FORM 10-Q/A NO. 1
Securities and Exchange Commission
Washington D.C. 20549
AMENDMENT NO. 1 TO QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: NOVEMBER 30, 2000
Commission file number: 0-18066
CHELL GROUP CORPORATION INC.
F/K/A NETWORKS NORTH, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2805051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 THIRD AVENUE, 21ST FLOOR
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
(Zip Code)
(416) 675-0874
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of January 12, 2000: 8,358,663 shares of common stock,
par value $.0467 per share.
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS: PAGE
Consolidated Balance Sheets -
as at November 30, 2000 (unaudited) and August 31, 2000 1
Consolidated Statements of Operations and Retained Earnings -
for the Three Months Ended November 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows -
for the Three Months Ended November 30, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9
RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
CONSOLIDATED BALANCE SHEETS
AS AT NOVEMBER 30, 2000 AND AUGUST 31, 2000
(Expressed in Canadian dollars)
- ----------------------------------------------------------------------------------------------------------
NOVEMBER 30, 2000 August 31, 2000
(UNAUDITED)
(RESTATED -NOTE 11) (RESTATED -NOTE 11)
$ $
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 1,199,088 1,355,613
Short-term investments 287,852 269,727
Accounts receivable, trade - net of allowance for doubtful
accounts of $185,500; August - $178,000 2,997,726 3,154,134
Other receivables 168,460 216,990
Income taxes receivable 220,642 143,227
Inventory 220,652 206,216
Prepaid expenses 564,670 636,726
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,659,090 5,982,633
- ----------------------------------------------------------------------------------------------------------
Property and equipment, net 9,438,858 7,721,769
Software development costs, net 187,500 200,000
Licenses, net of accumulated amortization 245,814 250,248
Goodwill, net of accumulated amortization 2,898,909 2,863,146
Notes receivable 160,000 160,000
Deposit on purchase 614,400 --
Other assets, net of amortization 186,799 202,799
- ----------------------------------------------------------------------------------------------------------
19,391,370 17,380,595
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness 127,000 133,000
Accounts payable - trade 2,369,065 1,375,414
Accrued liabilities 1,056,961 1,654,917
Current portion of long-term debt 863,018 397,632
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,416,044 3,560,963
- ----------------------------------------------------------------------------------------------------------
Long-term debt 4,344,017 4,377,040
Deferred income taxes payable 59,173 59,173
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,819,234 7,997,176
- ----------------------------------------------------------------------------------------------------------
Contingent liabilities
SHAREHOLDERS' EQUITY
Share capital
900,000 preferred shares 10,917 10,917
8,358,163 common shares [August - 2,925,141] 564,483 191,122
Capital in excess of par value 14,669,435 10,454,669
Deficit (4,672,699) (1,273,289)
- ----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 10,572,136 9,383,419
- ----------------------------------------------------------------------------------------------------------
19,391,370 17,380,595
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
1
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT)
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER 30, 1999
(Expressed in Canadian dollars - unaudited)
=====================================================================================================
NOVEMBER 30, 2000 November 30, 1999
(Restated - Note 11)
$ $
- -----------------------------------------------------------------------------------------------------
REVENUE
Network services 1,626,071 1,598,024
Pay-TV 1,785,106 1,836,700
Event programming 61,207 100,700
Ad sponsorship 58,845 195,810
Video/software sales 1,055,879 1,438,879
Video dubbing 159,975 219,491
Digital encoding 228,609 102,547
Other 27,173 43,455
- -----------------------------------------------------------------------------------------------------
5,002,865 5,535,596
- -----------------------------------------------------------------------------------------------------
COST OF SALES
Network services 579,812 527,266
Pay-TV 728,268 511,800
Event programming -- 18,938
Ad sponsorship -- 3,750
Video/software sales 432,062 682,460
Video dubbing 8,560 56,088
Digital encoding 5,916 2,412
Other -- 4,476
- -----------------------------------------------------------------------------------------------------
1,754,618 1,807,190
- -----------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses 5,196,637 2,587,398
Bad debt 34,879 4,540
Interest and bank charges 199,724 80,179
Write off of leasehold improvements 355,560 --
Depreciation and amortization 850,677 499,477
- -----------------------------------------------------------------------------------------------------
Income (loss) before undernoted (3,389,230) 556,812
Provision for income taxes -- 298,458
Minority interest 10,180 (4,253)
- -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR
THE PERIOD (3,399,410) 262,607
Retained earnings (deficit), beginning of period (1,273,289) 1,050,332
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD (4,672,699) 1,312,939
=====================================================================================================
EARNINGS (LOSS) PER SHARE:
Basic (0.41) 0.09
Diluted (0.41) 0.09
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
2
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER 30, 1999
(Expressed in Canadian dollars - unaudited)
============================================================================================================
November 30, 2000 November 30, 1999
(Restated - Note 11)
$ $
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) and comprehensive income (loss) for the period (3,399,410) 262,607
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 850,677 499,477
Accretion of interest on non-interest bearing promissory notes 45,896 43,269
Amortization of discount of debenture payable 108,841 --
Write-off of leasehold improvements 355,560 --
Write-off of prepaids arising from Chell asset purchase 359,662 --
Changes in assets and liabilities:
Increase in short-term investments (18,125) (873)
Decrease (increase) in accounts receivable, trade 156,408 (2,626,013)
Decrease (increase) in income taxes receivable (77,415) 157,464
Decrease (increase) in inventory (14,436) 13,441
Decrease (increase) in prepaid expenses 126,095 (248,728)
Decrease in other accounts receivable 49,934 --
Increase in accounts payable and accrued liabilities 349,797 685,912
Increase in income taxes payable -- 133,542
- ------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,106,516) (1,079,902)
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (738,956) (374,757)
Increase in deposit on purchase (614,400) --
- ------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (1,353,356) (374,757)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness (6,000) (6,000)
Increase in notes and loans payable 2,296,599 15,967
Repayment of notes and loans payable (13,933) --
Proceeds from exercise of options 26,681 --
- ------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,303,347 9,967
- ------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH eQUIVALENTS DURING THE PERIOD (156,525) (1,444,692)
Cash and cash equivalents, beginning of period 1,355,613 2,018,122
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,199,088 573,430
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
Income Taxes Paid 77,415 2,500
Interest Paid 46,559 36,910
Non cash items arose from the purchase of Chell.com assets during the 2001
First Fiscal Quarter. They are: $1,723,779 of property & equipment, $107,589 of
goodwill, $54,039 of prepaids, $16,000 other assets and in addition shares were
issued (Note 5).
The accompanying notes are an integral part of these statements
3
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER 30, 1999 (UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K of Networks North Inc. (the "Company") (Commission
No.:0-18066), filed with the Securities and Exchange Commission on December 14,
2000. The results of operations for the three months ended November 30, 2000 are
not necessarily indicative of the results for the full fiscal year ending August
31, 2001.
Note 2. GENERAL
The financial statements of the Company for the three months ended
November 30, 2000 (the "2001 First Fiscal Quarter"), include the operations of
the Company's wholly-owned subsidiaries Chell Merchant Capital Group Inc.
("CMCG"), Chell.com (USA) Ltd., NTN Interactive Network Inc. ("NTNIN"), 3484751
Canada Inc., GalaVu Entertainment Network Inc. ("GalaVu") and NTNIN's
wholly-owned subsidiaries Magic Lantern Communications Ltd. ("Magic") and
Interlynx Multimedia Inc. ("Interlynx").
The financial statements of the Company for the three months ended
November 30, 1999 (the "2000 First Fiscal Quarter"), include the operations of
the Company's wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN"),
3484751 Canada Inc., GalaVu Entertainment Network Inc. ("GalaVu") and NTNIN's
wholly-owned subsidiaries Magic Lantern Communications Ltd. ("Magic") and
Interlynx Multimedia Inc. ("Interlynx").
Magic conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ("Custom Video"), B.C. Learning Connection
Inc. ("BCLC"), and 1113659 Ontario Ltd. ("Viewer Services") and its 75%
ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic").
Effective September 1, 2000 the operations of BCLC and Custom Video were merged
with Magic and the BCLC and Custom Video corporations were wound up. Also,
effective September 1, 2000 Magic's wholly-owned subsidiary TutorBuddy.com Inc.
commenced operations.
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
4
Note 3. BUSINESS SEGMENT DATA FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND
NOVEMBER 30, 1999
2000 (RESTATED - NOTE 11)
- --------------------------------------------------------------------------------------------------------------
ENTERTAINMENT EDUCATION E-COMMERCE ASP INTER-SEGMENT TOTAL
SERVICES ADJUSTMENTS
$ $ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total revenue 3,556,462 1,314,560 184,000 -- (52,157) 5,002,865
Operating profit (loss) (319,547) (192,188) (128,325) (2,799,656) 50,486 (3.389,230)
Net income (loss) (319,547) (202,368) (128,325) (2,799,656) 50,486 (3,399,410)
Total assets 13,658,107 4,092,117 292,104 1,349,042 -- 19,391,370
Current liabilities 2,852,109 986,479 153,153 424,303 -- 4,416,044
Total liabilities 6,319,112 1,922,666 153,153 424,303 -- 8,819,234
- --------------------------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------------------------
ENTERTAINMENT EDUCATION E-COMMERCE ASP INTER-SEGMENT TOTAL
SERVICES ADJUSTMENTS
$ $ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total revenue 3,838,944 1,570,697 190,220 -- (64,265) 5,535,596
Operating profit (loss) 579,706 48,860 (264,865) -- 193,111 556,812
Net income (loss) 281,248 53,113 (264,865) -- 193,111 262,607
Total assets 12,519,966 3,898,105 2,477,305 -- -- 18,895,376
Current liabilities 1,721,897 1,209,639 99,423 -- -- 3,030,959
Total liabilities 5,371,703 1,220,653 952,286 -- -- 7,544,642
- --------------------------------------------------------------------------------------------------------------
Note 4. EARNINGS PER SHARE
Earnings per share were calculated in accordance with Statement of Financial
Accounting Standards No. 128. The following table sets forth the computation of
basic and diluted earnings per share for the three months ended November 30,
2000 and November 30, 1999:
2000 1999
---- ----
Numerator:
Net income (loss) (numerator for basic and diluted
earnings (loss) per share) $ (3,399,410) $ 262,607
============ ==========
Denominator:
For basic - weighted
average number of shares 8,356,045 2,856,641
Effect of dilutive securities:
Convertible preferred shares -- 192,857
Convertible promissory notes -- --
Employee stock options -- 51
------------ ----------
Denominator for diluted earnings (loss) per share -
adjusted weighted average number of shares
and assumed conversions 8,356,045 3,049,549
============ ==========
Basic earnings (loss) per share $ (0.41) $ 0.09
============ ==========
Diluted earnings (loss) per share $ (0.41) $ 0.09
============ ==========
5
Note 5. PURCHASE OF ASSETS AND SHARES FROM CHEL.COM LTD. AND CAMERON CHELL
On September 19, 2000, pursuant to an Agreement of Purchase and Sale dated
as of August 4, 2000, the Company and its subsidiary Chell Merchant Capital
Group acquired, effective August 31, 2000, certain shares and assets from
Cameron Chell and Chell.com Ltd. ("Chell.com"), a Company owned 100% by Cameron
Chell. Pursuant to the Agreement, the Company acquired: (a) 480,000 common
shares of cDemo Inc. (23%); (b) 875,000 common shares of Engyro, Inc. (34%); (c)
150,000 common shares of cMeRun Corp. (1%); and (d) 60,000 common shares of
Chell.com USA (100%). In addition, Chell Merchant Capital Group acquired 962,500
common shares of eSupplies (Alberta) Ltd. (27%) as well as certain assets from
Chell.com.
This acquisition was not reflected in the financial statements for the
year ended August 31, 2000 since shareholder approval to ratify the above
purchase transaction was not voted on and approved until September 8, 2000.
In consideration for this acquisition, the Company issued 5,396,733 shares
of its common stock and Chell Merchant Capital Group issued 1,928,267 special
convertible shares to Cameron Chell, Chell.com and others. Each share issued by
Chell Merchant Capital Group is convertible into one share of common stock of
the Company. Pursuant to a Voting and Exchange Trust Agreement entered into with
a trustee, whereby voting privileges have been granted, such shares issued by
Chell Merchant Capital Group can be voted by the trustee immediately. The amount
of shares issued was determined based upon an appraisal valuation of the
investments and assets acquired which aggregated US $28,652,086.
The shares of the Company that were issued in exchange for the shares of
cMeRun Corp. (421,829) and eSupplies (Alberta) Inc. (1,476,398) have been placed
in escrow and the investments in such companies will not be recorded until such
time as certain contingent conditions are met.
As a result of the above, Cameron Chell and Chell.com now own
approximately 65% of the Company's outstanding common stock, that is the Company
has in effect been acquired in a reverse acquisition.
This acquisition of the Company by Cameron Chell and Chell.com and the
acquisition by the Company of the equity interests, as described in the first
paragraph, are reflected at historical cost in the Company's separate financial
statements.
The Company will reflect the minority equity investments using the equity
method of accounting.
6
Note 6. PURCHASE OF RICHARD WOLFF ENTERPRISES, INC. ASSETS
Pursuant to an asset purchase agreement dated September 1, 2000, Magic
acquired the assets and business operations of Richard Wolff Enterprises, Inc.
("RWE"), a company based in Illinois, for a purchase price of $289,590
calculated on a discounted basis. As a result, Magic has expanded its library of
educational titles and now has access to the international distribution
infrastructure formerly held by RWE. The acquisition was accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to property and equipment. The purchase price was satisfied by
$154,825 in cash and the issuance of four promissory notes with maturity values
aggregating $147,350. These promissory notes mature over a period of two years.
The fair values of these promissory notes approximate their carrying value.
The asset purchase agreement also contains a purchase price adjustment
clause whereby the price may be adjusted upwards to a maximum of an additional
US$100,000 if certain revenue levels are achieved. Specifically, if gross
revenues for the acquired business exceed US$500,000 for the 12 month period
ending August 31, 2001, Magic will pay to RWE US$50,000, and if gross revenues
exceed US$600,000 for the second 12 month period ending August 31, 2002, Magic
will pay to RWE an additional US$50,000.
The operating results related to the acquisition are included in the
Company's consolidated statements of operations and retained earnings from the
date of acquisition. Pro-forma information has not been provided for the prior
year because it is not material.
Note 7. DEPOSIT ON PURCHASE OF APPLICATIONSTATION.COM, INC. SHARES
On November 22, 2000, the Company entered into an agreement with Chell.com
Ltd. to participate in the purchase of a 51% interest in the shares of
ApplicationStation.com, Inc. The Company will provide a deposit of US$1,000,000
to Chell.com Ltd. for its 25% share of the 51% interest in the shares of
ApplicationStation.com, Inc. As at November 30, 2000, the deposit that has been
provided is US$400,000. The remaining US$600,000 will be provided as a deposit,
pursuant to the Company receiving further financing from VC Advantage Limited
Partnership. If the remaining US$600,000 is not paid three days prior to the
scheduled closing date, at the option of Chell.com Ltd., the deposit will be
returned or the deposit will be used to purchase the pro rata portion of the 51%
interest in the shares of ApplicationStation.com, Inc. The Company's investment
will be reflected using the equity method of accounting.
Note 8. CONVERTIBLE DEBENTURE - RELATED PARTY TRANSACTION
On October 3, 2000, the Company closed the sale of US$3,000,000 of a
Convertible 10% Debenture to the VC Advantage Limited Partnership ("Holder"). As
at November 30, 2000 US$1,400,000 has been advanced. This unsecured convertible
debenture is due three years from issue. EITF-00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments" requires that a discount be recorded
for any beneficial conversion features associated with convertible debt. The
Company has recorded a discount of $1,959,144 in October 2000 and has amortized
$107,269 to interest expense for the three
7
months ending November 30, 2000. The Convertible Debenture bears interest at 10%
per annum, payable upon conversion, redemption or maturity. The unpaid principal
of the debenture bears interest from the date that it is actually advanced until
paid. Interest is payable in cash or stock at the Company's option. The
Convertible Debenture is convertible into common stock of the Company, at
US$3.00 per share, in amounts specified by the Holder. The maximum number of
common shares the Holder will receive is one million. On the close date, the
Company also issued 50,000 warrants to purchase 50,000 common shares at US$3.00
per share to the Holder. The warrants have a term of four years. The President
of the Company is the Chairman, a Director and a shareholder of the General
Partner of the Holder.
Note 9. CONTINGENT LIABILITIES
On June 18, 1992, Interactive Network Inc., a third party, instituted
proceedings against NTN Communications Inc., one of the Company's major
suppliers, NTN Interactive Network Inc. and the Company in the Federal Court of
Canada and in the California Supreme Court claiming patent infringement. It is
the opinion of the Company's management that this patent infringement claim will
be successfully defended.
Canada Customs and Revenue Agency is currently in discussions with the
Company regarding a potential liability with respect to withholding tax on
certain amounts paid to NTN Communications, Inc. No assessment has been made to
date by Canada Customs and Revenue Agency. Management believes that it has valid
defenses with respect to these matters and, accordingly, no amount has been
recorded in these consolidated financial statements. In the event that such
matters are settled in favour of Canada Customs and Revenue Agency, the amounts
could be material and would be recorded in the period in which they become
determinable.
Note 10. CHANGES IN SHARE CAPITAL
During the three months ended November 30, 2000, the following transactions
resulted in the issuance of 5,433,022 common shares of the Company and Chell
Merchant Capital Group Inc. The acquisition of certain assets of Chell.com and
Cameron Chell was satisfied by the issuance of 5,426,772 common shares of the
Company. Also during the three months ended November 30, 2000, options totaling
6,250 were exercised resulting in the issuance of additional 6,250 common shares
of the Company.
Note 11. RECENT PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB No. 25 for certain issues, including the definition of an
employee, the treatment of the acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 did not have a material impact on the
Company's financial position or results of operations.
8
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." (SAB No. 101). SAB No. 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The adoption of the provisions of SAB No. 101 in the first quarter of
fiscal 2001 did not have a material impact on the Company's financial position
or its results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."(SFAS No. 133). SFAS No. 133, as amended by
SFAS No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company adopted this standard in the first
quarter of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999),
which delays the adoption of SFAS No. 133 until that time. The adoption of SFAS
No. 133 did not have a material impact on the Company's financial position or
its results of operations.
Note 11. Restated Financial Statements
[a] DISCOUNT ON CONVERTIBLE DEBT
On October 3, 2000, the Company closed the sale of a US$3,000,000
Convertible 10% Debenture of which US$1,400,000 has been advanced (NOTE 8).
EITF-00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments"
requires that a discount be recorded for any beneficial conversion features
associated with convertible debt. The Company did not record the discount on the
US$1,400,000 debt and therefore had to make an adjustment and restate its Fiscal
2001 financial statements. The Company has now recorded a discount of $1,959,144
in October 2000 and has amortized $107,269 to interest expense for the three
months ending November 30, 2000.
[b] Change in preferred shares
On April 4th, 2000, the ratio at which preferred shares could be converted
to common shares was changed from 4.67 to 1 to 3 to 1. The resulting change from
192,857 to 300,000 common shares upon conversion resulted in a one-time
compensation charge of $337,779. In order to reflect this change, the fiscal
2000 financial statements have been restated.
9
The following table presents the impacts of the restatements.
- --------------------------------------------------------------------------------------------------------------
As Previously As Restated As Previously As Restated
Reported Reported
- --------------------------------------------------------------------------------------------------------------
3 Months ended For the year ended
November 30, 2000 August 31, 2000
Balance sheet:
Long-term debt 6,194,320 4,344,017 -- --
Share Capital
Common shares 556,596 564,483 183,235 191,122
Capital in excess of par value 12,380,399 14,669,435 10,124,777 10,454,669
Deficit (4,226,079) (4,672,699) (935,510) (1,273,289)
Statement of operations:
Selling, general and administration 5,195,065 5,196,637 -- --
Interest and Bank Charges 92,455 199,724 -- --
Net loss (3,290,569) (3,399,410) -- --
EPS
Basic loss per share $ (0.39) $ (0.41) -- --
Diluted loss per share $ (0.39) $ (0.41) -- --
- --------------------------------------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The financial statements of the Company and the information contained in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations are expressed in Canadian dollars.
GENERAL
Chell Group Corporation is engaged in the business of defining, building
and re-engineering businesses, interactive entertainment services and
electronic/online products and services using new economy technologies to
maximize market value. The Company's main business strategy is to operate or
invest in companies that represent the latest in technological innovations. In
that regard, the Company has two main categories of companies: operating
subsidiaries and investment companies. The Company applies its expertise,
industry contacts, and market foresight to these companies in order to create
shareholder value. The core businesses of the Company are the merchant capital
services provided through Chell Merchant Capital Group Inc. (referred to as the
"Merchant Capital Group") and the interactive entertainment services provided by
NTN IN. In addition, GalaVu is a technology based entertainment provider of
interactive in-room entertainment systems to hotels across
10
Canada; the Magic Lantern Group is involved in the marketing and distribution of
educational video and media resources and the conversion of analog video to
digital video formats; and Interlynx designs and develops web-based training
software.
HIGHLIGHTS OF THE THREE MONTHS ENDED NOVEMBER 30, 2000
During the 2001 First Fiscal Quarter, the Company completed the purchase
of certain assets and shares from Chell.com and Cameron Chell. In addition Magic
completed the purchase of assets from Richard Wolff Enterprises, Inc. ("RWE")
effective September 1, 2000. On October 3, 2000, the Company closed the sale of
US$3,000,000 of a Convertible 10% Debenture to the VC Advantage Limited
Partnership. To date US$1,400,000 has been advanced.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000
The Company's total revenues for the 2001 First Fiscal Quarter were
$5,002,865, compared to $5,535,596 for the 2000 First Fiscal Quarter, a decrease
of $532,731 or 9.6%.
Revenues from network services for the 2001 First Fiscal Quarter were
$1,626,071, compared to $1,598,024 for the 2000 First Fiscal Quarter, an
increase of $28,047 or 1.8%. These revenues are relatively constant between
years due to the number of Hospitality sites remaining at approximately the same
level between the 2001 and 2000 First Fiscal Quarters.
Revenues from Pay-tv for the 2001 First Fiscal Quarter were $1,785,106
compared to $1,836,700 for the 2000 First Fiscal Quarter, a decrease of $51,594
or 2.8%. This decrease can be attributed to fewer popular movies available in
the 2001 First Fiscal Quarter than in the 2000 First Fiscal Quarter.
Revenues from event programming for the 2001 First Fiscal Quarter were
$61,207, compared to $100,700 for the 2000 First Fiscal Quarter, a decrease of
$39,493 or 39.2%. The decrease was due to a decreased number of corporate events
hosted in the 2001 First Fiscal Quarter when compared to the number of events
hosted in 2000 First Fiscal Quarter.
Revenues from ad sponsorship were $58,845 for the 2001 First Fiscal
Quarter, compared to $195,810 for the 2000 First Fiscal Quarter, a decrease of
136,965 or 69.9%. The decrease was the result of a decrease in the number and
size of corporate sponsors over the level experienced in the previous period.
Revenues from video and software sales for the 2001 First Fiscal Quarter
were $1,055,879, compared to $1,438,879 for the 2000 First Fiscal Quarter, a
decrease of $383,000 or 26.6%. In the First Fiscal Quarter of 2000, a one time
large sale of $294,600 was recorded that resulted in abnormally high revenue
when year compared to 2001 First Fiscal Quarter.
Revenues from video dubbing were $159,975 for the 2001 First Fiscal
Quarter compared to $219,491 for the 2000 First Fiscal Quarter, a decrease of
$59,516 or 27.1%. This decrease can be attributed to management's decision to
reduce efforts on attracting 3rd party
11
revenue and to concentrate on internal production.
Revenues from digital encoding were $228,609 for the 2001 First Fiscal
Quarter, compared to $102,547 for the 2000 First Fiscal Quarter, an increase of
$126,062 or 122.9%. The increase can be attributed to increased demand for
digital services and the greater sales effort in this area.
Total cost of sales for the 2001 First Fiscal Quarter were $1,754,618,
compared to $1,807,190 for the 2000 First Fiscal Quarter, a decrease of $52,572
or 2.9%. The decrease is commensurate with the decreased sales levels
experienced offset by increased cable costs in the Pay-tv segment. As a
percentage of revenues, cost of sales increased in the 2001 First Fiscal Quarter
to 35.1% from 32.6% in the 2000 First Fiscal Quarter.
Total selling, general and administrative expenses for the 2001 First
Fiscal Quarter were $5,196,637, compared to $2,587,398 for the 2000 First Fiscal
Quarter, an increase of $2,609,239 or 100.8%. The increase was caused mainly by
the addition of the ASP Services segment, which accounted for an increase of
$2,691,020. As a percentage of the Company's total revenues, such expenses
increased to 103.9% for the 2001 First Fiscal Quarter from 46.7% for the 2000
First Fiscal Quarter.
During the 2001 First Fiscal Quarter, Chell Merchant Capital Group Inc.
vacated certain leased space and as a result the Company wrote off the net book
value of the related leasehold improvements in the amount of $355,560. There
were no similar transactions in the 2000 First Fiscal Quarter.
Interest and bank charges for the 2001 First Fiscal Quarter were $199,724,
compared to $80,179 for the 2000 First Fiscal Quarter, an increase of $119,545
or 149.1%. This increase results from an increase in debt related to the
purchase of the RWE assets, the amortization of the discount on the convertible
debenture and the sale of the convertible debenture. As a percentage of the
Company's total revenues, interest and bank charges increased to 4.0% for the
2001 First Fiscal Quarter from 1.4% for the 2000 First Fiscal Quarter.
Total depreciation and amortization expense for the 2001 First Fiscal
Quarter was $850,677, compared to $499,477 for the 2000 First Fiscal Quarter, an
increase of $351,200 or 70.3%. This increase is primarily the result of
depreciation on the fixed assets acquired from RWE and Chell.com Ltd.
There was no provision of income taxes recorded in the 2001 First Fiscal
Quarter compared with a provision for income taxes of $298,458 for the 2000
First Fiscal Quarter. As the tax provision is based upon the individual
company's taxable income, no provision was incurred as the companies are not in
a taxable position.
The minority interest share in profit for the 2001 First Fiscal Quarter
was $10,180. This is compared to the minority interest share in losses for the
2000 First Fiscal Quarter of $4,253, an overall change of $14,433. This change
results from profitable operations in Sonoptic Technologies Inc., in which there
is a 25% minority interest.
12
As a result of all of the above, the net loss for the 2001 First Fiscal
Quarter was $3,399,410, compared to net income of $262,607 for the 2000 First
Fiscal Quarter, a decrease of $3,662,017. The 2001 First Fiscal Quarter loss
resulted primarily from the addition of Chell Merchant Capital Group Inc. and
Chell.com (USA) Inc. to the Company and their activities including the provision
of services to developing ASP companies in which the Company has invested.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2000, the Company had working capital of $1,243,046, a
decrease of $1,178,624 from working capital of $2,421,670 at August 31, 2000.
For the 2001 First Fiscal Quarter, the Company had a net decrease of cash
of $156,525 compared to a net decrease of $1,444,692 in the 2000 First Fiscal
Quarter.
Cash used in operating activities for the 2001 First Fiscal Quarter was
$1,106,516, compared to $1,079,902 used in operating activities in the 2000
First Fiscal Quarter. In 2001, the major items that contributed to cash being
used in operating activities were as follows: the net loss with non-cash
expenses added back of $1,678,774 and the increase in income taxes receivable of
$77,415. The major items that contributed to cash being provided by operating
activities were as follows: the decrease in accounts receivable of $156,408,
decreases in prepaid expenses of $126,095 and increases in accounts payable and
accrued liabilities of $349,797. In 2000, the major items that contributed to
cash being provided by operating activities were as follows: net income with
non-cash expenses added back of $805,353, decreases in income taxes receivable
and inventory of $157,464 and $13,441 respectively, and increases in accounts
payable and accrued liabilities and income taxes payable of $685,912 and
$133,542 respectively. The major uses of operating funds included increases in
accounts receivable and prepaid expenses of $2,626,013 and $248,728
respectively.
Cash used in investing activities in the 2001 First Fiscal Quarter was
$1,353,356 compared to the $374,757 used in investing activities in the 2000
First Fiscal Quarter, an increase of $978,599. This increase was the result of
additions to property and equipment and the deposit of $614,400 on the purchase
of shares in ApplicationStation.com, Inc.
Cash provided by financing activities in the 2001 First Fiscal Quarter was
$2,303,347, compared to the $9,967 provided in the 2000 First Fiscal Quarter.
The increase is primarily due to the sale of the convertible debenture.
Management believes that the Company's working capital position and
current borrowings provide the necessary liquidity for its planned operating
activities in the current year. If cash flow is less than anticipated, however,
or if the Company incurs unexpected expenses, the company may need additional
funding in order to maintain its current level of operations of business
activities. It is likely that the Company will need to raise additional capital
in future periods in order to realize its strategy surrounding its investment
companies.
13
INFLATION
The rate of inflation has had little impact on the Company's operations or
financial position during the three months ended November 30, 2000 and 1999 and
inflation is not expected to have a significant impact on the Company's
operations or financial position during the 2001 Fiscal Year.
The Company pays a number of its suppliers, including its licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
its gross profit as well as its net income. If the value of the Canadian dollar
falls against the US dollar, the cost of sales of the Company will increase
thereby reducing its gross profit and net income. Conversely, if the value of
the Canadian dollar rises against the US dollar, its gross profit and net income
will increase.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
Pursuant to the Board of Directors authorization and a vote of a
majority of the issued and outstanding voting securities of the Company at the
Annual Meeting of Shareholders held on September 8, 2000, the following changes
in the Company's securities were executed by Certificate of Amendment of the
Company's Certificate of Incorporation:
The Company is authorized to issue a special class of voting stock
(the "Special Voting Stock"), to carry out obligations of the Company with
respect to the purchase by the Company of certain assets and shares owned by
Cameron Chell and Chell.com Ltd. pursuant to an Agreement dated August 4, 2000.
Each outstanding share of Special Voting Stock shall be entitled at any relevant
date to the number of votes on all matters presented to the shareholders equal
to (i) the number of Exchangeable Shares of Networks North Acquisition Corp, a
wholly owned subsidiary of the Company that was incorporated to facilitate the
purchase of the assets and shares owned by Cameron Chell and Chell.com Ltd.,
then issued and outstanding and held by holders (other than the Company or any
of its subsidiaries) multiplied by (ii) the number of votes to which a holder of
one share of the Common Stock of the Company is entitled with respect to such
matter. No dividend or distribution of assets shall be paid to the holders of
Special Voting Stock. The Special Voting Stock is not convertible into any other
class or series of the capital stock of the Company or into cash, property or
other rights, and may not be redeemed. Any shares of Special Voting Stock
purchased or otherwise acquired by the Company shall be deemed retired and shall
be cancelled and may not thereafter be reissued or otherwise disposed of by the
Company. At such time as the Special Voting Stock has no votes attached to it
because there are no "Exchangeable Shares" outstanding, the Special Voting Stock
shall be cancelled. In respect of all matters concerning the voting of shares,
the Company's Common Stock and the Special
14
Voting Stock shall vote as a single class and such voting rights shall be
identical in all respects.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of the Shareholders was held on September 8, 2000 at which the
following items were voted upon:
Item For Against Abstain Non-Vote
1) Purchase by the Company of certain assets and shares 1,140,843 4,267 2,364 1,753,929
owned by Chell.com Ltd. and Cameron Chell
2) Amendment to Article 1 of the Company's Certificate 1,591,284 7,210 2,400 1,300,509
of Incorporation, which provided for a change of the
name of the Company from Networks North, Inc. to Chell
Corporation
3) Issuance of a new class of voting stock which would be 1,137,651 6,423 3,400 1,753,929
required to carry out obligations of the Company upon
completion of the transaction described in Item 1)
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
EXHIBIT
NUMBER TITLE
- ------ -----
3.1 Certificate of Incorporation, as amended to date.
3.2 By-Laws, as amended to date.
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc.+
10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN
Canada Inc. and NetStar Enterprises Inc. (formerly, Labatt
Communications Inc.). +
Option, dated as of October 4, 1994, registered in the name of
NetStar Enterprises Inc. (formerly, Labatt Communications Inc).+
10.4 Designation Agreement dated as of October 4, 1994, among Networks
North Inc. (formerly know as NTN Canada, Inc.), NTN Interactive
Network Inc. and NetStar Enterprises Inc. (formerly Labatt
Communications Inc.). +
10.15 Asset Purchase Agreement, dated September 10, 1999, by and between
1373224
15
Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to
acquire the property and assets of GalaVu Entertainment Inc., from
the person appointed by the court of competent jurisdiction as the
receiver or receiver and manager of the property, assets and
undertaking of GalaVu. +
10.16 Promissory Note, dated September 10, 1999, by and between 1373224
Ontario Limited, as Debtor, and the Holder, as Creditor. +
10.17 General Security Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, to acquire the property and assets of
GalaVu Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of
the property, assets and undertaking of GalaVu. +
10.18 Securities Pledge Agreement, dated September 10, 1999, by and
between 1373224 Ontario Limited to acquire the property and assets
of GalaVu Entertainment Inc., from the person appointed by the court
of competent jurisdiction as the receiver or receiver and manager of
the property, assets and undertaking of GalaVu. +
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224
Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of
the property, assets and undertaking of GalaVu. +
10.24 Covenant of Networks North Inc., dated September 13, 1999, to allot
and issue and pay to the Bank in writing 100,000 common shares of
NETN.
11. Computation of Earnings Per Share (see note 4).
22 List of Subsidiaries
+ Incorporated by reference. See Exhibit Index.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (Date of Report: October 4,
2000) with the Commission on October 4, 2000, reporting that on September 19,
2000 pursuant to an Agreement of Purchase and Sale dated as of August 4, 2000
("the Agreement"), the Company and its wholly owned subsidiary Chell Merchant
Capital Group, Inc f/k/a Networks North Acquisition Corp ("CMCG") acquired,
effective August 31, 2000, certain assets and shares from Cameron Chell and
Chell.com Ltd.
The Company filed a Current Report on Form 8-K (Date of Report: October
19, 2000) with the Commission on October 19, 2000, reporting the resignation of
Ernst & Young LLP as the Company's auditors.
The Company filed a Current Report on Form 8-K (Date of Report: November
9, 2000) with the Commission on November 9, 2000, reporting the engagement of
Lazar Levine & Felix LLP as the Company's auditors for the fiscal year ended
August 31, 2000.
The Company filed an Amended Current Report on Form 8-KA (Date of Report:
December 4, 2000) with the Commission on December 4, 2000, reporting
Pro-forma Financial Statements in connection with the Agreement of
Purchase and Sale dated as of August 4, 2000, between the Company, Chell
Merchant Capital Group, Cameron Chell and Chell.com Ltd.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
Dated: March 5, 2004 By: /s/ Stephen McDermott
------------------------------------
Chairman and Chief Executive Officer
(Duly Authorized Officer)
17
CHELL GROUP CORPORATION INC.
(FORMERLY KNOWN AS NETWORKS NORTH INC.)
FORM 10-Q/A NO. 1
NOVEMBER 30, 2000
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
- ------ ---------------------- --------
3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1
3.2 By-Laws, as amended to date +1, Exh. 3.2
10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and
NTN Interactive Network Inc. +2, Exh. 10.9
10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings
Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN
Interactive Network Inc., minus Schedules thereto +3, Exh. 10.1
10.4 Designation Agreement dated as of October 4, 1994, among Networks North Inc.
(formerly known as NTN Canada, Inc.), NTN Interactive Network Inc. and NetStar
Enterprises Inc. (formerly Labatt Communications Inc.) +4, Exh. C
10.15 Asset Purchase Agreement, dated September 10, 1999, by and between 1373224
Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to acquire the
property and assets of GalaVu Entertainment Inc., from the person appointed by
the court of competent jurisdiction as the receiver or receiver and manager of
the property, assets and undertaking of GalaVu. +5, Exh. 10.1
10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario
Limited, as Debtor, and the Holder, as Creditor. +5, Exh. 10.2
10.17 General Security Agreement, dated September 10, 1999, by and between 1373224
Ontario Limited, to acquire the property and assets of GalaVu Entertainment
Inc., from the person appointed by the court of competent jurisdiction as the
receiver or receiver and manager of the property, assets and undertaking of
GalaVu. +5, Exh. 10.3
10.18 Securities Pledge Agreement, dated September 10, 1999, by and between 1373224
Ontario Limited to acquire the property and assets of GalaVu Entertainment
Inc., from the person appointed by the court of competent jurisdiction as the
receiver or receiver and manager of the property, assets and undertaking of
GalaVu +5, Exh. 10.4
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario Limited
to acquire the property and assets of GalaVu Entertainment Inc., from the
person appointed by the court of competent jurisdiction as the receiver or
receiver and manager of the property, assets and undertaking of GalaVu. +5, Exh. 10.9
18
10.24 Covenant of Networks North Inc. for valuable consideration to allot and issue
and pay to the Bank in writing 100,000 common shares of NETN. +5, Exh. 10.10
11 Computation of earnings per share (see Note 4)
22 List of Subsidiaries +1, Exh. 22
+1 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of the
Company, for its fiscal year ended August 31, 1996 (File No. 0-18066),
filed on December 16, 1996.
+2 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990 (File
No. 2-91761-C), filed on April 1, 1991.
+3 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on
October 17, 1996.
+4 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on
October 18, 1994.
+5 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's 8-K (Date of Report: September 13,
1999) (File No. 0-18066), filed on September 29, 1999.
+ Filed electronically pursuant to Item 401 of Regulation S-T.
19