | | | | - | | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Henry Schnurbach* | 2006 | | $ | 201,431 | | | - | | | $ | 58,798 | | | | - | | | |
| Chief Executive Officer | | | | | | | | | | | | | | | | | | |
Polyair Inter Pack Inc. (Resigned effective April 2006) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Victor D’Souza* | 2008 | | $ | N/A | | $ | N/A | | | $ | N/A | | | | N/A | | | |
| Polyair Inter Pack Inc. | 2007 | | $ | 384,193 | | $ | 16,000 | | | $ | 10,977 | | | | - | | | |
Chief Executive Office Interim Chief Executive Officer (post April 2006) Chief Financial Officer (June 2004-April 2006) | 2006 | | $ | 365,674 | | $ | 132,031 | | | $ | 77,458 | | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Alan Castle* | 2008 | | $ | N/A | | | N/A | | | $ | N/A | | | | N/A | | | |
| Polyair Inter Pack Inc. | 2007 | | $ | 365,898 | | $ | - | | | $ | 14,052 | | | | - | | | |
| President, Packaging Division | 2006 | | $ | 290,467 | | | 44,010 | | | $ | 35,685 | | | | - | | | |
| | | | | | | | | | | | | | | | | | | |
| Gary Crandall* | 2006 | | $ | 169,231 | | $ | 90,000 | | | $ | 6,092 | | | | - | | | $ | 550,000 (3) |
| Polyair Inter Pack Inc. | | | | | | | | | | | | | | | | | | | |
| President, Pool Division - (Resigned effective June 2006) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Len Coffin* | 2008 | | $ | N/A | | | N/A | | | $ | N/A | | | | N/A | | | | |
| Polyair Inter Pack Inc. | 2007 | | $ | 204,750 | | $ | - | | | $ | 9,600 | | | | - | | | | |
| Vice President of Operations | 2006 | | $ | 195,000 | | $ | 50,000 | | | $ | 9,600 | | | | - | | | | |
| | | | | | | | | | | | | | | | | | | | |
| GENTERRA INC. | | | | | | | | | | | | | | | | | | | |
| Mark Litwin | 2008 | | $ | 5,000 | | | | | | $ | 36,000 | | | | | | | | |
| President | 2007 | | $ | 5,000 | | | | | | $ | 36,000 | | | | | | | | |
| | 2006 | | $ | 5,000 | | | | | | $ | 36,000 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Stan Abramowitz | 2008 | | $ | | | | 150,000 | | | | | | | | | | | | |
| Secretary and Chief | 2007 | | $ | | | | | | | | | | | | | | | | |
| Financial Officer | 2006 | | $ | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| * Dollar amounts are in US dollars | | | | | | | | | | | | | | | | | | | |
NOTES:
(1) The amounts in this column relate to management fees paid by the Company and Distinctive to Forum for management, administrative and financial consulting services provided during the fiscal period. Forum is controlled by Fred A. Litwin.
Effective December 28, 2007, the Company sold its investment interest in Distinctive.
(2) On December 31, 2007, upon completion of the Company’s disposition of its investment interest in Polyair Inter Pack Inc., a bonus payment totaling $500,000 became payable to Forum and the above referenced officers. The bonus was paid in 2008.The Company has no pension, retirement or similar plans and none are proposed at the present time; accordingly, no amounts have been set aside or accrued by the Company for such plans.
| (3) | Severance for Gary Crandall. |
| | |
Compensation of Directors
CMI does not have a compensation committee of its board of directors. All matters relating to executive compensation are dealt with by the full board of directors. During the fiscal year of CMI ended December 31, 2008 the board of directors consisted of the following individuals: Fred A. Litwin, Stan Abramowitz, Sol D. Nayman, Ian Dalrymple and Mark E. Dawber. Each director of CMI who is not a salaried officer or employee of CMI or its operating subsidiaries is entitled to an annual retainer fee of $5,000 as well as additional fees, as approved by the Board from time to time, for special work conducted on behalf of the Company. In addition, the Chairman of the Audit Committee receives an additional annual retainer fee of $5,000.
Genterra does not have a compensation committee of its board of directors. All matters relating to executive compensation are dealt with by the full board of directors. The board of directors consists of the following individuals: Mark Litwin, Stan Abramowitz, Alan Kornblum, Sol D. Nayman, and Mark E. Dawber. Each director of Genterra who is not a salaried officer or employee of Genterra or its operating subsidiaries is entitled to an annual retainer fee of $5,000 as well as additional fees, as approved by the Board from time to time, for special work conducted on behalf of the company. In addition, the Chairman of the Audit Committee receives an additional annual retainer fee of $5,000
| Name | | Fees Earned ($) | | | Share Based Awards ($) | | | Option based Awards ($) | | | Non-equity incentive plan compensation ($) | | | Pension value ($) | | | All other compensation ($) | | | Total ($) | |
| Consolidated Mercantile | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fred A. Litwin | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Stan Abramowitz | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Sol D. Nayman | | $ | 12,500 | (1) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Ian Dalrymple | | $ | 15,000 | (1) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Mark E. Dawber | | $ | 10,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Genterra Inc. | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mark Litwin | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stan Abramowitz | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | |
| Alan Kornblum | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sol Nayman | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mark Dawber | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Includes special fees for work performed on the independent committee of Directors relating to the potential merger with Genterra.
Legal Matters
Certain legal matters in connection with the issuance of the shares will be passed on for us by Dolgenos Newman & Cronin LLP, New York, New York.
Experts
The consolidated financial statements and schedule of Genterra as of September 30, 2007 and for each of the two years in the period ended September 30, 2007 included in this Prospectus have been so included in reliance on the reports of Kraft Berger, LLP, an independent registered public accounting firm (until July 23, 2009), appearing elsewhere herein given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements and schedule of Genterra as of September 30, 2008 and for the year ended September 30, 2008 included in this Prospectus have been so included in reliance on the report of BDO Dunwoody, LLP, an independent registered public accounting firm, appearing elsewhere herein given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of CMI as of December 31, 2007 and for each of the two years in the period ended December 31, 2007 included in this Prospectus have been so included in reliance on the reports of Kraft Berger, LLP, an independent registered public accounting firm (until July 23, 2009), appearing elsewhere herein given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements and schedule of CMI as of December 31, 2008 and for the year ended December 31, 2008 included in this Prospectus have been so included in reliance on the report of BDO Dunwoody, LLP, an independent registered public accounting firm, appearing elsewhere herein given on the authority of said firm as experts in auditing and accounting.
Where You Can Find More Information
We have filed with the SEC a registration statement on Form F-4 under the Securities Act with respect to our offering of the exchange shares. This prospectus does not contain all of the information in the registration statement. You will find additional information about us and the exchange shares in the registration statement. Any statements made in this prospectus concerning the provisions of legal documents are not necessarily complete and you should read the documents that are filed as exhibits to the registration statement. CMI is currently subject to the reporting requirements of the Securities Exchange Act applicable to a foreign private issuer. In accordance with these requirements, they file reports and other information with the SEC. As a foreign private issuer, they are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
CMI’s reports and other information may be obtained from or viewed at the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington D.C. 20549. The SEC also maintains a website that contains reports and other information regarding issuers that file electronically with the SEC. For more information on the operation of the Public Reference Room, call the SEC in the United States at 1-800-SEC-0330. The website address is http://www.sec.gov.
PART III
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Under Section 136 of the BUSINESS CORPORATION ACT (ONTARIO), a director or officer of a corporation, a former director or officer of the corporation or a person who acts or acted at the corporation's request as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor, and his or her heirs and legal representatives:
1. may be indemnified by the corporation against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of such corporation or body corporate.
2. may be indemnified by the corporation, with the approval of a court, against all costs, charges and expenses reasonably incurred by the person in connection with an action by or on behalf of the corporation or body corporate to procure a judgment in its favor, to which the person is made a party by reason of being or having been a director or officer of the corporation or body corporate; and
3. is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by him or her in connection with the defense of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the corporation or body corporate, if the person seeking indemnity was substantially successful on the merits of his defense of the action or proceeding;
PROVIDED, in all cases, such person fulfills the conditions that (a) he or she acted honestly and in good faith with a view to the best interests of the corporation, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he or she had reasonable grounds for believing that his or her conduct was lawful.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Exhibits and Financial Statement Schedules
A list of Exhibits required to be filed as part of this Registration Statement on Form F-4 is listed in the attached Index to Exhibits and is incorporated herein by reference.
Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions of the Articles of Incorporation of the Registrant or the laws of Ontario, Canada or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (§230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and
(5) To arrange or provide for a facility in the U.S. for the purpose of responding to such requests. The undertaking in subparagraph (i) above includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
(6) To file a post-effective amendment to this Registration Statement to include any financial statements required by Item 8.A of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Securities Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements.
(7) That, for the purpose of determining any liability under the Securities Act of 1933 to any purchaser, each prospectus filed by the registrant pursuant to Rule 424(b)(3) (§230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement.
(8) That, for the purpose of determining any liability under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows: That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form.
The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Province of Ontario, Canada, on August 20, 2009.
| | CONSOLIDATED MERCANTILE INCORPORATED |
| Principal Accounting Officer | | | Principal Accounting Officer |
/s/STAN ABRAMOWITZ Stan Abramowitz | | | | |
| | | | | |
LIST OF EXHIBITS
| EXHIBIT NUMBER | | DESCRIPTION |
| 2.1 | | Amalgamation Agreement dated as of April 27, 2009 between Genterra Inc. and Consolidated Mercantile Incorporated* |
| 2.2 | | Proposed Amended Amalgamation Agreement between Genterr Inc. and Consolidated Mercantile Incorporated |
| 3.1(i) | | Articles of Incorporation of Genterra Inc. (f/k/a Equican Ventures Inc.) |
| 3.1(ii) | | By-Laws of Genterra Inc. |
| 3.2(i) | | Articles of Incorporation of Consolidated Mercantile Incorporated (f/k/a Lambda Mercantile Corporation) |
| 3.2(ii) | | By-Laws of Consolidated Mercantile Incorporated |
| 3.3(i) | | Proposed Articles of Amalgamation of Genterra Capital Inc. |
| 3.3(ii) | | Proposed By-Laws of Genterra Capital Inc. |
| 5.1 | | Opinion of Dolgenos Newman & Cronin LLP |
| 5.2 | | Opinion of Goldman Spring Kichler & Sanders LLP |
| 8.1 | | Tax Opinion of Kraft Berger LLP |
| 21.1 | | Subsidiaries of Genterra Inc. |
| 21.2 | | Subsidiaries of Consolidated Mercantile Incorporated |
| 23.1 | | Consents of KRAFT BERGER LLP (Toronto, Ontario) |
| 23.2 | | Consents of BDO Dunwoody LLP |
| 23.3 | | Consent of Dolgenos Newman & Cronin LLP (contained in Exhibit 5) |
| 23.4. | | Consent of Corporate Valuation Services Ltd (CVS) |
| 23.5. | | Consent of H.J.F. Financial Inc. (HJF) |
| 23.6 | | Fairness Opinion by CVS |
| 23.7 | | Valuation of Genterra Inc. by CVS |
| 23.8 | | Valuation of Consolidated Mercantile Incorporated by HJF |
| 23.9 | | Updated Fairness Opinion by CVS |
| 23.10 | | Updated Valuation of Genterra Inc. by CVS |
| 23.11 | | Updated Valuation OF Consolidated Mercantile Incorporated by HJF |
| 23.12 | | Consent of Goldman Spring Kichler & Sanders LLP (included in Exhibit 5.2) |
| 24 | | Power of Attorney* |
*
Reference is made to the co rrespondingly numbered Exhibit to the Registration Statement of Form F-4, Registration No. 333-161460 filed with the Commission on August 20, 2009, which is incorporated here by reference.
CONSOLIDATED MERCANTILE INCORPORATED
NOTICE OF SPECIAL MEETING
OF HOLDERS OF COMMON SHARES
TO BE HELD ON @, 2009
TO THE HOLDER OF COMMON SHARES
Notice is hereby given that a special meeting (the “CMI Meeting”) of the holders of common shares (“CMI Shares”) of Consolidated Mercantile Incorporated (“CMI”) will be held at @, at 10:00 a.m. (Toronto time), on @, 2009 for the following purposes:
| 1. | to consider and, if thought appropriate, to pass, with or without variation, a special resolution, as more particularly set forth in the joint management information circular of Genterra Inc. (“Genterra”) and CMI, dated @, 2008 (the “Circular”), to approve the amalgamation agreement (“Amalgamation Agreement”) between CMI and Genterra pursuant to which CMI and Genterra will amalgamate (the “Amalgamation”) and continue as one corporation (“Amalco”) pursuant to the provisions of the Business Corporations Act (Ontario); |
2. to approve the stock option plan of Amalco; and
3. to transact such further and other business as may properly come before the CMI Meeting.
The nature of the business to be transacted at the CMI Meeting and the specific details regarding the Amalgamation are described in further detail in the accompanying Circular, including the schedules thereto.
In order to pass the special resolution to approve the Amalgamation Agreement (the “Amalgamation Resolution”) at least a majority of the votes attaching to the CMI Shares, excluding CMI Shares owned or over which control or direction is exercised, directly or indirectly by Fred A. Litwin, Mark I. Litwin, Risa Shearer, Sutton Management Limited, the directors and senior officers of CMI and Genterra Inc., and their respective associates and affiliates, must be voted in favour of the Amalgamation Resolution.
The CMI record date for the determination of CMI shareholders entitled to receive notice of and to vote at the CMI Meeting or any adjournment thereof is @, 2009. CMI shareholders whose names have been entered in CMI’s register of shareholders at the close of business on that date will be entitled to receive notice of and to vote at the CMI Meeting, provided that, to the extent a CMI shareholder transfers the ownership of any of his or her shares after such date and the transferee of those shares establishes that he or she owns the shares and requests, not later than 10 days before the CMI Meeting, to be included in the list of shareholders eligible to vote at the CMI Meeting, such transferee will be entitled to vote those shares at the CMI Meeting.
A registered CMI shareholder may attend the CMI Meeting in person or may be represented by proxy. CMI shareholders who are unable to attend the CMI Meeting or any adjournment thereof in person are requested to date, execute and return the accompanying form of proxy for use at the CMI Meeting or any adjournment thereof. To be effective, the enclosed proxy must be mailed so as to reach or be deposited with Computershare, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1, not later than 48 hours (excluding Saturdays, Sundays and statutory holidays) prior to the time set for the CMI Meeting or any adjournment thereof.
The persons named in the enclosed form of proxy are directors or officers of CMI. Each CMI shareholder has the right to appoint a proxyholder other than such persons, who need not be a CMI shareholder, to attend and to act for him or her and on his or her behalf at the CMI Meeting. To exercise such right, the names of the nominees of management should be crossed out and the name of the CMI shareholder’s appointee should be legibly printed in the blank space provided.
The instrument appointing the proxy shall be in writing and shall be executed by the CMI shareholder or his or her attorney authorized in writing or, if the CMI shareholder is a corporation, under its corporate seal by an officer or attorney thereof duly authorized.
If you are a beneficial CMI shareholder and receive these materials through your broker or through another intermediary, please complete and return the form of proxy in accordance with the instructions provided to you by your broker or other intermediary.
TAKE NOTICE THAT pursuant to the Business Corporations Act (Ontario), a CMI shareholder may give CMI a notice of dissent by registered mail or delivery addressed to the President of CMI, 106 Avenue Road, Toronto, Ontario, M5R 2H3, at or before the date of the CMI Meeting in order to be effective. If the Amalgamation becomes effective, CMI shareholders who dissent in respect of the Amalgamation will be entitled to be paid the fair value of their CMI Shares in accordance with section 185 of the Business Corporations Act (Ontario). Failure by a dissenting CMI shareholder to adhere strictly to the requirements of section 185 of the Business Corporations Act (Ontario) may result in the loss of such rights of dissent. See “PART II - THE AMALGAMATION - Dissent Rights”.
In the event of a strike, lockout or other work stoppage involving postal employees, all documents required to be delivered by CMI shareholders should be delivered by facsimile to Computershare at 416-981-9800.
DATED at Toronto, Ontario, @, 2009.
BY ORDER OF THE BOARD OF DIRECTORS
OF CONSOLIDATED MERCANTILE INCORPORATED
By: (Signed) Stan Abramowitz
Secretary
GENTERRA INC.
NOTICE OF SPECIAL MEETING OF HOLDERS OF COMMON SHARES, CLASS A PREFERENCE SHARES AND CLASS B PREFERENCE SHARES TO BE HELD ON @, 2009
TO THE HOLDERS OF COMMON SHARES, CLASS A PREFERENCE SHARES
AND CLASS B PREFERENCE SHARES
Notice is hereby given that a special meeting (the “Genterra Meeting”) of the holders (“Genterra Shareholders”) of common shares, Class A Preference Shares and Class B Preference Shares (“Genterra Shares”) of Genterra Inc. (“Genterra”) will be held at @, at 10:00 a.m. (Toronto time), on @, 2009 for the following purposes:
| 1. | to consider and, if thought appropriate, to pass, with or without variation, a special resolution, as more particularly set forth in the joint management information circular of Genterra and Consolidated Mercantile Incorporated (“CMI”), dated @, 2008 (the “Circular”), to approve the amalgamation agreement (“Amalgamation Agreement”) between Genterra and CMI pursuant to which Genterra and CMI will amalgamate (the “Amalgamation”) and continue as one corporation (“Amalco”) pursuant to the provisions of the Business Corporations Act (Ontario); |
2. To approve the stock option plan of Amalco; and
| 3. | to transact any such other business as may properly be brought before the Genterra Meeting or any adjournment thereof. |
The nature of the business to be transacted at the Genterra Meeting and the specific details regarding the Amalgamation are described in further detail in the accompanying Circular, including the schedules thereto.
Holders of Genterra’s common shares, Class A Preference Shares and Class B Preference Shares are entitled to vote at the Genterra meeting, each voting separately as a class, on the special resolution to approve the Amalgamation Agreement (the “Amalgamation Resolution”). The holders of Genterra’s Class A Preference Shares and/or Class B Preference Shares are not entitled to vote with respect to any matter to come before the Genterra meeting other than the Amalgamation Resolution.
In order to pass the Amalgamation Resolution, at least two-thirds of the votes cast at the Genterra Meeting by the holders of Genterra’s common shares, Class A Preference Shares and Class B Preference Shares voting separately as a class must be voted in favour of the Amalgamation Resolution; provided that at least a majority of the votes cast by the holders of Genterra’s common shares and Class B Preference Shares voting separately as a class, excluding shares of Genterra owned or over which control or direction is exercised, directly or indirectly, by Fred A. Litwin, Mark I. Litwin, Risa Shearer, Sutton Management Limited, the directors and senior officers of Genterra and Consolidated Mercantile Incorporated, and their respective associates and affiliates must be voted in favour of the Amalgamation Resolution. All of the issued and outstanding Genterra Class A Preference Shares are controlled by Fred A. Litwin.
The Genterra record date for the determination of Genterra Shareholders entitled to receive notice of and to vote at the Genterra Meeting or any adjournment thereof is @, 2009. Genterra Shareholders whose names have been entered in Genterra’s register of shareholders at the close of business on that date will be entitled to receive notice of and to vote at the Genterra Meeting, provided that, to the extent a Genterra Shareholder transfers the ownership of any of his or her shares after such date and the transferee of those shares establishes that he or she owns the shares and requests, not later than 10 days before the Genterra Meeting, to be included in the list of shareholders eligible to vote at the Genterra Meeting, such transferee will be entitled to vote those shares at the Genterra Meeting.
A registered Genterra Shareholder may attend the Genterra Meeting in person or may be represented by proxy. Genterra Shareholders who are unable to attend the Genterra Meeting or any adjournment thereof in person are requested to date, execute and return the accompanying form of proxy for use at the Genterra Meeting or any adjournment thereof. To be effective, the enclosed proxy must be mailed so as to reach or be deposited with Computershare, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1, not later than 48 hours (excluding Saturdays, Sundays and statutory holidays) prior to the time set for the Genterra Meeting or any adjournment thereof.
The persons named in the enclosed form of proxy are directors or officers of Genterra. Each Genterra Shareholder has the right to appoint a proxyholder other than such persons, who need not be a Genterra Shareholder, to attend and to act for him or her and on his or her behalf at the Genterra Meeting. To exercise such right, the names of the nominees of management should be crossed out and the name of the Genterra Shareholder’s appointee should be legibly printed in the blank space provided.
The instrument appointing the proxy shall be in writing and shall be executed by the Genterra Shareholder or his or her attorney authorized in writing or, if the Genterra Shareholder is a corporation, under its corporate seal by an officer or attorney thereof duly authorized.
If you are a beneficial Genterra Shareholder and receive these materials through your broker or through another intermediary, please complete and return the form of proxy in accordance with the instructions provided to you by your broker or other intermediary.
TAKE NOTICE THAT pursuant to the Business Corporations Act (Ontario), a Genterra Shareholder may give Genterra a notice of dissent by registered mail or delivery addressed to the President of Genterra, 106 Avenue Road, Toronto, Ontario, M5R 2H3, at or before the date of the Genterra Meeting in order to be effective. If the Amalgamation becomes effective, Genterra Shareholders who dissent in respect of the Amalgamation will be entitled to be paid the fair value of their Genterra Shares in accordance with section 185 of the Business Corporations Act (Ontario). Failure by a dissenting Genterra Shareholder to adhere strictly to the requirements of section 185 of the Business Corporations Act (Ontario) may result in the loss of such rights of dissent. See “PART II - THE AMALGAMATION - Dissent Rights”.
In the event of a strike, lockout or other work stoppage involving postal employees, all documents required to be delivered by Genterra Shareholders should be delivered by facsimile to Computershare at 416-981-9800.
DATED at Toronto, Ontario, @, 2009.
BY ORDER OF THE BOARD OF DIRECTORS
OF GENTERRA INC.
By: (Signed) Mark Litwin
President
SCHEDULE 1A
GENTERRA CAPITAL INC.
STOCK OPTION PLAN
ARTICLE ONE
PURPOSE AND INTERPRETATION
Section 1.01 Purpose. The purpose of this Plan is to advance the interests of the Corporation by encouraging equity participation in the Corporation by its directors, senior officers and employees through the acquisition of Common Shares of the Corporation and to enable the Corporation to attract and maintain highly qualified directors, senior officers and employees.
Section 1.02 Definitions. In this Plan, the following capitalized words and terms shall have the following meanings:
"Act" means the Business Corporations Act (Ontario), and any Act that may be substituted therefor, as from time to time amended.
"Affiliate" shall have the meaning ascribed thereto in the Securities Act.
"Associate" shall have the meaning ascribed thereto in the Securities Act.
"Board of Directors" means the board of directors of the Corporation as constituted from time to time.
"Common Shares" means the common shares of the Corporation as constituted on the date hereof.
"Compensation Committee" means the Compensation Committee of the Board of Directors as constituted from time to time.
"Corporation" means Genterra Capital Inc., a corporation amalgamated under the Act, and its successors from time to time.
"Designated Affiliate" means the Affiliates of the Corporation designated by the Board of Directors for purposes of this Plan from time to time.
"Exchange" means The Toronto Stock Exchange or such other stock exchange or quotation system upon which the Common Shares are listed and posted or quoted for trading.
"Insider" shall have the meaning ascribed thereto in the Securities Act, and also includes any Associate or Affiliate of an Insider.
"Issuer Bid" shall have the meaning ascribed thereto in the Securities Act.
"Option Period" means the period of time an option may be exercised as specified in Subsection 2.07(a) of this Plan.
"Participant" means a participant under this Plan under Sections 2.01 and 2.02.
"Plan" means the stock option plan provided for herein.
"Securities Act" means the Securities Act (Ontario) or its successor, as amended from time to time.
"Securities Laws" means, collectively, the applicable securities laws, regulations, rules, schedules, prescribed forms, policy statements, notices, blanket rulings and other similar instruments of each of the jurisdictions in which the Corporation is or becomes a reporting issuer or equivalent and also includes, as the context so requires, the by-laws, rules, regulations and policies of the Exchange.
"Share Compensation Arrangement" means a stock option, stock option plan, employee stock purchase plan or any other compensation or incentive mechanism involving the issuance or potential issuance of securities of the Corporation to one or more service providers, including a share purchase from treasury which is financially assisted by the Corporation by way of a loan, guarantee or otherwise.
"Take-over Bid" shall have the meaning ascribed thereto in the Securities Act.
ARTICLE TWO
STOCK OPTION PLAN
Section 2.01 The Plan. The Plan is hereby established for the directors, senior officers and employees of the Corporation and its Designated Affiliates, and for such other persons who are eligible to participate in the Plan from time to time under the Securities Laws.
Section 2.02 Participants. Participants in the Plan shall be directors, senior officers or employees of the Corporation and consultants to the Corporation (to the extent permitted under the Securities Laws) or any of its Designated Affiliates (including officers thereof, whether or not directors) who, by the nature of their positions or duties are, in the opinion of the Board of Directors, upon the recommendation of the Compensation Committee, in a position to contribute to the success of the Corporation.
Section 2.03 Amount of Options. The determination regarding the aggregate number of Common Shares subject to options in favour of any Participant will take into consideration the Participant's present and potential contribution to the success of the Corporation and shall be determined from time to time by the Board of Directors upon the recommendation of the Compensation Committee. The aggregate number of Common Shares reserved for issuance upon the exercise of options pursuant to this Plan and any other Share Compensation Arrangements, subject to adjustment or increase of such number pursuant to Section 2.10 hereof, shall be Two Million (2,000,000) Common Shares of the Corporation or such other number or percentage of Common Shares as the directors may determine from time to time and, to the extent required under applicable Securities Laws or the requirements of any Exchange on which the Common Shares may then be listed and posted for trading, as the shareholders of the Corporation shall approve. The maximum number of Common Shares reserved for issuance to anyone Participant upon the exercise of options shall not exceed 5% of the total number of Common Shares outstanding immediately prior to such issuance. All options previously issued by the Corporation to its directors, senior officers and employees that are outstanding as at the date of this Plan, to acquire Common Shares of the Corporation, shall be deemed, as of the Effective Date of this Plan, to have been granted and issued under this Plan, shall constitute options to acquire Common Shares, shall have the same terms and conditions as to exercise price and vesting period as are currently applicable to such options, and shall otherwise be governed by the terms and conditions of this Plan. The form of option agreement for options granted from time to time under this Plan after the date hereof shall be in the form of Schedule "A" hereto or such other form of agreement as is adopted by the Board of Directors from time to time in substitution therefor.
Section 2.04 Limits with Respect to Insiders.
| (a) | The aggregate number of Common Shares issuable to all Insiders pursuant to options granted under this Plan, together with Common Shares issuable to Insiders under any other Share Compensation Arrangement of the Corporation, shall not: |
| | (i) | exceed 10% of the number of Common Shares outstanding immediately prior to the grant of any such option; or |
| | (ii) | result in the issuance to Insiders, within a one year period, of in excess of 10% of the number of Common Shares outstanding immediately prior to the grant of any such option. |
| (b) | The number of Common Shares issuable to any Insider and such Insider's Associates pursuant to options granted under this Plan, together with Common Shares issuable to such Insider or such Insider's Associates under any other Share Compensation Arrangement of the Corporation shall not, within a one year period, exceed 5% of the number of Common Shares outstanding immediately prior to the grant of any such option. |
Section 2.05 Price. The exercise price per Common Share with respect to any option shall be determined by the Board of Directors at the time the option is granted, but such price shall not be less than the closing price of the Common Shares on the Exchange, on the day prior to the day on which the grant of the option is approved by the Board of Directors or, if the Common Shares were not traded on such day, then an amount equal to the weighted average trading price for shares traded on the Exchange for the five trading days immediately preceding such day on which shares did trade, or, if the requirements of the Exchange specify a different amount, then such amount determined in accordance with the requirements of the Exchange in effect on the date upon which the option is granted.
Section 2.06 Lapsed Options. In the event that options granted under this Plan are surrendered, terminate or expire without being exercised or vested in whole or in part, the Common Shares reserved for issuance but not purchased under such lapsed options shall again be available for issuance for the purpose of this Plan.
Section 2.07 Consideration. Option Period and Payment.
| (a) | The period during which options may be exercised shall be determined by the Board of Directors upon the recommendation of the Compensation Committee, in its discretion, to a maximum of five (5) years from the date the option is granted (the "Option Period"), except as the same may be reduced with respect to any option as provided in Sections 2.08 and 2.09 hereof respecting termination of employment or death of the Participant. |
| (b) | Subject to any other provision of this Plan, or to any vesting requirement or limitation imposed with respect to such option at the time of grant thereof, an option may be exercised from time to time during the Option Period by delivery to the Corporation at its registered office of a written notice of exercise addressed to the Secretary of the Corporation specifying the number of Common Shares with respect to which the option is being exercised and accompanied by payment in full of the exercise price therefor. Certificates for such Common Shares shall be issued and delivered to the Participant as soon as practicable following receipt of such notice and payment. |
| (c) | Except as set forth in Sections 2.08 and 2.09 hereof, no option may be exercised unless the Participant is, at the time of such exercise, a director, senior officer, consultant of or in the employ of the Corporation or any of its Designated Affiliates and shall have been continuously a director, or senior officer, or so employed since the grant of his or her option. Absence on leave with the approval of the Corporation or a Designated Affiliate shall not be considered an interruption of employment for purposes of this Plan. |
| (d) | The exercise of any option will be contingent upon receipt by the Corporation of cash payment of the full exercise price of the Common Shares which are the subject of the exercised option. No Participant or his or her legal representatives, legatees or distributees will be, or will be deemed to be, a holder of any Common Shares with respect to which he or she was granted an option under this Plan, unless and until certificates for such Common Shares are issued to him or her under the terms of this Plan. |
| (e) | Notwithstanding any other provision of this Plan or in any option granted to a Participant, the Corporation's obligation to issue Common Shares to a Participant pursuant to the exercise of an option shall be subject to: |
| | (i) | completion of such registration or other qualification of such Common Shares or obtaining approval of such regulatory authorities as the Corporation shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof; |
| | (ii) | the admission of such Common Shares for quotation or listing and posting for trading, as the case may be, on the Exchange; and |
| | (iii) | the receipt from the Participant of such representations, warranties, agreements and undertakings, including as to future dealings in such Common Shares, as the Corporation or its counsel determines to be necessary or advisable in order to ensure compliance with the Securities Laws. |
| (f) | If there is a Take-over Bid or Issuer Bid made for all or any of the issued and outstanding Common Shares, then the Board of Directors may, by resolution, permit all options outstanding under the Plan to become immediately exercisable in order to permit Common Shares issuable under such options to be tendered to such bid. |
Section 2.08 Termination of Employment. If a Participant shall:
| (a) | cease to be a director or senior officer of the Corporation or any of its Designated Affiliates (and is not or does not continue to be an employee thereof); or |
| (b) | cease to be employed by the Corporation or any of its Designated Affiliates (and is not or does not continue to be a director or senior officer thereof) for any reason (other than death) or shall receive notice from the Corporation or any of its Designated Affiliates of the termination of his or her employment; |
(collectively, "Termination") he or she may, but only within 90 days next succeeding such Termination, exercise his or her options to the extent that he or she was entitled to exercise such options at the date of such Termination; provided that in no event shall such right extend beyond the Option Period. This section is subject to any agreement with any director or senior officer of the Corporation or any of its Designated Affiliates with respect to the rights of such director or senior officer upon Termination or change in control of the Corporation.
Section 2.09 Death of Participant. In the event of the death of a Participant who is a director or senior officer of the Corporation or any of its Designated Affiliates or who is an employee having been continuously in the employ of or retained by (as the case may be) the Corporation or any of its Designated Affiliates for one year from and after the date of the granting of his or her option, the option theretofore granted to him or her shall be exercisable within the six months next succeeding such death and then only:
| (a) | by the person or persons to whom the Participant's rights under the option shall pass by the Participant's will or the laws of descent and distribution; and |
| (b) | to the extent that he or she was entitled to exercise the option at the date of his or her death, provided that in no event shall such right extend beyond the Option Period. |
Section 2.10 Adjustment in Shares Subject to the Plan. In the event that:
| (a) | there is any change in the Common Shares of the Corporation through subdivisions or consolidations of the share capital of the Corporation, or otherwise; |
| (b) | the Corporation declares a dividend on Common Shares payable in Common Shares or securities convertible into or exchangeable for Common Shares; or |
| (c) | the Corporation issues Common Shares, or securities convertible into or exchangeable for Common Shares, in respect of, in lieu of, or in exchange for, existing Common Shares, |
the number of Common Shares available for option, the Common Shares subject to any option, and the option price thereof, shall be adjusted appropriately by the Board of Directors and such adjustment shall be effective and binding for all purposes of this Plan, subject to the prior consent of the Exchange.
Section 2.11 Record Keeping. The Corporation shall maintain a register in which shall be recorded:
(a) the name and address of each Participant in this Plan; and
(b) the number of options granted to a Participant and the number of options outstanding.
ARTICLE THREE
GENERAL
Section 3.01 Transferability. The benefits, rights and options accruing to any Participant in accordance with the terms and conditions of this Plan shall not be transferable or assignable by the Participant except as otherwise specifically provided herein, During the lifetime of a Participant, all benefits, rights and options shall only be exercised by the Participant or by his or her guardian or legal representative.
Section 3.02 Employment. Nothing contained in this Plan shall confer upon any Participant any right with respect to employment or continuance of employment with the Corporation or any Affiliate, or interfere in any way with the right of the Corporation or any Affiliate to terminate the Participant's employment at any time, Participation in this Plan by a Participant shall be voluntary.
Section 3.03 Delegation to Compensation Committee. All of the powers exercisable by the Board of Directors under this Plan may, to the extent permitted by applicable law and authorized by resolution of the Board of Directors of the Corporation, be exercised by a Compensation Committee of the Board of Directors. The composition of the Compensation Committee shall be as determined by the Board of Directors from time to time subject to the requirements (if any) of the Securities Laws.
Section 3.04 Administration of the Plan. This Plan shall be administered by the Board of Directors of the Corporation, The Board of Directors shall be authorized to interpret and construe this Plan and may, from time to time, establish, amend or rescind rules and regulations required for carrying out the purposes, provisions and administration of this Plan and determine the Participants to be granted options, the number of Common Shares covered thereby, the exercise price therefor and the time or times when they may be exercised, Any such interpretation or construction of this Plan shall be final and conclusive, All administrative costs of this Plan shall be paid by the Corporation, The directors and senior officers of the Corporation are hereby authorized and directed to do all things and execute and deliver all instruments, undertakings and applications and writings as they, in their absolute discretion, consider necessary for the implementation of this Plan and of the rules and regulations established for administering this Plan.
Section 3.05 Amendment. Modification or Termination of the Plan. The Board of Directors reserves the right to amend, modify or terminate this Plan at any time if and when it is advisable in the discretion of the Board of Directors without shareholder approval. However, shareholder approval shall be required in respect of:
| (a) | any amendments to the number of Common Shares (or other securities) issuable under this Plan; |
(b) any amendment which reduces the exercise price of an option;
| (c) | any amendment to the transferability or assignability of an option except as otherwise permitted by this Plan; |
| (d) | amendments required to be approved by shareholders under applicable law or pursuant to the requirements of the Exchange. |
Where shareholder approval is sought for amendments under subsections (b) and (d) above, the votes attached to Common Shares held directly or indirectly by Insiders benefiting from the amendment will be excluded.
Other than as specified above, the Board of Directors may approve all other amendments to this Plan or options granted under this Plan without shareholder approval. Without limiting the generality of the foregoing, the following types of amendments would not require shareholder approval:
| (e) | amendments of a "housekeeping" or ministerial nature including any amendment for the purpose of curing any ambiguity, error or omission in this Plan or to correct or supplement any provision of this Plan that is inconsistent with any other provision of this Plan; |
| (f) | amendments necessary to comply with the provisions of applicable law (including without limitation the rules, regulations and policies of the Exchange); |
(g) an amendment which increases the exercise price of an option;
(h) an expansion of the scope of persons eligible to participate in this Plan;
(i) amendments respecting administration of this Plan;
(j) any amendment to the vesting provisions of this Plan or any option;
| (k) | any amendment to the early termination provisions of this Plan or any option whether or not such option is held by an Insider, provided such amendment does not entail an extension beyond the original expiry date; and |
(l) amendments necessary to suspend or terminate this Plan.
Section 3.06 Consolidation, Merger, etc. If there is a consolidation, merger or statutory amalgamation or arrangement of the Corporation with or into another corporation, a separation of the business of the Corporation into two or more entities or a transfer of all or substantially all of the assets of the Corporation to another entity, upon the exercise of an option under this Plan, the holder thereof shall be entitled to receive the securities, property or cash which the holder would have received upon such consolidation, merger, amalgamation, arrangement, separation or transfer if the holder had exercised the option immediately prior to such event, unless the directors of the Corporation otherwise determine the basis upon which such option shall be exercisable, subject to Exchange approval.
Section 3.07 No Representation or Warranty. The Corporation makes no representation or warranty as to the future market value of any Common Shares issued in accordance with the provisions of this Plan.
Section 3.08 Interpretation. This Plan shall be governed by and construed in accordance with the laws of the Province of Ontario.
Section 3.09 Approval of the Plan. This Plan shall only become effective after the issue of Articles of Amalgamation amalgamating Genterra Inc. and Consolidated Mercantile Incorporated. The obligations of the Corporation to sell and deliver Shares in accordance with this Plan shall be subject to the prior approval of any governmental or other regulatory authority having jurisdiction over the securities of the Corporation.
SCHEDULE “A”
FORM OF OPTION AGREEMENT
OPTION AGREEMENT
THIS AGREEMENT is made as of the ____ day of ________________, 20___ by GENTERRA CAPITAL INC., a corporation existing under the laws of the Province of Ontario (hereinafter referred to as the “Corporation”), in favour of ______________________________, an individual residing in the _______________ of ___________________, in the ____________________ of _________________ (hereinafter referred to as the “Optionee”).
WHEREAS:
A. The Optionee is a [director, officer or employee] of the Corporation or any Designated Affiliate, and will render faithful and efficient service to the Corporation, or any Designated Affiliate, as the case may be;
B. The Corporation, or any Designated Affiliate, as the case may be, desires to continue to receive the benefit of the services of the Optionee and to more fully identify the interest of the Optionee with the Corporation’s or any Designated Affiliate’s future and success; and
C. The Corporation has adopted a stock option plan (as such stock option plan may be amended or superseded from time to time, the “Plan”) which became effective upon the date of its formation as a result of the amalgamation of Genterra Inc. and Consolidated Mercantile Incorporated;
D. The board of directors of the Corporation has approved the granting of a stock option to the Optionee to purchase common shares in the capital of the Corporation upon and subject to the provisions of the Plan and to the terms and conditions hereinafter provided;
E. Capitalized terms not defined herein have the meaning ascribed to them in the Plan.
NOW THEREFORE in consideration of the sum of $2.00 and the mutual covenants herein contained, the sufficiency and receipt of which are hereby acknowledged, the Corporation hereto agrees as follows:
1. Option to Purchase. The Corporation hereby grants to the Optionee the irrevocable right and option to purchase from the Corporation that number of authorized and unissued common shares without nominal or par value in the capital of the Corporation as are specified in Exhibit “1” hereto (the “Shares”), at the exercise price per Share specified in Exhibit “1” hereto. Such option shall at all times be and remain subject to the provisions of the Plan and to the terms and conditions contained herein.
2. Basic Term of Option. Notwithstanding any other provisions of this Agreement, this option shall be exercisable, in whole or in part, at any time during the period (the “Term”) commencing the date hereof and expiring on the date specified in Exhibit “1” hereto, at which time this option shall be void and of no further force or effect. However such option shall only be exercisable, at any time, to acquire those Shares in respect of which the Optionee has satisfied the vesting requirements, if any, specified in Exhibit “1” hereto.
3. Manner of Exercise of Option. The Optionee, subject to the qualifications and exceptions contained in paragraph 5, may exercise this option to purchase on a cumulative basis, to the extent hereinafter provided, all or any part of the number of Shares subject to this option, and such right shall be a continuing and cumulative one during the Term until the number of Shares subject to the option stated in paragraph 1 has been purchased.
4. Death of Optionee. Notwithstanding paragraph 3, upon the death of the Optionee while an employee of the Corporation or any Designated Affiliate, this option shall, then and for a period of six months after the date of death or prior to the expiration of the Term, whichever is sooner, be exercisable in full, and may be exercised in whole or in part by the estate of the Optionee or by such person or persons to whom this option shall be transferred by the will of the Optionee, or by the applicable laws of descent and distribution.
5. Termination as Employee. Upon the Optionee ceasing to be employed by the Corporation or a Designated Affiliate for any reason (other than death), the Optionee may, but only for a period of ninety (90) days next succeeding such cessation of employment or prior to the expiration of the Term, whichever is sooner, thereafter exercise this option in whole or in part, but only in respect of such number of remaining Shares originally covered by this option as the Optionee may purchase at such time as specified in paragraph 3.
6. Notice of Exercise of Option. This option shall be exercised in whole or in part upon providing notice in writing to the Corporation addressed to the President of the Corporation at such place as the Corporation’s executive office may then be located (the “Notice”).
7. Right of a Shareholder. After receipt of the Notice and payment in full of the option price for the total number of Shares to be purchased, the Corporation shall cause to be issued and delivered such certificates in such denominations as the Optionee may in the Notice direct, representing the number of fully paid, non-assessable Shares so purchased, registered in the name of the Optionee, but the Optionee shall have no right as a shareholder with respect to any Shares covered by this option until the issuance of such share certificates, and no adjustment shall be made for dividends or other rights for which the record date is prior to the time such share certificates are issued. The Corporation agrees to issue all Shares so purchased (including share certificates in respect thereof) within twenty (20) business days after such receipt of Notice and payment in full of the option price for the total number of Shares to be purchased.
8. Transfer or Assignment of Option. The option granted pursuant to this Agreement shall not be transferable or assignable by the Optionee.
9. Adjustment in Shares Subject to the Option. In the event there is any change in the common shares of the Corporation through the declaration of stock dividends or consolidations, subdivisions or reclassifications of the common shares of the Corporation, or otherwise, the number of Shares subject to this option, and the option price thereof, shall be adjusted appropriately by the board of directors of the Corporation and such adjustment shall be effective and binding for all purposes of this Agreement.
10. Effect of Takeover Bid. If a bona fide offer (the “Offer”) is made during the Term of this option to the Optionee or to shareholders generally or to a class of shareholders which includes the Optionee for Shares, which Offer, if accepted in whole or in part, would result in the offeror exercising control over the Corporation within the meaning of the Securities Act (Ontario) (as amended from time to time), then the Corporation shall, immediately upon receipt of notice of the Offer notify the Optionee of the Offer, with full particulars thereof; whereupon, notwithstanding paragraph 3 hereof, this option may be exercised in whole or in part by the Optionee so as to permit the Optionee to tender the Shares received upon such exercise (the “Optioned Shares”) pursuant to the Offer. If the Offer is not completed within the time specified therein the Optioned Shares shall be returned by the Optionee to the Corporation and reinstated as authorized but unissued Shares and the terms of this option as set forth in paragraph 3 shall again apply to this option.
11. Regulatory Approval. This Agreement and the obligations of the Corporation to sell and deliver Shares under the option granted hereunder shall be subject to the prior approval of any governmental or other regulatory authority having jurisdiction over the securities of the Corporation.
12. Governing Law. This Agreement and the options granted hereunder shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein.
IN WITNESS WHEREOF the Corporation has duly executed this Agreement as of the day, month and year first above written and the Optionee has duly executed this Agreement and accepted the terms hereof as set forth below.
GENTERRA CAPITAL INC.
Per:
Authorized Signing Officer
Accepted and agreed to this ____ day of ____________________, 20___.
______________________________ _____________________________
Signature of Optionee Witness
______________________________
Name of Optionee
_______________________________
_______________________________
Address of Optionee
Exhibit “1”
Particulars of Option
Name of Optionee: __________________________
Number of Shares
subject to Option: ___________________________ common shares
Exercise Price
per Share: $_____________ per common share
Term of Option: ____________________________ [maximum 5 years]
Vesting Period
(if applicable): as to ______________ Shares after _______ months from the date hereof;
as to ______________ Shares after _______ months from the date hereof;
as to ______________ Shares after _______ months from the date hereof;
and
as to ______________ Shares after _______ months from the date hereof
SCHEDULE "5"
Section 185 of the Business Corporations Act (Ontario)
Rights of dissenting shareholders
| | (a) | amend its articles under section 168 to add, remove or change restrictions on the issue, transfer or ownership of shares of a class or series of the shares of the corporation; |
| | (b) | amend its articles under section 168 to add, remove or change any restriction upon the business or businesses that the corporation may carry on or upon the powers that the corporation may exercise; |
| | (c) | amalgamate with another corporation under sections 175 and 176; |
| | (d) | be continued under the laws of another jurisdiction under section 181; or |
| | (e) | sell, lease or exchange all or substantially all its property under subsection 184 (3), |
a holder of shares of any class or series entitled to vote on the resolution may dissent. R.S.O. 1990, c. B.16, s. 185 (1).
Idem
| | (a) | clause 170(1)(a), (b) or (e) where the articles provide that the holders of shares of such class or series are not entitled to dissent; or |
| | (b) | subsection 170(5) or (6). R.S.O. 1990, c. B.16, s. 185 (2). |
One class of shares
Exception
| | (a) | amends the express terms of any provision of the articles of the corporation to conform to the terms of the provision as deemed to be amended by section 277; or |
| | (b) | deletes from the articles of the corporation all of the objects of the corporation set out in its articles, provided that the deletion is made by the 29th day of July, 1986. R.S.O. 1990, c.B.16, s.185(3). |
Shareholder’s right to be paid fair value
No partial dissent
Objection
Idem
Notice of adoption of resolution
Idem
Demand for payment of fair value
| | (a) | the shareholder’s name and address; |
| | (b) | the number and class of shares in respect of which the shareholder dissents; and |
| | (c) | a demand for payment of the fair value of such shares. R.S.O. 1990, c.B.16, s. 185(10). |
Certificates to be sent in
Idem
Endorsement on certificate
Rights of dissenting shareholder
| | (a) | the dissenting shareholder withdraws notice before the corporation makes an offer under subsection (15); |
| | (b) | the corporation fails to make an offer in accordance with subsection (15) and the dissenting shareholder withdraws notice; or |
| | (c) | the directors revoke a resolution to amend the articles under subsection 168(3), terminate an amalgamation agreement under subsection 176(5) or an application for continuance under subsection 181(5), or abandon a sale, lease or exchange under subsection 184(8), |
in which case the dissenting shareholder’s rights are reinstated as of the date the dissenting shareholder sent the notice referred to in subsection (10), and the dissenting shareholder is entitled, upon presentation and surrender to the corporation or its transfer agent of any certificate representing the shares that has been endorsed in accordance with subsection (13), to be issued a new certificate representing the same number of shares as the certificate so presented, without payment of any fee. R.S.O. 1990, c.B.16, s. 185(14).
Offer to pay
| | (a) | a written offer to pay for the dissenting shareholder’s shares in an amount considered by the directors of the corporation to be the fair value thereof, accompanied by a statement showing how the fair value was determined; or |
| | (b) | if subsection (30) applies, a notification that it is unable lawfully to pay dissenting shareholders for their shares. R.S.O. 1990, c.B.16, s. 185(15). |
Idem
Idem
Application to court to fix fair value
Idem
(19) If a corporation fails to apply to the court under subsection (18), a dissenting shareholder may apply to the court for the same purpose within a further period of twenty days or within such further period as the court may allow. R.S.O. 1990, c.B.16, s. 185(19).
Idem
Costs
Notice to shareholders
| | (a) | has sent to the corporation the notice referred to in subsection (10); and |
| | (b) | has not accepted an offer made by the corporation under subsection (15), if such an offer was made, |
of the date, place and consequences of the application and of the dissenting shareholder’s right to appear and be heard in person or by counsel, and a similar notice shall be given to each dissenting shareholder who, after the date of such first mentioned notice and before termination of the proceedings commenced by the application, satisfies the conditions set out in clauses (a) and (b) within three days after the dissenting shareholder satisfies such conditions. R.S.O. 1990, c.B.16, s. 185(22).
Parties joined
Idem
Appraisers
Final order
Interest
Where corporation unable to pay
Idem
| | (a) | withdraw a notice of dissent, in which case the corporation is deemed to consent to the withdrawal and the shareholder’s full rights are reinstated; or |
| | (b) | retain a status as a claimant against the corporation, to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the corporation but in priority to its shareholders. R.S.O. 1990, c.B.16, s. 185(29). |
Idem
| | (a) | the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or |
| | (b) | the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities. R.S.O. 1990, c.B.16, s. 185(30). |
Court order
Commission may appear
