SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission (as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant toss. 240.14a-11(c) orss. 240.14a-12
CHELL GROUP CORPORATION
(Name of Registrant as Specified In Its Charter)
CHELL GROUP CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
|X| No Fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
_______________
2) Aggregate number of securities to which transaction applies:
_____________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction: _______________
5) Total fee paid: _____________________
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ___________
2) Form, Schedule or Registration Statement No: _____________
3) Filing Party: ___________
4) Date Filed: ____________
CHELL GROUP CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 28, 2002
To the Shareholders of Chell Group Corporation:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of Chell
Group Corporation, a New York corporation, will be held at 10:00 a.m., local
time, on June 28, 2002, at the offices of the company, 14 Meteor Drive, Toronto,
Ontario, Canada M9W 1A4, for the following purposes:
1. To elect a seven member Board of Directors to serve until the next
Annual Meeting of Shareholders of the company or until their successors
are duly elected and qualified;
2. To authorize the issuance of shares of the company's common stock upon
the conversion of notes issued pursuant to an 8% convertible promissory
notes private offering which was conducted by the company;
3. To authorize the issuance of shares of the company's common stock
pursuant to a Share Purchase Agreement dated December 13, 2001 by and
among the company, Chell Merchant Capital Group, Inc., Logicorp Data
Systems Ltd., Logicorp Service Group Ltd., and the individuals and
entities which own all of the issued and outstanding shares of Logicorp
Data Systems and Logicorp Service Group and to ratify the transaction
contemplated by the Share Purchase Agreement;
4. To authorize the issuance of shares of the company's common stock upon
the conversion of shares of the company's preferred stock issued pursuant
to a Securities Exchange Agreement dated February 6, 2002 by and between
the company and The Shaar Fund Ltd. and to ratify the transaction
contemplated by the Securities Exchange Agreement;
5. To authorize the issuance of shares of the company's common stock upon
the conversion of shares of the company's preferred stock issued pursuant
to a Securities Exchange Agreement dated February 6, 2002 by and between
the Company and Triton Private Equities Fund, L.P. and to ratify the
transaction contemplated by the Securities Exchange Agreement;
6. To authorize the issuance of shares of the company's common stock
pursuant to the the conversion of a promissory note issued to Canadian
Advantage Limited Partnership in the principal amount of $1,365,100 and
the conversion of a promissory note issued to Advantage Bermuda Limited
Partnership in the principal amount of $504,900;
7. To authorize the increase in the number of shares of the company's
common stock authorized for issuance by the company from 50,000,000 to
75,000,0000;
8. To ratify the Board of Directors' selection of Lazar Levine & Felix LLP
as the auditors for the company for the 2002 fiscal year; and
9. To consider and transact such other business as may properly come
before the Annual Meeting and any adjournments thereof.
In accordance with the provisions of the company's By-laws, the Board of
Directors has fixed the close of business on June 6, 2002 as the date for
determining the shareholders of record entitled to receive notice of, and to
vote at, the meeting and any adjournments thereof.
Dated: June 7, 2002 By Order of the Board of Directors,
/s/ Mark Truman
Mark Truman, Secretary
SHAREHOLDERS ARE URGED TO FILL IN, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING PREPAID ENVELOPE.
It is desirable that as many shareholders as possible be represented, in
person or by proxy, at the annual meeting. Consequently, whether or not you now
expect to be present, please execute and return the enclosed proxy. You have the
power to revoke your proxy at any time before it is voted, and the giving of a
proxy will not affect your right to vote in person if you attend the annual
meeting.
ii
CHELL GROUP CORPORATION
14 Meteor Drive, Toronto, Ontario, Canada M9W 1A4
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
June 28, 2002
This proxy statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Chell Group Corporation for use
at the company's annual meeting of shareholders to be held on June 28, 2002, and
at any adjournment thereof.
The meeting will be held at 10:00 a.m., local time, on June 28, 2002, at
the offices of the company, 14 Meteor Drive, Toronto, Ontario, Canada M9W 1A4
We are first mailing this proxy statement and accompanying forms of proxy
and voting instructions on or about June 7, 2002 to holders of shares of the
company's common stock as of June 6, 2002, the record date for this meeting.
Proxies and Voting Procedures
Solicitation of proxies may be made personally, or by telephone or
telegraph, by regularly employed officers and other employees of the company,
who will receive no additional compensation for such solicitation. The cost of
soliciting proxies will be borne by the company which may enlist the assistance,
and reimburse the reasonable expenses, of banks and brokerage houses in the
additional solicitation of proxies and proxy authorizations, particularly from
their customers whose stock is not registered in the owner's name, but in the
name of such banks or brokerage houses.
All shares represented at the annual meeting by proxies will be voted
provided that such proxies are properly signed and dated. In instances where a
choice is indicated, the shares represented will be voted in accordance with the
specifications so made. In instances where no specifications are made, the
shares represented will be voted as the Board of Directors recommends.
Any shareholder executing and returning a proxy has the power to revoke
such proxy at any time prior to the voting thereof by: (A) providing written
notice to the Secretary of the company at the Company's headquarters, which
notice is delivered prior to the commencement of the meeting, (B) providing a
signed proxy bearing a later date, or (C) appearing in person and voting at the
meeting.
Voting Securities
Shareholders of record at the close of business on June 6, 2002, are
entitled to notice of and to vote at the meeting. On June 6, 2002, there were
_________ common shares issued and outstanding. Each of such shares of common
stock is entitled to one vote upon all matters to be acted upon at the meeting.
On February 8, 2002 the company issued 454,545 shares of non-voting Series
B Convertible Preferred Stock, par value $.01 per share, to The Shaar Fund Ltd.
(389,610 shares) and to Triton Private Equities Fund L.P. (64,935 shares).
Holders of Series B Convertible Preferred Stock are not entitled to vote at the
Annual Meeting.
1
Quorum and Required Vote - Election of Directors and Shareholder Proposals
The holders of a majority of the outstanding votes (i.e., _______ votes)
shall constitute a quorum, which is necessary for the transaction of business at
the meeting.
In accordance with the company's Certificate of Incorporation and By-laws,
and applicable law, a plurality of the votes cast is required for the election
of Directors (i.e. the nominees receiving the greatest number of votes will be
elected). Abstentions are not counted for purposes of the election of Directors.
With respect to the shareholder proposals and all other matters (other
than the election of Directors) upon which holders of the company's common
shares are entitled to vote, the affirmative vote of the holders of a majority
of shares of common stock, present and in person or represented by proxy and
entitled to vote. is required. An abstention is counted as a vote against all
matters on which holders of the company's common shares are entitled to vote at
the meeting (other than the election of Directors).
Copy of Annual Report to Shareholders
A copy of the Annual Report on Form 10-K of the company for the fiscal
year ended August 31, 2001, including financial statements, is being mailed
concurrently herewith (on or about June 7, 2002) to all shareholders of record
at the close of business on June 6, 2002 and is incorporated by reference
herein.
STOCK OWNERSHIP
Security Ownership of Certain Beneficial Owners
The following table lists those persons or groups known to the company to
be the beneficial owner of more than 5% of the company's common stock:
Percentage
Name and Address(1) Common Stock of Class (2)
- --------------------- ------------ ------------
Chell.com Ltd. (3) 3,347,271 14.9%
114, 1215-- 13th Street S.E.
Calgary, Alberta T2G 3J4
Cameron Chell (President (4) 3,430,971 15.3%
and Chief Executive Officer)
Canadian Advantage Limited
Partnership (5) 2,086,009 9.3%
c/o Thomson Kernaghan & Co. Limited
120 Adelaide Street West, Suite 1800
Toronto Ontario M5H 1T1
Michael J. Rice (Director) (6) 1,700,000 7.6%
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(1) Unless otherwise stated, the address of the directors and executive officers
of the corporation is c/o Chell Group Corporation, 14 Meteor Drive, Toronto,
Ontario, Canada M9W 1A4.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants and convertible securities that
are held by such person (but not those held by any other person) and which are
exercisable within such 60-day period, have been exercised. The percentages
reflected in this table assume the approval of the issuance of shares of the
company's common stock pursuant to the Logicorp transaction, the issuance of
shares of the company's common stock pursuant to the conversion of the 8%
convertible promissory notes and the issuance of shares of the company's common
stock pursuant to the conversion of two promissory notes issued by the company.
(3) Cameron Chell is the sole director and shareholder of Chell.com Ltd.
(4) Includes 3,347,271 Common Shares held by Chell.com Ltd. Does not include the
issuance of options to purchase 5,000,000 shares of our common stock, the
granting of which is subject to conditions which have not been met as of the
date hereof.
(5) Excludes options to purchase 33,500 shares of the company's common stock.
Includes 442,145 shares to be issued upon shareholder approval at the meeting.
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Shares Held By Directors and Named Executive Officers
The following table contains information regarding the beneficial ownership of
shares of the company's common stock as of June 6, 2002 by the company's
directors and named executive officers* :
Amount & Nature Percentage
Name and Address(1) of Beneficial Ownership of Class (2)
- ------------------- ----------------------- ------------
Cameron Chell (President (3) 3,430,971 15.3%
and Chief Executive Officer)
Gordon Herman (Director) (4) 332,236 1.5%
David Bolink (Director) (5) 311,411 1.4%
Don Pagnutti (Director, Vice-President- (6) 187,500 0.8%
Finance,and Chief Financial Officer)
Michael J. Rice (Director) 1,700,000 7.6%
Adrian Towning (Director) (7) 150,000 0.7%
Robert Stone (Director) (8) 150,000 0.7%
Shelley Singhal (Director) 0 0.0%
All directors and executive officers as a group 6,262,118 27.3%
8 persons (9)
(1) Unless otherwise stated, the address of the directors and executive officers
of the corporation is c/o Chell Group Corporation, 14 Meteor Drive, Toronto,
Ontario, Canada M9W 1A4.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants and convertible securities that
are held by such person (but not those held by any other person) and which are
exercisable within such 60-day period, have been exercised. The percentages
reflected in this table assume the approval of the issuance of shares of the
company's common stock pursuant to the Logicorp transaction, the issuance of
shares of the company's common stock pursuant to the conversion of the 8%
convertible promissory notes and the issuance of shares of the company's common
stock pursuant to the conversion of two promissory notes issued by the company.
- ----------
* The term named executive officers includes all persons who served as Chief
Executive Officer of the company at any time during the company's fiscal year
ended August 31, 2001 (the "2001 Fiscal Year") and the four highest paid
individuals whose total compensation exceeded $100,000 for the 2001 Fiscal Year
and who were serving as executive officers of the company at the end of the 2001
Fiscal Year
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(3) Includes 3,347,271 Common Shares held by Chell.com Ltd. Does not include the
issuance of options to purchase 5,000,000 shares of our common stock, the
granting of which is subject to conditions which have not been met as of the
date hereof.
(4) Represents the vested portion of an option from Chell.com Ltd. held by Mr.
Herman to purchase 332,236 of our shares which are currently owned by Chell.com
Ltd.
(5) Represents the vested portion of an option from Chell.com Ltd. held by Mr.
Bolink to purchase 311,411 of our shares which are currently owned by Chell.com
Ltd.
(6) Represents options, which have vested and are available for exercise.
(7) Represents options, which have vested and are available for exercise.
(8) Includes 100,000 options, which have vested and are available for exercise.
(9) This percentage of stock ownership by directors and executive officers was
calculated as a percentage of our total outstanding common stock, which was
_______ on June 6, 2002 and the applicable outstanding options held by certain
Officers and Directors in the aggregate of 487,450, which for purposes of this
footnote does not include options held by Messrs. Bolink and Herman which are
described in footnotes 6 and 7 above. Our total outstanding common stock
includes 5,355,000 shares of the company's wholly-owned subsidiary, Chell
Merchant Capital Group, which are exchangeable into shares of the company's
common stock which will be held in escrow until shareholder approval of the
issuance of such shares with respect to the Logicorp transaction. Such shares do
not have voting power while held in escrow.
Chell.com Ltd., the company's largest shareholder, which is 100% owned by
Cameron Chell, the company's President and Chief Executive Officer, recently
sold certain of its beneficially owned shares of the company's common stock. As
a result of such sales, Mr. Chell currently beneficially owns approximately
27.9% of the issued and outstanding shares of the company's common stock. This
calculation does not include (i) the exchangeable shares of the company's
wholly-owned subsidiary, Chell Merchant Capital Group, which are exchangeable
into shares of the company's common stock which will be held in escrow until
shareholder approval of the issuance of such shares with respect to the Logicorp
transaction, which do not have voting power while held in escrow (ii) the
issuance of shares of the company's common stock pursuant to the conversion of
the 8% convertible promissory notes and (iii) the issuance of shares of the
company's common stock pursuant to the conversion of two promissory notes issued
by the company. One sale of 1,700,000 shares of the company's common stock was
to Mr. Michael Rice, a Director of the company. Mr. Rice has given Mr. Chell an
irrevocable proxy to vote as proxy all of Mr. Rice's shares of the company for
the approval of the items being presented to the shareholders for approval at
the meeting. In addition, Canadian Advantage Limited Partnership, a substantial
shareholder of the company(1), has given Don Pagnutti, Chief Financial Officer
and a Director of the company an irrevocable proxy to vote as proxy all of
Canadian Advantage Limited Partnership's shares of the company for the approval
of the items being presented to the shareholders for approval at the meeting.
Lastly, Advantage Bermuda Fund Limited(2) has
- ----------
(1) As of April 17, 2002, CALP beneficially holds 1,381,064 shares of the
Company's common stock which excludes 442,145 shares of the Company's common
stock which will be issued upon shareholder approval.
(2) As of April 17, 2002, ABFL beneficially holds 510,804 shares of the
Company's common stock, which excludes 163,533 shares of the Company's common
stock which will be issued upon shareholder approval.
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given Mr. Pagnutti an irrevocable proxy to vote as proxy all of ABFL's shares of
the company for the approval of the items being presented to the shareholders
for approval at the meeting. Together with Mr. Chell's voting power, the Proxies
provide approval of approximately 56.4% of the issued and outstanding shares of
common stock, ensuring shareholder approval of the items being presented to the
shareholders at the meeting.
ELECTION OF DIRECTORS
The individuals named in the enclosed form of proxy will vote, if so
authorized, FOR the persons named below as directors of the company, each of
whom has served as a director of the company for the periods indicated. Each
such person is to be elected to hold office until the next succeeding annual
meeting of shareholders and until his successor is duly elected and qualified.
Management of the company is not aware of any reason why any of the nominees
will not be able to serve. If a nominee should subsequently become unavailable
for election, the persons voting the accompanying proxy may, in their sole
discretion, vote FOR such substitute nominee that the present Board of Directors
may recommend.
Director
Name Age Principal Positions with the Company Since
- ------- --- ------------------------------------ --------
Cameron Chell 33 President and N/A
Chief Executive Officer
Don Pagnutti 51 Director, Vice President-Finance, 2000
Chief Financial Officer
Adrian P. Towning 57 Director 1994
David Bolink 33 Director 2000
Gordon Herman 43 Director 2000
Robert Stone 58 Director 2000
Shelley Singhal 34 Director 2001
Michael J. Rice 35 Director 2002
Cameron Chell is our President and Chief Executive Officer and is the
Chairman and Chief Executive Officer of Chell.com Ltd. Mr. Chell was a director
on our board from October 2000 until April 2002. Mr. Chell is a founder of the
ASP Consortium and FutureLink Corp., a company formerly listed on NASDAQ under
the trading symbol "FTRL". He served as FutureLink's President, CEO and Chairman
from 1997 to 1999. In April 2001, FutureLink filed for the protections of
Chapter 11 bankruptcy reorganization. Mr. Chell is also a former Director and
Shareholder of VC Advantage Limited, the general partner of VC Advantage Fund
Limited Partnership. Mr. Chell is a Director and founder of C MeRun Corp. and is
a cofounder of JAWS Technologies Inc., a company which is quoted on the "Pink
Sheets" and a provider of information security consulting services and software
solutions. Mr. Chell is also the Chairman of the Board of Directors of cDemo.
Previously, Mr. Chell worked in corporate finance in the private sector. Mr.
Chell worked as a stockbroker at McDermid St. Lawrence Securities Ltd. from 1994
to 1997. On November 6, 1998, Mr. Chell entered into a Settlement Agreement with
the Alberta Stock Exchange to resolve a pending investigation into alleged
breaches by Mr. Chell of Alberta Stock Exchange rules and bylaws. As part of the
Settlement Agreement, (i) Mr. Chell acknowledged that he had breached certain
duties of supervision, disclosure, or compliance in connection with various
offers and sales of securities and (ii) Mr. Chell was prohibited from receiving
Alberta Stock Exchange approval for a five year period, subjected to a
Cdn$25,000 fine and a three year period of enhanced supervision.
6
Gordon Herman was a Senior Managing Director of Chell Merchant Capital
Group from September 2000 to January 19, 2001 and currently has oversight of our
acquisition team operations. He is also currently the Chairman/President of
Madison Companies Ltd., a company listed on the Canadian Venture Exchange Inc.,
which focuses on acquiring small to medium sized facilities management companies
since 1997. From 1992 to 1998, Mr. Herman was the President/owner of various
publicly held Canadian insurance companies. From 1988 to 1992, Mr. Herman was
the President of General Electric Capital Canada Leasing Inc., Canadian
Operations (Canadian Subsidiary of General Electric).
Don Pagnutti was appointed our Vice President, Finance on September 19,
2000. Mr. Pagnutti has been our Chief Financial Officer since September 1998,
and has been our Executive Vice President and Chief Operations Officer since
September 1997. From 1996 to 1997, he worked for Sullivan Entertainment Inc., as
Executive Vice President and Chief Financial Officer. From 1980 to 1996, he
worked for Telemedia Communications Ltd., a large Canadian media company as Vice
President, Radio. Mr. Pagnutti is a Chartered Accountant and has a Masters
Degree in Business Administration and a Bachelor of Commerce Degree from the
University of Toronto.
David Bolink was a Managing Director of Chell Merchant Capital Group from
September 2000 to January 19, 2001 and served as Chell.com. Ltd.'s first
President from December 1999 to July 2000. Mr. Bolink is currently
Vice-President of Business Development at Engyro, Inc. Mr. Bolink served as
Director of Business Management of FutureLink Distribution Corp., an application
service provider and a provider of server-based computing services, from May
1998 to December 1999. Mr. Bolink also served as Business Manager of Edmonton
Society for Christian Education from May 1996 to May 1998. From February 1989 to
May 1996, Mr. Bolink served as Asset Manager of Wilson Holdings, a property and
financial management company.
Adrian Towning is a private, independent investor in several companies
involved in the communications industry. As a result of his investments, he has
served as a director of some of these companies, including Medical
Communications Corporation, which we refer to as MCC, from 1994 to July 1996. On
May 14, 1996, MCC filed a petition under Chapter 7 of the United States
Bankruptcy Code and the Bankruptcy Court appointed a Trustee of MCC on July 11,
1996. On July 16, 1996, MCC was dissolved. From 1983 to 1989, he established and
managed Anglo-Massachusetts Investments Incorporated, with offices in Boston and
London, which was involved in providing financial advice to Europeans.
Robert Stone graduated with the degree of Bachelor of Science from the
University of Toronto in 1964. From 1973 until 1997 Mr. Stone served in various
capacities with Cominco Ltd., a company listed on the Toronto Stock Exchange,
which we refer to as TSE, and the American Stock Exchange, which we refer to as
AMEX, being the Vice-President, Finance and Chief Financial Officer of that
company from 1980 until 1997. From 1969 until 1973 Mr. Stone was the Director of
Finance of Great Northern Capital Corporation. From 1964 until 1969 Mr. Stone
worked with Clarkson Gordon, Chartered Accountants, receiving his Chartered
Accountant designation in 1967. Mr. Stone currently serves as a director of a
number of companies including: Boliden Limited, a company listed on the TSE ;
Golden Star Resources Ltd., a company listed on the TSE and listed on AMEX;
Mainsborne Communications International Inc.; Manhatten Minerals Corp., a
company listed on the TSE; Mr. Stone is also a former director of Agrium Inc., a
company listed on the New York Stock Exchange and the TSE ; Cominco Ltd.; Global
Stone Corporation; Pine Point Mines Ltd.; TVI Pacific Inc., a company listed on
the TSE and Canadian Venture Exchange Inc.; and United Bolero Development Corp.,
a company listed on the Canadian Venture Exchange Inc.; Union Bank of
Switzerland and West Kootenay Power & Light Company.
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Shelly Singhal has been a director on our board of directors since 2001.
Since December 2001, Mr. Singhal has been the President of vFinance Capital, a
private merchant banking concern providing investment opportunities to
corporations and high net worth individuals through equity investments in
emerging companies. From June 2001 until November of 2001, Mr. Singhal was
Managing Director of Technology Investment Banking for SBI E2-Capital (USA) Inc.
From November 2000 until May 2001 he was Managing Director of Technology
Investment Banking for BlueStone Capital Securities, Inc. From July of 1995
until August 2000, Mr. Singhal was Managing Director of Corporate Finance at
Roth Capital Partners where he was head of the E-Commerce Group and Manager of
the Roth Capital Partners Bridge Fund.
Michael J. Rice has been a Director since March 2002. Mr. Rice is the
Executive Director of the Retail Branch System within Prudential Securities'
Private Client Group, serving in this position since November 2000. In his
current role, Mr. Rice also sits on several of Prudential Securities' Leadership
and Business Review Committees that include the New Product Group, Investments,
Investment Management, and Public Finance. Mr. Rice joined Prudential Securities
in October 1997 as Senior Vice President and Director of Strategic Business
Initiatives. Prior to joining Prudential Securities, Mr. Rice was a Vice
President and Branch Manager for Smith Barney in New York City. He is an
Advisory Board member of NYC2012, the nonprofit group leading the initiative to
bring the 2012 Olympic Games to New York City. He is also a member of the
Financial Management Division of the Securities Industry Association. Mr. Rice
holds an undergraduate degree from Georgetown University and an M.B.A. from The
Wharton School at The University of Pennsylvania.
Board Committees and Attendance Records
The company's Audit and Compensation Committee currently consists of
Messrs. Adrian Towning and Robert Stone. Neither Mr. Towning nor Mr. Stone is an
officer or employee of the company and neither has served in such capacities
with the company in the past.
During the 2001 Fiscal Year, there were fourteen formal meetings of the
Board of Directors of the company. The following chart outlines the directors of
the company during the 2001 fiscal year, how many of the formal meetings they
were eligible to attend, and how many they attended.
Eligible
Board Member Meetings Attended
------------ -------- --------
Cameron Chell 14 14
Don Pagnutti 14 14
David Bolink 14 11
Adrian Towning 14 12
Gordon Herman 14 12
Robert Stone 14 14
Shelley Singhal 1 1
Michael J. Rice N/A(3) N/A
- ----------
(3) Became a director of the Company after the end of the fiscal year ended
August 31, 2001.
8
Audit Committee Report
The Board of Directors maintains an Audit Committee comprised of two of
the company's outside directors. The Board of Directors and the Audit Committee
believe that the Audit Committee's current member composition satisfies the rule
of the National Association of Securities Dealers, Inc., which governs audit
committee composition, Rule 310(c)(26)(B)(i), including the requirement that
audit committee members all be "independent directors" as that term is defined
by NASD Rule 4200(a)(15).
In accordance with its written charter adopted by the Board of Directors
(set forth in Appendix A to our proxy statement for our annual shareholder's
meeting in 2001), the Audit Committee assists the Board of Directors with
fulfilling its oversight responsibility with respect to the quality and
integrity of the accounting, auditing and financial reporting practices of the
company. In discharging its oversight responsibilities with respect to the audit
process, the Audit Committee:
(1) reviewed and discussed the audited financial statements with
management;
(2) discussed with the independent auditors the material required to be
discussed by Statement on Auditing Standards No. 61; and
(3) reviewed the written disclosures and the letter from the independent
auditors required by the Independence Standards Board's Standard No.
1, and discussed with the independent auditors any relationships
that may impact their objectivity and independence.
Based upon the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2001, as filed with the Securities and Exchange
Commission.
Compensation Committee Report
Proxy disclosure rules require the company to report certain relationships
involving the company in which members of the company's compensation committee
have a direct or indirect material interest. Also required is disclosure of
interlocking relationships among the company's compensation committee members
and those executive officers of the company, if any, who also serve as members
of the company's compensation committee or executive officers at other
companies. The purpose of these requirements is to allow shareholders to assess
the independence of the company's compensation committee members in making
executive compensation decisions and recommendations.
9
Formation
The company's compensation committee was formed on September 8, 2000 and
its mandate is to assist the Board in the discharge of its fiduciary
responsibilities relating to the fair and competitive compensation of the
employees of the company, including: (i) the review and approval of the
company's compensation philosophy; (ii) the review and approval of compensation
programs, plans and awards; and (iii) administration of the company's short and
long-term incentive plans and other stock or stock-based plans, and; (iv) to
issue an annual report on executive compensation.
Insider Participation and Interlocks
Although the company has had transactions with companies and firms with
which certain members of the company's compensation committee are, or at some
point during fiscal year 2001 were, affiliated as an officer and/or director,
there are no such relationships in which members of the company's compensation
committee have a direct or indirect material interest. In addition, there are no
interlocking relationships of the nature described above involving members of
the company's compensation committee.
Director and Executive Compensation
Existing executive compensation agreements were entered into prior to the
formation of the company's compensation committee. For information with respect
to these agreements, please see "Employment Contracts with Named Executive
Officers".
On December 11, 2000, the Board of Directors ratified the company's
compensation committee 's proposed compensation plan for outside directors.
Please see "Directors Remuneration".
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF
THE ABOVE-LISTED SLATE OF DIRECTOR-NOMINEES
THE AUTHORIZATION OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK
PURSUANT TO THE CONVERSION OF THE 8% CONVERTIBLE NOTES
WHICH WERE ISSUED IN THE PRIVATE OFFERING
Pursuant to a Private Placement Memorandum, dated December 1, 2001, the company
conducted an offering to raise a maximum of US$8,000,000, consisting of 8%
promissory notes which were convertible into shares of common stock. The 8%
convertible promissory notes offering has closed. Pursuant to such offering, the
company raised $4,154,880 in convertible debt. All of the investors in the 8%
promissory notes offering have voluntarily converted their promissory notes,
including accrued interest, into shares of the company's common stock, to be
issued upon shareholder approval. Such conversion will result in the issuance of
4,373,558 shares of the company's common stock, which represents approximately
18.8% of the company's issued and outstanding shares of common stock as of April
24, 2002. Such percentage assumes the approval of the issuance of shares of the
company's common stock pursuant to the Logicorp transaction, the issuance of
shares of the company's common stock pursuant to the conversion of the 8%
convertible promissory notes and the issuance of shares of the company's common
stock pursuant to the conversion of two promissory notes issued by the company.
10
The company financed the acquisition of Logicorp in part by using the
proceeds which were obtained from the 8% convertible promissory notes offering.
The net proceeds from such offering were also used for debt repayment, a merger
fee to the placement agent of such offering, and will be used for working
capital and expenses.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION
OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK
PURSUANT TO THE CONVERSION OF 8% CONVERTIBLE NOTES THAT
WERE ISSUED IN THE COMPANY'S PRIVATE OFFERING
THE AUTHORIZATION OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK
PURSUANT TO THE SHARE PURCHASE AGREEMENT BY AND AMONG THE COMPANY,
CHELL MERCHANT CAPITAL GROUP, INC., LOGICORP DATA SYSTEMS LTD., AND LOGICORP
SERVICE GROUP LTD. AND RATIFICATION OF THE TRANSACTION PURSUANT
TO THE SHARE PURCHASE AGREEMENT
Chell Merchant Capital Group, Inc., a wholly owned subsidiary of the
company, has entered into a Share Purchase Agreement with Logicorp Data Systems
Ltd., Logicorp Service Group and the individuals and entities which own all of
the issued and outstanding shares of Logicorp Data Systems and Logicorp Service
Group, together with 123557 ALBERTA LTD. and 591360 ALBERTA LTD., which own
one-third of the shares of Logicorp Data Systems and Logicorp Service Group,
respectively, a copy of which, without schedules thereto, is attached hereto as
Exhibit "A".(4) Pursuant to said agreement, the company has purchased all of the
issued and outstanding shares of Logicorp Data Systems and Logicorp Service
Group from the individuals and entities which own said shares.
Logicorp Data Systems is a corporation incorporated under the laws of the
province of Alberta, Canada and is a Western Canadian Network Infrastructure
Provider which specializes in server based computing, network design and
delivery, network administration and support, procurement services, Hardware
Support Services, and Storage Area Network Solutions. Logicorp Data Systems's
primary focus is high-performance computer systems for the corporate market.
Logicorp currently has 113 employees. The Company entered into the agreement
pursuant to its strategy to acquire and grow undervalued technology companies.
The address of Logicorp Data Systems and Logicorp Service Group is 8215 112 St.,
S.W., Suite 1500, Edmonton, Alberta, Canada.
Pursuant to the Logicorp agreement, the total purchase price payable by
Chell Merchant Capital Group to the sellers shall be a maximum of
Cdn$8,199,668.00, subject to adjustments which are set forth in the agreement.
Pursuant to the Logicorp transaction, the company's wholly-owned subsidiary,
Chell Merchant Capital Group, acquired all of the issued and outstanding
securities of Logicorp Data Systems, 123557 ALBERTA LTD., Logicorp Service Group
and 591360 ALBERTA LTD. In consideration for such acquisition, in addition to
cash payments in the amount of US$1,500,000 and the issuance of promissory notes
in the amount of US$2,540,000, the company has issued to the former shareholders
of the Logicorp securities 5,355,000 exchangeable shares of the company's
wholly-owned subsidiary Chell Merchant Capital Group. Chell Merchant Capital
Group paid a non-refundable Deposit of $100,000.00 to the sellers' counsel
- ----------
(4) A copy of the Logicorp Agreement, with applicable schedules, was filed on
January 22, 2002 with the Securities and Exchange Commission on Form 8-KA.
11
from the proceeds of the 8% convertible promissory notes offering. The company
financed the acquisition of Logicorp substantially by using the proceeds which
were obtained from such offering.
The purchase price shall be adjusted downward by 3 times the amount, if
any, that the earnings before taxes, depreciation for the first full 12 months
after the effective date is less than Cdn$1,000,000 to a maximum downward
adjustment of Cdn$3,000,000. The adjustment will be made, at the option of the
sellers, by reduction of any consideration remaining unpaid, by reducing the
balance owing in respect of any promissory note payable by Chell Merchant
Capital Group and the Company to the sellers and canceling such promissory note
if fully paid, by payment of cash to Chell Merchant Capital Group, or by
returning to Chell Merchant Capital Group any share consideration equivalent in
dollar terms calculated by using the share price of US$1.00 per share with a
currency exchange rate of Cdn$1.58 per US dollar.
The exchangeable shares are exchangeable into shares of the company's
common stock on a one for one basis upon the occurrence of certain events and
have the same voting rights in the company as if the exchangeable shares were
exchanged for common stock of the company. In addition, the exchangeable shares
were deposited in escrow in connection with 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, exchange or encumber such shares, nor are they
entitled to dividends.
The exchangeable shares are exchangeable on a one-for-one basis for shares
of the company's common stock at any time after the filing of a registration
statement with the Securities and Exchange Commission pursuant to a Registration
Rights Agreement. The Registration Rights Agreement by and between the company
and the holders of all of the issued and outstanding shares of Logicorp Data
Systems and Logicorp Service Group requiring the company to file a registration
statement for 2,677,500 shares of its common stock within 6 months after the
effective date and for a further 2,677,500 shares of its common stock within 1
year after the effective date.
The issuance of shares of the company's common stock issuable upon the
conversion of the 5,355,000 exchangeable shares of the company's wholly-owned
subsidiary Chell Merchant Capital Group pursuant to the Logicorp transaction is
subject to the approval by a majority of votes cast at annual meeting.
Selected financial data of the Company and Logicorp is attached hereto as
Exhibit "B".
The Logicorp audited statements of profit and loss for the fiscal years
ended June 30, 2001 and 2000, and balance sheets as of June 30, 2001 and 2000
are attached hereto as Exhibit "C".
Pro forma financial data showing the pro forma effect of the transaction
is attached hereto as Exhibit "D".
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION OF THE ISSUANCE
OF SHARES OF THE COMPANY'S COMMON STOCK PURSUANT TO THE SHARE PURCHASE AGREEMENT
BY AND AMONG THE COMPANY, CHELL MERCHANT CAPITAL GROUP, INC., LOGICORP DATA
SYSTEMS LTD., AND LOGICORP SERVICE GROUP LTD. AND RATIFICATION OF THE
TRANSACTION PURSUANT TO THE SHARE PURCHASE AGREEMENT
12
AUTHORIZATION OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK UPON THE
CONVERSION OF SHARES OF THE COMPANY'S PREFERRED STOCK ISSUED PURSUANT TO THE
SECURITIES EXCHANGE AGREEMENT BY AND BETWEEN THE COMPANY AND THE SHAAR FUND LTD.
AND RATIFICATION OF THE TRANSACTION PURSUANT TO THE SECURITIES EXCHANGE
AGREEMENT
The company entered into a Securities Exchange Agreement with The Shaar
Fund Ltd. Pursuant to the Securities Exchange Agreement, the company and The
Shaar Fund have exchanged 389,610 shares of Series A 6% Convertible Preferred
Stock of Wareforce, Inc., par value $0.01 per share for 389,610 shares of the
company's Series B Convertible Preferred Stock, par value $.01 per share having
the designations, preferences and rights set forth in the company's Certificate
of Designation of Series B Convertible Preferred Stock in a transaction exempt
from the registration and prospectus delivery requirements of the Securities Act
of 1933, as amended. The company entered into the Shaar Fund Securities Exchange
Agreement partly for the purpose to induce The Shaar Fund to invest in the 8%
convertible promissory notes offering. In addition, the Securities Exchange
Agreement furthers the company's potential interest and further involvement in
an equity interest in Wareforce.com. The Shaar Fund has invested an aggregate of
$660,000 in the 8% convertible promissory notes offering.
The shares of the Wareforce Series A 6% Convertible Preferred Stock are
convertible at the option of the holder into shares of Wareforce common stock.
Pursuant to the Series A 6% Convertible Preferred Stock Certificate of
Designation, the convertible shares are convertible into 3,896,100 shares of
common stock of Wareforce.com, Inc. For further details concerning conversion
terms of the Series A 6% Convertible Preferred Stock of Wareforce, Inc., please
see the Certificate of Designation of Series A 6% Convertible Preferred Stock of
Wareforce, Inc., which is attached as Exhibit "3.3" the Registration Statement
on Form S-1/A of Wareforce.com, Inc., filed with the SEC on January 12, 2001.
In consideration for the Wareforce Preferred Stock, the company has issued
389,610 shares of the company's Series B Convertible Preferred Stock, which is
convertible into shares of the company's common stock at the option of the
holders at any time at a conversion price per share of US$1.00 and provides for
mandatory conversion of the preferred stock into shares of the company's common
stock on January 22, 2005. Pursuant to the certificate of designation, the
convertible shares are convertible into 3,896,100 shares of common stock of the
company.
For further details concerning conversion terms of the Company's Series B
Convertible Preferred Stock, please see the Certificate of Designation of Series
B Convertible Preferred Stock of the company, which is attached to this document
as Exhibit "E".
Wareforce.com, Inc. provides computer-related technical services, support,
hardware and software that clients need to design, develop, manage and maintain
their data processing and information systems. The company believes that its
approach to the market for information technology is to be a diversified
information technology organization and to develop a complete single-source
solution for all information technology requirements. Wareforce.com Inc.'s
address is 2361 Rosecrans Ave., Suite 155, El Segundo, CA 90245.
13
The company entered into a non-binding expression of interest, dated
October 25, 2001, concerning this proposed merger. The company is in the process
of negotiating a definitive agreement with Wareforce but the terms of the
transaction have yet to be finalized. The terms of the definitive agreement to
purchase the business and assets of Wareforce are currently being negotiated
with a purchase price in the range of $1.5 million to $3 million, consisting of
cash and stock. There can be no assurance when or if the Company will consummate
such a transaction, what the terms of such transaction will be or if any such
transaction is consummated, that it will be successful.
As discussed in the proposal to authorize the issuance of shares of the
company's common stock, the company's acquisition of the Wareforce preferred
stock pursuant to The Shaar Fund Ltd. Securities Exchange Agreement combined
with the company's acquisition of the Wareforce preferred stock pursuant to
Triton Private Equities Fund Ltd. Securities Exchange Agreement has resulted in
the company's owning all of the issued and outstanding shares of the Wareforce
preferred stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION OF THE ISSUANCE
OF SHARES OF THE COMPANY'S COMMON STOCK UPON THE CONVERSION OF SHARES OF THE
COMPANY'S PREFERRED STOCK ISSUED PURSUANT TO THE SECURITIES EXCHANGE AGREEMENT
BY AND BETWEEN THE COMPANY AND THE SHAAR FUND LTD. AND RATIFICATION OF THE
TRANSACTION CONTEMPLATED BY THE SECURITIES EXCHANGE AGREEMENT
AUTHORIZATION OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK PURSUANT
TO THE SECURITIES EXCHANGE AGREEMENT BETWEEN THE COMPANY AND TRITON PRIVATE
EQUITIES FUND, L.P. AND RATIFICATION OF THE TRANSACTION CONTEMPLATED BY THE
SECURITIES EXCHANGE AGREEMENT
Triton Private Equities Fund, L.P. was the beneficial owner of 64,395
shares of Series "A" 6% Convertible Preferred Stock of Wareforce.com, Inc., a
Nevada corporation, par value $0.001 per share. Pursuant to a Securities
Exchange Agreement, Triton Private Equities Fund exchanged the Wareforce
Preferred Stock for shares of the Company's Series B Preferred Stock of the
company upon the terms and conditions set forth in the Triton Securities
Exchange Agreement. The company entered into the Triton Securities Exchange
Agreement partly for the purpose to induce Triton Private Equities Fund to
invest in the 8% convertible promissory notes offering. In addition, the
Securities Exchange Agreement furthers the company's potential interest and
further involvement in an equity interest in Wareforce.com. Triton Private
Equities Fund has invested an aggregate of $140,000 in the 8% convertible
promissory notes offering. As set forth in the section of this Proxy Statement,
which discusses the Shaar Fund Securities Exchange Agreement, the company is
contemplating entering into a merger agreement with Wareforce.
Pursuant to the Securities Exchange Agreement, the company and Triton
Private Equities Fund have agreed to exchange all of the Wareforce Preferred
Stock owned by Triton Private Equities Fund for 64,395 shares of the company's
Series B Convertible Preferred Stock, par value $.01 per share having the
designations, preferences and rights set forth in the company's Certificate of
Designation of Series B Convertible Preferred Stock, in a transaction exempt
from the registration and prospectus delivery
14
requirements of the Securities Act of 1933, as amended. The company and Triton
Private Equities Fund have agreed to this share exchange upon substantially the
same terms and conditions as set forth in the above discussion of the share
exchange between the company and The Shaar Fund.
The shares of the Wareforce Series A 6% Convertible Preferred Stock which
the company acquired from Triton Private Equities Fund are convertible at the
option of the holder into shares of Wareforce common stock. Pursuant to the
Series A 6% Convertible Preferred Stock Certificate of Designation, the
convertible shares are convertible into 643,950 shares of common stock of
Wareforce.com, Inc. The Wareforce Certificate of Designation has a conversion
limitation with respect to the Wareforce Preferred Stock such that the holder
does not have the right to convert all or any portion of the Series A Preferred
Stock if such conversion would result in the holder being deemed a "beneficial
owner" of more than 5% of the then outstanding common shares of Wareforce.com
Inc.
In consideration for the Wareforce Preferred Stock which the company
acquired from Triton Private Equities Fund, the company has issued 64,395 shares
of the company's Series B Convertible Preferred Stock, which is convertible into
shares of the company's common stock at the option of the holders at any time at
a conversion price per share of US$1.00 and provides for mandatory conversion of
the preferred stock into shares of the company's common stock on January 22,
2005. Pursuant to the certificate of designation, the convertible shares are
convertible into 643,950 shares of common stock of the company.
Pursuant to the Shaar Securities Exchange Agreement and the Triton
Securities Exchange Agreement, the company has acquired all of the issued and
outstanding shares of Wareforce preferred stock. In consideration for all of the
issued and outstanding shares of the Wareforce Preferred Stock the Company, the
company issued a total of 454,005 of its Series B Preferred Stock. The value of
the consideration of such stock has been estimated at approximately $100,000.
Such shares are convertible into an aggregate of 4,540,050 shares of
Wareforce common stock. However, the Wareforce Certificate of Designation has a
conversion limitation with respect to the Wareforce Preferred Stock such that
the holder does not have the right to convert all or any portion of the Series A
Preferred Stock if such conversion would result in the holder being deemed a
"beneficial owner" of more than 5% of the then outstanding common shares of
Wareforce.com Inc. Accordingly, based upon the conversion of such number of
shares that would result in the company being a 4.99% owner of the issued and
outstanding common stock of Wareforce.com, Inc., the Company may convert such
number of shares of Preferred Stock which will result in the ownership of
672,483 shares of common stock of Wareforce.com, Incsuch ownership represents
26.2% beneficial ownership of the Wareforce issued and outstanding common stock.
As discussed in the proposal to authorize the issuance of shares of the
company's common stock contemplated by the Shaar Fund Securities Exchange
Agreement, the company is negotiating a definitive merger agreement with
Wareforce. There can be no assurance when or if the Company will consummate such
a transaction, what the terms of such transaction will be or if any such
transaction is consummated, that it will be successful.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION OF THE ISSUANCE
OF SHARES OF THE COMPANY'S COMMON STOCK PURSUANT TO THE SECURITIES EXCHANGE
AGREEMENT BY AND BETWEEN THE COMPANY AND TRITON PRIVATE EQUITIES FUND, L.P. AND
RATIFICATION OF THE TRANSACTION CONTEMPLATED BY THE SECURITIES EXCHANGE
AGREEMENT
15
AUTHORIZATION OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK PURSUANT
TO THE CONVERSION OF A PROMISSORY NOTE ISSUED TO THE ADVANTAGE
BERMUDA FUND LIMITED AND A PROMISSORY NOTE ISSUED TO CANADIAN
ADVANTAGE LIMITED PARTNERSHIP
On October 12, 2000, the company issued a convertible debenture in the
amount of US$3,000,000 to VC Advantage Limited Partnership. On November 30,
2000, VC Advantage Limited Partnership assigned the convertible debenture to
Canadian Advantage Limited Partnership. A total of US$1,700,000 had been
advanced to the company in 2000. Effective September 2001, the convertible
debenture was converted into the following:
(i) the company issued a promissory note in the principal amount of
$1,365,100 to Canadian Advantage Limited Partnership; and
(ii) the Company issued a promissory note in the principal amount of
$504,900 to Advantage Bermuda Fund Ltd.
Conversion of the Canadian Advantage Limited Partnership Promissory Note
Pursuant to a conversion agreement, as of March 28, 2002, in full
satisfaction of the Canadian Advantage Limited Partnership promissory note, the
company agreed to issue 1,314,000 shares of the Company's Common Stock
immediately and 442,145 shares of the company's common stock upon the approval
of the shareholders of the company at the meeting.
Conversion of the Advantage Bermuda Fund Ltd. Partnership Promissory Note
Pursuant to a conversion agreement, as of March 28, 2002, in full
satisfaction of the Advantage Bermuda Fund Ltd. promissory note, the company
agreed to issue 486,000 shares of the company's common stock immediately and
163,533 shares of the company's common stock upon the approval of the
shareholders of the company at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION OF THE ISSUANCE
OF SHARES OF THE COMPANY'S COMMON STOCK PURSUANT TO THE CONVERSION OF A
PROMISSORY NOTE ISSUED TO THE ADVANTAGE BERMUDA FUND LIMITED AND A PROMISSORY
NOTE ISSUED TO CANADIAN ADVANTAGE LIMITED PARTNERSHIP
RATIFICATION OF A PROPOSAL TO INCREASE THE NUMBER OF COMMON
SHARES AUTHORIZED FOR ISSUANCE BY THE COMPANY
FROM 50,000,000 TO 75,000,0000
16
The Board of Directors has adopted, subject to shareholder approval, an
amendment to the company's Certificate of Incorporation to increase the
authorized capital stock of the company by increasing the number of authorized
shares of common stock from 50,000,000 to 75,000,000 shares.
The company is presently authorized to issue 50,000,000 shares of the
company's common stock, par value as $.0467 per share, and 1,500,000 shares of
the company's preferred stock, par value US$.01 per share. Assuming the approval
of the issuance of shares of the company's common stock contemplated by the
Logicorp transaction, the issuance of shares of the company's common stock
pursuant to the conversion of the 8% convertible promissory notes and the
issuance of shares of the company's common stock pursuant to the conversion of a
convertible debenture of the company, there will be 22,066,483 shares of the
company's common stock issued and outstanding. As of April 24, 2002, an
aggregate of 6,530,196 shares of the company's common stock had been reserved
for issuance as follows: (i) an aggregate of 555,571 shares of common stock
issuable in connection with outstanding warrants to purchase shares of common
stock, (ii) an aggregate of approximately 1,324,625 shares of common stock
issuable in connection with options granted or to be granted under the Chell
Group Corporation Stock Option Plan, and (iii) 4,650,000 shares of the company's
common stock issuable pursuant to the Shaar Fund Securities Exchange Agreement
and the Triton Securities Exchange Agreement Therefore, as of April 24, 2002,
approximately 21,403,321 unreserved shares of our common stock were available
for issuance.
The additional 25,000,000 shares of the company's common stock to be
authorized would provide needed flexibility for the company's financial and
capital requirements and requirements in connection with the transactions
discussed in this Proxy Statement so that proper advantage could be taken of
favorable market conditions and possible business acquisitions. Additional
shares of the company's common stock would also be available to the company for
stock dividends or splits should the Board of Directors decide that it would be
desirable, in view of market conditions then prevailing, to broaden the public
ownership of, and to enhance the market for, the shares of the company's common
stock. The additional shares would be available for issuance for these and other
purposes, subject to the laws of the State of New York and Nasdaq rules, at the
discretion of the company's Board of Directors without, in most cases, the
delays and expenses attendant to obtain further shareholder approval.
THE BOARD RECOMMENDS A VOTE FOR THE INCREASE IN THE NUMBER OF
COMMON SHARES AUTHORIZED FOR ISSUANCE BY THE COMPANY
FROM 50,000,000 TO 75,000,0000
RATIFICATION OF THE BOARD OF DIRECTORS' SELECTION OF AUDITORS
Subject to shareholder ratification, the Board has selected Lazar Levine &
Felix LLP as independent auditors for the fiscal year ending August 31, 2002,
and until its successor is selected. Lazar Levine & Felix LLP has audited the
company's financial statements for the company's fiscal years ended August 31,
2001 and August 31, 2000. No representative of Lazar Levine & Felix LLP is
expected to be present at the Annual Meeting, and accordingly it will not have
an opportunity to make a statement or be available to answer questions.
Audit Fees
Lazar Levine & Felix LLP's fees billed for professional services rendered
for the audit of the company's annual financial statements for the most recent
fiscal year, 2001, were $84,877.35. The aggregate fees billed for professional
services rendered for the review of the financial statements included in the
company's Form 10-Qs for 2001 were $29,871.00.
Financial Information Systems Design and Implementation Fees
Lazar Levine & Felix LLP did not render any service to the Company in
fiscal 2001 with respect to financial information systems design or
implementation.
All Other Fees
Lazar Levine & Felix LLP's fees for all other services rendered to the
Company in fiscal 2001 were $30,670.00 for review of other SEC filings.
The audit committee of the board of directors has considered whether the
auditing of the company's annual financial statements and reviews of financial
statements included in the company's 10Q is compatible with Lazar Levine's
maintaining its independence and has concluded that provision of these services
is compatible with Lazar Levine's maintaining its independence.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF
THE BOARD OF DIRECTORS' SELECTION OF AUDITORS
17
MANAGEMENT REMUNERATION
General
The Company compensates its employees and directors in Canadian dollars
("Cdn$"). For information concerning the applicable exchange rates, see
"Exchange Rates."
Summary Compensation Table
The following table sets forth information with respect to the
compensation paid or accrued by the company during the two years ended August
31, 2001 to the company's named executive officers.
Long-term
Annual Compensation Compensation
===================================================================
Name and Principal Other Annual Securities Under All Other
Compensation Salary(1) Bonus Compensation(1) Options/Granted
Position Year (Cdn$) (Cdn$) ($) (#) ($)
- ------------------------ ---- -------- ------ ------ ------ ---------
Cameron Chell (2) 2001 0 -- -- -- --
President and
Chief Executive Officer
Donald Pagnutti (3) 2001 160,000 -- -- -- --
Vice-President, Finance 2000 156,249 -- -- 22,500 --
and Chief Financial Officer
Notes:
(1) Perquisites and other personal benefits received in 2000 and 2001 did not
exceed the lesser of US$50,000 or 10% of the total annual salary and bonuses for
any of the Named Executive Officers.
(2) Mr. Chell did not receive monetary compensation in fiscal years 2000 or
2001. He did receive health benefits pursuant to the company's employee benefit
plan and was reimbursed for certain expenses he incurred in connection with his
position as President and Chief Executive Officer of the company.
(3) Mr. Pagnutti's title was changed to Vice President Finance and Chief
Financial Officer on September 19, 2000.
18
During the three year period ended August 31, 2001, the company did not
grant any restricted stock awards or stock appreciation rights. Additionally,
all of the company 's group life, health, hospitalization, medical reimbursement
or relocation plans, if any, do not discriminate in scope, terms or operation,
in favor of the named executive officer s and are generally available to all
salaried employees. Further, no named executive officer received, in any of the
periods specified in the Summary Compensation Table, perquisites and other
personal benefits, securities or property in an aggregate amount in excess of
the lesser of US$50,000 or 10% of the total salary and bonus reported for the
named executive officer in the fiscal years in which such benefits were
received, and no single type of perquisite or other personal benefits exceeded
25% of the total perquisites and other benefits reported for the named executive
officer in the applicable fiscal year.
Option Grants Table
The following table sets forth (a) the number of shares underlying options
granted to each named executive officer during the 2001 Fiscal Year, (b) the
percentage the grant represents of the total number of options granted to all
company employees during the 2001 Fiscal Year, (c) the per share exercise price
of each option, (d) the expiration date of each option, and (e) the potential
realized value of each option based upon: (i) the assumption of a 5% percent
annualized compounded appreciation of the market price of the common stock from
the date of the grant of the subject option to the end of the option term, and
(ii) the assumption of a 10% percent annualized compounded appreciation of the
market price of the common stock from the date of the grant of the subject
option to the end of the option term.
Potential Realizable Value at
Number of Percentage of Assumed Rates of Stock Price
Shares Total Options Appreciation for Option Term
Underlying Granted to ----------------------------
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price Date 5% 10%
- ------- ---------- ------------- -------- ---------- --- ---
Donald Pagnutti Nil Nil Nil Nil Nil Nil
Vice-President,
Finance and Chief
Financial Officer
Options Exercised and Remaining Outstanding
Set forth in the table below is information, with respect to each of the
named executive officers, as to the (a) number of shares acquired during the
2001 Fiscal Year upon each exercise of options granted to such individuals, (b)
the aggregate value realized upon each such exercise (i.e., the difference
between the market value of the shares at exercise and their exercise price),
(iii) the total number of unexercised options held on August 31, 2001,
separately identified between those exercisable and those not exercisable, and
(iv) the aggregate value of in-the-money, unexercised options held on August 31,
2001, separately identified between those exercisable and those not exercisable.
19
Securities Aggregate
Acquired on Value Unexercised Options at Value of Unexercised in the Money
Exercise Realized August 31, 2001 Options at August 31, 2001
(#) ($) (#) ($)
Exercisable Unexercisable Exercisable(1) Unexercisable(1)
----------- --------- ------------- ------------- -------------- ----------------
Donald Pagnutti Nil Nil 31,875 20,625 Nil Nil
Note:
(1) The value of the unexercised "in-the-money" options has been
determined by subtracting the exercise price of the options from the closing
common share price of US$1.33 on August 31, 2001, and multiplying by the number
of common shares which may be acquired upon the exercise of the options. The
current exercise price of the options is higher than the closing common share
price of US$1.33, therefore the value of the options is nil.
(2) As of October 31, 2001, the company's options were repriced at $1.00
per share. The vesting schedule for these options are one-third per year on each
anniversary of the grant date.
Director's Remuneration
Prior to September 8, 2000, each director, not otherwise our full time
employee, was eligible to receive $500 for each meeting of the Board of
Directors or committee thereof which they attended, along with the reimbursement
of their reasonable expenses incurred on our behalf. In addition, each director,
not otherwise a full time employee of the company was eligible to receive 1,500
stock options annually.
As of December 11, 2000, the Board of Directors formally adopted a
standard arrangement pursuant to which only our outside directors are
compensated for their services in their capacity as directors. This compensation
arrangement is retroactive to September 19, 2000 (the date of the closing of the
Agreement of Purchase and Sale between Networks North Inc., Networks North
Acquisition Corp., Chell.com Ltd. and Cameron Chell).
Outside Director's Compensation Schedule Cash Options
(US$)
1. Directorship Acceptance Options (one time grant
with a 3 year vesting schedule) 45,000
2. Annual Retainer-Chairman 20,000 10,000
3. Annual Retainer-Director 6,000
4. Annual Retainer-Committee Member (over and above
directorship retainer) 3,000
5. Annual Retainer-Committee Chair (over and above
directorship retainer and committee retainer) 2,000
6. Board Meeting Attendance Fee 750/mtg.
7. Committee Attendance Fee 500/mtg.
20
Employment Contracts with Named Executive Officers
In November 2001, we renewed Donald Pagnutti's employment agreement
originally dated November 1, 1999, pursuant to which Mr. Pagnutti serves as our
Executive Vice President, Chief Financial Officer and Chief Operating Officer.
Effective September 19, 2000, Mr. Pagnutti's title was changed to Vice
President, Finance and Chief Financial Officer. The agreement provides for an
initial base compensation of Cdn$160,000 with annual reviews, together with
automobile expenses of $9,000. In addition to the fixed remuneration, we shall
pay Mr. Pagnutti a bonus at the end of each year of the term in the event that
during the said year our net income before taxes as audited using generally
accepted accounting principles applied on a basis consistent with those previous
years, equaled or exceeded our projected net income before taxes as determined
by our Board of Directors at the commencement of the said year. The agreement
further provided that we grant to Mr. Pagnutti options to purchase a minimum of
15,000 of the Company's common shares.
On September 19, 2000, we entered into an employment agreement with
Cameron Chell, pursuant to which Mr. Chell serves as our President and Chief
Executive Officer. The agreement provides for an initial base compensation
of$360,000, together with automobile expenses of $8,400. In addition to the
fixed remuneration, we shall provide Mr. Chell with the services of an Executive
Assistant on an ongoing basis and an Accountant for a reasonable period of time
to allow for the completion of outstanding accounting work related to existing
companies in which Mr. Chell is involved. It was the understanding of the
parties that this agreement was to be replaced by a definitive employment
agreement before October 10, 2000, however, such agreement has not been entered
into at this time. Since the signing of this agreement, Mr. Chell has eliminated
both his salary and automobile allowance in an effort to reduce our cash
requirements. These were eliminated with the understanding that the compensation
of Mr. Chell will be mutually agreed upon between the parties.
We do not have any other employment agreements in effect with any
other executive employee.
CERTAIN TRANSACTIONS
Set forth below is a description of certain transactions between us
and our directors, executive officers, beneficial owners of five percent or more
of the outstanding common stock, or members of the immediate family of any of
the foregoing persons, as well as certain business relationships between the us
and our directors, which occurred or existed during the 2001 Fiscal Year and
subsequent thereto. Our management believes that the transactions described in
this section were made on terms no less favorable than those which could have
been obtained from third parties.
A) Cameron Chell is Chairman of the Board and a director of cDemo.
Chell.com., which is owned by Mr. Chell, holds 120,000 warrants to purchase
common shares of cDemo at $5.00 per share and 85,000 warrants to purchase Class
A Voting Shares of eSupplies at $7.00 per share and 500,000 options at $7.00 per
share. Chell.com holds 200,000 options to purchase 200,000 shares of common
stock of Engyro for $5.00 per share and warrants to purchase 97,500 shares of
common stock of Engyro at $5.00 per share.
B) Gordon Herman holds an option from Chell.com to acquire 332,236
shares of common stock of the Company, which are held by Chell.com, at a price
of $1.00 (which may be adjusted up or downward based upon certain
contingencies).
21
C) David Bolink holds an option from Chell.com to acquire 311,411
shares of common stock of the Company, which are held by Chell.com, at a price
of $1.00 (which may be adjusted up or downward based upon certain
contingencies).
D) License Agreement between us, Cameron Chell, and Chell Merchant
Capital Group dated August 31, 2000 whereby Mr. Chell grants us and Chell
Merchant Capital Group the right to use the trademarks "Chell.com", "Chell
Merchant Capital Group" and "Chell Corporation" in exchange for the fee of $1.00
per year.
E) Securities Purchase Agreement with VC Advantage Fund on October
3, 2000, for up to US$3,000,000 loan to us. VC received a Convertible Debenture,
which was convertible into the company's common stock, based upon an agreed
conversion price of $3.00 per share. As of November 30, 2000, VC had assigned
its rights in this Agreement to Canadian Advantage Limited Partnership and a
total of US$1,700,000 has been advanced to the Company. The US$1,700,000 advance
is convertible into 566,667 Common shares. Cameron Chell is a Director and
shareholder of VC Advantage Limited, the general partner of VC. Pursuant to the
assignment of this agreement to CALP II, the Company's loan is no longer a
related transaction because Mr. Chell has no interests in CALP II. The
Securities Purchase Agreements entered into with The Shaar Fund and Triton
include a provision stating that on or before March 31, 2002, the Company
converted its outstanding debt to VC Advantage Limited Partnership in the amount
of $1,500,000 into long term debt with a maturity date for all of the principal
after the third anniversary of the date hereof. On November 30, 2000, VC
Advantage Limited Partnership assigned the convertible debenture to Canadian
Advantage Limited Partnership. A total of US$1,700,000 had been advanced to the
Company in 2000. Effective September 2001 the convertible debenture was
converted into the following: (i) the Company issued a Promissory Note in the
principal amount of $1,365,100 to CALP (the "CALP Promissory Note") and (ii) the
Company issued a Promissory Note in the principal amount of $504,900 to ABFL
(the "ABFL Promissory Note"). Pursuant to a Conversion Agreement, as of March
28, 2002, in full satisfaction of the CALP Promissory Note, the Company agreed
to issue 1,314,000 shares of the Company's Common Stock immediately and 442,145
shares of the Company's Common Stock upon the approval of the Shareholders of
the Company. In addition, pursuant to a Conversion Agreement, as of March 28,
2002, in full satisfaction of the ABFL Promissory Note, the Company agreed to
issue 486,000 shares of the Company's Common Stock immediately and 163,533
shares of the Company's Common Stock upon the approval of the Shareholders of
the Company.
OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors is not
aware of any other matter which is to be presented for action at the meeting. If
any matter other than those described above (i.e., (1) to elect a seven member
Board of Directors to serve until the next annual meeting of the company and
until their successors are duly elected and qualified; (2) to authorize the
issuance of shares of the company's common stock pursuant to a share purchase
agreement between the company, Chell Merchant Capital Group, Inc., Logicorp Data
Systems Ltd., Logicorp Service Group Ltd., and the registered and beneficial
owners of all issued and outstanding shares of Logicorp Data and Logicorp Group
(3) to authorize the issuance of shares of the company's common stock upon the
conversion of notes by subscribers pursuant to an 8% convertible promissory note
offering conducted by the company; (4) to authorize the issuance of shares of
the company's common stock upon the conversion of shares of the company's
preferred stock issued pursuant to
22
a securities exchange agreement by the company and The Shaar Fund; (5) to
authorize the issuance of shares of the company's common stock upon the
conversion of shares of the company's preferred stock issued pursuant to a
securities exchange agreement between the company and Triton Private Equities
Fund, L.P.; (6) to authorize the issuance of shares of the company's common
stock pursuant to the the conversion of a promissory note issued to Canadian
Advantage Limited Partnership in the principal amount of $1,365,100 and the
conversion of a promissory note issued to Advantage Bermuda Limited Partnership
in the principal amount of $504,900; (7) to authorize the increase of the number
of common shares authorized for issuance by the company from 50,000,000 to
75,000,0000; and (8) to ratify the Board's selection of auditors) does properly
come before the meeting, the individuals named in the enclosed Proxy will,
unless indicated otherwise, vote the shares represented thereby in accordance
with their best judgment.
EXCHANGE RATES
This proxy statement contains translations of certain amounts in Canadian
dollars into United States dollars based upon the exchange rate in effect at the
end of the period to which the amount relates, or the exchange rate on the date
specified. For such purposes, the exchange rate means the noon buying rate in
New York City for cable transfers in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York. These translations should not
be construed as representations that the Canadian dollar amounts actually
represent such U.S. dollar amounts or that Canadian dollars could be converted
into U.S. dollars at the rate indicated or at any other rate. The noon buying
rate at the end of each of the five years ended August 31, 2001, the average of
the noon buying rates on the last day of each month during each of such fiscal
years and the high and low noon buying rate for each of such fiscal years were
as follows:
August 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
At end of period....... Cdn$1.5508 Cdn$1.4715 Cdn$1.4965 Cdn$1.5722 Cdn$1.3685
Average for period..... 1.5284 1.4714 1.4949 1.4390 1.3676
High for period........ 1.5825 1.4955 1.5135 1.5770 1.3942
Low for period......... 1.4685 1.4489 1.4760 1.4100 1.3381
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
The company's annual report is also available upon the written request of
any shareholder of the company, as record or beneficial owner. The company will
provide to such shareholder a copy of the company's annual report on Form 10-K
for its fiscal year ended August 31, 2001, including the financial statements
and the schedules thereto, filed with the Securities and Exchange Commission.
Any request should be directed to the Corporate Secretary, at the company's
place of business listed above. There will be no charge for the Form 10-K,
unless one or more exhibits thereto are requested, in which event the company's
reasonable expenses of furnishing such exhibits may be charged.
FUTURE SHAREHOLDER PROPOSALS
From time to time, shareholders present proposals, which may be the proper
subject for inclusion in the company's proxy statement and for consideration at
its annual meetings of shareholders. To be considered,
23
proposals must be submitted on a timely basis. Proposals for the next annual
meeting of shareholders of the company must be received by the company no later
than September 15, 2002, for inclusion, if proper, in next year's proxy
solicitation materials.
GENERAL
The company will pay all of the costs of preparing, assembling and mailing
the form of Proxy, Proxy Statement and other materials which may be sent to the
shareholders in connection with this solicitation, as well as any costs of
soliciting proxies in the accompanying form. Solicitation will be made by mail,
and officers and regular employees of the company may also solicit proxies by
telephone, telegraph or personal interview for which they will receive no
additional remuneration. The company expects to request brokers and nominees who
hold stock in their names to furnish this proxy material to their customers and
to solicit proxies from them. The company will reimburse such brokers and
nominees for their out-of-pocket and reasonable clerical expenses in connection
therewith.
WHILE YOU HAVE THE MATTER IN MIND, PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED
PROXY CARD.
BY ORDER OF THE BOARD OF DIRECTORS,
Mark Truman, Secretary
24
PROXY PROXY
Chell Group Corporation
14 Meteor Drive, Toronto, Ontario, Canada MAW 1A4
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENT, that the undersigned shareholder of Chell Group
Corporation (the "Company") hereby constitutes and appoints Don Pagnutti and
Mark Truman and each of them, the true and lawful attorneys, agents and proxies
of the undersigned, each with full power of substitution to vote all of the
shares of stock of the Company that the undersigned would be entitled, if
personally present, to vote at the meeting of shareholders of the Corporation to
be held on June __, 2002 at 10:00 a.m. at the offices of the Company, 14 Meteor
Drive, Toronto, Ontario, Canada M9W 1A4, and at any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR:
1. Election of Directors:
For all nominees listed below (except as marked to the contrary below)
Nominees: Don Pagnutti, Adrian Towning, David Bolink, Gordon Herman,
Robert Stone, Shelley Singhal and Michael J. Rice
WITHHOLD AUTHORITY
to vote for all nominees listed above ___
INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.
_____________________________________
2. To approve the issuance of shares of the Company's Common Stock pursuant
to the conversion of 8% convertible notes issued pursuant to an 8%
promissory note private offering which was conducted by the Company.
For ___ Against ___ Abstain _______
3. To approve the issuance of shares of the Company's Common Stock pursuant
to a Share Purchase Agreement dated December 13, 2001 by and among the
Company, Chell Merchant Capital Group, Inc., Logicorp Data Systems Ltd.,
Logicorp Service Group Ltd., and the individuals and entities which own
all of the issued and outstanding shares of Logicorp Data and Logicorp
Group and to ratify the transaction contemplated by the Share Purchase
Agreement
For ___ Against ___ Abstain _______
25
4. To approve the issuance of shares of the Company's Common Stock upon the
conversion of shares of the Company's Preferred Stock issued pursuant to a
Securities Exchange Agreement dated February 6, 2002 by and between the
Company and The Shaar Fund Ltd. and to ratify the transaction contemplated
by the Securities Exchange Agreement.
For ___ Against ___ Abstain _______
5. To approve the issuance of shares of the Company's Common Stock upon the
conversion of shares of the Company's Preferred Stock issued pursuant to a
Securities Exchange Agreement dated February 6, 2002 by and between the
Company and Triton Private Equities Fund, L.P and to ratify the
transaction contemplated by the Securities Exchange Agreement.
For ___ Against ___ Abstain _______
6. To approve the issuance of shares of the Company's Common of the company's
common stock pursuant to the conversion of a promissory note issued to
Advantage Bermuda Limited Partnership in the principal amount of $504,900
and the conversion of a promissory note issued to Canadian Advantage
Limited Partnership in the principal amount of $1,365,100;
For ___ Against ___ Abstain _______
7. To approve the increase in the number of Common Shares authorized for
issuance by the Company from 50,000,000 to 75,000,0000
For ___ Against ___ Abstain _______
8. To ratify the Board of Directors' selection of Lazar Levine & Felix LLP as
the auditors for the Company for the 2002 fiscal year
For ___ Against ___ Abstain _______
Dated: __, 2002
26
Exhibit "B"
SELECTED FINANCIAL DATA
I. Chell Group Corporation
(Canadian Dollars):
Year Ended August 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Operating revenues 18,222,374 19,107,290 12,823,691 13,404,542 10,351,689
Net income (loss) (11,226,225) (2,323,621) (971,497) 618,065 609,387
Net income (loss)
per share (1.34) (0.81) (0.36) 0.24 0.25
Total assets 16,225,003 17,220,211 14,546,003 15,802,359 14,287,602
Long-term obligations 5,943,512 4,436,213 2,216,675 2,840,218 2,185,249
Shareholders' equity 2,248,128 9,383,419 10,792,767 11,033,178 9,488,648
Sum of long-term
Obligations and
Shareholders' equity 8,191,640 13,819,632 13,009,442 13,873,396 11,673,897
II. LOGICORP DATA SYSTEMS LTD.
Statement Date 30-Nov-01 31-Aug-01 30-Jun-01 30-Jun-00 29-Feb-00 28-Feb-99 28-Feb-98 28-Feb-97
3 months 12 months (4 Months)
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Sales 9,537,778 57,053,009 60,417,265 18,989,310 53,034,932 37,679,336 21,777,808 14,878,936
Net Income (Loss)
From Operations (472,486) 76,988 402,940 71,390 424,528 471,453 (2,267) 173,798
Net Income (Loss)
From Operations
per common share (238.63) 38.88 203.51 36.06 214.41 238.11 (1.14) 87.78
Total Assets 9,406,371 11,326,511 11,578,345 10,446,644 11,393,021 10,144,137 5,130,597 5,785,478
Long Term Obligations
and Redeemable
Preferred Stock 1,621,475 1,372,087 1,880,614 1,461,268 1,739,747 875,103 264,125 135,250
Cash Dividends
declared per
Common Share NIL NIL NIL NIL NIL NIL NIL NIL
2
LOGICORP SERVICE GROUP LTD.
Statement Date 30-Nov-01 31-Aug-01 30-Jun-01 30-Jun-00 29-Feb-00 28-Feb-99 28-Feb-98 28-Feb-97
3 months 12 months (4 Months)
--------- --------- --------- ---------- --------- --------- --------- ---------
Net Sales 422,350 1,696,592 1,674,325 633,456 1,804,017 1,339,187 1,160,287 596,354
Net Income (Loss)
From Operations 305,973 807,684 199,160 (64,344) 202,497 198,160 188,054 (1,923)
Net Income (Loss)
From Operations
per common share 10,199.10 6,638.67 (2,144.80) 6,749.90 6,605.33 6,268.47 (64.10)
Total Assets 806,504 685,991 610,871 655,340 850,690 284,288 203,434 260,389
Long Term Obligations
and Redeemable
Preferred Stock 235,599 378,907 458,446 521,965 660,685 98,019 -- --
Cash Dividends
declared per
Common Share NIL NIL 53.86 NIL 50.00 50.00 50.00 NIL
3
EXHIBIT "C"
================================================================================
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 Date Group Ltd.
We have audited the balance sheet of Logicorp Data 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.
================================================================================
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.
================================================================================
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.
================================================================================
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.
================================================================================
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.
================================================================================
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.
================================================================================
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 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 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 Systems Ltd.
We have audited the balance sheet of Logicorp Service Systems Ltd. as at June
30, 2001 and the statements of loss and retained earnings and cash flows for the
year then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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
LOGICORP DATA SYSTEMS LTD.
BALANCE SHEETS
AS AT FEBRUARY 28, 2002 AND AUGUST 31, 2001
(Expressed in Canadian dollars)
======================================================================================
February 28, August 31,
2002 2001
(unaudited) (unaudited)
$ $
- --------------------------------------------------------------------------------------
ASSETS
Current
Accounts receivable, trade - net of allowance for doubtful
accounts 9,003,263 8,277,884
Income taxes receivable 4,850 --
Inventory 1,824,322 1,589,057
Prepaid expenses 52,265 80,526
- --------------------------------------------------------------------------------------
Total current assets 10,884,700 9,947,467
- --------------------------------------------------------------------------------------
Property and equipment, net 1,438,100 1,379,044
- --------------------------------------------------------------------------------------
12,322,800 11,326,511
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable - trade 7,480,323 4,748,929
Accrued liabilities 282,235 400,268
Income taxes payable -- 5,570
Current portion of long-term debt 2,037,432 3,833,802
- --------------------------------------------------------------------------------------
Total current liabilities 9,799,990 8,988,569
- --------------------------------------------------------------------------------------
Long-term debt , net of current portion 1,579,750 1,073,459
Intercompany payable 1,308,944 1,060,991
- --------------------------------------------------------------------------------------
Total liabilities 12,688,684 11,123,019
- --------------------------------------------------------------------------------------
Commitments and Contingent liabilities
Shareholders' equity
Share capital
Common shares 99 99
(Accumulated deficit)/ Retained earnings (365,983) 203,393
- --------------------------------------------------------------------------------------
Total shareholders' equity (365,884) 203,492
- --------------------------------------------------------------------------------------
12,322,800 11,326,511
- --------------------------------------------------------------------------------------
LOGICORP DATA SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars - unaudited)
=================================================================================================================
For Three Months Ended For Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
$ $ $ $
- -----------------------------------------------------------------------------------------------------------------
REVENUE
Product sales 9,811,783 9,147,134 19,349,561 22,970,595
Service sales 239,419 457,841 820,181 1,076,822
- -----------------------------------------------------------------------------------------------------------------
10,051,202 9,604,975 20,169,742 24,047,417
- -----------------------------------------------------------------------------------------------------------------
COST OF SALES
Product sales 8,688,269 8,176,256 17,396,001 20,631,017
Service sales 388,516 474,478 1,044,276 1,261,750
- -----------------------------------------------------------------------------------------------------------------
9,076,785 8,650,734 18,440,277 21,892,767
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses 870,885 876,225 1,994,339 2,029,358
Interest and bank charges 44,188 70,384 130,436 123,554
Depreciation and amortization 11,176 30,259 29,009 74,434
- -----------------------------------------------------------------------------------------------------------------
926,249 976,868 2,153,784 2,227,346
- -----------------------------------------------------------------------------------------------------------------
(Loss) income before undernoted 48,168 (22,627) (424,319) (72,696)
Provision for income taxes -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
(Loss) income and comprehensive (loss)
income for the period 48,168 (22,627) (424,319) (72,696)
- -----------------------------------------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
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
Cash and cash equivalents
Cash and cash equivalents include cash on hand and balances with banks, net of
bank overdrafts. The operating line of credit is included in cash and cash
equivalents.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on a first-in, first out basis.
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 value
Computer equipment 30% diminishing value
Computer software 30% diminishing value
Leasehold improvements 20% diminishing value
Office equipment 20% diminishing value
Small tools 100% diminishing value
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.
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.
LOGICORP SERVICE GROUP LTD.
BALANCE SHEETS
AS AT FEBRUARY 28, 2002 AND AUGUST 31, 2001
(Expressed in Canadian dollars)
================================================================================
February 28, August 31,
2002 2001
(unaudited) (unaudited)
$ $
- --------------------------------------------------------------------------------
ASSETS
Current
Income taxes receivable 19,467 1,866
- -------------------------------------------------------------------------------
Total current assets 19,467 1,866
- -------------------------------------------------------------------------------
Property and equipment, net 1 1
Intercompany receivable 1,308,945 1,060,991
- -------------------------------------------------------------------------------
1,328,413 1,062,858
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable - trade 14,539 (32,085)
Accrued liabilities 566,747 536,694
Current portion of long-term debt (4,858) 378,907
- -------------------------------------------------------------------------------
Total liabilities 576,428 883,516
- -------------------------------------------------------------------------------
Commitments and Contingent liabilities
Shareholders' equity
Share capital
Common shares 31 31
Retained earnings 751,954 179,311
- -------------------------------------------------------------------------------
Total shareholders' equity 751,985 179,342
- -------------------------------------------------------------------------------
1,328,413 1,062,858
- -------------------------------------------------------------------------------
LOGICORP SERVICE GROUP LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars - unaudited)
========================================================================================================
For Three Months Ended For Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
$ $ $ $
- --------------------------------------------------------------------------------------------------------
REVENUE
Service sales 274,101 258,764 696,451 775,637
- --------------------------------------------------------------------------------------------------------
274,101 258,764 696,451 775,637
- --------------------------------------------------------------------------------------------------------
COST OF SALES
Product sales 65 368 221 1,315
Service sales 102,100 89,800 216,623 270,707
- --------------------------------------------------------------------------------------------------------
102,165 90,168 216,844 272,022
- --------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses (641) 427 1,057 702
Interest and bank charges -- 290 -- 290
- --------------------------------------------------------------------------------------------------------
(641) 717 1,057 992
- --------------------------------------------------------------------------------------------------------
Income before undernoted 172,577 167,879 478,550 502,623
Provision for income taxes -- -- -- --
- --------------------------------------------------------------------------------------------------------
Income and comprehensive income for the period 172,577 167,879 478,550 502,623
- --------------------------------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
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
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.
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.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and balances with banks, net of
bank overdrafts.
591360 ALBERTA LTD.
BALANCE SHEETS
AS AT FEBRUARY 28, 2002 AND AUGUST 31, 2001
(Expressed in Canadian dollars)
================================================================================
February 28, August 31,
2002 2001
(unaudited) (unaudited)
$ $
- --------------------------------------------------------------------------------
ASSETS
Cash 464 464
Other receivables 173,395 173,395
Long-term investment 10 10
- --------------------------------------------------------------------------------
173,869 173,869
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable - trade 3,500 3,500
- --------------------------------------------------------------------------------
Total liabilities 3,500 3,500
- --------------------------------------------------------------------------------
Commitments and Contingent liabilities
Shareholders' equity
Share capital
Common shares 10 10
Retained earnings 170,359 170,359
- --------------------------------------------------------------------------------
Total shareholders' equity 170,369 170,369
- --------------------------------------------------------------------------------
173,869 173,869
- --------------------------------------------------------------------------------
591360 ALBERTA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars - unaudited)
==========================================================================================================
For Three Months Ended For Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
$ $ $ $
- ----------------------------------------------------------------------------------------------------------
REVENUE
Dividend income -- 53,860 -- 53,860
- ----------------------------------------------------------------------------------------------------------
-- 53,860 -- 53,860
- ----------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses -- 2,228 -- 2,228
- ----------------------------------------------------------------------------------------------------------
-- 2,228 -- 2,228
- ----------------------------------------------------------------------------------------------------------
Income before undernoted -- 51,632 -- 51,632
Provision for income taxes -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Income and comprehensive income for the period -- 51,632 -- 51,632
- ----------------------------------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The company is incorporated under the laws of Alberta and is a holding company.
Management Estimates
The 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 is
necessarily includes he use of estimates and approximations which have been made
using careful judgement. Actual results could differ from those estimates. These
financial statements have in management's opinion, been properly prepared within
reasonable limits of materiality and within the framework of the accounting
principles summarized below.
Financial Instruments
The company as part of its operations carries a number of financial instruments.
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising from these
financial instruments.
Long-term Investments
The investment in shares is recorded at cost.
123557 ALBERTA LTD.
BALANCE SHEETS
AS AT FEBRUARY 28, 2002 AND AUGUST 31, 2001
(Expressed in Canadian dollars)
================================================================================
February 28, August 31,
2002 2001
(unaudited) (unaudited)
$ $
- --------------------------------------------------------------------------------
ASSETS
Long-term investment 5,228 5,228
- --------------------------------------------------------------------------------
5,228 5,228
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable - trade 2,499 2,499
- --------------------------------------------------------------------------------
Total liabilities 2,499 2,499
- --------------------------------------------------------------------------------
Commitments and Contingent liabilities
Shareholders' equity
Share capital
Common shares 20 20
Retained earnings 2,709 2,709
- --------------------------------------------------------------------------------
Total shareholders' equity 2,729 2,729
- --------------------------------------------------------------------------------
5,228 5,228
- --------------------------------------------------------------------------------
123557 ALBERTA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars - unaudited)
==========================================================================================================
For Three Months Ended For Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
$ $ $ $
- ----------------------------------------------------------------------------------------------------------
REVENUE
Consulting -- 2,250 -- 9,000
Investment loss -- -- -- (6,335)
- ---------------------------------------------------------------------------------------------------------
-- 2,250 -- 2,665
- ---------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses -- 6,132 -- 24,530
- ---------------------------------------------------------------------------------------------------------
-- 6,132 -- 24,530
- ---------------------------------------------------------------------------------------------------------
Loss before undernoted -- (3,882) -- (21,865)
Provision for income taxes -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Loss and comprehensive loss for the period -- (3,882) -- (21,865)
- ---------------------------------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The company is incorporated under the laws of Alberta and is a holding company.
Management Estimates
The 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 is
necessarily includes he use of estimates and approximations which have been made
using careful judgement. Actual results could differ from those estimates. These
financial statements have in management's opinion, been properly prepared within
reasonable limits of materiality and within the framework of the accounting
principles summarized below.
Financial Instruments
The company as part of its operations carries a number of financial instruments.
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising from these
financial instruments.
Short-term Investments
Temporary investments are stated at the lower of cost and market value.
Long-term Investments
The investment in shares is recorded at cost.
EXHIBIT "D"
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
EXHIBIT "E"
CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
CHELL GROUP CORPORATION
----------------------------------------------------------
Pursuant to Section 502(d) of the Business Corporation Law
of the State of New York
----------------------------------------------------------
Chell Group Corp., a corporation organized and existing under the State of
New York (the "Corporation"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation on January 22, 2002,
in accordance with the provisions of Section 708(b) of the Business Corporation
Law of the State of New York;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $.01 per share (the "Preferred Stock"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series "B" Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
The terms defined in this Article whenever used in this Certificate of
Designation have the following respective meanings:
(a) "Additional Capital Shares" has the meaning set forth in Section
6.1(c).
(b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended.
(c) "Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the State of New York are authorized or obligated to
close.
(d) "Capital Shares" means the Common Shares and any other shares of any
other class or series of capital stock, whether now or hereafter authorized and
however designated, which have the right to participate in the distribution of
earnings and assets (upon dissolution, liquidation or winding-up) of the
Corporation.
(e) "Common Shares" or "Common Stock" means shares of common stock, par
value $ .0467 per share, of the Corporation.
(f) "Common Stock Issued at Conversion", when used with reference to the
securities issuable upon conversion of the Series B Preferred Stock, means all
Common Shares now or hereafter
Outstanding and securities of any other class or series into which the Series B
Preferred Stock hereafter shall have been changed or substituted, whether now or
hereafter created and however designated.
(g) "Conversion Date" means any day on which all or any portion of shares
of the Series B Preferred Stock is converted in accordance with the provisions
hereof.
(h) "Conversion Notice" means a written notice of conversion substantially
in the form annexed hereto as Annex I.
(i) "Conversion Price" means on any date of determination the applicable
price for the conversion of shares of Series B Preferred Stock into Common
Shares on such day as set forth in Section 6.1.
(j) "Corporation" means Chell Group Corporation, a New York corporation,
and any successor or resulting corporation by way of merger, consolidation, sale
or exchange of all or substantially all of the Corporation's assets, or
otherwise.
(k) "Current Market Price" means on any date of determination the closing
bid price of a Common Share in the regular day session on such day as reported
on Nasdaq; provided, if such security is not listed or admitted to trading on
Nasdaq, as reported on the principal national security exchange or quotation
system on which such security is quoted or listed or admitted to trading, or, if
not quoted or listed or admitted to trading on any national securities exchange
or quotation system, the closing bid price of such security on the
over-the-counter market in the regular day session on the day in question as
reported by Bloomberg LP, or a similar generally accepted reporting service, as
the case may be.
(l) "Holder" means The Shaar Fund Ltd., any successor thereto, or any
Person or Persons to whom the Series B Preferred Stock is subsequently
transferred in accordance with the provisions hereof.
(m) "Issue Date" means, as to any share of Series B Preferred Stock, the
date of issuance of such share.
(n) "Junior Securities" means all capital stock of the Corporation.
(o) "Liquidation Preference" means, with respect to a share of the Series
B Preferred Stock, an amount equal to the sum of (i) the Stated Value thereof,
plus (ii) an amount equal to 30% of such Stated Value, plus (iii) the aggregate
of all accrued and unpaid dividends (whether or not earned or declared, whether
or not there were funds legally available for the payment of dividends and
whether or not a Dividend Payment Due Date has occurred since the last dividend
payment) on such share of Series B Preferred Stock until the most recent
Dividend Payment Due Date; provided that, in the event of an actual liquidation,
dissolution or winding up of the Corporation, the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such liquidation, dissolution or winding up, rather than the
Dividend Payment Due Date referred to above.
(p) "Mandatory Conversion Date" has the meaning set forth in Section 6.8.
(q) "Market Price" per Common Share means the arithmetic mean of the
closing bid prices of the Common Shares in the regular day session as reported
on Nasdaq for the three Trading Days on which the three lowest closing bid
prices in the regular day session are reported during any Valuation Period, it
being understood that such three Trading Days need not be consecutive; provided,
if such security is not listed or
admitted to trading on Nasdaq, as reported on the principal national security
exchange or quotation system on which such security is quoted or listed or
admitted to trading, or, if not quoted or listed or admitted to trading on any
national securities exchange or quotation system, the closing bid price of such
security in the regular day session on the over-the-counter market on the day in
question as reported by Bloomberg LP, or a similar generally accepted reporting
service, for the three Trading Days on which the three lowest closing bid prices
in the regular day session are reported during any Valuation Period, it being
understood that such three Trading Days need not be consecutive.
(r) "Nasdaq" means the Nasdaq Market.
(s) "Outstanding", when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that any such Shares directly or indirectly owned or
held by or for the account of the Corporation or any Subsidiary of the
Corporation shall not be deemed "Outstanding" for purposes hereof.
(t) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, an unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(u) "Redemption Date" has the meaning set forth in Section 6.5.
(v) "Registration Rights Agreement" means that certain Registration Rights
Agreement to be dated as of January 23, 2002 between the Corporation and The
Shaar Fund Ltd.
(w) "SEC" means the United States Securities and Exchange Commission.
(x) "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder, all as in effect at the time.
(y) "Securities Exchange Agreement" means that certain Securities Exchange
Agreement to be dated as of January 23, 2002 between the Corporation and The
Shaar Fund Ltd.
(z) "Series B Preferred Shares" or "Series B Preferred Stock" means the
shares of Series B Convertible Preferred Stock of the Corporation or such other
convertible preferred stock of the Corporation as may be exchanged therefor.
(aa) "Stated Value" has the meaning set forth in Article 2.
(bb) "Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are owned directly or
indirectly by the Corporation.
(cc) "Trading Day" means any day on which (a) purchases and sales of
securities authorized for quotation on Nasdaq are reported thereon, (b) no event
which results in a material suspension or limitation of trading of the Common
Shares on Nasdaq has occurred and (c) at least one bid for the trading of Common
Shares is reported on Nasdaq.
(dd) "Valuation Event" has the meaning set forth in Section 6.1.
(ee) "Valuation Period" means the period of 10 Trading Days immediately
preceding the Conversion Date; provided, however, that if a Valuation Event
occurs during a Valuation Period on a date
less than 5 Trading Days before the Conversion Date, the Valuation Period shall
be extended until the date 5 Trading Days after the occurrence of the Valuation
Event.
All references to "cash" or "$" herein mean currency of the United States
of America.
ARTICLE 2
DESIGNATION AND AMOUNT
The designation of this series, which consists of 450,000 shares of
Preferred Stock, shall be Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and the stated value shall be $10 per share (the "Stated
Value").
ARTICLE 3
RANK
The Series B Preferred Stock shall rank prior to any other capital stock
of the Corporation.
ARTICLE 4
DIVIDENDS
(a) If the Corporation shall at any time or from time to time after the
Issue Date declare, order, pay or make a dividend or other distribution
(including, without limitation, any distribution of stock or other securities or
property or rights or warrants to subscribe for securities of the Corporation or
any of its Subsidiaries by way of dividend or spin-off) on shares of its Common
Stock, then, and in each such case, the Corporation shall declare, order, pay
and make the same dividend or distribution to each Holder of Series B Preferred
Stock as would have been made with respect to the number of Common Shares the
Holder would have received had it converted all of its Series B Preferred
Shares, immediately prior to such dividend or distribution.
ARTICLE 5
LIQUIDATION PREFERENCE; MERGERS, CONSOLIDATIONS, ETC.
(a) If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee or sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up, no distribution shall be made to the holders of
any shares of capital stock of the Corporation upon liquidation, dissolution or
winding-up unless prior thereto, the Holders of shares of Series B Preferred
Stock, subject to this Article 5, shall have received the Liquidation Preference
with respect to each share.
(b) Except as set forth on Schedule 5(b), which is attached hereto, in
case the Corporation shall reorganize its capital, reclassify its capital stock,
consolidate or merge with or into another Person (where
the Corporation is not the survivor or where there is a change in or
distribution with respect to the Common Stock of the Corporation), sell, convey,
transfer, or otherwise dispose of all or substantially all its property, assets
or business to another person, or effectuate a transaction or series of related
transactions in which more than 50% of the voting power of the corporation is
disposed of (each, a "Fundamental Corporate Change") and, pursuant to the terms
of such Fundamental Corporate Change, shares of common stock of the successor or
acquiring corporation, or any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants or other subscription or
purchase rights) in addition to or in lieu of common stock of the successor or
acquiring corporation ("Other Property"), are to be received by or distributed
to the holders of Common Stock of the Corporation, then each Holder of Series B
Preferred Stock shall have the right thereafter, at its sole option, either (x)
to require the Corporation to deem such Fundamental Corporate Change to be a
liquidation, dissolution or winding up of the Corporation pursuant to which the
Corporation shall be required to distribute, upon consummation of and as a
condition to, such Fundamental Corporate Change an amount equal to 0% of the
Liquidation Preference with respect to each outstanding share of Series B
Preferred Stock, (y) to receive the number of shares of common stock of the
successor or acquiring corporation or of the Corporation, if it is the surviving
corporation, and Other Property as is receivable upon or as a result of such
Fundamental Corporate Change by a holder of the number of shares of Common Stock
into which such Series B Preferred Stock may be converted at the Conversion
Price applicable immediately prior to such Fundamental Corporate Change or (z)
require the Corporation, or such successor, resulting or purchasing corporation,
as the case may be, to, without benefit of any additional consideration
therefor, to execute and deliver to the Holder shares of its Preferred Stock
with substantial identical rights, preferences, privileges, powers, restrictions
and other terms as the Series B Preferred Stock equal to the number of shares of
Series B Preferred Stock held by such Holder immediately prior to such
Fundamental Corporate Change; provided, that all Holders of Series B Preferred
Stock shall be deemed to elect the option set forth in clause (x) above if at
least a majority in interest of such Holders elect such option. For purposes of
this Section 5(b), "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not preferred as
to dividends or assets over any other class of stock of such corporation and
which is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 5(b) shall similarly apply to successive Fundamental Corporate
Changes.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
Section 6.1 Conversion; Conversion Price
At the option of the Holder, the shares of Series B Preferred Stock may be
converted, either in whole or in part, into Common Shares (calculated as to each
such conversion to the nearest 1/100th of a share) at any time and from time to
time following the Issue Date at a Conversion Price per share of Common Stock
equal to $1.00 (subject to adjustment for any stock split or stock combination
to occur after the date hereof), (the "Conversion Price"). The number of shares
of Common Stock due upon conversion of Series B Preferred Stock shall be (i) the
number of shares of Series B Preferred Stock to be converted, multiplied by (ii)
the Stated Value and divided by (iii) the applicable Conversion Price.
Within two Business Days of the occurrence of a Valuation Event, the
Corporation shall send notice thereof to each Holder. Notwithstanding anything
to the contrary contained herein, if a Valuation Event occurs during any
Valuation Period, the Holder may convert some or all of its Series B Preferred
Stock, at its sole option, at a Conversion Price equal to the Current Market
Price on any Trading Day during the Valuation Period.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event
in which the Corporation takes any of the following actions:
(a) subdivides or combines its Capital Shares; and
(b) makes any distribution on its Capital Shares without reasonable
consideration;
Section 6.2 Exercise of Conversion Privilege
(a) Conversion of the Series B Preferred Stock may be exercised, in whole
or in part, by the Holder by telecopying an executed and completed Conversion
Notice to the Corporation. Each date on which a Conversion Notice is telecopied
to the Corporation in accordance with the provisions of this Section 6.2 shall
constitute a Conversion Date. The Corporation shall convert the Preferred Stock
and issue the Common Stock Issued at Conversion, and all voting and other rights
associated with the beneficial ownership of the Common Stock Issued at
Conversion shall vest with the Holder, effective as of the Conversion Date at
the time specified in the Conversion Notice. The Conversion Notice also shall
state the name or names (with addresses) of the Persons who are to become the
holders of the Common Stock Issued at Conversion in connection with such
conversion. The Holder shall deliver the shares of Series B Preferred Stock to
the Corporation by express courier within 30 days following the Conversion Date.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
proper assignment thereof to the Corporation or be endorsed in blank. As
promptly as practicable after the receipt of the Conversion Notice as aforesaid,
but in any event not more than five Business Days after the Corporation's
receipt of such Conversion Notice, the Corporation shall (i) issue the Common
Stock issued at Conversion in accordance with the provisions of this Article 6,
and (ii) cause to be mailed for delivery by overnight courier to the Holder (x)
a certificate or certificate(s) representing the number of Common Shares to
which the Holder is entitled by virtue of such conversion, (y) cash, as provided
in Section 6.3, in respect of any fraction of a Common Share issuable upon such
conversion and (z) if the Corporation chooses to pay accrued and unpaid
dividends in cash, cash in the amount of accrued and unpaid dividends as of the
Conversion Date. Such conversion shall be deemed to have been effected at the
time at which the Conversion Notice indicates so long as the Series B Preferred
Stock shall have been surrendered as aforesaid at such time, and at such time
the rights of the Holder of the Series B Preferred Stock, as such, shall cease
and the Person or Persons in whose name or names the Common Stock Issued at
Conversion shall be issuable shall be deemed to have become the holder or
holders of record of the Common Shares represented thereby and all voting and
other rights associated with the beneficial ownership of such Common Shares
shall at such time vest with such Person or Persons. The Conversion Notice shall
constitute a contract between the Holder and the Corporation, whereby the Holder
shall be deemed to subscribe for the number of Common Shares which it will be
entitled to receive upon such conversion and, in payment and satisfaction of
such subscription (and for any cash adjustment to which it is entitled pursuant
to Section 6.3), to surrender the Series B Preferred Stock and to release the
Corporation from all liability thereon. No cash payment aggregating less than
$1.00 shall be required to be given unless specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or denies the
right of the Holder hereof to effect the conversion of the Series B Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice
delivered in accordance with this Section 6.2 or (ii) any third party commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny, enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Series B Preferred Stock into Common Shares, then the Holder shall have
the right, by written notice to the Corporation, to require the Corporation
promptly to redeem the Series B Preferred Stock for cash at a redemption price
equal to 135% of the Stated Value thereof together with all accrued and unpaid
dividends (whether or not earned or declared, whether or not there were funds
legally available for the payment of dividends and whether or not a Dividend
Payment Due
Date has occurred since the last dividend payment) thereon (the "Mandatory
Purchase Amount"). Under any of the circumstances set forth above, the
Corporation shall be responsible for the payment of all costs and expenses of
the Holder, including reasonable legal fees and expenses, as and when incurred
in disputing any such action or pursuing its rights hereunder (in addition to
any other rights of the Holder).
(c) The Holder shall be entitled to exercise its conversion privilege
notwithstanding the commencement of any case under 11 U.S.C. ss. 101 et seq. or
any other comparable applicable bankruptcy related law (the "Bankruptcy Code").
In the event the Corporation is a debtor under the Bankruptcy Code, the
Corporation hereby waives to the fullest extent permitted any rights to relief
it may have under 11 U.S.C. ss. 362 or any other comparable applicable
bankruptcy related law in respect of the Holder's conversion privilege. The
Corporation hereby waives to the fullest extent permitted any rights to relief
it may have under 11 U.S.C. ss. 362 or any other comparable applicable
bankruptcy related law in respect of the conversion of the Series B Preferred
Stock. The Corporation agrees, without cost or expense to the Holder, to take or
consent to any and all action necessary to effectuate relief under 11 U.S.C. ss.
362 or any other comparable applicable bankruptcy related law.
Section 6.3 Fractional Shares
No fractional Common Shares or scrip representing fractional Common Shares
shall be issued upon conversion of the Series B Preferred Stock. Instead of any
fractional Common Shares which otherwise would be issuable upon conversion of
the Series B Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction.
Section 6.4 Adjustments to Conversion Price
For so long as any shares of the Series B Preferred Stock are outstanding,
if the Corporation issues and sells pursuant to an exemption from registration
under the Securities Act (A) Common Shares at a purchase price that is lower
than the Conversion Price on the date of issuance of such Common Shares, (B)
warrants or options with an exercise price on the date of issuance thereof that
is lower than the Conversion Price for the Holder on such date, except for
warrants or options issued pursuant to employee stock option agreements or stock
incentive agreements of the Corporation, or (C) convertible, exchangeable or
exercisable securities with a right to exchange at lower than the Current Market
Price on the date of issuance or conversion, as applicable, of such convertible,
exchangeable or exercisable securities, except for stock option agreements or
stock incentive agreements, then the Conversion Price shall be reduced to equal
the lowest of any such purchase price, exercise price or exchange price, and the
number of shares of Common Stock into which the Series B Preferred Stock is
convertible pursuant to the second paragraph of Section 6.1 shall be
correspondingly adjusted. After such reduction, the Conversion Price shall never
exceed the Conversion Price as so reduced, in spite of any subsequent increase
in the Market Price.
Section 6.5 Mandatory Conversion
(a) On the third anniversary of the date of this Certificate of
Designation (the "Mandatory Conversion Date"), the Corporation shall convert all
Series B Preferred Stock outstanding, at the Conversion Price utilizing the
Stated Value as the value of each share of Series B Preferred Stock, into shares
of Common Stock registered for resale in open market transactions on the
Registration Statement (as defined in the Registration Rights Agreement), which
Registration Statement shall then be effective under the Securities Act;
provided that if the Current Market Price of the Common Stock on the Mandatory
Conversion Date is below $1.50 (subject to adjustment for any stock split or
stock combination to occur after the date hereof), the Company shall redeem all
the Series B Preferred Stock then outstanding at a price per share in cash equal
to the stated value of each share of Series B Preferred Stock.
(b) In the event the Company fails to comply with the covenant of the
Company specified in Section IV I of the Securities Exchange Agreement, the
Company will promptly redeem all outstanding Series B Preferred Stock at a price
in cash equal to 125% of the Stated Value thereof.
Section 6.6 Certain Conversion Limitations
(a) Notwithstanding anything herein to the contrary, the Holder shall not
have the right, and the Corporation shall not have the obligation, to convert
all or any portion of the Series B Preferred Stock (and the Corporation shall
not have the right to pay dividends on the Series B Preferred Stock in shares of
Common Stock) if and to the extent that the issuance to the Holder of shares of
Common Stock upon such conversion (or payment of dividends) would result in the
Holder being deemed the "beneficial owner" of more than 5% of the then
Outstanding shares of Common Stock within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder. If any court of competent jurisdiction shall determine that the
foregoing limitation is ineffective to prevent a Holder from being deemed the
beneficial owner of more than 5% of the then Outstanding shares of Common Stock,
then the Corporation shall redeem so many of such Holder's shares (the
"Redemption Shares") of Series B Preferred Stock as are necessary to cause such
Holder to be deemed the beneficial owner of not more than 5% of the then
Outstanding shares of Common Stock. Upon such determination by a court of
competent jurisdiction, the Redemption Shares shall immediately and without
further action be deemed returned to the status of authorized but unissued
shares of Series B Preferred Stock, and the Holder shall have no interest in or
rights under such Redemption Shares. Such redemption shall be for cash at a
redemption price equal to 125% of the Stated Value of the Redemption Shares. All
amounts payable to Holder pursuant to this Section 6.6(a) shall be paid
immediately and in no event later than twenty (20) Business Days after the
determination that redemption is required pursuant to this Section 6.6(a).
(b) Notwithstanding anything herein to the contrary, if and to the extent
that, on any date (the "Section 16 Determination Date"), the holding by the
Holder of shares of the Series B Preferred Stock would result in the Holder's
becoming subject to the provisions of Section 16(b) of the Exchange Act in
virtue of being deemed the "beneficial owner" of more than 10% of the then
Outstanding shares of Common Stock, then the Holder shall not have the right,
and the Corporation shall not have the obligation, to convert so many of such
Holder's shares of Series B Preferred Stock (the "Section 16 Redemption Shares")
as shall cause such Holder to be deemed the beneficial owner of more than 10% of
the then Outstanding shares of Common Stock during the period ending 60 days
after the Section 16 Determination Date. If any court of competent jurisdiction
shall determine that the foregoing limitation is ineffective to prevent a Holder
from being deemed the beneficial owner of more than 10% of the then Outstanding
shares of Common Stock for the purposes of such Section 16(b), then the
Corporation shall redeem the Section 16 Redemption Shares. Upon such
determination by a court of competent jurisdiction, the Section 16 Redemption
Shares shall immediately and without further action be deemed returned to the
status of authorized but unissued shares of Series B Preferred Stock, and the
Holder shall have no interest in or rights under such Section 16 Redemption
Shares. Such redemption shall be for cash at a redemption price equal to 105% of
the Stated Value of the Section 16 Redemption Shares. All amounts payable to
Holder pursuant to this Section 6.6(b) shall be paid immediately and in no event
later than twenty (20) Business Days after the determination that redemption is
required pursuant to this Section 6.6(b).
(c) Unless the Corporation shall have obtained the approval of its voting
stockholders to such issuance in accordance with the rules of Nasdaq or any
other stock market rules with which the Corporation shall be required to comply,
but only to the extent required thereby, the Corporation shall not issue shares
of Common Stock upon conversion of any shares of Series B Preferred Stock, if
such issuance of Common Stock, when added to the number of shares of Common
Stock previously issued by the Corporation upon conversion of shares of the
Series B Preferred Stock, would equal or exceed 20% of the number of shares of
the Corporation's Common Stock which were issued and Outstanding on the Issue
Date (the "Maximum
Issuance Amount"). To the extent that such approval is required, the Corporation
agrees to use its best efforts to take all action to obtain such stockholder
approval as soon as possible. In the event that a properly executed Conversion
Notice is received by the Corporation which would require the Corporation to
issue shares of Common Stock equal to or in excess of the Maximum Issuance
Amount, the Corporation shall honor such conversion request by (a) converting
the number of shares of Series B Preferred Stock stated in the Conversion Notice
which is not in excess of the Maximum Issuance Amount and (b) redeeming the
remaining number of shares of Series B Preferred Stock stated in the Conversion
Notice in cash at a price equal to 125% of the Stated Value thereof, on the
total number of shares stated in the Conversion Notice; ; provided, however,
that the Corporation shall not be required to redeem the remaining shares
pursuant to clause (b) for a 60 day period so long as during such 60-day period
the Corporation is continuously using its best efforts to obtain the necessary
stockholder approval; provided, further, however, that if the Corporation is
unable to obtain the necessary stockholder approval during such 60-day period as
a result of a delay of obtaining the approval of the SEC for the relevant proxy,
such 60-day period shall be extended by 30-days. All amounts payable to Holder
pursuant to this Section 6.6(c) shall be paid immediately and, in no event later
than twenty (20) Business Days after the delivery of the Conversion Notice
pursuant to the previous sentence.
Section 6.7 Injunction
In the event a Holder shall elect to convert any Series B Preferred Stock,
the Corporation shall not refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, or for any other reason, unless, an injunction from a court,
on notice, restraining and or enjoining conversion of any Series B Preferred
Stock shall have been sought and obtained. The Corporation shall have two (2)
Business Days after the Corporation's receipt of a Conversion Notice pursuant to
Section 6.2(a) to notify the Holder in writing of its intent to seek an
injunction from a court (the "Injunction Notice"). In the event the Holder shall
not have received the Injunction Notice within such two Business Day period, the
Corporation shall promptly honor such Conversion Notice in accordance with
Section 6.2(a). Immediately following the Holder's receipt of the Injunction
Notice, the five (5) Business Day time period for conversion of the Series B
Preferred Stock in Section 6.2(a) shall be extended until the earlier to occur
of (i) the date on which a court of competent jurisdiction grants a final,
non-appealable permanent injunction on the applicable conversion, (ii) the date
on which a court of competent jurisdiction dismisses the Corporation's action
seeking a temporary or permanent injunction on the applicable conversion and
such dismissal is final and non-appealable, and (iii) the date which is four (4)
weeks from the date the Holder received the Injunction Notice. The provisions of
this Certificate of Designation, including, but not limited to, the provisions
of this Section 6.7, shall not in any way affect the rights of the Holder under
Section 6.2(b).
ARTICLE 7
VOTING RIGHTS
The Holders of the Series B Preferred Stock have no voting power, except
as otherwise provided by the Business Corporation of Law of New York (the
"BCL"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each Holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of all proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a
notice thereof to each Holder at least 30 days prior to the date on which any
such record is to be taken for the purpose of such dividend, distribution, right
or other event, together with a brief statement regarding the amount and
character of such dividend, distribution, right or other event to the extent
known at such time.
To the extent that under the BCL the vote of the Holders of the Series B
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the Holders of at least a majority of the outstanding shares of
Series B Preferred Stock represented at a duly held meeting at which a quorum is
present or by written consent of a majority of the outstanding shares of Series
B Preferred Stock (except as otherwise may be required under the BCL shall
constitute the approval of such action by the class. To the extent that under
the BCL, holders of the Series B Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series B Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series B Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of all proxy materials and other information sent to shareholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the BCL
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided in the DGCL) of the Holders of at least a 80% of the then
outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of the Series B
Preferred Stock;
(b) create any new class or series of capital stock having a preference
over the Series B Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation ("Senior Securities") or alter or
change the rights, preferences or privileges of any Senior Securities so as to
affect adversely the Series B Preferred Stock;
(c) increase the authorized number of shares of Series B Preferred Stock;
or
(d) do any act or thing not authorized or contemplated by this Certificate
of Designation which would result in taxation of the Holders of shares of the
Series B Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended (or any comparable provision of the Internal Revenue Code of 1986, as
hereafter from time to time amended).
In the event Holders of least a majority of the then outstanding shares of
Series B Preferred Stock agree to allow the Corporation to alter or change the
rights, preferences or privileges of the shares of Series Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series B Preferred Stock,
then the Corporation will deliver notice of such approved change to the Holders
of the Series Preferred Stock that did not agree to such alteration or change
(the "Dissenting Holders") and Dissenting Holders shall have the right for a
period of 30 days to convert pursuant to the terms of this Certificate of
Designation as in effect prior to such alteration or change or to continue to
hold their shares of Series B Preferred Stock.
Notwithstanding anything to the contrary herein, if at any time the
Corporation shall "spin-off" certain of its assets or businesses by
transferring, directly or indirectly, such assets or businesses to a Subsidiary
of the Corporation ("Spinco") and making a dividend (the "Spin-off Dividend") to
the Corporation's stockholders of the shares of capital stock of Spinco, then
prior to making the Spin-off
Dividend, the Corporation shall cause Spinco to issue to each Holder that number
of shares of preferred stock of Spinco with substantially identical rights,
preferences, privileges, powers, restrictions and other terms as the Series B
Preferred Stock equal to the number of shares of Series B Preferred Shares held
by such Holder immediately prior to the Spin-off Dividend.
ARTICLE 9
MISCELLANEOUS
Section 9.1 Loss, Theft, Destruction of Preferred Stock
Upon receipt of evidence satisfactory to the Corporation of the loss,
theft, destruction or mutilation of shares of Series B Preferred Stock and, in
the case of any such loss, theft or destruction, upon receipt of indemnity or
security reasonably satisfactory to the Corporation, or, in the case of any such
mutilation, upon surrender and cancellation of the Series B Preferred Stock, the
Corporation shall make, issue and deliver, in lieu of such lost, stolen,
destroyed or mutilated shares of Series B Preferred Stock, new shares of Series
B Preferred Stock of like tenor. The Series B Preferred Stock shall be held and
owned upon the express condition that the provisions of this Section 9.1 are
exclusive with respect to the replacement of mutilated, destroyed, lost or
stolen shares of Series B Preferred Stock and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without the surrender thereof.
Section 9.2 Who Deemed Absolute Owner
The Corporation may deem the Person in whose name the Series B Preferred
Stock shall be registered upon the registry books of the Corporation to be, and
may treat it as, the absolute owner of the Series B Preferred Stock for the
purpose of receiving payment of dividends on the Series B Preferred Stock, for
the conversion of the Series B Preferred Stock and for all other purposes, and
the Corporation shall not be affected by any notice to the contrary. All such
payments and such conversion shall be valid and effectual to satisfy and
discharge the liability upon the Series B Preferred Stock to the extent of the
sum or sums so paid or the conversion so made.
Section 9.3 Fundamental Corporate Change
In the case of the occurrence of any Fundamental Corporate Change
described in Section 5(b), the Corporation shall cause to be mailed to the
Holder of the Series B Preferred Stock at its last address as it appears in the
Corporation's security registry, at least 20 days prior to the applicable
record, effective or expiration date specified in connection therewith (or, if
such 20 days notice is not possible, at the earliest possible date prior to any
such record, effective or expiration date), a notice stating (x) the date on
which a record is to be taken for the purpose of such corporate action, or if a
record is not to be taken, the date as of which the Holders of record of Series
B Preferred Stock to be entitled to any dividend, distribution, issuance or
granting of rights, options or warrants are to be determined or the date on
which such Fundamental Corporate Change is expected to become effective, and (y)
the date as of which it is expected that Holders of record of Series B Preferred
Stock will be entitled to exchange their shares for securities, cash or other
property deliverable upon such Fundamental Corporate Change.
Section 9.4 Register
The Corporation shall keep at its principal office a register in which the
Corporation shall provide for the registration of the Series B Preferred Stock.
Upon any transfer of the Series B Preferred Stock in
accordance with the provisions hereof, the Corporation shall register such
transfer on the register of Series B Preferred Stock.
Section 9.5 Withholding
To the extent required by applicable law, the Corporation may withhold
amounts for or on account of any taxes imposed or levied by or on behalf of any
taxing authority in the United States having jurisdiction over the Corporation
from any payments made pursuant to the Series B Preferred Stock.
Section 9.6 Headings
The headings of the Articles and Sections of this Certificate of
Designation are inserted for convenience only and do not constitute a part of
this Certificate of Designation.
Section 9.7 Severability
If any provision of this Certificate of Designation, or the application
thereof to any person or entity or any circumstance, is invalid or
unenforceable, (i) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision, and (ii) the
remainder of this Certificate of Designation and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
Section 9.8 Specific Enforcement, Consent to Jurisdiction
The Corporation and Holder acknowledge and agree that irreparable damage
would occur in the event that any of the provisions of this Certificate were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Certificate
and to enforce specifically the terms and provisions hereof or thereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity. Each of the Corporation and Holder hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Nothing in this Section shall affect or limit
any right to serve process in any other manner permitted by law.
[SIGNATURE PAGE FOLLOWS.]
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its duly authorized officers on January 22, 2002.
CHELL GROUP CORP.
By:/s/ Cameron Chell
-------------------------------
Name:
Title:
By:/s/ Don Pagnutti
-------------------------------
Name:
Title:
ANNEX I
FORM OF CONVERSION NOTICE
TO: Chell Group Corporation
The undersigned owner of this Series B 0% Convertible Preferred Stock (the
"Series B Preferred Stock") issued by Chell Group Corporation (the
"Corporation") hereby irrevocably exercises its option to convert __________
shares of the Series B Preferred Stock into shares of the common stock, par
value $_____$.01 per share ("Common Stock"), of the Corporation in accordance
with the terms of the Certificate of Designation. The undersigned hereby
instructs the Corporation to convert the number of shares of the Series __B
Preferred Stock specified above into Shares of Common Stock Issued at Conversion
in accordance with the provisions of Article 6 of the Certificate of
Designation. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion and the recertificated Series
B Preferred Stock, if any, not being surrendered for conversion hereby, together
with any check in payment for fractional Common Stock, be issued in the name of
and delivered to the undersigned unless a different name has been indicated
below. All capitalized terms used and not defined herein have the respective
meanings assigned to them in the Certificate of Designation. So long as the
Series B Preferred Stock shall have been surrendered for conversion hereby, the
conversion pursuant hereto shall be deemed to have been effected at the date and
time specified below, and at such time the rights of the undersigned as a Holder
of the Series B Preferred Stock shall cease and the Person or Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby and all voting and other rights associated with the
beneficial ownership of such Common Shares shall at such time vest with such
Person or Persons.
Date and time: _______________________________
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Signature
Fill in for registration of Series B Preferred Stock:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please print name and address (including zip code number)