SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 1
TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 7, 2002
----------------
FREESOFTWARECLUB.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-25671 88-0414076
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
600 Bancroft Way, Berkeley, CA 94710
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 649-2920
-1-
This amendment to the Current Report on Form 8-K originally dated March
26, 2002, is being filed in order to provide the audited financial information
of 3608948 Canada Inc. dba Ideas and Associates ("Ideas") for the year ended
December 31, 2001. All financial information for Ideas is expressed in Canadian
Dollars ($CDN)
Item 7. Financial Statements and Exhibits
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the balance sheet of 3608948 Canada Inc. as at December 31, 2001
and the statements of earnings and retained earnings and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2001 and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles and also
comply, in all material respects, with United States generally accepted
accounting principles.
Chartered Accountants
/s/ KPMG
Montreal, Canada
March 1, 2002 (except as to note 10 which is as of March 31, 2002)
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3608948 CANADA INC.
Balance Sheet
December 31, 2001, with comparative figures for 2000
(in Canadian dollars)
2001 2000
---- ----
Assets
Current assets:
Cash $ -- $166,826
Term deposits 152,344 1,643
Accounts receivable 937,189 371,058
Research and development tax credits receivable 714,333 --
Advance receivable from shareholder, without interest 220,000 --
Prepaid expenses 1,045 1,584
---------- --------
2,024,911 541,111
Capital assets (note 2) 421,791 305,958
Future tax assets 38,500
---------- --------
$2,485,202 $847,069
========== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 3) $ 931,597 $ --
Accounts payable and accrued liabilities 196,654 157,147
Income taxes payable 172,934
Current portion of long-term debt (note 4) 50,000 --
---------- --------
1,178,251 330,081
Long term debt (note 4) 81,250 --
Future tax liabilities -- 13,400
Shareholders' equity:
Share capital (note 5) 156,000 1,000
Retained earnings 1,069,701 502,588
---------- --------
1,225,701 503,588
========== ========
Lease commitment (note 6)
Subsequent events (note 10)
---------- --------
$2,485,202 $847,069
========== ========
See accompanying notes to financial statements.
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3608948 CANADA INC.
Statement of Earnings and Retained Earnings
Year ended December 31, 2001, with comparative figures for 2000
(in Canadian dollars)
2001 2000
---- ----
Revenue $ 5,122,481 $3,101,068
----------- ----------
Research and development tax credits 887,632 --
----------- ----------
6,010,113 3,101,068
Expenses:
Salaries and benefits 3,916,086 1,551,391
Advertising and marketing consultations 274,052 30,353
Rent 167,131 97,850
Professional fees 142,657 44,125
Travel and representation 134,560 90,728
Amortization 131,543 64,545
Consulting fees 123,421 --
Website development contracts 122,160 238,641
Placement agencies and recruting 61,152 148,512
Interest and bank charges 47,244 3,547
Office expenses 43,765 19,134
Telecommunication 41,796 24,179
Insurance 35,969 2,712
Other expenses 19,600 5,722
Internet access 16,948 3,042
Taxes and license 15,502 6,622
Car rental and expenses 13,670 10,380
Donations 6,469 1,800
Bad debt 4,206 134,955
Loss on devaluation of marketable securities -- 9,259
----------- ----------
5,317,931 2,487,497
----------- ----------
Earnings before income taxes 692,182 613,571
Income taxes:
Current 176,969 161,128
Future (51,900) 13,400
----------- ----------
125,069 174,528
----------- ----------
Net earnings 567,113 439,043
Retained earnings, beginning of year 502,588 63,545
----------- ----------
Retained earnings, end of year $ 1,069,701 $ 502,588
=========== ==========
Earnings per share $ 0.55 $ 0.44
=========== ==========
Weighted number of common shares outstanding 1,032,596 1,000,000
=========== ==========
See accompanying notes to financial statements.
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3608948 CANADA INC.
Statement of Cash Flows
Year ended December 31, 2001, with comparative figures for 2000
(in Canadian dollars)
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 567,113 $ 439,043
Adjustments for:
Amortization 131,543 64,545
Devaluation of marketable securities 9,259
Future tax (51,900) 13,400
Changes in non-cash working capital:
Accounts receivable (566,131) (356,211)
Accounts payable 39,507 103,195
Income taxes payable (172,934) 188,989
Prepaid expenses 539 (1,584)
Tax credits receivable (714,333) --
--------- ---------
(766,596) 460,636
Cash flows from financing activities:
Bank indebtedness 931,597 --
Decrease in advance from a director -- (20,750)
Advance receivable from a shareholder (220,000) --
Long-term debt 150,000 --
Repayment on long-term debt (18,750) --
Issue of share capital 155,000 --
--------- ---------
997,847 (20,750)
Cash flows from investing activities:
Capital assets (247,376) (324,336)
Term deposits (50,701) (10,902)
--------- ---------
(298,077) (335,238)
--------- ---------
Net (decrease) increase in cash and cash equivalents
during the year (66,826) 104,648
Cash and cash equivalents, beginning of year 166,826 62,178
--------- ---------
Cash and cash equivalents, end of year $ 100,000 $ 166,826
========= =========
Additional information concerning cash flows:
Interest paid $ 27,086 $ 3,527
Income taxes paid 169,834 --
--------- ---------
Cash and cash equivalents comprise:
Cash $ -- $ 166,826
Short-term deposits 100,000 --
--------- ---------
$ 100,000 $ 166,826
========= =========
See accompanying notes to financial statements.
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3608948 CANADA INC.
Notes to Financial Statements
Year ended December 31, 2001
(in Canadian dollars)
The Company was incorporated on June 7, 1999 under the provisions of the
Canada Business Corporations Act and its principal business activities
comprise the design of web sites and information technology outsourcing
and operates under the name of Ideas and Associates.
1. Significant accounting policies:
(a) Basis of presentation:
The Company's accounting policies are in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP") which are
consistent with accounting principles generally accepted in the
United States ("US GAAP") in all material respects. The preparation
of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. The following policies are
considered to be significant.
(b) Capital assets:
Capital assets are carried at cost. Amortization is provided using
the following methods and annual rates:
Asset Method Rate
----- ------ ----
Office furniture and equipment Declining balance 20%
Computer hardware Declining balance 30%
Computer software Declining balance 50%
Leasehold improvements Straight-line 20%
(c) Marketable securities:
Marketable securities are stated at the lower of cost and market
value.
(d) Revenue recognition:
Revenues are generated from service and maintenance contracts where
revenue is recognized, as the services are provided in agreement
with the contracts. The contracts do not provide any warranties,
guarantees or rights of returns.
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(e) Foreign exchange:
Monetary assets and liabilities denominated in foreign currencies
are translated at the year-end exchange rate in effect at the
balance sheet date. Other balance sheet items and income and
expenses are translated at the average rate of exchange prevailing
at the respective transaction date. Gains or losses on foreign
exchange are included in the determination of net income.
(f) Cash and cash equivalents:
The Company considers deposits in banks, certificates of deposit and
short-term investments with original maturities of three months or
less as cash and cash equivalents.
(g) Earnings per share:
Earnings per share was calculated based on the weighted average
number of shares outstanding throughout the year. The Company has no
dilutive instruments outstanding.
(h) Research and development costs:
Research and development costs are expensed as incurred. Related
government grants and tax incentives are recorded as other income in
the period when reasonable assurance of realization is obtained.
(i) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under this method, future income taxes are recognized
for the future tax consequences attributable to differences between
the financial statement carrying values and their respective tax
bases. Future tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on future tax assets and liabilities of a change in tax
rates is included in income in the period that includes the
enactment date.
(j) 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 assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
#Significant areas requiring the use of estimates relate to the
assessment of the useful lives of capital assets and assessing their
net realizable values. The valuation of research and development tax
credits also requires the use of estimates and assumptions. The
receipt of these credits is dependent on the taxation authorities'
review and acceptance of the eligibility of expenditures.
Consequently, actual results could differ from those estimates.
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2. Capital assets:
2001 2000
---- ----
Accumulated Net book Net book
Cost depreciation value value
---- ------------ ----- -----
Office furniture and
equipment $134,590 $ 31,293 $103,297 $ 80,032
Computer hardware 346,184 114,798 231,386 174,389
Computer software 117,524 54,833 62,691 45,338
Leasehold improvements 28,659 4,242 24,417 6,199
-------- -------- -------- --------
$626,957 $205,166 $421,791 $305,958
======== ======== ======== ========
3. Bank indebtedness:
The Company has at its disposal a revolving operating line of credit of
$850,000. This credit bears interest at bank prime rate plus 1% and is
secured by a first rank moveable hypothec on the universality of property
and undertaking and by an assignment of term deposits. Borrowings under
this credit are limited to eligible accounts receivable, inventories and
tax credits.
Under the loan agreement, the Company must comply with several restrictive
covenants, which require to respect financial covenants. The loan
agreement is negotiable annually.
4. Long-term debt:
2001 2000
---- ----
Term loans, bearing interest at prime rate plus 1.25%,
secured by computer hardware, payable in monthly
capital instalments of $4,167, maturing in 2004 $131,250 $ --
Current portion of long-term debt 50,000 --
-------- ------
$ 81,250 $ --
======== ======
The instalments on long-term debt over the next years are as follows:
2002 $ 50,000
2003 50,000
2004 31,250
--------
$131,250
========
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5. Share capital:
2001 2000
---- ----
Authorized in an unlimited number of:
Class A common shares, voting, participating
Class B common shares, non-voting
Class C preferred shares, voting, redeemable
Class D preferred shares, non-voting, retractable,
preferential and non-cumulative dividend
Class E preferred shares, non-voting, retractable,
preferential and non-cumulative dividend,
non-participating
Class F preferred shares, non-voting, preferential
and non-cumulative dividend, retractable,
non-participating
Class G preferred shares, non-voting, preferential
and non-cumulative dividend
Issued:
1,103,707 Class A common shares (2000 - 1,000) $ 156,000 $ 1,000
========= =======
During the year, the 1,000 Class A shares were converted into 1,000,000
Class A shares and the Company issued 54,769 Class A shares for a cash
consideration of $146,000 along with 48,938 Class A shares to employees
for a nil consideration.
6. Lease commitment:
Minimum annual payments under long-term operating lease for each of the
four succeeding years are:
2002 $108,836
2003 108,836
2004 108,836
2005 59,365
7. Financial instruments:
(a) Fair value of financial assets and financial liabilities:
The carrying values of cash, marketable securities, accounts
receivable, notes receivable, accounts payable and accrued
liabilities, and advances from shareholders approximate their fair
value due to the relatively short periods to maturity of these items
or because they are receivable or payable on demand.
(b) Credit risk:
The Company regularly monitors its credit risk exposure to its
customers and takes steps to mitigate the risk of loss. The
Company's extension of credit is based on an evaluation of each
customer's financial condition.
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8. Income taxes:
The income tax provision differs from the amounts computed by applying the
combined federal and provincial income tax rate to loss before income
taxes. Explanations and fiscal impacts of this difference are as follows:
2001 2000
---- ----
Earnings before income taxes $ 692,182 $ 613,571
Combined federal and provincial statutory
income tax rate 32.3% 32.3%
--------- ---------
Expected income tax 223,575 198,183
Provincial exemption (17,600) (18,000)
Research and development tax credits (88,256) --
Non-deductible items and others 7,350 (5,655)
--------- ---------
$ 125,069 $ 174,528
========= =========
The income tax effect of temporary differences that give rise to future
tax assets and liabilities are as follows:
2001 2000
---- ----
Future tax assets:
Research and development tax credits carryforward $ 90,026 $ --
Future tax liability:
Difference between carrying value and tax value of
capital assets and intangible assets (33,097) (13,400)
Difference between carrying value and tax value of
research and development expenses (18,429) --
------- -------
$ 38,500 $(13,400)
======== ========
The Company has research and development expenditures in Canada available
to reduce taxable income in the future. These expenditures are as follows:
2001 2000
---- ----
Federal $ -- $ --
Provincial 140,841 --
======== ==========
9. Segmented information:
(a) Geographic information:
The Company operates in one business segment only, namely the design
of web sites and information technology outsourcing.
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Geographic sales are as follows:
2001 2000
Canada $ 35,400 $ --
United States of America 5,087,081 --
--------- ----------
$5,122,481 $ --
========== ==========
Sales are attributed to geographic locations based on the location
of the customer.
(b) Information about major customers:
Three customers represented more than 10% each of total sales for
2001 and 2000.
10. Subsequent events:
(a) Reverse takeover:
On March 7, 2002, all of the issued and outstanding shares of the
Company were acquired by a public company called Free Software
Club.com Inc. by issuing 30,000,000 common shares to the
shareholders of the Company. Upon completion of this transaction,
the former shareholders of the Company held approximately 77% of the
common shares of Free Software Club.com Inc.
This business combination has been accounted for as a reverse
takeover of Free Software Club.com Inc.
(b) The Company acquired a private company, Digital Voice Technologies
Inc., pursuant to the terms of a share purchase agreement dated
March 28, 2002. The purchase price includes the issuance of common
shares and US$300,000 in cash. The acquisition will be accounted for
as a purchase.
(c) On March 30, 2002, the Company purchased assets consisting of
Software, Website and Seller's customer list for cash consideration
of US$373,000 which will be reduced by the total amount owed to the
Company and for the issuance of common shares, the number of which
will depend on sales derived from the purchased assets.
11. Comparative figures:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current year.
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.
Freesoftwareclub.com, Inc.
---------------------------------
(Registrant)
Date: May 24, 2002 /s/ Terence C. Byrne
----------------------------
Terence C. Byrne, Chief Executive
Officer
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