SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 19, 2000
CHELL GROUP CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 005-524525 112805051
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
14 METEOR DRIVE, ONTARIO, CANADA, M9W 1A4
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code................ 416 675-6666
NETWORKS NORTH, INC.
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(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets
On September 19, 2000 pursuant to an Agreement of Purchase and Sale dated
as of August 4, 2000 ("the Agreement"), Chell Group Corporation f/k/a Networks
North, Inc (the "Registrant") and its wholly owned subsidiary Chell Merchant
Capital Group, Inc f/k/a Networks North Acquisition Corp ("CMCG") acquired
certain assets and shares from Cameron Chell and Chell.com Ltd (collectively the
"Vendors" and when referring to each in their own capacity the "Vendor"). The
Agreement was approved by a majority of the Registrant's shareholders at a
Special Meeting of Shareholders held on September 8, 2000. A copy of the
Agreement is annexed hereto as Exhibit "10.1" and is incorporated herein by
reference thereto.
Pursuant to the Agreement, the Registrant acquired (a) 480,000 shares of
cDemo, Inc. ("cDemo") which equals approximately 14.3% of its outstanding stock
for $2,510,000; (b) 875,000 shares of Engyro f/k/a R Home Funding CO. Ltd.
("Engyro") which equals 34.1% of its outstanding stock for $16,950,000; (c)
962,500 shares of eSupplies (Alberta) Ltd. ("eSupplies") which equals 27.1% of
its outstanding stock for $5,775,000; and (d) 150,000 shares of C Me Run Corp.
("C Me Run") which equals approximately 1.0% of its outstanding stock on a fully
diluted basis for $1,650,000. Financial Statements for each of Engyro,
eSupplies, C Me Run and cDemo are attached hereto as Exhibit "10.2" through
Exhibit "10.5." The Registrant also acquired assets of Chell.com, valued at
$1,767,503 and assumed a liability in the amount of $1,767,499 to CALP II
Limited Partnership, a creditor of Chell.com. The Registrant has agreed to issue
451,868
exchangeable shares of CMCG in full settlement of such indebtedness. The
Chell.com assets include:
1. Leased property consisting of Chell.com's executive offices at Unit 11
(east half), Suite 302, 630 8th Avenue SW, Calgary, and Unit 13, Suite
500, 630 8th Avenue SW, Calgary;
2. Office equipment, servers, computers, office supplies (as well as any
leases pertaining thereto) and leasehold improvements;
3. All contracts of insurance covering any of the Chell.com assets to the
extent that such are assignable;
4. All contracts of employment or contracts for services with independent
contractors for the performance of personal services to Chell.com;
5. Service agreements between Chell.com and C Me Run dated November 15, 1999,
Chell.com and eSupplies dated February 8, 2000, Chell.com and R Home
Funding Co. Ltd. (the former name of Engyro) dated January 17, 2000 and
Chell.com and Buyersangel.com (the former name of cDemo) dated March 1,
2000.
The shares of the Registrant that were issued in exchange for shares of C
Me Run are currently held in escrow until such time as (i) C Me Run is current
with its SEC filings pursuant to the Securities Exchange Act of 1934, as
amended; (ii) The average closing price of C Me Run's stock is $11 for five
consecutive trading days and (iii) C Me Run is listed in good standing on either
the NASD Bulletin Board or the NASDAQ Small Cap or National Stock Market. In
addition the shares of the Registrant that were issued in exchange for shares of
eSupplies will be held in escrow until at such time the Board of Directors of
the Registrant has reviewed a new
business plan and made a determination that the new course taken by eSupplies
fits with the Registrant's business model and provides similar value to the
Registrant.
In a valuation provided by Stanford Keene, it was concluded in its
fairness report (the "Valuation Report") a copy of which is attached hereto as
Exhibit "10.6", that the issuance of 7,325,000 common shares of the Registrant
to the Vendors in exchange for the assets being transferred was fair. The
Registrant paid a total of $28,652,086 for the assets, which was paid by
issuance of the following shares:
(a) Chell.com Ltd. 4,974,904 shares of the Registrant
(b) Chell.com Ltd. 1 shares of CMCG
(c) Cameron Chell 421,829 shares of the Registrant
(d) Cameron Chell 1,476,398 shares of CMCG
----------
6,873,132
(e) CALP II Limited
Partnership 451,868 shares of CMCG
----------
7,325,000 shares of the Registrant or
Shares exchangeable into Shares
of the Registrant.
Cameron Chell is a Director, Chief Executive Officer and President of the
Registrant and is also a director of Engyro, cDemo and C Me Run. He is also the
Chief Executive Officer of Chell.com. Frank Killoran is Chairman of the Board of
Directors of the Registrant and is also a director and shareholder of cDemo.
Gordon Herman one of the Registrant's directors was a managing director of Chell
Merchant Capital Group from September 2000 to January 19, 2001. David Bolink is
one of the Registrant's directors and was a managing director of Chell Merchant
Capital Group from September 2000 to January 19, 2001. Also, Mr. Bolink owns
shares and options in C Me Run and is also a consultant to eSupplies.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of the businesses in which the Registrant
acquired assets.
(1) Balance sheet and statements of income and cash flows of Engyro
as of August 31, 2000.
(2) Balance sheet and statements of income and cash flows of cDemo
for the period ended August 31, 2000.
(3) Balance sheet and statements of income and cash flows of
eSupplies for the period ended August 31, 2000.
(b) Pro forma information of Engyro, eSupplies, cDemo and the
Registrant for the period ended August 31, 2000.
(c) Set forth below is a list of the Exhibits applicable to this Current
Report on Form 8-K/A, numbered in accordance with Item 601 of Regulation S-K.
10.1 Agreement of Purchase and Sale dated August 4, 2000 by and among Networks
North Inc., Networks North Acquisition Corp., Chell.com Ltd. and Cameron Chell.+
10.2 Valuation of Chell.com Ltd. as of May 31, 2000 by Stanford Keene+
10.3 Financial Statements for C Me Run for period ended March 31, 2000. These
financial statements were filed with the SEC on a Form 10-QSB. C Me Run has
announced that it intends to file an amended Form 10-QSB containing a
restatement of such financial statements.+
23.1 Consent of Lazar Levine & Felix LLP
23.2 Consent of Simione Scillia Larrow & Dowling LLC
+ Incorporated by reference. See Exhibit Index
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Chell Group Corporation f/k/a
Networks North Inc.
a New York Corporation
Date: February 27, 2001 By: /s/ Don Pagnutti
----------------------------------
Don Pagnutti, Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
10.1 Agreement of Purchase and Sale dated August 4,
2000 by and among Network North Inc., Networks
North Acquisition Corp., Chell.com Ltd. and
Cameron Chell. Exh. A.
10.2 Valuation of Chell.com Ltd. as of May 31, 2000 by
Stanford Keene. Exh. B
10.3 Financial Statements for C Me Run for period ended
March 31, 2000. Exh. F
All of the above Exhibits are incorporated by reference to the exhibit number
listed above in the Definitive Proxy Statement on Form 14A of the Registrant
(File No. 000-18066), filed with the Securities and Exchange Commission on
August 8, 2000.
23.1 Consent of Lazar Levine & Felix LLP
23.2 Consent of Simione Scillia Larrow & Dowling LLC
Item 7.(a)(1) Balance Sheet and statement of income and cash flows of Engyro as
of August 31, 2000
ENGYRO, INC.
(A Company in the Development Stage)
AUDITED FINANCIAL STATEMENTS
Period from Inception (May 19, 2000)
through August 31, 2000
ENGYRO, INC.
(A Company in the Development Stage)
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Deficiency in Assets 4
Statement of Cash Flows 5
Notes to Financial Statements 6
[LETTERHEAD OF SIMIONE SCILLIA LARROW & DOWLING LLC]
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Engyro, Inc.
Shelton, Connecticut
We have audited the accompanying balance sheet of Engyro, Inc. as of August 31,
2000 and the related statements of operations and retained earnings, and cash
flows for the period from May 19, 2000 (date of inception) through August 31,
2000. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Engyro, Inc. as of August 31,
2000, and the results of its operations and cash flows for the period from May
19, 2000 (date of inception) through August 31, 2000 in conformity with
generally accepted accounting principles.
/s/ Simione Scillia Larrow & Dowling LLC
New Haven, Connecticut
December 27, 2000
ENGYRO, INC.
(A Company in the Development Stage)
BALANCE SHEET
August 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,293,146
Other current assets 258,942
----------
Total current assets 1,552,088
----------
LONG-TERM ASSETS
Certificate of deposit 255,000
Property and equipment, net 532,423
----------
Total long-term assets 787,423
----------
$2,339,511
==========
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 352,462
-----------
Total current liabilities 352,462
-----------
CONVERTIBLE PREFERRED STOCK, SERIES A 3,419,944
-----------
DEFICIENCY IN ASSETS
Common stock, $.001 par value per share; authorized
20,000,000 shares; issued and outstanding 1,585,000 shares 1,585
Paid - in capital 100
Accumulated accretion of value of preferred stock (22,917)
Deficit accumulated during development stage (1,411,663)
-----------
(1,432,895)
-----------
$ 2,339,511
===========
See notes to financial statements.
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN OPERATIONS
Period from May 19, 2000 (date of inception)
through August 31, 2000
REVENUES $ --
COST OF SALES --
-----------
GROSS MARGIN ON SALES --
-----------
OPERATING EXPENSES
Product development 587,748
Marketing and selling 70,996
General and administrative 747,242
-----------
Total operating expenses 1,405,986
-----------
LOSS FROM OPERATIONS (1,405,986)
OTHER INCOME (EXPENSE)
Interest income 4,220
Interest expense (9,897)
-----------
Net other income (expense) (5,677)
-----------
NET LOSS $(1,411,663)
===========
See notes to financial statements.
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN DEFICIENCY IN ASSETS
Accumulated Deficit
Common Stock Accretion Accumulated
------------------------ of Value of During
Amount Paid-In Preferred Development
Shares at Par Capital Stock Stage Total
--------- --------- --------- -------- ----------- -----------
Balance, January 1, 2000 -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock, to
individual investors 1,585,000 1,585 100 -- -- 1,685
Accretion of value of preferred stock -- -- -- (22,917) -- (22,917)
Net loss -- -- -- -- (1,411,663) (1,411,663)
--------- --------- --------- -------- ----------- -----------
Balance, August 31, 2000 1,585,000 $ 1,585 $ 100 $(22,917) $(1,411,663) $(1,432,895)
========= ========= ========= ======== =========== ===========
See notes to financial statements.
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CASH FLOWS
Period from May 19, 2000 (date of inception)
through August 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,411,663)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 9,030
Changes in assets and liabilities:
Other current assets (258,942)
Accounts payable and accrued expenses 352,462
-----------
Net cash used in operating activities (1,309,113)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit (255,000)
Purchases of property and equipment (534,219)
-----------
Net cash used in investing activities (789,219)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock and receipt of paid-in capital 1,685
Proceeds from issuance of preferred stock, Series A 3,389,793
-----------
Net cash provided by financing activities 3,391,478
-----------
NET INCREASE IN CASH 1,293,146
CASH AND CASH EQUIVALENTS, Beginning --
-----------
CASH AND CASH EQUIVALENTS, Ending $ 1,293,146
===========
See notes to financial statements.
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
On May 19, 2000, Engyro, Inc. (Engyro or the Company) was incorporated. Engyro
provides payment and transaction settlement solutions focused on the Application
Service Provider (ASP) industry. Engyro provides data consolidation,
reconciliation, transaction settlement, and payment processing and revenue
assurance services for the new economy sector, currently serving the Application
Service Provider industry, the software industry and evolving m-commerce
applications. Engyro's management believes that the Company has developed
leading edge technologies based on an open architecture Java software and ultra
sophisticated Online Analytical Processing (OLAP) software. Engyro partners with
metering, billing and ASP infrastructure providers to complement its services.
On July 31, 2000, R Home Funding Co. Ltd., was merged into Engyro, Inc., with
Engyro as the surviving entity. R Home Funding Co. Ltd., was incorporated on
November 4, 1999 as a Nevada Corporation. On November 26, 1999, R Home Funding
entered into a consulting agreement with Chell.com whereby R Home Funding would
receive certain corporate strategic services and advice. As a result of the
merger, Engyro assumed this consulting agreement, which expires during January
2001.
Significant Accounting Policies
Use of Estimates -- 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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company's actual results in subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying consolidated financial
statements.
Cash and Cash Equivalents -- Cash is invested in overnight sweep accounts on a
nightly basis. Deposits in banks may exceed the amount of insurance provided on
such deposits. The Company performs reviews of the credit worthiness of its
depository banks. The Company has not experiences any losses on its deposits of
cash.
Certificate of Deposit -- The Company was required to deliver a security deposit
to the We Progress Drive, L.L.C. (Landlord) representing one year's lease
payment. In lieu of cash, the Company issued a Letter of Credit to the Landlord.
The Letter of Credit is secured by a $255,000 Certificate of Deposit with First
Union National Bank. The amount of this deposit decreases monthly during the
second year of the lease until the obligation is eliminated at the end of the
second year.
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
Other Current Assets -- Other current assets consist primarily of advances to
shareholders for contractual consulting services to be provided through January
15, 2001. Consulting costs are expensed as incurred. The consulting expense
through August 31, 2000 was approximately $462,000.
Property and Equipment -- Property and equipment are recorded at cost. The
Company provides for depreciation using the straight-line method over the
estimated useful lives for equipment and the shorter of the useful lives or the
related lease term for leasehold improvements.
Stock-Based Compensation -- The Company recognizes expense for stock options
granted to its employees and board members in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). APB 25 requires recognition of compensation expense if the exercise price
is greater than the fair market value at the date of the grant.
Deferred Income Taxes -- Deferred income taxes are provided on the differences
between the financial statement and tax bases of assets and liabilities and
operating loss carryovers using enacted tax rates in which the differences are
expected to reverse.
NOTE 2 -- CONCENTRATION OF CREDIT RISK
The Company has cash in various financial institutions that insure deposits up
to $100,000 per depositor through the Federal Deposit Insurance Corporation
(FDIC). Deposits in excess of FDIC coverage are not insured and thereby
represent a credit risk to the Company. At August 31, 2000, there was $1,535,803
of uninsured deposit amounts.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment at August 31, 2000 consisted of the following:
Furniture and fixtures $ 6,025
Computer equipment 39,715
Software 488,479
--------
534,219
Less accumulated depreciation 1,796
--------
Property and equipment, net $532,423
========
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- PREFERRED STOCK
In August 2000, Engyro issued 975,000 shares of Series A preferred stock at
$3.84 (preference value) per share. Proceeds from the sale were used to finance
the development of its financial transaction technology and to fund daily
operations.
The following is a summary of convertible redeemable preferred stock at August
31, 2000:
Series A cumulative convertible preferred
stock, par value $0.01; 20,000,000
shares authorized: 975,000 shares
issued and outstanding (redeemable at
$4.61 at August 31, 2000) $ 3,749,900
Accumulated accretion of value of preferred stock 22,917
Less financing costs, net of accumulated
amortization of $7.235 (352,873)
-----------
Net preferred stock $ 3,419,944
===========
Holders of the preferred stock are entitled to a cumulative annual dividend at
the rate of 10 percent of the lower of (a) the preference value ($3.84 per
share); and (b) once the common stock of the Company is publicly traded on a
national securities exchange or an established over the counter trading market
in the United States (publicly traded), 80 percent of the average closing bid
price, for 15 consecutive trading days prior to December 31 of the preceding
year provided such price shall not be less than $1.92 per share, payable
quarterly in cash or shares of common stock, at the election of the Company,
commencing September 30, 2000.
For purposes of determining aggregate redemption value, it is assumed redemption
does not occur until August 8, 2003 with dividends accumulating until such time.
This will result in a redemption amount of $5,616,000. Additionally, these same
assumptions are used to record accretions in value using the interest method.
If, on or after August 8, 2003 (redemption date), the Series A convertible
preferred stock has not been converted to common stock, the Company shall redeem
all shares of Series A convertible preferred stock outstanding on that date out
of funds legally available for such payment at a per share redemption price
equal to the redemption price described below. Any holder of the Series A
convertible preferred stock shall have the right to convert his shares to shares
of common stock until August 8, 2003 (redemption date). The redemption price of
the convertible preferred stock shall be the sum of 120 percent of the
preference value ($3.84) plus 100 percent of all accumulated and unpaid
dividends accrued as of the redemption date.
If the Company fails to discharge all or any part of its preferred stock
redemption obligations because sufficient funds are not available, the holders
of the preferred stock shall share ratably in any distribution of cash legally
available.
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- STOCK OPTIONS AND WARRANTS
The Company has a fixed stock option plan under which officers and key employees
may be granted options to purchase shares of the Company's authorized but
unissued common stock. From May 19, 2000 (date of inception) through August 31,
2000, the Company issued 675,000 options to officers and key employees. These
options vest at 25 percent each anniversary date (August 8) over the next 4
years at an exercise price of $5.00 per share. From inception (May 19, 2000)
through August 31, 2000, no options were vested or exercised. The option price
for all options granted equaled or exceeded the fair value of the Company's
stock at the time of issue. Accordingly, the Company did not recognize any
compensation expense in relation to options granted to employees during the
period from inception (May 19, 2000) through August 31, 2000.
The following is a summary of the status of the stock option plan for the period
from inception (May 19, 2000) through August 31, 2000:
Shares Exercise Price
------- --------------
Outstanding at beginning of year -- $ --
Granted 675,000 5.00
Exercised -- --
Forfeited -- --
------- -------
Outstanding at end of year 675,000 $ 5.00
======= =======
During the period from inception (May 19, 2000) to August 31, 2000, Engyro
issued warrants for the purchase of 292,500 shares of common stock at $5.00 per
share, in connection with the issuance of the convertible redeemable preferred
stock. The warrants become exercisable commencing August 9, 2000 and ending
August 9, 2003. As of August 31, 2000, 292,500 shares of common stock were
reserved for that purpose.
NOTE 6 -- PROVISION FOR INCOME TAXES
At August 31, 2000, the Company has available net operating losses for federal
and state corporation income tax purposes of approximately $1,424,000, which can
be carried forward for up to 15 years (federal) and 5 years (state). Anticipated
corporate tax benefits related to these loss carryforwards amounting to $576,000
are fully reserved by the Company because as a development stage company, it is
not more likely than not that the asset will be realizable.
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- LEASE COMMITMENT
At August 31, 2000, the Company leases temporary office space in Shelton,
Connecticut through December 31, 2000. Rent expense for the period from May 19,
2000 (date of inception) through August 31, 2000 amounted to $3,310.
In August 2000, the Company entered into an agreement to lease its office space
at another location in Shelton, Connecticut at an annual rental of $257,907,
subject to escalating rates expiring June 30, 2005. The lease allows the Company
to occupy the space starting in January 2001.
At August 31, 2000, future minimum payments under the noncancellable operating
leases were as follows:
2000 $ 31,492
2001 259,171
2002 274,342
2003 289,513
2004 303,420
Thereafter 278,135
----------
Total minimum lease payments $1,436,073
==========
NOTE 8 -- UNCERTAINTIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in recent months.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern.
Item 7.(a)(2) Balance sheet and statements of income and cash flows of cDemo for
the period ended August 31, 2000
cDEMO INC.
(a Development Stage Company)
FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 14, 2000 (INCEPTION) TO AUGUST 31, 2000
cDEMO INC.
(a Development Stage Company)
FOR THE PERIOD JANUARY 14, 2000 (INCEPTION) TO AUGUST 31, 2000
- INDEX -
Page(s)
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Independent Auditors' Report F-66
Financial Statements:
Balance Sheet - August 31, 2000 F-67
Statement of Operations - For the Period from
January 14, 2000 (Inception) to August 31, 2000 F-68
Statement of Shareholders' Equity (Deficiency) -
For the Period from January 14, 2000 (Inception) to
August 31, 2000 F-69
Statement of Cash Flows - For the Period from
January 14, 2000 (Inception) to August 31, 2000 F-70
Notes to Financial Statements F-71-76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
cDemo Inc.
Calgary, Alberta
We have audited the accompanying balance sheet of cDemo Inc. (a Development
Stage Company) as of August 31, 2000 and the related statements of operations,
shareholders' equity (deficit) and cash flows for the period from January 14,
2000 (Inception) to August 31, 2000. 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 the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of cDemo Inc. (a Development Stage
Company) and the results of its operations and cash flows for the period from
January 14, 2000 (Inception) to August 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, operations have generated losses from inception and, as of
August 31, 2000, the Company has an accumulated deficit. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
___________________________
LAZAR LEVINE & FELIX LLP
New York, New York
January 25, 2001
cDEMO INC.
(a Development Stage Company)
BALANCE SHEET
AS OF AUGUST 31, 2000
(Expressed in Canadian Dollars)
- ASSETS - (Note 5)
CURRENT ASSETS:
Cash and cash equivalents $ 1,779,226
Prepaid expenses and other current assets (Note 9) 739,339
-------------
TOTAL CURRENT ASSETS 2,518,565
FIXED ASSETS - net of accumulated depreciation and amortization (Note 4) 106,969
OTHER ASSETS:
Deferred financing costs -net of accumulated amortization (Note 5) $ 443,868
Non-competition costs (Note 6) 149,000 592,868
------------- -------------
$ 3,218,402
=============
- LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) -
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 90,300
-------------
TOTAL CURRENT LIABILITIES 90,300
LONG-TERM DEBT:
Convertible debentures (Note 5) 4,277,000
COMMITMENTS AND CONTINGENCIES (Notes 6, 9, 10 and 11)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 7):
Common shares - authorized 20,000,000 shares, $.001 par value; 2,088,000 shares issued
and outstanding $ 2,088
Additional paid-in capital 210,107
Deficit accumulated during the development stage (1,361,093) (1,148,898)
------------- -------------
$ 3,218,402
=============
cDEMO INC.
(a Development Stage Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 14, 2000 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
REVENUES $ --
EXPENSES:
General and administrative $ 1,273,680
Computer development costs 52,219
Amortization 24,543
Foreign exchange 10,651 1,361,093
------------- -------------
NET LOSS (Note 8) $ (1,361,093)
=============
cDEMO INC.
(a Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM JANUARY 14, 2000 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
Deficit
accumulated
Additional during the
Common paid-in development Total
Shares Amount capital stage (Deficit)
--------- ------ --------- ----------- -----------
Subscription of common stock
Cash:
Common stock issued 174,000 $ 195 $ -- $ -- $ 195
12 for 1 stock split (Note 7) 1,914,000 1,893 (1,893) -- --
Non-Cash:
Value of warrants granted (Note 7) -- -- 212,000 -- 212,000
Net loss -- -- -- (1,361,093) (1,361,093)
--------- ------ --------- ----------- -----------
Balance at August 31, 2000 2,088,000 $2,088 $ 210,107 $(1,361,093) $(1,148,898)
========= ====== ========= =========== ===========
cDEMO INC.
(a Development Stage Company)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 14, 2000 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,361,093)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization 24,543
Consulting fees 64,000
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other current assets (739,339)
Increase in accounts payable and accrued expenses 90,300
-------------
Net cash (used in) operating activities (1,921,589)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets $ (118,831)
-------------
Net cash (used in) investing activities (118,831)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (456,549)
Non-competition costs (149,000)
Issue of convertible debentures 4,425,000
Sale of common stock 195
-------------
Net cash provided by financing activities 3,819,646
-------------
NET INCREASE IN CASH 1,779,226
Cash and cash equivalents, at inception --
-------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,779,226
=============
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS:
cDemo Inc. (the "Company"), was incorporated under the laws of the
State of Delaware by Articles of Incorporation dated January 14,
2000. The Company filed to have its name changed from the original
name of buyersangel.com inc. to consumersangel.com inc. A subsequent
filing was done to change the Company's name to C Me Buy Inc. A
final name change was filed for and received on May 4, 2000 changing
the Company's name to cDemo Inc.
The Company's business purpose is to develop an infrastructure that
empowers and aids consumers for transacting in the automotive
industry.
Since the most significant portion of the Company's operations are
located in Canada and its normal transaction currency is Canadian
dollars, these financial statements are stated in Canadian dollars.
The Company has been in the development stage in accordance with
Statement of Financial Accounting Standards No. 7, since its
inception. Principal operations of the Company have not yet
commenced.
NOTE 2 - BASIS OF PRESENTATION - GOING CONCERN:
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
Company as a going concern. However, the Company as of August 31,
2000 has had significant operating losses, has a deficit in
shareholder's equity of $1,148,898 and has not yet generated
revenues. These factors create an uncertainty about the Company's
ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Ultimate recovery of the Company's assets is dependent on the
Company, after an expected period of initial losses, achieving and
maintaining profitability which is dependant on market conditions,
successful rollout of the Company's business plan and the ability to
obtain adequate financing to meet capital and operational
requirements. It is management's opinion that the Company will be
able to obtain the necessary financing to continue development
activities over the next fiscal year.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with accounting
principles generally accepted in the United States of America
(GAAP). Outlined below are those policies considered particularly
significant.
(a) Deferred financing
Deferred financing charges represent costs paid by the Company
relating to the convertible debenture financing. Financing fees and
expenses relating to this debt financing will be amortized over the
term of the related debt which is 3 years. During the period,
$12,682 of these costs have been amortized.
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(b) Fixed assets
Fixed assets are recorded at cost. Depreciation of fixed assets is
provided on a straight-line basis as follows:
Furniture and fixtures - 5 years
Computer hardware - 3 years
Computer software - 3 years
Leasehold improvements are amortized over the term of the lease.
Maintenance and repairs are charged to operations and major
improvements are capitalized.
(c) Foreign currency
Assets and liabilities transacted in a foreign currency are
translated at the period end exchange rate while revenues and
expenses are translated at average exchange rates for the period.
Any gains or losses resulting from the translation of these assets
and liabilities are recorded on the statement of operations.
(d) Financial instruments
The Company's assets and liabilities include various financial
instruments. Unless otherwise indicated, it is management's opinion
that the Company is not exposed to significant interest, currency or
credit risks arising from these financial instruments. The fair
market values of these financial instruments approximate their
carrying values, unless otherwise noted.
(e) Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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 revenues and expenses during
the period. Actual results could differ from those estimates.
(f) Statement of Comprehensive Income
SFAS 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement prescribes
standards for reporting other comprehensive income and its
components. Since the Company currently does not have material items
of other comprehensive income, a statement of comprehensive income
is not required.
(g) Advertising Expenses
To date the Company has incurred no expenses for advertising and
promoting its services. Such costs will be expensed as incurred.
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(h) Income Taxes
Deferred income taxes are recognized for tax consequences of
temporary differences, principally depreciation, by applying enacted
statutory tax rates applicable for years in which taxes are expected
to be paid or recovered to differences between the financial
reporting and the tax bases of existing assets and liabilities.
(i) Cash Equivalents
The Company defines cash equivalents as all short-term, highly
liquid investments with original maturity dates of less than 90
days.
(j) New accounting pronouncements
(i) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. Based on its
current and planned future activities, the Company believes
that the adoption of SFAS No. 133 will not have any current
effect or expected future effect on its financial statements.
(ii) On December 3, 1999, the United States Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101
summarizes some of the SEC's interpretations of the
application of generally accepted accounting principles to
revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first quarter 2000
financial statements. However, SAB 101B, which was released on
June 26, 2000, delayed adoption of SAB 101 until no later than
the fourth fiscal quarter 2000. Changes resulting from SAB 101
require that a cumulative effect of such changes for 1999 and
prior years be recorded as an adjustment to net income on
January 1, 2000.
The Company believes that its revenue recognition practices
are in substantial compliance with SAB 101 and that adoption
of its provisions will not be material to its results of
operations.
NOTE 4 - FIXED ASSETS:
The major classes of fixed assets are as follows:
Furniture and fixtures $ 7,876
Computer hardware 59,327
Computer software 10,570
Leasehold improvements 41,058
--------
118,831
Less: accumulated depreciation 11,862
--------
Net book value $106,969
========
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 5 - CONVERTIBLE DEBENTURES:
During the period, the Company issued $4,425,000 (US$3,000,000) in
convertible debentures bearing interest at 8% per annum, due on July
31, 2003 and secured by a general security agreement on all of the
assets of the Company. These debentures are convertible into 1
common share of the Company's common stock for every US$5 of debt.
When the Company is publicly traded, the debentures are convertible
into 1 common share at the lower of US$5 or 80% of the average
closing price for 15 consecutive trading days prior to the
conversion, subject to a floor price of US$2.50. The convertible
debenture was subscribed for by two related parties, VC Advantage
Limited Partnership and the VC Advantage (Bermuda) Fund Ltd., of
which a director of the Company is an investor and beneficiary,
respectively.
Costs aggregating $456,550, required to obtain this financing are
reflected in deferred financing costs on the balance sheet.
NOTE 6 - NONCOMPETITION AGREEMENT:
On August 22, 2000, the Company entered into a noncompetition
agreement with a former officer of the Company for a period of three
years. The cost of this arrangement of $149,000 (US$100,000) will be
amortized on a straight-line method over the term of the agreement.
No amortization expense was charged to operations for the period
ended August 31, 2000.
NOTE 7 - SHAREHOLDERS EQUITY (DEFICIENCY):
During the period ended August 31, 2000, the Company changed its
authorized shares from 200,000 common shares with no par value to
20,000,000 common shares with $.001 par value.
On August 21, 2000, the Board of Directors authorized a 12 for 1
stock split of the Company's common stock. As a result of the split,
1,914,000 additional shares were issued, and additional paid-in
capital was reduced by $1,893.
During the period ended August 31, 2000, the Company issued 660,000
warrants, allowing the holder to purchase 1 common share for every
warrant at prices varying between US$2.083 and US$5 per share, until
dates varying from March 1, 2003 to August 21, 2003.
No expense has been recorded for 480,000 of these warrants issued to
a trust fund on behalf of a director. The value attributable to
these warrants, based on the Black-Scholes pricing model, with an
expected volatility of 0% and risk free rate of return of 6% would
approximate $593,000. Accordingly, the value attributable to the
warrants is approximately $1.24 each. The expected life of the
warrants is the date of expiration. It is expected that no dividends
will be paid on the common shares after conversion of any warrants.
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 7 - SHAREHOLDERS EQUITY (DEFICIENCY) (Continued):
Had cost for these 480,000 warrants issued to the fund been
recorded, the pro-forma income statement would have been as follows:
Reported net loss $(1,361,093)
Cost of warrants (593,000)
-----------
Pro forma net loss $(1,954,093)
===========
As to the remaining warrants, the Company issued 60,000 of these
warrants to a consultant for services provided (see Note 9) and
120,000 warrants were issued in conjunction with the convertible
debenture financing (see Note 5). An expense of $64,000 has been
recorded for the warrants issued to the consultant. The $148,000 of
value attributed to the convertible debentures financing has been
netted against the debentures on the balance sheet and will be
amortized over the life of the convertible debt. The value of the
warrants granted was estimated using the Black-Scholes pricing
model.
Pursuant to an escrow agreement dated August 21, 2000 with the
shareholders of the Company, all 2,088,000 common shares of the
Company may not be traded, released, transferred or dealt with in
any manner. The shares will be released from escrow 1/3 each on the
dates of July 31, 2001, July 31, 2002 and July 31, 2003.
NOTE 8 - INCOME TAXES:
The Company has adopted SFAS 109, "Accounting for Income Taxes"
which requires use of the asset and liability approach of providing
for income taxes. SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method deferred tax liabilities and assets are
determined based on the difference between the financial statement
and the tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company has available for income tax purposes a net operating
loss carry forward of approximately $1,300,000 which can be carried
forward over the next 7 years as per Canadian tax law. Since there
is no assurance that the Company will generate future taxable income
to utilize the deferred tax asset generated by the net operating
loss carry forward, the Company has taken a full valuation allowance
against the asset.
NOTE 9 - RELATED PARTY TRANSACTIONS:
(a) The Company has paid consulting fees to parties related by
virtue of being shareholders or on the management team in the
amount of $318,927.
(b) The Company has committed to paying $2,900 per month for rent
to a related party by virtue of being a common shareholder and
director.
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued):
cDEMO INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
(c) The Company has entered into an agreement with a party related
by virtue of being a common shareholder and director for
provision of supplying certain strategic services and advice.
The contract called for a lump sum payment of $1,065,600
(US$720,000). As at August 31, 2000, four months of services
have been performed therefore, $710,400 (US$480,000) has been
recorded as prepaid expenses and $355,200 ($240,000) has been
expensed. 60,000 warrants have also been issued pursuant to
this contract (Note 7).
(d) The Company issued US$3,000,000 in convertible debentures to
two related parties (Note 5).
(e) The Company entered into a noncompetition agreement at a cost
of $149,000 with a former officer of the Company (Note 6).
NOTE 10 - FINANCIAL INSTRUMENTS:
As disclosed in Note 3 (d), the Company holds various forms of
financial instruments. The nature of these instruments and the
Company's operations expose the Company to foreign currency risk and
industry credit risk. The Company manages its exposure to these
risks by operating in a manner that minimizes its exposure to the
extent practical.
(a) Foreign currency rate risk management
The Company manages its exposure to foreign currency
fluctuations by maintaining foreign currency bank accounts and
receivables to offset foreign currency payables and planned
expenditures. At August 31, 2000, approximately US$1.1 million
was being held at one institution.
(b) Credit risk
Substantially all of the Company's cash is being held at one
financial institution.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
(a) As per the convertible debt agreement, prior to May 31, 2001,
the Company is required to file a registration statement with
the SEC to register common stock to be issued by the Company
as well as 200% of the shares that would be issued upon debt
conversions and 100% of the shares to be issued upon exercise
of the lender and agent warrants. Any delay in obtaining such
registration will result in the Company paying the lender an
amount equal to 1% per month of the original advance. The
lender has the option of converting this penalty into common
shares at the same conversion price as the original principal
loan.
(b) The Company has entered into consulting agreements with
various individuals which require monthly payments of
approximately $46,000. These agreements can be terminated at
any time by either party without any additional liability.
Item 7.(a)(3) Balance sheets and statements of income and cash flows of
eSupplies for the period ended August 31, 2000
eSUPPLIES (ALBERTA) LTD.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM OCTOBER 29, 1999 (INCEPTION) TO AUGUST 31, 2000
eSupplies (Alberta) Ltd.
Interim Financial Statements For the
period from date of incorporation on
October 29, 1999 to August 31, 2000
(Unaudited)
Contents
================================================================================
Review Engagement Report 2
Comments by Accountant for US Readers
On Canada - US Reporting Differences 3
Interim Financial Statements
Interim Balance Sheet 4
Interim Statement of Operations and Deficit 5
Interim Statement of Cash Flows 6
Notes to Interim Financial Statements 7 - 16
[LOGO]
eSUPPLIES (ALBERTA) LTD.
FOR THE PERIOD FROM OCTOBER 29, 1999 (INCEPTION) TO AUGUST 31, 2000
- INDEX -
Page(s)
-------
Independent Auditors' Report 1.
Financial Statements:
Balance Sheet - August 31, 2000 2.
Statement of Operations - For the Period from
October 29, 1999 (Inception) to August 31, 2000 3.
Statement of Shareholders' Equity (Deficiency) -
For the Period from October 29, 1999 (Inception) to
August 31, 2000 4.
Statement of Cash Flows - For the Period from
October 29, 1999 (Inception) to August 31, 2000 5.
Notes to Financial Statements 6. - 14.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
eSupplies (Alberta) Ltd.
Calgary, Alberta
We have audited the accompanying balance sheet of eSupplies (Alberta) Ltd. as of
August 31, 2000 and the related statements of operations, shareholders' equity
(deficiency) and cash flows for the period from October 29, 1999 (Inception) to
August 31, 2000. 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 the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSupplies (Alberta) Ltd. and
the results of its operations and cash flows for the period from October 29,
1999 (Inception) to August 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, operations have generated losses from inception and, as of
August 31, 2000, the Company has an accumulated deficit and negative working
capital. Such matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
________________________
LAZAR LEVINE & FELIX LLP
New York, New York
January 25, 2001
eSUPPLIES (ALBERTA) LTD.
BALANCE SHEET
AS OF AUGUST 31, 2000
(Expressed in Canadian Dollars)
- ASSETS (Note 6) -
CURRENT ASSETS:
Cash and cash equivalents $ 782,672
Restricted cash (Note 10) 940,407
Accounts receivable - net of allowance for doubtful accounts of $309,544 565,528
Accounts receivable - affiliates (Note 8i) 58,668
Inventory 11,941
Prepaid expenses (Note 8b) 530,489
-------------
TOTAL CURRENT ASSETS 2,889,705
FIXED ASSETS - net of accumulated depreciation and amortization (Note 4) 784,882
OTHER ASSETS:
Deferred financing costs (Note 6) $ 415,773
Non-competition costs (Note 9) 120,961 536,734
------------- -------------
$ 4,211,321
=============
- LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) -
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 11) $ 659,709
Convertible debt (Note 6) 3,623,801
-------------
TOTAL CURRENT LIABILITIES 4,283,510
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, 11, 12, 13 and 14)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 7)
Class A voting common shares - unlimited number of shares
authorized, no par value; 3,550,000 shares issued and outstanding $ 4,879,222
Class B voting common shares, unlimited number of shares
authorized, no par value; no shares issued and outstanding --
Class C and D non-voting common shares, unlimited number of
shares authorized, no par value; no shares issued and outstanding --
Additional paid-in capital 675,580
Accumulated deficit (5,626,991) (72,189)
------------- -------------
$ 4,211,321
=============
eSUPPLIES (ALBERTA) LTD.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 29, 1999 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
SALES $ 1,076,123
COST OF SALES 1,043,222
-----------
GROSS PROFIT 32,901
EXPENSES:
Depreciation and amortization $ 287,402
Impairment charge (Note 4) 746,499
Website development costs 757,302
General and administrative costs 3,576,038
Financing costs 75,809
Interest expense 216,842 5,659,892
---------- -----------
NET LOSS $(5,626,991)
===========
eSUPPLIES (ALBERTA) LTD.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM OCTOBER 29, 1999 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
Deficit
accumulated
Class A Class B, C and D Additional during the
Common Common paid-in development Total
Shares Amount Shares Amount capital stage (Deficit)
----------- ----------- -------- --------- ----------- ----------- -----------
Subscription of common shares
Cash:
Common stock issued (Note 7a) 2,500,000 $ 1 -- $ -- $ -- $ -- $ 1
Issued upon conversion of VCALP
debt - net (Note 7b) 416,667 3,492,504 -- -- -- -- 3,492,504
Non-Cash:
Issued upon conversion of
Willsons debt (Note 7c) 633,333 1,386,717 -- -- -- -- 1,386,717
Value of warrants granted (Note
7d) -- -- -- -- 675,580 -- 675,580
Net loss -- -- -- -- -- (5,626,991) (5,626,991)
----------- ----------- -------- --------- ----------- ----------- -----------
Balance at August 31, 2000 3,550,000 $ 4,879,222 -- $ -- $ 675,580 $(5,626,991) $ (72,189)
=========== =========== ======== ========= =========== =========== ===========
eSUPPLIES (ALBERTA) LTD.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 29, 1999 (INCEPTION) TO AUGUST 31, 2000
(Expressed in Canadian Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,626,991)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and write-down of capital assets 1,049,058
Interest 157,634
Amortization of deferred finance cost and noncompetition costs 102,901
Changes in operating assets and liabilities:
Decrease in accounts receivable 255,867
Decrease in inventory 275,654
(Increase) in prepaid expenses (530,489)
Increase in accounts payable and accrued liabilities 659,709
---------------
Net cash (used in) operating activities (3,656,657)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of assets $ 369,966
Purchase of capital assets (1,733,940)
Noncompetition costs (148,110)
Restricted cash (940,407)
---------------
Net cash (used in) investing activities (2,452,491)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debenture 3,680,500
Deferred financing (378,130)
Issuance of common stock 3,589,450
---------------
Net cash provided by financing activities 6,891,820
---------------
NET INCREASE IN CASH 782,672
Cash and cash equivalents, at beginning of period --
---------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 782,672
===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The Company purchased the assets of Willson Stationers Ltd. in the
aggregate amount of $1,637,624 and assumed debt in the aggregate
amount of $5,455,660
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS:
eSupplies (Alberta) Ltd. (the "Company"), was incorporated under the
Canadian Alberta Business Corporations Act on October 29, 1999. The
Company filed to have its name changed from the original name of
851970 Alberta Ltd. to eSupplies (Alberta) Ltd. The Company is a
provider of business products and services.
Since the most significant portion of the Company's operations are
located in Canada and its normal transaction currency is Canadian
dollars, these financial statements are stated in Canadian dollars.
NOTE 2 - BASIS OF PRESENTATION - GOING CONCERN:
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
Company as a going concern. However, the Company as of August 31,
2000 has negative working capital of $1,393,805, a deficit in
shareholder's equity of $72,189 and net loss for the period from
October 29, 1999 to August 31, 2000 of $5,626,991. Ultimate recovery
of the Company's assets is dependent on the Company, after an
expected period of initial losses, achieving and maintaining
profitability which is dependant on market conditions, successful
rollout of the Company's business plan and the ability to obtain
adequate financing to meet capital and operational requirements. It
is management's opinion that the Company will be able to obtain the
necessary financing to continue development activities over the next
fiscal year.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with accounting
principles generally accepted in the United States of America
(GAAP). Outlined below are those policies considered particularly
significant.
(a) Deferred financing
Deferred financing charges represent costs paid by the Company
relating to the convertible debenture financing. Financing fees and
expenses relating to the debt financing will be amortized over the
term of the related debt which is approximately one year. During the
period, $75,809 of these costs have been amortized.
(b) Revenue recognition
Revenue is generally recorded on shipment, with a provision for
estimated returns recorded at that time.
(c) Inventory
Inventory is recorded at the lower of actual cost (first-in,
first-out method) or market. Market is considered as net realizable
value.
(d) Fixed assets
Fixed assets are reflected at cost. Depreciation is provided on a
straight-line basis over the following useful lives:
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(d) Fixed assets and depreciation (Continued)
Computer hardware - 3 years
Software - 2 years
Furniture and equipment - 5 years
Vehicles - 5 years
Leasehold improvements are amortized over the life of the lease.
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
(e) Foreign currency
Assets and liabilities transacted in a foreign currency are
translated at the period end exchange rate while revenues and
expenses are translated at average exchange rates for the period.
Any gains or losses resulting from the translation of these assets
and liabilities are recorded on the statement of operations.
(f) Financial instruments
The Company's assets and liabilities include various financial
instruments. Unless otherwise indicated, it is management's opinion
that the Company is not exposed to significant interest, currency or
credit risks arising from these financial instruments. The fair
market values of these financial instruments approximate their
carrying values, unless otherwise noted.
(g) Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the period. While actual results could differ from those
estimates, management does not expect such variance, if any, to have
a material effect on financial statements.
(h) Stock-based compensation plan
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its stock option plan. Under APB
Opinion 25, compensation cost would be recognized for stock options
granted to employees and directors for their services as directors
only if the option price is less than the market price of the
underlying common stock on the date of the grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro-forma information regarding net income as
if the compensation costs for the Company's stock option plan had
been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro-forma
information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model (see Note 7e).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
(i) Cash equivalents
For purposes of the statement of cash flows the Company considers
all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
(j) Advertising expenses
To date the Company has incurred no expenses for advertising and
promoting its services. Such costs will be expensed as incurred.
(k) Statement of Comprehensive Income
SFAS 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement prescribes
standards for reporting other comprehensive income and its
components. Since the Company currently does not have material items
of other comprehensive income, a statement of comprehensive income
is not yet required.
(l) Valuation of long-lived assets
The Company periodically evaluates the carrying value of its
long-lived assets. The carrying value of the long-lived assets is
considered impaired when the undiscounted net cash flow from such
assets is estimated to be less than its carrying value. Management
has recorded an impairment adjustment of $746,499 in the initial
period ended August 31, 2000 (see Note 4).
(m) New accounting pronouncements
(i) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. Based on its
current and planned future activities relative to derivative
instruments, the Company believes that the adoption of SFAS
No. 133 will not have a significant effect on its financial
statements.
(ii) On December 3, 1999, the United States Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101
summarizes some of the SEC's interpretations of the
application of generally accepted accounting principles to
revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first quarter 2000
financial statements. However, SAB 101B, which was released
June 26, 2000, delayed adoption of SAB 101 until no later than
the fourth fiscal quarter of 2000. Changes resulting from SAB
101 require that a cumulative effect of such changes for 1999
and prior years be recorded as an adjustment to net income on
January 1, 2000.
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(m) New accounting pronouncements (ii) (Continued):
The Company believes that its revenue recognition practices are in
substantial compliance with SAB 101 and that adoption of its
provisions would not be material to its results of operations.
NOTE 4 - FIXED ASSETS:
The major classes of fixed assets are as follows:
Computer hardware and software $ 824,195
Furniture and equipment 480,892
Vehicles 129,920
Leasehold improvements 398,933
----------
1,833,940
Less: accumulated depreciation and write downs 1,049,058
----------
$ 784,882
==========
During the period ended August 31, 2000, certain computer hardware
and software and furniture and equipment were deemed to be impaired
and written down to their fair value. Fair value, which was
determined by references to the present value of the estimated
future cash in flows of such assets, exceeded their carrying value
by $746,499. An impairment loss of that amount (included in
expenses) has been charged to operations in the period ended August
31, 2000.
NOTE 5 - BUSINESS COMBINATION:
Effective February 7, 2000, the Company purchased the assets of
Willson Stationers Ltd. ("Willsons"), an office stationary business
in Western Canada. This acquisition has been accounted for using the
purchase method of accounting with results from operations being
included since the acquisition date. The acquisition has been
accounted for as a non-monetary transaction and as such, the fair
value of assets acquired has been used to determine the value of the
debt assumed. Net assets acquired were as follows:
Cash $ 369,966
Accounts receivable 880,063
Inventory 287,595
Fixed assets 100,000
----------
Net book value of assets purchased $1,637,624
==========
Purchase price paid via the assumption of debt (i) $1,637,624
==========
(i) This debt was converted to common shares on May 23, 2000 (Note
7c)
The transaction was negotiated with the court appointed
receiver/manager of Willsons as Willsons was in receivership at the
time of this transaction. Certain shareholders of the Company were
shareholders of Willsons as well.
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 6 - CONVERTIBLE DEBT:
Effective May 24, 2000, (and after conversion of prior debt, see
Note 7b) the Company entered into a US$6 million, non-revolving term
loan agreement with VC Advantage Limited Partnership ("VCALP").
Under the terms of this agreement, VCALP would have a general
security interest over the assets of the Company for any advances.
All advances carry an 8% fee on the date of each draw down of funds
and a 10% per annum interest on gross amounts advanced. The
principal amount including interest must be repaid by June 18, 2001
(the "Maturity Date") unless such a date is mutually extended. On
May 26, 2000, a gross amount of $3,680,500 (US$2,500,000) was
advanced to the Company under this agreement.
Advances are convertible prior to the Maturity Date or as extended,
at VCALP's option, to Class A common shares at the lower of (1) US$7
for conversions up to and including May 24, 2002, US$8 for
conversions between and including May 25, 2002 and May 24, 2004 and
US$9 after May 24, 2004; or (2) maximum of (a) 80% of the weighted
average of the closing bid price on a stock exchange or quotation
system during a period of 10 consecutive trading days ending not
more than 3 trading days before written notice from VCALP of such
intentions; (b) US$2 per share.
As additional consideration, the Company agreed to grant warrants
convertible to a maximum of 255,000 Class A common shares based on a
conversion rate of 14.1667 shares for each US$1,000 advanced. Theses
warrants are exercisable at US$7 per share up to May 24, 2003. The
Company has a right to cause mandatory conversion of these warrants
after May 24, 2001 if the average share price of each common share
exceeds US$9 on any public exchange for 30 consecutive trading days.
As at August 31, 2000, US$2,500,000 has been advanced therefore,
106,500 warrants have been issued at a value of $170,093 (see Note
7d).
Provided that the advances are not repaid by the Maturity Date, the
Company will issue, on the first date of each month after the
Maturity Date, warrants to VCALP to purchase 2,500 Class A common
shares for each US$500,000 of indebtedness outstanding. These
warrants expire 3 years from the Maturity Date and are exercisable
at US$7 per share up to and including the second anniversary of the
Maturity Date and at US$8 per share after the second anniversary up
to the expiry date. The Company has a right to cause mandatory
conversion of these warrants after June 18, 2002 if the average
share price of each common share exceeds US$9 on any public exchange
for 30 consecutive trading days.
NOTE 7 - SHAREHOLDERS' EQUITY (DEFICIENCY):
(a) In November 1999, the Company issued 10,000,000 shares of
Class A common stock to its initial founders. In May 2000, the
Company authorized a 1 for 4 reverse stock split and
accordingly these became 2,500,000 shares outstanding.
(b) In February 2000, the Company issued convertible debt in the
net amount of $3,589,450 (US$2,500,000) to VCALP. On May 23,
2000, the Company and VCALP agreed to convert debt in the
amount of US$2,500,000 into Class A common shares at a
conversion rate of one share for each US$6 of debt. The value
attributed to the common shares issued was $3,492,504
(original loan of $3,589,450, net of accrued interest of
$106,686 and discount of $203,632).
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 7 - SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued):
(c) As part of the acquisition of Willsons (see Note 5), the Company
assumed its debt owing to secured creditors. On May 23, 2000, the
Company and the secured creditors agreed to convert debt in the
amount of $5,451,860 (US$3,800,000) into Class A common shares at a
conversion rate of one share for each US$6 of debt. As a result
633,333 Class A common shares were issued to satisfy that debt. As
the underlying acquisition transaction is a non-monetary
transaction, the value of the debt assumed was valued at the fair
value of the assets acquired. The value attributed to the common
shares issued was $1,386,717 (fair value of the assets of $1,637,624
(see Note 5), net of accrued interest of $50,948 and discount of
$301,855).
(d) During the period, the Company issued 316,500 and 106,500 warrants,
valued at $505,487 and $170,093, respectively, allowing the holders
to purchase 1 common share for every warrant at US$7 per share until
May 23, 2003 and May 24, 2003, respectively. The Company has a right
to cause a mandatory call on the 316,500 and 106,500 warrants on May
23, 2001 and May 24, 2001, respectively, if the Company is listed on
an exchange and their average stock price exceeds US$9 per share for
30 consecutive trading days.
Of these amounts, $56,699, which represents the value of the
warrants issued to the lender, was attributed to the convertible
debenture financing (discount) and has been netted against the
debentures in the financial statements. The balance has been
reflected as deferred financing costs and will be amortized over the
life of the debt.
The value attributable to these warrants was calculated based on the
Black-Scholes pricing model, with an expected volatility of 0% and
risk free rate of return of 6%. The expected life of the warrants is
the date of expiration. It is expected that no dividends will be
paid on any shares, resulting from the exercise of warrants.
(e) In May 2000, the Company adopted a stock option plan, through which
options may be granted to directors, officers, employees,
consultants and affiliates for the purchase of 1,970,000 Class A
common shares. As at August 31, 2000 there were 380,000 stock
options outstanding. These options are exercisable at US$7 per share
and expire in April 2010. Pro-forma information has not been
provided for these options as these options have yet to vest. 1/3 of
the options vest on each of November 1, 2000, November 1, 2001 and
November 1, 2002.
The Company has granted stock options to the officers and employees
of the Company as follows:
Weighted
Average
Option Price Exercise
Number of Shares per Share Price
---------------- -------------- -----------
Options-granted 380,000 US$7 US$7
Options outstanding, August 31, 2000 380,000 US$7 US$7
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 7 - SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued):
The following table summarizes information about the stock options
outstanding at August 31, 2000:
Weighted Weighted Number of Weighted Average
Average Average Options Exercise Price of
Options Exercise Remaining Currently Options Currently
outstanding Option price Price Contractual Life Exercisable Exercisable
----------- ------------ -------- ---------------- ----------- -----------------
380,000 US$7 US$7 10 -- --
NOTE 8 - RELATED PARTY TRANSACTIONS:
(a) The Company has issued 423,000 warrants to a parties related by
virtue of them being common shareholders of the Company (see Note
7d).
(b) The Company has entered into an agreement with a party related by
virtue of them being common shareholders of the Company for
provision of supplying certain strategic services and advice. The
contract called for a lump sum payment of $1,034,856 (US$720,000).
As at August 31, 2000, $455,829 remains in prepaid expenses and
$579,027 has been amortized and included in general and
administrative expense.
(c) The Company issued US$2,500,000 in convertible debt to a party
related by virtue of being a shareholder in the Company (see Note
6).
(d) The Company paid $413,227 (US$279,000) to an affiliated consultant
for financing costs related to the convertible debenture which will
be deferred and amortized over the life of the debenture.
(e) The Company entered into an agreement to lease premises from Bankton
Development Corp., a party related by virtue of being a common
shareholder, commencing on February 7, 2000 to January 31, 2005.
Under the terms of this agreement, the Company is committed to
paying basic rent and condo fees of $96,000 and $30,636 per annum,
respectively. For the period ended August 31, 2000, $69,027 has been
included in general and administrative expenses.
(f) General and administrative expenses also includes $533,682 in fees
associated with computer services provided by Futurelink Corp., a
party related by virtue of being a common shareholder of the
Company.
(g) On March 15, 2000, the Company entered into an agreement with a
party related by virtue of being a shareholder and officer of an
entity which is a shareholder of the Company. Under the terms of
this agreement, the individual is not to carry on business in
competition with the Company for a period of 3 years. As
consideration, the Company has paid US$100,000. For the period ended
August 31, 2000, $27,149 has been included in general and
administrative expenses (see Note 9).
(h) In the normal course of business, the Company had purchases from
parties related by virtue of being common shareholders and directors
in the amount of $110,526.
(i) Included in accounts receivable are amounts owed from parties
related by virtue of being common shareholders and officers of
$56,866.
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 9 - NONCOMPETITION AGREEMENT:
On August 22, 2000, the Company entered into a noncompetition
agreement with a former officer of the Company for a period of three
years. The cost of this arrangement of $148,110 (US$100,000) will be
amortized on a straight-line basis over the term of the agreement.
At August 31, 2000, $27,149 was amortized and charged to operations.
NOTE 10 - RESTRICTED CASH:
Restricted cash includes $382,772 that is held in trust for any
remaining liabilities that may arise from the convertible debt
financing raised during the period, $300,000 for costs relating to
the negotiation of a contract for development of their e-commerce
business, and cash to support a pledge to secure accounts payable
relating to the purchase of certain inventory, which at period end,
including interest earned, amounted to $257,635. Subsequent to the
period end, all restricted cash has been released and related
liabilities paid, except for the cash to support the pledge of
accounts payable (see Notes 11b and 12c).
NOTE 11 - ECONOMIC DEPENDENCY:
During the period ended August 31, 2000, purchases from one supplier
were in excess of 10% of the Company's total purchases and amounted
to approximately, $620,000. At August 31, 2000, accounts payable to
this supplier was $76,757.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
(a) The Company leases business premises under a five-year lease, which
expires on January 31, 2005, from a related party (see Note 8e). The
Company, in addition to the base rent under this lease, is also
responsible for condo fees. Rental expense for the period ended
August 31, 2000 was $51,816. Future minimum rental payments under
operating leases are as follows:
Twelve Months Ended August 31,
------------------------------
2001 $126,636
2002 126,636
2003 126,636
2004 126,636
2005 52,765
(b) During June 2000, the Company issued a letter of credit for
US$170,000 to secure accounts payables relating to the purchase of
inventory.
(c) In May 2000, the Company entered into an employment contract with
its Vice-President of marketing which requires an annual salary of
$190,000 and severance payment of nine months salary. This employee
was terminated as part of the reorganization (see Note 14e).
eSUPPLIES (ALBERTA) LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 13 - LITIGATION:
A vendor of the Company has filed a lawsuit against the Company for
outstanding amounts owing on software licenses and support services
in the amount of $133,250. Outside counsel for the Company is of the
opinion that it is too early to assess whether the supplier will
succeed in its claim against the Company. Also, another vendor has
filed a lawsuit against the Company for $15,000 with respect to
software supplied to the Company. Outside counsel for the Company
and management are of the opinion that an adverse outcome is
unlikely. The Company has recorded the full amount of both claims as
a liability as of August 31, 2000.
NOTE 14 - SUBSEQUENT EVENTS:
(a) In September 2000, the Company's management decided to re-focus the
Company's business so as to realign itself and to reduce costs. As a
part of this reorganization, the Company is currently in
negotiations to dispose of certain assets to a party related by
virtue of having common shareholders and directors. These assets
will be sold at their approximate net book value of $360,000. As a
part of this plan, the Company has reduced its workforce by about 30
employees, which represented approximately 70% of the Company's
employee base. The Company incurred $200,000 in severance costs and
approximately $30,000 in moving and relocation expenses in relation
to this reorganization. As a result of the reduced employee base,
the Company has written off $100,000 of leasehold improvements and
capitalized software expenditures in September 2000.
These costs have not been accrued on the Company's August 31, 2000
financial statements since the plan of reorganization was not
formerly approved by management at that date.
(b) During October 2000, the Company entered into an agreement with a
company related by virtue of them being common shareholders of the
Company. Under the terms of the agreement, the Company has loaned
US$450,000 to this company. The loan is non-interest bearing, due on
demand and is secured by various assets of the Company.
(c) During October 2000, the letter of credit (see Note 12b) was reduced
from US$170,000 to US$70,000.
(d) In November 2000, the Company moved its offices to other facilities
where it would serve a dual purpose of being more visible and more
accessible to its main customer base. The Company is presently in
negotiations with its prior landlord to be released from future
rental commitments.
(e) In January 2001, the Company's management was changed to better
reflect the operational requirements of the Company. This action
resulted in the cash outlay of $150,000 and payments of $30,000 per
month through April 2001 and $15,000 per month through October 2001.
(f) In January 2001, the Company disposed of fixed assets no longer
required for operations. The net proceeds from the sale of these
assets were approximately $100,000.
Item 7. (b) Proformat information of Engyro, eSupplies, cDemo and the Registrant
for the period ended August 31, 2000
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2000
(Unaudited)
(EXPRESSED IN CANADIAN DOLLARS)
Historical Transactions and adjustments Proforma
---------- ---------------------------- --------
Debit Credit
----- ------
$ $ $ $
REVENUES 19,693,946 19,693,946
---------- -----------
COSTS AND EXPENSES:
Costs of sales 7,657,960 7,657,960
Selling, general and administrative 11,266,339 11,266,339
Bad debts 140,090 140,090
Interest and bank charges 297,654 297,654
Depreciation and amortization 2,347,321 481,800 (a) 2,829,121
Loss from equity investments -- 920 (b) 920
---------- -----------
21,709,364 22,192,084
---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,015,418) (2,498,138)
Provision for income taxes -- --
---------- -----------
LOSS BEFORE MINORITY INTEREST (2,015,418) (2,498,138)
Minority interest in net loss of subsidiary 29,476 29,476
---------- -----------
NET LOSS (1,985,942) (2,468,662)
========== ===========
LOSS PER COMMON SHARE $ (.25)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,776,213
===========
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
CONDENSED CONSOLIDATED PROFORMA BALANCE SHEET
AS OF AUGUST 31, 2000
(Unaudited)
(EXPRESSED IN CANADIAN DOLLARS)
Historical Transactions and adjustments Proforma
----------- ------------------------------- -----------
Debit Credit
----------- ---------
$ $ $ $
- ASSETS -
CURRENT:
Cash and cash equivalents 1,355,613 1,355,613
Short-term investments 269,727 269,727
Accounts receivable, trade -net 3,154,134 3,154,134
Inventory 206,216 206,216
Prepaids and other current assets 996,943 100,000(a) 1,096,943
----------- ----------- -----------
TOTAL CURRENT ASSETS 5,982,633 100,000 6,082,633
----------- ----------- -----------
Investments on affiliated
companies -- 920(a) 920(b) --
Property and equipment, net 7,721,769 2,079,339(a) 395,500(c) 9,405,608
Goodwill, net of accumulated
amortization 2,863,146 2,863,146
Other assets, net of amortization 813,047 312,278(a) 86,300(c) 1,039,025
----------- ----------- --------- -----------
11,397,962 2,392,537 482,720 13,307,779
----------- ----------- --------- -----------
17,380,595 2,492,537 482,720 19,390,412
=========== =========== ========= ===========
- - LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT:
Account payable - trade 1,375,414 1,375,414
Accrued liabilities 1,654,917 1,654,917
Other current liabilities 530,632 109,263(a) 421,369
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 3,560,963 109,263 3,451,700
----------- ----------- -----------
Long-term debt 4,377,040 4,377,040
Deferred income taxes payable 59,173 59,173
----------- -----------
TOTAL LIABILITIES 7,997,176 109,263 7,887,913
----------- ----------- -----------
SHAREHOLDERS EQUITY:
Preferred shares 10,917 10,917
Common shares 183,235 2,601,800(a) 2,785,035
Capital in excess of par value 10,124,777 10,124,777
Deficit (935,510) 482,720(b)(c) (1,418,230)
----------- ----------- --------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,383,419 482,720 2,601,800 11,502,499
----------- ----------- --------- -----------
17,380,595 591,983 2,601,800 19,390,412
=========== =========== ========= ===========
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2000
(Unaudited)
(EXPRESSED IN CANADIAN DOLLARS)
Historical Transactions and adjustments Proforma
---------- ---------------------------- --------
Debit Credit
----- ------
$ $ $ $
- - - -
REVENUES 19,694,046 19,694,046
---------- -----------
COSTS AND EXPENSES:
Costs of sales 7,657,960 7,657,960
Selling, general and administrative 11,266,339 11,266,339
Bad debts 140,090 140,090
Interest and bank charges 297,654 297,654
Depreciation and amortization 2,347,321 481,800 (c) 2,829,121
Loss from equity investments -- 920 (b) 920
---------- -----------
21,709,364 22,192,084
---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,015,318) (2,498,038)
Provision for income taxes -- --
---------- -----------
LOSS BEFORE MINORITY INTEREST (2,015,418) (2,498,138)
Minority interest in net loss of subsidiary 29,476 29,476
---------- -----------
NET LOSS (1,985,842) (2,468,562)
========== ===========
LOSS PER COMMON SHARE $ (.25)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,776,213
===========
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
NOTES TO CONDENSED CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
(Unaudited)
a) The Company has recorded the purchase price of the investment and net
assets acquired from the Chell shareholders.
b) Reflects the Company's share of the losses (not to exceed the carrying
amounts of its investment) of the entities it acquired from the Chell
shareholders using the equity method of accounting.
The Company's equity in the losses of $2,621,358 is limited to the amount
of its investment aggregating $920. If the entities subsequently report
net income, the Company will record its equity in those earnings only
after its share of that net income equals the share of net losses not
recognized.
c) The Company has recorded depreciation expense on the assets acquired from
Chell.com. Fixed assets acquired include computer and other equipment and
leasehold improvements which are being depreciated on a straight line
basis over 3-7 years.