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