FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: November 30, 2001
Commission file number: 0-18066
CHELL GROUP CORPORATION
(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.)
14 Meteor Drive
Toronto, Ontario, Canada M9W 1A4
(Address of principal executive offices)
(Zip Code)
(416) 675-6666
(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 11, 2002: 9,491,787 shares of common
stock, par value $.0467 per share.
CHELL GROUP CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets -
as at November 30, 2001 (unaudited) and August 31, 2001 1
Consolidated Statements of Operations - For the Three Months Ended
November 30, 2001 and November 30, 2000 (unaudited) 2
Consolidated Statements of Cash Flows - For the Three Months Ended
November 30, 2001 and November 30, 2000 (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 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 16
2
CHELL GROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
AS AT NOVEMBER 30, 2001 AND AUGUST 31, 2001
(Expressed in Canadian dollars)
===============================================================================================
November 30, 2001 August 31, 2001
(unaudited)
$ $
===============================================================================================
ASSETS
Current
Cash and cash equivalents 301,870 356,421
Short-term investments 4,659 19,676
Accounts receivable, trade - net of allowance for doubtful
accounts of $237,000; [Aug 2001 - $227,000] 2,071,091 2,308,790
Other receivables 279,805 84,814
Income taxes receivable 155,239 155,204
Inventory 86,157 105,590
Prepaid expenses 565,412 570,868
- -----------------------------------------------------------------------------------------------
Total current assets 3,464,233 3,601,363
- -----------------------------------------------------------------------------------------------
Property and equipment, net 7,692,144 8,260,282
Licenses, net of accumulated amortization 241,923 247,321
Goodwill, net of accumulated amortization 1,765,274 1,795,737
Notes receivable 160,000 160,000
Deposit on purchase 1,689,710 1,689,710
Other assets, net of amortization 342,691 388,032
Net assets from discontinued operations -- 82,558
- -----------------------------------------------------------------------------------------------
15,355,975 16,225,003
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable - trade 2,610,152 2,469,663
Accrued liabilities 1,775,556 1,789,042
Current portion of long-term debt 4,048,356 3,774,658
- -----------------------------------------------------------------------------------------------
Total current liabilities 8,434,064 8,033,363
- -----------------------------------------------------------------------------------------------
Long-term debt, net of current portion 5,594,401 5,884,339
Deferred income taxes payable 59,173 59,173
- -----------------------------------------------------------------------------------------------
Total liabilities 14,087,638 13,976,875
- -----------------------------------------------------------------------------------------------
Commitments and Contingent liabilities
Shareholders' equity
Share capital
9,028,239 common shares [Aug 2001 - 9,028,239] 604,109 604,109
Capital in excess of par value 14,143,533 14,143,533
Deficit (13,479,305) (12,499,514)
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 1,268,337 2,248,128
- -----------------------------------------------------------------------------------------------
15,355,975 16,225,003
===============================================================================================
The accompanying notes are an integral part of these statements
1
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000
(Expressed in Canadian dollars - unaudited)
===============================================================================================
November 30, 2001 November 30, 2000
(restated - Note 7)
$ $
===============================================================================================
REVENUE
Network services 1,710,218 1,746,123
Pay-TV 1,532,421 1,785,106
Video/software sales 615,648 1,031,854
Digital encoding 87,209 228,609
Other 12,670 27,173
- -----------------------------------------------------------------------------------------------
3,958,166 4,818,865
- -----------------------------------------------------------------------------------------------
COST OF SALES
Network services 589,117 579,812
Pay-TV 664,823 728,268
Video/software sales 133,830 388,885
Digital encoding -- 5,916
- -----------------------------------------------------------------------------------------------
1,387,770 1,702,881
- -----------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative expenses 2,482,750 4,993,216
Bad debt 16,108 34,879
Interest and bank charges 321,206 85,263
Write off of leasehold improvements -- 355,560
Depreciation and amortization 730,123 825,878
- -----------------------------------------------------------------------------------------------
3,550,187 6,294,796
- -----------------------------------------------------------------------------------------------
Loss before undernoted (979,791) (3,178,812)
Provision for income taxes -- --
Minority interest -- (10,180)
- -----------------------------------------------------------------------------------------------
Loss from continuing operations (979,791) (3,188,992)
Loss from discontinued operations (net of
income tax) -- (101,577)
- -----------------------------------------------------------------------------------------------
Loss and comprehensive loss for the period (979,791) (3,290,569)
===============================================================================================
Earnings (loss) per share [Note 4]:
Basic and diluted from continuing operations (0.11) (0.38)
Basic and diluted from discontinued operations -- (0.01)
- -----------------------------------------------------------------------------------------------
Net loss per share (0.11) (0.39)
===============================================================================================
The accompanying notes are an integral part of these statements
2
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000
(Expressed in Canadian dollars - unaudited)
======================================================================================================
November 30, 2001 November 30, 2000
(restated - Note 7)
$ $
======================================================================================================
OPERATING ACTIVITIES
Net loss and comprehensive loss for the period (979,791) (3,290,569)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 730,123 825,878
Accretion of interest on non-interest bearing promissory notes 45,825 45,896
Write-off of leasehold improvements -- 355,560
Write-off services rendered for shares 36,725 --
Write-off of equity positions -- 1,333
Write-off of prepaids arising from Chell asset purchase 45,341 359,662
Changes in assets and liabilities:
Decrease (increase) in short-term investments 15,017 (18,125)
Decrease in accounts receivable, trade 237,699 383,433
Increase in income taxes receivable (35) (77,415)
Decrease (increase) in inventory 19,433 (14,439)
Decrease in prepaid expenses 5,456 19,081
Decrease (increase) in other accounts receivable (194,991) 49,934
Decrease in other assets -- 16,000
Increase in net assets from discontinued operations -- (67,804)
Increase in accounts payable and accrued liabilities 127,011 307,316
- ------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 87,813 (1,104,259)
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (126,124) (747,213)
Increase in deposit on purchase -- (614,400)
- ------------------------------------------------------------------------------------------------------
Cash used in investing activities (126,124) (1,361,613)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes and loans payable -- 2,296,599
Repayment of notes and loans payable (16,240) (13,933)
Proceeds from exercise of options -- 26,681
- ------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (16,240) 2,309,347
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents during the period (54,551) (156,525)
Cash and cash equivalents, beginning of period 356,421 1,355,613
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 301,870 1,199,088
======================================================================================================
- ------------------------------------------------------------------------------------------------------
Income Taxes Paid 35 77,415
Interest Paid 68,388 46,559
Non cash items are $82,558 from the net assets from discontinued
operations, as this was transferred to other receivables during the 2002 First
Fiscal Quarter.
Non cash items arose from the purchase of Chell.com assets during the 2001
First Fiscal Quarters. They are $1,936,272 of property & equipment, $107,589 of
goodwill, $42,706 of prepaids, $1,404 in other accounts receivable and in
addition 5,426,772 shares were issued from the purchase of Cameron Chell and
Chell.com assets.
The accompanying notes are an integral part of these statements
3
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000
(Expressed in Canadian dollars - unaudited)
==========================================================================================================
November 30, 2001 November 30, 2000
(restated - Note 7)
$ $
==========================================================================================================
OPERATING ACTIVITIES
Net loss and comprehensive loss for the period (979,791) (3,290,569)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 730,123 825,878
Accretion of interest on non-interest bearing promissory notes 45,825 45,896
Write-off of leasehold improvements -- 355,560
Write-off services rendered for shares 36,725 --
Write-off of equity positions -- 1,333
Write-off of prepaids arising from Chell asset purchase 45,341 359,662
Changes in assets and liabilities:
Decrease (increase) in short-term investments 15,017 (18,125)
Decrease in accounts receivable, trade 237,699 383,433
Increase in income taxes receivable (35) (77,415)
Decrease (increase) in inventory 19,433 (14,439)
Decrease in prepaid expenses 5,456 19,081
Decrease (increase) in other accounts receivable (194,991) 49,934
Decrease in other assets -- 16,000
Increase in assets from discontinued operations -- (67,804)
Increase in accounts payable and accrued liabilities 127,011 307,316
- ----------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 87,813 (1,104,259)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (126,124) (747,213)
Increase in deposit on purchase -- (614,400)
- ----------------------------------------------------------------------------------------------------------
Cash used in investing activities (126,124) (1,361,613)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes and loans payable -- 2,296,599
Repayment of notes and loans payable (16,240) (13,933)
Proceeds from exercise of options -- 26,681
- ----------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (16,240) 2,309,347
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents during the period (54,551) (156,525)
Cash and cash equivalents, beginning of period 356,421 1,355,613
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 301,870 1,199,088
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
Income Taxes Paid 35 77,415
Interest Paid 68,388 46,559
Non cash items are $82,558 from the net assets from discontinued
operations, as this was transferred to other receivables during the 2002 First
Fiscal Quarter.
Non cash items arose from the purchase of Chell.com assets during the 2001
First Fiscal Quarters. They are $1,936,272 of property & equipment, $107,589 of
goodwill, $42,706 of prepaids, $1,404 in other accounts receivable and in
addition 5,426,772 shares were issued from the purchase of Cameron Chell and
Chell.com assets.
The accompanying notes are an integral part of these statements
4
CHELL GROUP CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND NOVEMBER 30, 2000
(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 Chell Group Corporation (the "Company")
(Commission No.:0-18066), filed with the Securities and Exchange Commission on
November 30, 2001. The results of operations for the three months ended November
30, 2001 are not necessarily indicative of the results for the full fiscal year
ending August 31, 2002.
Note 2. General
The financial statements of the Company for the three months ended
November 30, 2001 (the "2002 First Fiscal Quarter"), include the operations of
the Company's wholly-owned subsidiaries Chell Merchant Capital Group Inc.
("CMCG"), Chell.com (USA) Inc., NTN Interactive Network Inc. ("NTNIN"), 3484751
Canada Inc., GalaVu Entertainment Network Inc. ("GalaVu") and NTNIN's
wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic").
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 CMCG, Chell.com (USA), NTNIN, 3484751
Canada Inc., GalaVu and NTNIN's wholly-owned subsidiary Magic. Discontiued
operations are the results of NTNIN's wholly-owned subsidiary Interlynx, which
was sold in July 2001.
Magic conducts its operations directly and through its wholly owned
subsidiary, TutorBuddy Inc. and its 75% ownership of the outstanding shares of
Sonoptic Technologies Inc. ("Sonoptic").
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
5
Note 3. Business Segment Data for the three months ended November 30, 2001 and
November 30, 2000
================================================================================
For Three Months Ended
November 30, November 30,
2001 2000
$ $
================================================================================
External revenue
Entertainment 3,253,254 3,550,252
Education 703,287 1,262,403
Corporate 1,625 6,210
- --------------------------------------------------------------------------------
3,958,166 4,818,865
- --------------------------------------------------------------------------------
Inter-segment revenue
Education -- 52,157
- --------------------------------------------------------------------------------
-- 52,157
- --------------------------------------------------------------------------------
Operating profit (loss)
Entertainment 46,871 (109,692)
Education (468,865) (141,704)
Merchant Services (253,646) (2,799,656)
Corporate (304,151) (127,760)
- --------------------------------------------------------------------------------
(979,791) (3,178,812)
- --------------------------------------------------------------------------------
Net income (loss)
Entertainment 46,871 (109,692)
Education (468,865) (151,884)
Merchant Services (253,646) (2,799,656)
Corporate (304,151) (127,760)
Discontinued operations -- (101,577)
- --------------------------------------------------------------------------------
(979,791) (3,290,569)
- --------------------------------------------------------------------------------
================================================================================
As at
November 30, November 30,
2001 2000
$ $
================================================================================
Total assets
Entertainment 8,809,323 10,524,578
Education 2,459,331 3,998,133
Merchant Services 1,259,738 1,349,043
Corporate 2,827,583 2,094,010
Discontinued operations -- 1,228,740
- --------------------------------------------------------------------------------
15,355,975 18,079,394
- --------------------------------------------------------------------------------
6
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, 2001 and November 30, 2000:
================================================================================
For Three Months Ended
November 30, November 30,
2001 2000
$ $
================================================================================
Numerator:
Net loss (numerator for basic and diluted
loss per share) from continuing operations (979,791) (3,188,992)
Net loss (numerator for basic and diluted
loss per share) from discontinued operations -- (101,577)
- --------------------------------------------------------------------------------
Net loss (numerator for basic and diluted
loss per share) (979,791) (3,290,569)
================================================================================
Denominator for basic and diluted loss
per share -adjusted weighted average
number of shares and assumed conversions 9,028,239 8,356,045
================================================================================
Basic and diluted loss per share from
continuing operations $ (0.11) $ (0.38)
Basic and diluted loss per share from
discontinued operations -- $ (0.01)
- --------------------------------------------------------------------------------
Net loss per share $ (0.11) $ (0.39)
================================================================================
Note 5. Subsequent Events
Financing
A term sheet for the following transactions has been signed, however all
of the conditions for completion of these transactions have not been met. It is
anticipated that during the second fiscal quarter, these transactions will be
completed and will be effective September 1, 2001. The Company will issue
secured notes in the aggregate principal amount of U.S$3,370,000. In addition
options to purchase 812,000 common shares will be issued.
(a) The first part of this transaction will be an exchange of the
convertible debentures held by CALP II Limited Partnership ("CALP
II") on behalf of Canadian Advantage Limited Partnership ("CALP")
and Advantage (Bermuda) Fund Ltd. ("ABFL") for notes and warrants.
The existing convertible debentures of the Company, in the aggregate
principal amount of US$1,700,000, are currently held by CALP II on
behalf of CALP and ABFL. Together with interest at 10% from October
3, 2000, the total amount owing under these convertible debentures
at August 31, 2001 was approximately US$1,870,000. The convertible
debentures will be cancelled. The Company will issue notes to CALP
and ABFL in the aggregate principal amount of US$1,870,000. These
notes will have a five year term bearing interest at 10%
7
per annum payable semi-annually in arrears. The interest is payable
in stock of the Company calculated at 100% of the market price as at
the date such payment is due. Prepayment is permitted at any time on
30 days prior notice. The notes will be secured by a general
security agreement against the assets of the Company in priority to
all other claims subject to the existing security of the Bank of
Montreal and the CIBC. The note will be held as to US$1,365,100 by
CALP and as to US$504,900 by ABFL.
Five year options to purchase 625,000 shares of common stock of the Company at
an exercise price of US$3.00 will be issued by Chell.com Ltd. to CALP and ABFL.
Three year options to purchase 187,000 shares of the Company's common stock at
an exercise price of US$2.00 will also be issued by Chell.com Ltd. The sole
shareholder of Chell.com Ltd. is Cameron Chell, the controlling shareholder of
the Company. Therefore the costs associated with these options will be recorded
by the Company. The financing cost associated with these options will be
approximately US$345,000 and will amortized over the five year term of the notes
payable to CALP and ABFL.
(b) The second part of the transaction is the purchase of 250,000 units
in VC Advantage (Bermuda) Fund Ltd. in exchange for a US$1,500,000
note. The note will have a term of five years and will bear interest
at 3% per annum payable semi-annually in arrears. The interest is
payable in stock of the Company calculated at 100% of the market
price as at the date such payment is due. The note will be
discounted for financial reporting purposes to reflect the Company's
cost of borrowing. This discount will result in a maximum of
approximately US$178,000 additional interest expense over the five
year term of the note. Prepayment is permitted at any time on 30
days prior notice. The note will be secured by a general security
agreement against the assets of the Company ranking pari passu to
the notes in the first part of this transaction.
BOTB Corporation, an Alberta corporation of which Cameron Chell is
the sole beneficial shareholder, whose sole asset is a residence in
Laguna Beach, California, will provide the Company a guarantee with
a minimum value of $1,500,000 for the units purchased and will
provide a second mortgage on this property to secure the guarantee.
Bank Debt
Effective December 3, 2001 the company has changed its bank from the Royal
Bank of Canada to the Bank of Montreal. Under the new agreement with the Bank of
Montreal, two credit facilities are available to the Company. The first credit
facility is a revolving demand operating loan in the amount of $300,000 bearing
interest at the Bank of Montreal's prime rate plus 1.75% payable monthly in
arrears. The second credit facility is a non-revolving demand loan, and/or Fixed
Rate Term Loan in the amount of $1,250,000 bearing interest at the Bank of
Montreal's prime rate plus 1.75% payable monthly in arrears. This loan replaces
the Matched Fund Term Loan previously provided by the Royal Bank of Canada. The
loan is amortized over 10 years. The company may convert the demand loan to
8
a Fixed Rate Term Loan at any time subject to review and approval by the Bank of
Montreal. These loans are secured by general security agreement providing a
first charge over all accounts receivable, inventory and equipment of the
Company. Collateral mortgages in the amount of $1,550,000 provide the Bank of
Montreal a first position on the properties known as 10 Meteor Drive, Toronto,
14 Meteor Drive, Toronto and 775 Pacific Road, Units 36, 37 & 38, Oakville. The
mortgage security is a blanket charge on all properties and includes assignment
of rents.
Note 6. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, business combinations can no longer be
reflected by using the pooling of interests method of accounting and goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter in the year beginning September
1, 2002 (Fiscal 2002). Application of the nonamortization provisions of the
Statement is expected to result in an increase in net income of $110,976 ($0.01)
per year. During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
September 1, 2002 and has not yet determined what the effects of these tests
will be on the earnings and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144), that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The new
rules on asset impairment supersede SFAS 121, Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
Accounting Principles Board Opinion 30, "Reporting the Results of Operations."
This Standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. This Standard also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company is currently assessing the
potential impact of SFAS 144 on the operating results and financial position.
Note 7. Restatement of financial statements
In Fiscal 2001, the Company sold its wholly-owned subsidiary, Interlynx.
The Company's financial statements have been restated to reflect Interlynx as a
discontinued operation for all periods presented.
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
We are engaged in the business of providing interactive entertainment
services, electronic/online products and services and merchant capital services.
Our core businesses
9
are interactive entertainment services provided by our NTN Interactive Network
subsidiary and the merchant capital services provided through our Merchant
Capital Group subsidiary. GaluVu is a technology-based entertainment provider of
interactive in-room entertainment systems to hotels across Canada. Interactive
entertainment services also involve, for example electronic sports trivia games
played on computer units installed in bars, pubs and restaurants. Our Magic
Lantern subsidiary and its subsidiaries are involved in the marketing and
distribution of educational video and media resources, providing interactive
online educational video services and the conversion of analog video to digital
video formats. Electronic/online products and services involve providing
business software applications and support, as well as educational tools, over
the Internet to registered subscribers. In addition, the business of merchant
capital services involves our investment in and acquisition of significant but
undervalued operating companies or technologies, to which we then apply
management experience, in an effort to appreciate the value of those companies.
Our main business strategy is to operate or invest in companies that
represent the latest in technological innovations. We apply our expertise,
industry contacts, and market foresight to these companies in order to create
shareholder value.
Results of Operations for the Three Months ended November 30, 2001
The Company's total revenues for the 2002 First Fiscal Quarter were
$3,958,166, compared to $4,818,865 for the 2001 First Fiscal Quarter, a decrease
of $860,699 or 17.9%.
Revenues from network services for the 2002 First Fiscal Quarter were
$1,710,218, compared to $1,746,123 for the 2001 First Fiscal Quarter, a decrease
of $35,905 or 2.1%. These revenues have decreased due to the number of
Hospitality sites decreasing to 513 from 551 between the 2002 and 2001 First
Fiscal Quarters.
Revenues from Pay-tv for the 2002 First Fiscal Quarter were $1,532,421
compared to $1,785,106 for the 2001 First Fiscal Quarter, a decrease of $252,685
or 14.2%. This decrease can be attributed to not as many "blockbuster" movies
available in the 2002 First Fiscal Quarter than in the 2001 First Fiscal
Quarter. In addition there was a decrease in the amount of guests, due to
decreased levels of travel arising from September 11th.
Revenues from video and software sales for the 2002 First Fiscal Quarter
were $615,648, compared to $1,031,854 for the 2001 First Fiscal Quarter, a
decrease of $416,206 or 40.3%. The decrease is primarily the result of weaker
foreign sales, and a decrease in analog video sales, as the demand for digital
video has not increased at the same corresponding levels.
Revenues from digital encoding were $87,209 for the 2002 First Fiscal
Quarter, compared to $228,609 for the 2001 First Fiscal Quarter, a decrease of
$141,400 or 61.9%. The decrease can be attributed a decreased level of sales
compared to the 2001 First Fiscal Quarter.
Total cost of sales for the 2002 First Fiscal Quarter were $1,387,770
compared to $1,702,881 for the 2001 First Fiscal Quarter, a decrease of $315,111
or 18.5%. The decrease is
10
consummate with the decreased level of sales. As a percentage of revenues, cost
of sales decreased in the 2002 First Fiscal Quarter to 35.1% from 35.3% in the
2001 First Fiscal Quarter.
Total selling, general and administrative expenses for the 2002 First
Fiscal Quarter were $2,482,750, compared to $4,993,216 for the 2001 First Fiscal
Quarter, a decrease of $2,510,466 or 50.3%. The significant reduction in the
number of employees and related costs that took place in the 2001 Second Fiscal
Quarter in the Merchant Services segment caused the decrease; $145,306 in 2002
First Fiscal Quarter compared to $2,335,459 in 2001 First Fiscal Quarter, a
decrease of $2,190,153. In addition, during the 2001 First Fiscal Quarter, there
was a one-time $337,779 compensation charge resulting from a change in the
conversion rate on the preferred shares.
As a percentage of the Company's total revenues, selling, general and
administration expenses decreased to 62.7% for the 2002 First Fiscal Quarter
from 103.6% for the 2001 First Fiscal Quarter.
Interest and bank charges for the 2002 First Fiscal Quarter were $321,206,
compared to $85,263 for the 2001 First Fiscal Quarter, an increase of $235,943
or 276.7%. This increase results from an increase in debt related to the
purchase of the Richard Wolff Enterprises, Inc. assets, the Chanana note payable
and the convertible debenture. As a percentage of the Company's total revenues,
interest and bank charges increased to 8.1% for the 2002 First Fiscal Quarter
from 1.8% for the 2001 First Fiscal Quarter.
There was no provision for income taxes recorded in the 2002 First Fiscal
Quarter compared with no provision of income taxes for the 2001 First Fiscal
Quarter. As the tax provision is based upon the individual companies' taxable
income, no provision was incurred, as the companies are not in a taxable
position. There are no deferred tax assets recorded by the Company.
As a result of all of the above, the net loss for the 2002 First Fiscal
Quarter was $979,791, compared to net loss of $3,290,569 for the 2001 First
Fiscal Quarter, a decrease of $2,310,778. The 2002 First Fiscal Quarter reduced
loss resulted primarily from a decrease in selling, general and administrative
costs as a result of the staff and related cost reductions in the Merchant
Services segment, offset by the decreased level in sales.
Liquidity and Capital Resources
The Company's working capital deficit changed from $4,432,000 at August
31, 2001 to $4,969,831 at November 30, 2001, an increase of $537,831.
11
For the 2002 First Fiscal Quarter, the Company had a net decrease of cash
of $54,551 compared to a net decrease of $156,525 in the 2001 First Fiscal
Quarter.
Cash provided by operating activities for the 2002 First Fiscal Quarter
was $87,813, compared to $1,104,259 used in operating activities in the 2001
First Fiscal Quarter. In 2002, 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 $121,777, and the increase in other accounts receivable
of $194,991. The major items that contributed to cash being provided by
operating activities were as follows: the decrease in accounts receivable of
$237,699 and an increase in accounts payable and accrued liabilities of
$127,011. In 2001, the major items that contributed to cash being used in
operating activities were as follows: net loss non-cash expenses added back of
$1,702,240, increases in income taxes receivable $77,415, and a decrease in net
assets from discontinued operations of $67,805. The major sources of cash
provided by operating activities included decreases in accounts receivable
$383,433 and an increase in accounts payable and accrued liabilities of
$307,316.
Cash used in investing activities in the 2002 First Fiscal Quarter was
$126,124 compared to the $1,361,613 used in investing activities in the 2001
First Fiscal Quarter, a decrease of $1,235,489. The decrease was primarily the
result of a decrease in the purchase of property and equipment of $621,089 and
the deposit of $614,400 on the future purchase of certain equity shares of a
Company in the 2001 First Fiscal Quarter
Cash used in financing activities in the 2002 First Fiscal Quarter was
$16,240, compared to the $2,309,347 provided in the 2001 First Fiscal Quarter.
The decrease is primarily due to the sale of the convertible debenture in the
2001 First Fiscal Quarter.
Our business plan for 2002 contemplates obtaining additional working
capital through refinancings or restructurings of our existing loan agreements,
reducing operating overhead (which has already begun through workforce
consolidation), and the possible sale of some of our existing subsidiaries. Our
management is of the opinion that they will be able to obtain enough working
capital and that together with funds provided by operations, there will be
sufficient working capital for the Company's requirements.
Inflation
The rate of inflation has had little impact on the Company's operations or
financial position during the three months ended November 30, 2001 and November
30, 2000 and inflation is not expected to have a significant impact on the
Company's operations or financial position during the 2002 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.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
13
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 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. +
10.25 Agreement and Plan of Merger and Reorganization, dated November 21,
2001, by and among Chell Group Corporation, Chell Group Corporation,
in trust for Chell SSI Acquisition Corp., and Stardrive Solutions
Inc. +
10.26 Share Purchase Agreement, dated December 13, 2001, by and among
Chell Group
14
Corporation, Chell Merchant Capital Group, Inc., Melanie Johannesen,
Randy Baxandall, Morris Chynoweth, Elaine Chynoweth, the Johannesen
Family Trust, the Baxandall Family Trust, the Merc Family Trust,
Logicorp Data Systems Ltd., 123557 Alberta Ltd., Logicorp Service
Group Ltd. and 591360 Alberta Ltd. +
11. List of Subsidiaries
22. Computation of Earnings Per Share (see note 4).
+ Incorporated by reference. See Exhibit Index.
(b) Reports on Form 8-K
The Company filed an Amended Current Report on Form 8-KA (Date of Report:
December 4, 2000) with the Commission on December 6, 2001, reporting an
Agreement and Plan of Merger and Reorganization, dated November 21, 2001, by and
among Chell Group Corporation, Chell Group Corporation, in trust for Chell SSI
Acquisition Corp., and Stardrive Solutions Inc.
The Company filed a Current Report on Form 8-KA (Date of Report: January
16, 2001) with the Commission on December 28, 2001, reporting a Share Purchase
Agreement, dated December 13, 2001, by and among Chell Group Corporation, Chell
Merchant Capital Group, Inc., Melanie Johannesen, Randy Baxandall, Morris
Chynoweth, Elaine Chynoweth, the Johannesen Family Trust, the Baxandall Family
Trust, the Merc Family Trust, Logicorp Data Systems Ltd., 123557 Alberta Ltd.,
Logicorp Service Group Ltd. and 591360 Alberta Ltd.
15
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
Dated: January 14, 2002 By: /s/ Cameron Chell
-------------------------------------
Cameron Chell,
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: January 14, 2002 By: /s/ Don Pagnutti
-------------------------------------
Don Pagnutti,
Principal Financial Officer
16
CHELL GROUP CORPORATION
FORM 10-Q
November 30, 2001
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
17
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
10.25 Agreement and Plan of Merger and Reorganization, dated November 21,
2001, by and among Chell Group Corporation, Chell Group Corporation,
in trust for Chell SSI Acquisition Corp., and Stardrive Solutions
Inc. +6
10.26 Share Purchase Agreement, dated December 13, 2001, by and among
Chell Group Corporation, Chell Merchant Capital Group, Inc., Melanie
Johannesen, Randy Baxandall, Morris Chynoweth, Elaine Chynoweth, the
Johannesen Family Trust, the Baxandall Family Trust, the Merc Family
Trust, Logicorp Data Systems Ltd., 123557 Alberta Ltd., Logicorp
Service Group Ltd. and 591360 Alberta Ltd. +7
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.
++6 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's 8-K (Date of Report: November 21,
2001) (File No. 0-18066) filed on December 6, 2001.
++7 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's 8-K (Date of Report: December 13,
2001) (File No. 0-18066) filed on December 28, 2001.
++ Filed electronically pursuant to Item 401 of Regulation S-T.
18